Colgate-Palmolive Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dollar amounts are in millions except per-share data. The filing is unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $4,260 | $3,897 | $8,604 | $7,994 |
| Gross profit | $2,556 | $2,369 | $5,193 | $4,834 |
| Operating profit | $996 | $946 | $2,000 | $1,898 |
| Net income attributable to Colgate | $703 | $635 | $1,384 | $1,350 |
| Diluted EPS | $0.83 | $0.74 | $1.63 | $1.57 |
| Operating cash flow | Not stated by quarter | $1,225 | $1,794 |
Q2 sales increased 9.5% (organic sales +5.0%); six-month sales rose 7.5% (organic +5.0%). Q2 growth reflected volume +2.5%, pricing +2.5% and foreign exchange +4.5%. Hill’s Pet Nutrition was a significant growth contributor: Q2 sales rose 18% to $794, including 15% organic growth. Oral, Personal and Home Care Q2 sales rose 7.5% to $3,466, including 3.0% organic growth.
Q2 gross margin fell to 60.0% from 60.8%, mainly as higher raw and packaging costs (370 basis points) outweighed savings initiatives (200 bps) and pricing (90 bps). GAAP operating margin declined to 23.4% from 24.3%; excluding the Brazil tax benefit, it was 22.8%. Selling, general and administrative expense rose 12% to $1,568, with higher overhead/logistics and advertising costs. Q2 advertising was $494, or 11.6% of sales, versus $439 and 11.3% a year earlier.
Q2 reported operating profit and net income included a $26 pretax ($20 after-tax) Brazil value-added-tax benefit; excluding it, operating profit was $970, net income attributable to Colgate was $683 and diluted EPS was $0.80. For the first half, adjusted operating profit was $1,974 versus $1,904, and adjusted diluted EPS was $1.60 versus $1.49; these company-presented non-GAAP comparisons exclude specified unusual items.
Cash, debt and liquidity
First-half operating cash flow was $1,225, down 32% from $1,794, primarily due to higher working capital and income taxes paid. Capital expenditures were $237 versus $159. Cash and equivalents were $937 at June 30, up from $888 at year-end; most cash was held by foreign subsidiaries. First-half cash flow also included $796 of dividends and $713 of treasury-share purchases.
Total debt was $7,966 at June 30, 2021, compared with $7,601 at December 31, 2020; long-term debt, including current maturities, was $7,961 versus $7,343. Current liabilities were $4,203 and current assets $4,652. Management expects operating cash flow and debt issuance to cover foreseeable operating and recurring cash needs and reports compliance with debt covenants.
Changes, outlook and risks
- Q2 revenue growth coexisted with margin pressure from sharply higher materials and logistics costs. Management expected the difficult cost environment to continue at least through the rest of 2021; it did not provide specific full-year sales or EPS guidance in the supplied filing text.
- Management expected capital expenditures to be approximately 3.0%–3.5% of net sales for 2021. It cited COVID-19 uncertainty, changing consumer and shopping patterns, supply-chain disruptions, cost inflation, foreign-exchange volatility, competitive and promotional intensity, and evolving retail channels as risks.
- COVID-19 continued to affect demand, operations and channels unevenly by region. The company noted heightened prior-year demand for certain hygiene products, continued above-historical-level demand in some categories, and potential for additional operational disruption or costs.
- Potential reasonably possible legal losses in excess of accrued liabilities were estimated at $0 to approximately $425 in aggregate for matters where estimates could be made. The company said ultimate outcomes could differ; potential losses in talc cases could not currently be reasonably estimated. Management did not expect the disclosed matters, based on current knowledge, to materially affect financial position or ongoing results, while acknowledging an adverse outcome could affect a particular period.
- Reported first-half 2020 results included $71 of discrete tax benefits related to prior tax matters, complicating year-over-year comparisons. The filing also notes a potential Canadian notes redemption price of approximately $115 if noteholder approval is obtained, based on June 30 rates.
Investor verification priorities
- Track whether pricing and productivity savings can offset continuing materials, packaging and freight inflation without further margin erosion.
- Reconcile reported and non-GAAP results, especially the $26 Brazil tax benefit and the prior-year $71 tax benefit and acquisition-related costs.
- Monitor cash conversion and working capital after the first-half operating cash flow decline, alongside higher debt, dividends and share repurchases.
- Follow segment trends, particularly North America’s Q2 sales decline and Hill’s growth, and verify market-share data given the filing’s stated data limitations.
- Monitor COVID-19 and supply-chain developments, legal contingencies, and the Canadian notes’ proposed redemption and financing implications.