Colgate-Palmolive Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial amounts are in millions of U.S. dollars except per-share data. The company sells Oral, Personal and Home Care products and Pet Nutrition products in more than 200 countries and territories.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $4,097 | $3,884 | +5.5%; organic sales +7.5% |
| Gross profit / margin | $2,465 / 60.2% | $2,287 / 58.9% | Margin +130 bps GAAP; +110 bps adjusted |
| Operating profit / margin | $952 / 23.2% | $879 / 22.6% | Profit +8%; adjusted margin was 23.4% in both periods |
| Net income attributable to Colgate-Palmolive | $715 | $560 | +28% GAAP; +11% adjusted |
| Diluted EPS | $0.83 | $0.65 | +28% GAAP; $0.75 versus $0.67 adjusted |
| Operating cash flow | $768 | $605 | +27% |
Gross-margin improvement reflected cost savings, pricing and mix, partly offset by higher raw and packaging material costs. SG&A rose 8% to $1,473, including increased advertising and overhead; advertising reached $484, or 11.8% of sales.
Sales by major segment: Oral, Personal and Home Care sales increased 3% to $3,378 (organic growth 5%); Hill’s Pet Nutrition increased 20% to $719 (organic growth 21%). By geography, Asia Pacific sales fell 9.5% to $633, while North America rose 9% to $929 and Europe rose 12% to $675. Asia Pacific weakness included declines in Greater China and India.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $854 at March 31, 2020, down from $883 at year-end 2019. Current assets were $4,248 and current liabilities $4,443.
- Total debt was $7,846, broadly unchanged from $7,847 at year-end; long-term debt, including current portion, was $7,591. The company reported approximately $4.5 billion of unused credit lines and said it remained in compliance with borrowing covenants.
- Q1 investing cash use was $459, including $351 for the Hello Products acquisition; capital expenditures were $82. Financing cash use was $308, including $373 of dividends and $220 of treasury-share purchases.
- Management expected 2020 capital expenditures of approximately 2.5%–3.0% of net sales. Share repurchases were moderated and expected to remain so into 2021 to reduce debt. The quarterly dividend was increased to $0.44 per share effective Q2 2020.
Material changes, outlook and risks
- Tax benefit: Q1 reported tax expense included $71 of discrete tax benefits—$45 from reversing previously recorded foreign withholding taxes and $26 from reversing a valuation allowance. The reported effective tax rate was 16.4%, versus 26.3% a year earlier; the adjusted rate was 24.4% versus 26.2%. These benefits materially lifted reported earnings.
- Acquisitions and unusual items: Hello Products was acquired for $351 in January 2020. Filorga, acquired in September 2019, contributed to European sales and added amortization expense. The Global Growth and Efficiency restructuring program concluded in 2019; no program charges were recorded in Q1 2020. Q1 2019 results included $29 of pretax program charges.
- COVID-19: The company reported elevated demand across many categories, but also factory disruptions, including limited closures in India, absenteeism, supply-chain and service-provider disruptions, and occasional product stockouts. Greater China, India, professional sales and travel retail experienced declines. Management could not estimate the pandemic’s full impact and warned demand may moderate as pantry-loading unwinds.
- Outlook: Management cited challenging macroeconomic conditions, volatile consumption and expected category growth to slow and remain below historical levels. It emphasized maintaining operations and employee safety, adapting 2020 plans, investing in e-commerce and efficiency, and positioning for a return to stronger growth in 2021. No specific full-year sales or EPS guidance is stated in the provided filing text.
- Impairment sensitivity: Filorga’s goodwill and indefinite-lived assets were not impaired at quarter-end, but the reporting unit’s fair value exceeded carrying value by 10%. Management said a 50-basis-point reduction in long-term growth or a 25-basis-point increase in the discount rate would reduce fair value by approximately 5%; future impairment remains possible.
- Contingencies: Estimated reasonably possible losses above recorded accruals were $0–$175 in aggregate for matters where losses could be estimated. Management said ultimate resolution was not expected to materially affect consolidated results, but outcomes could materially affect a particular quarter or year. Matters include Brazilian tax disputes, talcum powder claims, competition proceedings and an ERISA class action.
Most important facts for investors to verify
- How much of reported earnings growth came from the $71 tax benefit, and whether adjusted earnings trends persist.
- Whether pandemic-driven demand, stockouts and disruptions continue, and how sales develop in Asia Pacific, especially China and India.
- Progress on debt reduction, share-repurchase moderation and liquidity as acquisition spending and the pandemic affect cash needs.
- Filorga’s performance and impairment assumptions, given its limited fair-value cushion.
- Developments in legal contingencies, particularly the Brazilian matters and talcum powder litigation.