Colgate-Palmolive Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in millions of dollars, except per-share data. The company sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries; approximately 75% of sales were outside the U.S.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $3,974 | $3,867 | $11,562 | $11,474 |
| Gross profit / margin | $2,383 / 60.0% | $2,324 / 60.1% | $6,952 / 60.1% | $6,876 / 59.9% |
| Operating profit / margin | $927 / 23.3% | $1,071 / 27.7% | $2,665 / 23.0% | $2,882 / 25.1% |
| Net income attributable to Colgate | $607 | $702 | $1,701 | $1,835 |
| Diluted EPS | $0.68 | $0.78 | $1.91 | $2.04 |
| Cash from operations | Not separately presented for the quarter | $2,295 | $2,317 |
- Q3 sales rose 3.0%; volume increased 1.5%, foreign exchange contributed 1.5%, and net selling prices were flat. Organic sales rose 1.5%.
- For the first nine months, sales rose 1.0% and organic sales rose 0.5%; volume declined 0.5%, while pricing contributed 1.0% and foreign exchange 0.5%.
- Management’s non-GAAP comparisons exclude restructuring and, where applicable, prior-year land-sale, litigation and tax items. On that basis, Q3 operating profit fell 4% to $985 and diluted EPS was $0.73, flat year over year. Nine-month operating profit fell 1% to $2,911; adjusted diluted EPS rose 3% to $2.12.
- Q3 non-GAAP gross margin was 60.4%, unchanged year over year. Cost savings were offset by higher raw and packaging material costs. Advertising investment rose 19% to $405 in Q3 and 6% to $1,204 year to date.
Balance sheet, cash flow and liquidity
- At September 30, cash and cash equivalents were $1,380, versus $1,315 at year-end 2016. Operating cash flow was $2,295; capital expenditures were $382.
- Total debt was $6,527, compared with $6,533 at year-end; long-term debt was $6,520. The company issued $500 of 30-year notes at a fixed 3.70% rate during Q3.
- Cash flow from financing was a $1,767 use, including $1,070 of dividends and $1,055 of treasury-share purchases. The quarterly dividend declared was $0.40 per share.
- Current assets were $4,736 and current liabilities $3,854. Total liabilities were $12,508; total equity was $267, including negative Colgate shareholders’ equity of $108 and noncontrolling interests of $375.
- Management expects operating cash flow and debt issuance to cover foreseeable operating and recurring cash needs, including debt service, dividends, capital spending, restructuring and repurchases. Most cash was held by foreign subsidiaries: $1,341 of $1,380 at quarter-end.
Changes, outlook and key considerations
- GAAP earnings declined despite modest sales growth. Q3 GAAP operating profit included $58 of restructuring charges; Q3 2016 included a $97 land-sale gain and a $6 litigation charge. Nine-month 2017 restructuring charges were $246, versus $156 a year earlier.
- On October 26, 2017, the board expanded and extended the Global Growth and Efficiency Program through December 31, 2019. Estimated cumulative pretax charges increased to $1,730–$1,885, with annual pretax savings projected at $560–$635 once approved projects are implemented. The company expects 2017 charges of $340–$380 pretax and savings of $50–$60 pretax; approximately 80% of total program charges are expected to require cash.
- Management described macroeconomic and category growth conditions as challenging, citing intense competition, volatile currencies, high raw and packaging material costs, and changing sales channels including e-commerce. It also noted that continued cost increases or inability to sustain pricing could harm results.
- Reasonably possible losses in excess of accrued liabilities were estimated at $0–$250 for disclosed matters that could be estimated. That range excludes talcum-powder and ERISA cases whose potential losses could not be reasonably estimated. Brazilian tax assessments include approximately $171 and $77; the company disputes them and says it expects to prevail, but outcomes are uncertain.
- Management said no material changes had occurred in the previously disclosed risk factors. Disclosure controls were concluded effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether organic sales and volume trends improve, particularly given Q3 market-share declines in global toothpaste and manual toothbrush versus the year-earlier period.
- Whether advertising, overhead and input-cost pressures continue to weigh on operating margins, and whether projected restructuring savings are realized against the higher charge estimates.
- The pace and cash cost of restructuring, including the expected workforce reduction of approximately 3,800–4,400 positions and payments of about 75% of the September restructuring accrual within twelve months.
- Debt, foreign-held cash and the company’s stated capacity to fund dividends, capital spending, restructuring and repurchases; assess the implications of its negative parent-company shareholders’ equity.
- Developments in Brazilian tax, competition, talcum-powder and ERISA proceedings, noting that some potential losses are not included in the disclosed estimated range.