Colgate-Palmolive Company — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Unaudited results; dollars in millions except per-share amounts. The company notes interim results may not represent full-year performance.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $3,829 | $3,503 |
| Gross profit / gross margin | $2,268 / 59.2% | $2,013 / 57.5% |
| Operating profit | $678 | $811 |
| Net income attributable to Colgate-Palmolive | $357 | $508 |
| Diluted EPS | $0.69 | $0.97 |
| Net cash provided by operations | $733 | $690 |
| Capital expenditures | $81 | $73 |
Sales rose 9.5%, driven by 6.0% volume growth and a 3.5% favorable foreign-exchange impact; net selling prices were level. Organic sales growth was 6.0%. Gross margin improved on lower raw and packaging costs and cost savings. SG&A increased to 35.4% of sales from 33.9%; advertising rose 33% to $423.
Operating profit included a one-time $271 Venezuela hyperinflationary-accounting transition charge. Excluding that charge, operating profit was $949, up 17%; net income was $628, up 24%; and diluted EPS was $1.21, up 25%, according to the company. Other expense, net was $235, including the charge and a $46 pretax Venezuela remeasurement gain. The tax provision also included a $9 charge related to the U.S. Medicare Part D retiree drug subsidy tax change.
Segments and material changes
- Oral, Personal and Home Care sales increased 10.5% to $3,313; organic sales grew 7.5%. Regional operating profit increased in all four reporting regions.
- Hill’s Pet Nutrition sales increased 2.0% to $516, but organic sales declined 2.5% as volume fell 2.0% and net selling prices declined 0.5%. Operating profit nevertheless rose 8% to $141.
- Corporate operating loss widened to $400 from $113, primarily reflecting the $271 Venezuela charge.
- Interest expense, net declined to $16 from $21. The company said lower average interest rates and lower debt contributed.
Cash, liquidity and capital allocation
Cash from operations increased 6% to $733. Operating cash flow less capital expenditures was $652, compared with $617 in Q1 2009. Investing activities used $87 and financing activities used $677; cash declined by $39 to $561 during the quarter. Working capital as a percentage of sales improved 220 basis points year over year.
At March 31, 2010, current assets were $3,931 and current liabilities $3,818. Total debt, including current maturities and notes payable, was $3,117; cash was $561. Commercial paper outstanding was zero, compared with $697 a year earlier. The company reported compliance with borrowing-facility requirements.
Financing included $505 of treasury-share purchases and $222 of dividends paid. The board authorized a new repurchase program of up to 40 million shares; 5.66 million shares were purchased under publicly announced programs during the quarter. The annualized common dividend was increased 20% to $2.03 per share, effective in Q2 2010. Full-year capital expenditures were expected to be approximately 3.5% of sales.
Outlook, risks and contingencies
- Management described global macroeconomic and market conditions as highly challenging. It cited currency volatility, political uncertainty, raw-material costs, pricing, retail-customer policies and the ability to sustain cost reductions among risks.
- Following Venezuela’s currency devaluation and the change to hyperinflationary accounting, management estimated a net reduction in 2010 diluted EPS of $0.06–$0.10, including the $59 after-tax first-quarter gain associated with balance-sheet remeasurement and lower taxes on accrued remittances. Management warned that local operations would translate into fewer U.S. dollars and that restricted access to official exchange rates could increase currency costs.
- The company estimated a 32.5% full-year effective tax rate before discrete items. The filing did not provide a clear broad-based full-year sales or earnings forecast.
- Contingencies include Brazilian tax assessments of approximately $113 and $67, ongoing Brazilian civil and tax proceedings, European competition investigations and claims, and consolidated U.S. ERISA litigation. The company intends to contest these matters; management said they were not expected to materially affect financial position, ongoing results or cash flows, while acknowledging a particular quarter or year could be affected.
- Venezuelan bond investments were written down as part of the transition charge; their reported fair value at March 31 was $126. Management also warned of possible further adverse effects from exchange controls and less favorable parallel-market rates.
Most important facts for investors to verify
- Reconcile reported versus adjusted results, especially the $271 Venezuela transition charge, the $46 pretax remeasurement gain and the stated $59 after-tax gain.
- Track Venezuela’s exchange-rate access, translation effects and management’s estimated $0.06–$0.10 2010 EPS impact.
- Assess whether strong core-category organic growth can offset continued weakness in Hill’s Pet Nutrition and elevated advertising spending.
- Monitor operating cash conversion, working capital, debt and substantial share repurchases alongside the dividend increase.
- Follow developments in Brazilian tax disputes and European competition matters; outcomes and potential financial effects remain uncertain.