Colgate-Palmolive Company — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Dollar amounts are in millions, except per-share data. The company sells oral, personal and home care products and pet nutrition products in more than 200 countries; approximately 80% of sales came from outside the U.S. and more than 50% from emerging markets.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $4,346 | $4,267 | $8,661 | $8,467 |
| Operating profit | $906 | $982 | $1,648 | $1,920 |
| Operating margin | 20.8% | 23.0% | 19.0% | 22.7% |
| Net income attributable to Colgate | $561 | $627 | $1,021 | $1,220 |
| Diluted EPS | $0.60 | $0.65 | $1.08 | $1.26 |
| Gross margin | 58.3% | 57.7% | 58.3% | 57.8% |
- Q2 sales grew 2.0%; volume rose 4.0% and net pricing 1.0%, partly offset by a 3.0% foreign-exchange headwind. Organic sales growth was 5.5% (non-GAAP). For the first half, sales rose 2.5%, with organic growth of 5.5%.
- Excluding disclosed special items, Q2 operating profit was $1,032, up 3%, and diluted EPS was $0.70, up 4%. First-half adjusted operating profit was $2,017, up 3%, and adjusted diluted EPS was $1.36, up 5%. These are company-presented non-GAAP measures.
- First-half operating cash flow was $1,325, versus $1,193 a year earlier. Investing activities used $398, including $243 of capital expenditures; financing activities used $846. Cash ended the period at $884, unchanged from year-end 2012.
- At June 30, total debt was $5,628, compared with $5,230 at December 31, 2012; long-term debt including current maturities was $5,607. Current liabilities were $4,444 and current assets $4,867. The company said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs.
- Dividends paid in the first half were $625. The annualized dividend was increased 10% to $1.36 per share, effective in Q2. Treasury-share purchases were $771 in the first half.
Material changes and segment trends
- Reported Q2 operating profit fell 8%, and first-half operating profit fell 14%; attributable net income declined 11% in Q2 and 16% in the first half. The company attributed much of the decline to restructuring charges, the Venezuela devaluation, and a French competition-law charge. On its adjusted basis, operating profit and EPS increased in both comparisons.
- Q2 organic sales grew 7.0% in Latin America and 9.5% in Greater Asia/Africa; North America grew 5.0%. Europe/South Pacific organic sales declined 2.0%. Hill’s Pet Nutrition organic sales increased 5.5%, but its operating profit fell 6%, partly due to higher raw-material costs.
- Funding-the-growth savings and pricing helped lift gross margin, while higher raw and packaging costs and increased advertising investment constrained operating-margin improvement. Q2 advertising investment increased 8.8% to $497; first-half investment increased 7.0% to $968.
Outlook, unusual items and risks
- The four-year 2012 Restructuring Program is expected to be substantially completed by December 31, 2016. Projected cumulative pretax charges are $1.1–$1.25 billion, with 2013 charges estimated at $260–$310 million. Annual pretax savings of $365–$435 million are projected by the program’s fourth year; 2013 savings were expected to be $40–$50 million. About 75% of total charges are expected to require cash expenditures.
- The February 2013 Venezuelan currency devaluation produced a $172 pretax ($111 after-tax) first-half charge, or $0.12 per diluted share. Venezuela represented approximately 4% of first-half sales. Currency controls, price controls, import restrictions, inflation, labor issues and possible further devaluation could continue to affect results and repatriation of earnings. The company reported a $450 bolivar-denominated net monetary asset exposure to potential remeasurement at June 30.
- Management expected global macroeconomic and market conditions to remain challenging, citing competition, volatile currencies and high commodity costs. It estimated a full-year effective tax rate of 32.0% before discrete items and expected 2013 capital expenditures to be approximately 4.5% of sales. No specific company-wide sales or EPS forecast is stated in the filing.
- The filing estimates reasonably possible legal losses in excess of accrued liabilities at an aggregate $0–approximately $250 million. Management did not expect the matters discussed to materially affect consolidated financial position or ongoing results, but noted an adverse outcome could materially affect a particular quarter or year. Matters include Brazilian tax disputes, European competition investigations and ERISA litigation. A new French competition-law statement of objections was disclosed; the company recorded an $18 million Q2 charge related to a French matter.
- Other notable items: a two-for-one stock split took effect May 15, 2013, and all per-share figures were retrospectively adjusted. The company’s Mexico City land transfer is expected in 2014, with related relocation and exit costs continuing through then.
Important facts for investors to verify
- Whether organic sales growth, pricing, volume and market-share trends persist, especially in Europe/South Pacific and Hill’s Pet Nutrition.
- Actual restructuring charges, cash costs, workforce reductions and realized savings compared with management’s projections.
- Further Venezuelan exchange-rate or regulatory changes, access to foreign currency, and the value and liquidity of Venezuelan government bonds.
- Debt levels, refinancing needs, cash available outside the U.S., and the effect of repurchases and dividends on liquidity.
- Developments in Brazilian tax disputes, European competition proceedings and ERISA litigation, including any changes to the disclosed loss range.