Colgate-Palmolive Company — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Figures are unaudited and, unless noted, in millions of dollars. Colgate operates Oral, Personal and Home Care and Pet Nutrition businesses across more than 200 countries; about 80% of sales were generated outside the U.S.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $4,267 | $4,185 | $8,467 | $8,179 |
| Operating profit | $982 | $968 | $1,920 | $1,883 |
| Net income attributable to Colgate | $627 | $622 | $1,220 | $1,198 |
| Diluted EPS | $1.30 | $1.26 | $2.53 | $2.42 |
| Gross margin | 57.7% | 57.4% | 57.8% | 57.9% |
| Operating margin | 23.0% | 23.1% | 22.7% | 23.0% |
- Q2 net sales grew 2.0%; volume rose 5.0% and pricing 3.5%, offset by a 6.5% negative foreign-exchange impact. Organic sales growth was 8.0% (non-GAAP). First-half sales rose 3.5%, with 7.0% organic growth.
- Q2 GAAP net income increased 1% and diluted EPS 3%; first-half net income rose 2% and diluted EPS 5%. Excluding specified land-sale and realignment costs, management reported Q2 diluted EPS growth of 6% and first-half growth of 6% (non-GAAP).
- Q2 gross margin improved 30 basis points year over year; first-half GAAP gross margin declined 10 basis points. Higher pricing and cost-saving initiatives helped, while commodity, packaging and foreign-exchange costs pressured margins. Advertising increased 4.3% in Q2 and 5.7% in the first half.
- Q2 segment sales: Oral, Personal and Home Care $3,736 (+2.5%); Pet Nutrition $531 (-1.0%). Greater Asia/Africa and Latin America posted strong organic growth, while reported growth was materially reduced by currency effects. Hill’s Pet Nutrition faced volume declines, particularly in the U.S.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $1,193, compared with $1,154 in 2011. Investing used $321, versus $1,111, largely reflecting the prior-year $960 Sanex acquisition. Capital expenditures were $189, down from $225.
- Financing activities used $730, versus $199 provided in the prior-year period. Cash increased $117 to $995. First-half dividends paid were $593; treasury-share purchases were $894.
- At June 30, 2012, total debt was $5,363, versus $4,810 at year-end 2011; cash was $995. Long-term debt, including current maturities, was $5,320. The company issued $500 of 10-year notes at a fixed 2.30% rate during Q2.
- Current assets were $4,835 and current liabilities $3,566. The company stated that operating cash flow and debt issuances should meet foreseeable operating and recurring cash needs. It expected 2012 capital expenditures of approximately 3.5% of net sales.
- The annualized common dividend was increased 7% to $2.48 per share, effective in Q2. The board’s 2011 repurchase authorization covers up to 50 million shares; 4.3 million shares were repurchased under publicly announced plans during Q2.
Outlook, risks and unusual items
- Management expected global macroeconomic and market conditions to remain highly challenging. It cited intense competition, volatile currencies and high commodity costs; no specific full-year sales or earnings guidance is provided in the filing text.
- The estimated full-year effective tax rate, before discrete items, was 31.8%. Management described cost savings, brand investment, innovation and focus on higher-margin businesses as strategic priorities.
- Venezuela is a notable exposure: it represented about 5% of first-half sales, with a local-currency net monetary asset position of approximately $426. Currency, import and payment controls, high inflation and price controls restrict operations and the ability to raise prices or repatriate earnings. The filing reports $329 of cash subject to Venezuelan currency controls at June 30.
- Management estimated reasonably possible legal losses in excess of accruals at $0 to approximately $225. Matters include Brazilian tax disputes, European competition investigations and fines under appeal, and an ERISA class-action case in mediation. Management did not expect the matters, based on current knowledge, to materially affect consolidated financial position or ongoing results, but an adverse outcome could affect a particular period.
- Q2 results included after-tax costs of $5 related to the Mexico land sale and $9 for business realignment and cost-saving initiatives. First-half amounts were $10 and $12, respectively. The realignment includes Sanex integration and facility and business restructuring. A sharp currency-translation loss contributed to Q2 comprehensive income attributable to Colgate falling to $342 from $815 a year earlier.
Most important facts for investors to verify
- Whether organic sales and volume growth persist after separating currency, pricing, acquisitions and divestitures from reported sales.
- Whether commodity inflation, foreign-exchange transaction costs and Venezuela’s price and currency restrictions continue to constrain margins and cash repatriation.
- Debt growth, commercial-paper refinancing, cash availability abroad, and the company’s capacity to fund dividends and share repurchases alongside capital needs.
- Actual costs and benefits from restructuring and the Mexico site relocation, including remaining exit costs and the expected 2014 property transfer.
- Developments in Brazilian tax, European competition and ERISA matters, including changes to the disclosed potential-loss range.
- That non-GAAP growth and margin figures exclude specified costs and are supplemental to, not replacements for, GAAP results.