Colgate-Palmolive Company — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone quarterly report; fourth-quarter figures are identified separately below. Unless stated otherwise, figures are in U.S. dollars and millions.
Business context
Colgate-Palmolive sells consumer products in more than 200 countries and territories through Oral, Personal and Home Care and Hill’s Pet Nutrition. Approximately 80% of sales came from outside the U.S. and more than half from emerging markets. Oral Care represented 46% of sales, Personal Care 21%, Home Care 20% and Pet Nutrition 13%.
Financial performance
| Metric | FY2014 | FY2013 | Change or context |
|---|---|---|---|
| Net sales | $17,277 | $17,420 | Down 1%; organic sales grew 5%, offset by a 6% adverse foreign-exchange impact |
| Gross profit / margin | $10,109 / 58.5% | $10,201 / 58.6% | Reported margin down 10 basis points |
| Operating profit / margin | $3,557 / 20.6% | $3,556 / 20.4% | Profit essentially flat; reported margin up 20 basis points |
| Net income attributable to Colgate | $2,180 | $2,241 | Down 3% |
| Diluted EPS | $2.36 | $2.38 | Down 1% |
| Cash from operations | $3,298 | $3,204 | Up $94 |
| Capital expenditures | $757 | $670 | Higher investment |
| Total debt | $6,148 | $5,657 | Up $491; cash and equivalents were $1,089 |
Management’s non-GAAP results, excluding specified restructuring, Venezuela, competition-law, Mexico land-sale and tax items, showed operating profit of $4,215, up 2%; net income of $2,712, up 2%; and diluted EPS of $2.93, up 3%. These are supplemental measures, not GAAP results.
At year-end, current assets were $4,863 and current liabilities $3,946 (current ratio 1.2). Shareholders’ equity was $1,385, down from $2,536, with accumulated other comprehensive loss worsening to $3,507, primarily reflecting currency translation and retirement-benefit adjustments. The company reported $3,001 of unused domestic and foreign credit lines and said operating cash flow and debt issuance should cover foreseeable needs.
Fourth-quarter results
Q4 2014 net sales were $4,221 versus $4,361 in Q4 2013. Net income attributable to Colgate was $628 versus $564, and diluted EPS was $0.68 versus $0.60. Q4 2014 results included $41 of after-tax restructuring charges and a $30 European competition-law charge.
Material changes and drivers
- Sales growth was led by organic growth, but currency movements—particularly in Latin America and Africa/Eurasia—reduced reported sales. Hill’s Pet Nutrition sales rose 2% and organic sales grew 4%.
- Reported earnings included $327 of pretax Venezuela remeasurement losses ($214 after tax, or $0.23 per diluted share), compared with $172 pretax in 2013. The 2014 restructuring charge was $286 pretax ($208 after tax), down from $371 pretax in 2013.
- Gross margin excluding specified items declined 10 basis points to 58.7%. Higher raw and packaging costs, including foreign-exchange transaction costs, were largely offset by productivity savings, pricing and restructuring benefits. Lower advertising and overhead helped reduce SG&A.
- Operating cash flow increased to $3,298. Financing used $2,170, including $1,446 in dividends and $1,530 in share repurchases. The annual dividend was $1.42 per share.
- Debt increased; 2014 included issuance of $1 billion of fixed-rate notes and $134 million of variable-rate, 40-year notes. Long-term debt including current maturities was $6,132 at year-end.
Outlook, risks and contingencies
- Management expected global macroeconomic and market conditions to remain highly challenging, citing intense competition, currency volatility and high raw and packaging material costs. The filing gives no specific 2015 sales, earnings or EPS guidance.
- The expanded 2012 Restructuring Program was expected to be substantially complete by December 31, 2016. Total pretax charges were estimated at $1,285–$1,435, with annual pretax savings of $405–$475 by the program’s fourth year. For 2015, estimated charges were $330–$385 and savings $80–$100. The program was expected to reduce the workforce by approximately 2,000–2,500 positions.
- Venezuela remained a significant uncertainty: price controls, inflation, limited access to U.S. dollars, labor issues and exchange-rate changes could further affect results or asset values. CP Venezuela accounted for about 3% of company sales; its local-currency net monetary assets were $549, and the company’s total investment was $955 at year-end. February 2015 exchange-regime changes could add risk if imports require the new floating-rate market.
- Other risks include foreign-exchange exposure, commodity and supplier costs, retailer concentration, regulatory review of ingredients including triclosan, product claims and liability, cybersecurity, and execution of restructuring savings.
- Legal matters include competition proceedings and fines under appeal, Brazilian tax assessments, and talc-related product-liability cases. The estimated aggregate reasonably possible losses above accrued liabilities were $0–$200; that range excludes Australian competition and talc cases whose potential losses could not be estimated. The company said adverse outcomes could materially affect a particular period. A retirement-plan class action settled for approximately $40.
- Management expected 2015 capital expenditures of approximately 4.5% of sales. A $5 billion share-repurchase authorization was approved in February 2015, after the reporting date.
Most important facts for investors to verify
- Whether organic growth can continue to translate into reported growth amid foreign-exchange pressure, and whether market-share trends improve in weaker regions.
- The pace and cash cost of the expanded restructuring program versus realized savings and margin improvement.
- Further Venezuelan currency, import, pricing or labor developments and their effects on remeasurement, operations and asset recoverability.
- Debt, pension and liquidity trends, including the effect of dividends, repurchases and elevated capital spending on financial flexibility.
- Developments and any new estimates or accruals for European, Australian and Brazilian proceedings and talc-related litigation.