Business context and reporting period
Colgate-Palmolive Company’s unaudited Form 10-Q covers the three months ended March 31, 2011, compared with the first quarter of 2010. The company sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries and territories. Unless noted otherwise, financial amounts are in millions of U.S. dollars.
Financial results and position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $3,994 | $3,829 |
| Gross profit / margin | $2,331 / 58.4% | $2,268 / 59.2% |
| Operating profit | $915 | $678 |
| Net income attributable to Colgate | $576 | $357 |
| Diluted EPS | $1.16 | $0.69 |
| Net cash provided by operations | $680 | $733 |
| Capital expenditures | $78 | $81 |
Sales grew 4.5%, reflecting 2.0% volume growth and a 3.0% favorable foreign-exchange effect, partly offset by 0.5% lower net selling prices. Organic sales growth was 1.5%. Gross margin fell 0.8 percentage points, primarily from higher raw and packaging material costs and promotional pricing; cost savings partly offset these pressures. SG&A was 35.2% of sales versus 35.4%, and net interest expense was $16 in both periods.
Reported operating profit rose 35%, but included a $271 Venezuela hyperinflation accounting charge in Q1 2010. Excluding that charge, operating profit declined 4%; adjusted net income declined 8% and adjusted diluted EPS declined 4%, according to management’s non-GAAP comparisons.
At March 31, cash and cash equivalents were $686, versus $490 at year-end 2010. Current assets were $4,274 and current liabilities $4,282. Balance-sheet debt comprised $597 current maturities and $3,166 long-term debt, in addition to $41 of notes and loans payable. Commercial paper outstanding was separately reported at $547. Operating cash flow decreased 7% year over year; financing activities included $580 of treasury-share purchases and $261 of dividends paid.
Material changes versus the prior comparable period
- Latin America, Greater Asia/Africa and Pet Nutrition sales grew 9.0%, 11.5% and 3.5%, respectively; North America sales fell 4.5%, and Europe/South Pacific grew 1.0%.
- Segment operating profit declined in North America, Latin America and Europe/South Pacific; Greater Asia/Africa increased 7%, while Pet Nutrition was flat. Margins were pressured by commodity costs across regions.
- Q1 2010 results included the $271 Venezuela transition charge and a $46 pretax gain from Venezuelan currency remeasurement. These items make reported year-over-year profit growth substantially higher than the underlying comparison.
- Venezuelan government currency changes contributed to a $62 unrealized gain on the company’s devaluation-protected Venezuelan bonds in Q1 2011; the filing says the bonds became actively traded and were classified as Level 2 investments.
Outlook, risks and contingencies
Management expected global macroeconomic and market conditions to remain highly challenging, citing heightened competition, promotional activity and sharply rising commodity costs. It said cost-reduction and other initiatives would continue, but persistent pressures could adversely affect results. The filing gives no specific sales or earnings growth guidance. It estimates 2011 capital expenditures at approximately 3.5% of net sales and a full-year effective tax rate of 32.5% before discrete items.
The company announced an agreement to acquire Unilever’s Sanex personal care brand business for approximately €672 million (about $950), subject to adjustment and closing conditions, and to sell its Colombian laundry detergent business to Unilever for approximately $215. It expected the Sanex acquisition to close by the end of Q2 2011; the sale was contingent on regulatory approval and the acquisition closing. The acquisition was expected to be funded primarily with available European cash and short-term commercial paper borrowings.
Venezuela remained exposed to inflation, currency devaluation, import authorization and exchange controls, price controls, and restrictions on repatriating earnings. CP Venezuela represented 5% of consolidated Q1 sales and had a monetary local-currency net asset position of approximately $225. Management warned that further devaluations or controls could worsen the impact.
The company disclosed routine legal and regulatory matters, including Brazilian tax disputes, European competition proceedings and an ERISA class-action matter. For specified matters, reasonably possible losses in excess of accrued liabilities were estimated in an aggregate range of $0 to approximately $400; management said outcomes could be higher or lower and did not expect ultimate resolution to materially affect consolidated financial position or ongoing results, while noting an adverse outcome could materially affect a particular period. The European Commission investigation was resolved in April 2011 without claims or decisions against the company.
The company reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. Its bank facilities include financial covenants and cross-default provisions; the company stated it was in compliance.
Important facts for investors to verify
- Review the non-GAAP reconciliations and assess underlying profit and EPS trends apart from the unusual Venezuela charge in Q1 2010.
- Monitor commodity costs, selling prices, promotional spending and whether cost savings can protect gross margins.
- Check the closing status, regulatory conditions, funding and financial effects of the Sanex acquisition and Colombian detergent-business sale.
- Follow Venezuelan exchange controls, currency rates, repatriation constraints and the valuation and accounting treatment of the government bonds.
- Track commercial-paper use, refinancing capacity, debt maturities, share repurchases and liquidity; assess possible outcomes of the disclosed legal matters, including the estimated $0–$400 million range above accruals.