Colgate-Palmolive Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; dollar amounts are in millions except per-share data. The company sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries and territories.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $3,999 | $4,379 | $12,135 | $13,056 |
| Gross profit | $2,347 | $2,558 | $7,106 | $7,634 |
| Operating profit | $1,136 | $948 | $2,928 | $2,562 |
| Net income attributable to Colgate-Palmolive | $726 | $542 | $1,842 | $1,552 |
| Diluted EPS | $0.80 | $0.59 | $2.02 | $1.68 |
- Q3 organic sales grew 5.0%, but reported sales fell 8.5%, principally because foreign exchange reduced sales 13.0%; volume grew 1.0% and pricing rose 3.5%. For the nine months, organic sales grew 5.0%, while reported sales declined 7.0% on a 12.0% foreign-exchange headwind.
- Q3 GAAP gross margin was 58.7% (58.8% excluding specified items); adjusted operating margin was 25.3%, up 70 basis points year over year. Reported operating profit included a $187 pretax divestiture gain. Excluding disclosed items, Q3 operating profit declined 6% and diluted EPS declined 5% to $0.72.
- For the nine months, GAAP operating margin was 24.1%; excluding disclosed items it was 24.5%, up 50 basis points. Adjusted diluted EPS was $2.08, down 4%, and adjusted attributable net income was $1,901, down 6%. GAAP growth therefore overstates underlying performance, partly reflecting the South Pacific sale gain and prior-year Venezuela and tax charges.
- Segment trends were mixed: Q3 organic sales increased 11.0% in Latin America, 5.5% in Pet Nutrition, 5.0% in Africa/Eurasia, 4.0% in Asia and 2.0% in North America; Europe/South Pacific declined 1.0%. Currency materially reduced reported sales across most regions.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $2,108, down from $2,392. Capital expenditures were $459; operating cash flow less capital expenditures was $1,649. Cash and cash equivalents ended at $1,445, up from $1,089 at year-end 2014.
- Total debt was $6,790, including $6,554 long-term debt and $226 current maturities; total debt was $6,148 at year-end. Cash less total debt was approximately negative $5,345. Current assets were $5,089 and current liabilities $3,937.
- Financing used $1,326 net in the first nine months: dividends paid were $1,033 and treasury-share purchases $1,196. The company authorized a $5 billion repurchase program in February 2015. Dividends declared were $0.38 per share in Q3.
- Shareholders’ equity fell to $590 from $1,385 at year-end, with accumulated other comprehensive losses and treasury-stock purchases among the notable balance-sheet movements. Approximately $1,412 of cash was held by foreign subsidiaries; $159 was subject to Venezuelan currency controls.
Outlook, unusual items and risks
- Management expects challenging global economic and market conditions, heightened competition, volatile currencies and elevated raw and packaging costs. It cited cost savings, pricing, innovation and brand investment as responses. No specific consolidated sales or EPS forecast is provided in the filing.
- The 2012 Restructuring Program had incurred $944 pretax cumulative charges through September 30. The company estimated total program charges of $1,285–$1,435 pretax and annual savings of $405–$475 pretax by the fourth year. For 2015, expected charges were revised down to $265–$290 pretax; expected savings remained $80–$100 pretax. On October 29, 2015, after the reporting date, the board approved reinvesting the South Pacific sale proceeds to expand the program and extend it through 2017; the impact of this expansion was not yet quantified.
- The August 2015 sale of the South Pacific laundry detergent business generated $221 proceeds and a $187 pretax gain ($120 after tax, or $0.13 per diluted share), which management plans to reinvest in restructuring.
- Venezuela remains exposed to currency devaluation, inflation, price and profit controls, import restrictions and limited access to U.S. dollars. Q3 remeasurement charges were $18 pretax. Venezuela represented about 4% of nine-month sales; its $594 local-currency-denominated net monetary position was exposed to further remeasurement. Management estimated that use of the SIMADI rate at September 30 would have produced an approximately $556 pretax loss, but the company had not used that market.
- Legal contingencies include Brazilian tax disputes, competition matters, 32 pending talc cases, and an N8 lawsuit in which plaintiffs alleged approximately $2,500 in damages. The company disputes the claims. The estimated aggregate reasonably possible losses of $0–$175 above accruals excludes the Australian competition proceedings, talc cases and N8 matter because their potential losses could not be estimated. Management said it did not expect the disclosed matters, based on current knowledge, to materially affect consolidated position or ongoing results, while warning an adverse outcome could affect a particular period.
- A separate Mexico City property sale remained conditional; the company expected the transfer in the first half of 2016 but said the purchaser could terminate under specified circumstances. The filing also cites foreign tax uncertainty, foreign-exchange exposure and restructuring execution as risks.
Most important facts for investors to verify
- Whether organic sales growth and market-share gains continue as foreign-exchange effects and regional operating pressures evolve.
- Underlying earnings and margins excluding the South Pacific divestiture gain, restructuring costs, Venezuela remeasurements and other disclosed items.
- Cash generation, debt growth, foreign-cash accessibility, and the pace and cost of share repurchases and dividends.
- Updated charges, savings, timing and returns for the expanded restructuring program, including the effect of reinvesting sale proceeds.
- Developments in Venezuela’s exchange-rate and import environment, and material changes in the Brazilian, competition, talc and N8 proceedings.