Colgate-Palmolive Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Dollar amounts are in millions except per-share data.
Business context
Colgate-Palmolive sells consumer products in more than 200 countries and territories. Its segments are Oral, Personal and Home Care and Hill’s Pet Nutrition. Approximately 70% of 2019 net sales came from outside the U.S.; about 50% came from emerging markets. Walmart and affiliates represented approximately 11% of net sales.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $15,693 | $15,544 |
| Gross profit / margin | $9,325 / 59.4% | $9,231 / 59.4% |
| Operating profit / margin | $3,554 / 22.6% | $3,694 / 23.8% |
| Net income attributable to Colgate-Palmolive | $2,367 | $2,400 |
| Diluted EPS | $2.75 | $2.75 |
| Cash provided by operations | $3,133 | $3,056 |
| Capital expenditures | $335 | $436 |
Worldwide sales rose 1.0%; volume increased 2.5% and net selling prices rose 2.0%, offset partly by 3.5% unfavorable foreign exchange. Organic sales, a non-GAAP measure, grew 4.0%. Adjusted operating profit was $3,673, down 4%; adjusted diluted EPS was $2.83, down 5%. These adjusted figures exclude specified restructuring, acquisition, tax and Brazil VAT items.
Cash and cash equivalents were $883 at year-end. Total debt was $7,847, up from $6,366, primarily reflecting the Filorga acquisition; unused domestic and foreign credit lines totaled $4,594. Current assets were $4,179 and current liabilities $4,038 (current ratio approximately 1.0). Colgate-Palmolive shareholders’ equity was $117, while total equity including noncontrolling interests was $558.
Q4 2019 net sales were $4,015 versus $3,811 in Q4 2018; net income attributable to the company was $643 versus $606, and diluted EPS was $0.75 versus $0.70. Q4 earnings included restructuring and acquisition costs, a Brazil VAT benefit and a Swiss tax benefit.
Material changes versus prior year
- Hill’s Pet Nutrition sales increased 6.0% to $2,525, with 7.5% organic growth. Oral, Personal and Home Care sales were approximately flat at $13,168, with 3.5% organic growth.
- Operating profit declined 4%, and operating margin fell 120 basis points. Higher raw and packaging costs and greater advertising investment pressured profitability; productivity savings and pricing partly offset those pressures.
- Global toothpaste share declined 0.7 percentage point to 41.1%; manual toothbrush share declined 0.5 point to 31.6%.
- Filorga was acquired in September for approximately $1,712, funded with debt and cash. The company acquired a 51% controlling interest in a Nigeria joint venture for $31. In January 2020, it acquired Hello Products for $351.
- Operating cash flow increased $77, while investing cash use increased to $2,099, mainly reflecting acquisitions. Debt increased and share repurchases were moderated in Q4; management said moderation would continue into 2021 to reduce debt.
Outlook, commentary and risks
Management expected challenging macroeconomic and market conditions, category growth below historical levels, intense competition, continued foreign-exchange volatility and higher raw and packaging costs. It did not provide specific numerical 2020 sales or earnings guidance in the supplied filing text. Management expected the novel coronavirus to negatively affect near-term business and results, but said the extent was not yet known. It emphasized sales growth, innovation, margin improvement, cash generation and effective use of cash.
The Global Growth and Efficiency Program concluded at year-end 2019. Total program charges were $1,854 pretax ($1,380 after tax); annual savings of $640–$660 pretax ($580–$590 after tax) were projected, with substantially all savings said to have been realized. The company recorded $132 of program charges in 2019.
Other risks include currency and tariff exposure, commodity costs, concentrated retailer bargaining power, eCommerce and competitive pressures, supply-chain disruption, cyber incidents, regulatory and product-safety matters, litigation, and sustainability expectations. Management estimated reasonably possible losses above accrued liabilities at $0–$225 for matters that could be estimated; certain talc and ERISA exposures were not included because losses could not be reasonably estimated. Hill’s expanded a voluntary recall of select canned dog food in 2019 after potentially elevated vitamin D levels; the company reported no material impact on 2019 sales or operating profit and stated that Hill’s was entitled to supplier indemnification.
Most important facts for investors to verify
- Whether organic growth and Hill’s momentum can continue while reported sales remain exposed to foreign exchange.
- Whether pricing and productivity savings can offset material inflation, advertising spending and pressure on operating margins.
- How quickly debt is reduced after Filorga and other acquisitions, and the implications for buybacks and liquidity.
- Progress on Filorga integration and the assumptions behind its acquired trademark valuation.
- Developments in the coronavirus outlook, the Hill’s recall-related litigation, Brazilian tax disputes, talc claims and other contingencies.
- The sustainability of earnings after non-GAAP adjustments and the timing and realization of restructuring savings.