Colgate-Palmolive Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. Dollar amounts are in millions, except per-share data. The filing is unaudited.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $4,070 | $4,325 | Down 6%; organic sales rose 4%, with 1.5% volume growth and 2.5% higher net selling prices more than offset by 10% adverse foreign exchange. |
| Gross profit / margin | $2,392 / 58.8% | $2,524 / 58.4% | Reported margin up 40 basis points. Excluding specified items, margin was 58.9% versus 58.6%. |
| Operating profit / margin | $860 / 21.1% | $634 / 14.7% | Reported profit rose 36%, largely reflecting the absence of the prior-year Venezuela remeasurement charge. Excluding specified items, operating profit fell 4% to $960; margin rose to 23.6% from 23.2%. |
| Net income attributable to Colgate-Palmolive | $542 | $388 | Up 40% reported. Excluding specified items, down 4% to $609. |
| Diluted EPS | $0.59 | $0.42 | Up 40% reported. Excluding specified items, down 3% to $0.66. |
| Operating cash flow | $727 | $820 | Down 11%. |
| Capital expenditures | $122 | $168 | Lower year over year. |
| Cash and cash equivalents | $859 | $1,089 at Dec. 31, 2014 | Quarter-end balance; $804 was held by foreign subsidiaries. |
| Total debt | $6,128 | $6,148 at Dec. 31, 2014 | Includes $488 current portion of long-term debt and $5,622 long-term debt. |
The effective tax rate was 31.6%, compared with 31.1%. The company reported $8 of net interest expense. Two dividends were declared in each comparative period; declared dividends were $0.74 per share in Q1 2015 versus $0.70 in Q1 2014. The company increased its annualized dividend 6% to $1.52 per share, effective Q2 2015.
Business context and material changes
Colgate operates in Oral, Personal and Home Care and Pet Nutrition, across more than 200 countries and territories. Approximately 80% of sales came from outside the U.S. and more than half from emerging markets. Foreign exchange was the principal reported-sales headwind, while organic sales grew 4% overall.
- Oral, Personal and Home Care sales were $3,532, down 6.5%; organic sales increased 4%.
- Hill’s Pet Nutrition sales were $538, down 2.5%; organic sales increased 5.5%.
- Latin America and Africa/Eurasia had organic growth of 9% and 8%, respectively, but reported sales declined 5.5% and 15% due mainly to currency. Europe/South Pacific sales fell 14.5%; Asia sales fell 1.5%.
- Global toothpaste share was 45.2%, up 0.7 percentage points; manual toothbrush share was 33.8%, up 0.3 points.
Reported earnings benefited from comparison with Q1 2014, when the company recorded $266 of pretax Venezuela remeasurement charges ($174 after tax, or $0.19 per diluted share). Q1 2015 included $100 pretax restructuring charges ($67 after tax), compared with $102 pretax ($73 after tax) a year earlier. Management’s non-GAAP comparisons exclude specified restructuring, Venezuela and, where applicable, Mexico land-sale costs.
Liquidity, capital allocation and outlook
Investing activities used $257 of cash, including $252 of purchases of marketable securities and investments; financing activities used $641. Debt issuance and repayments were $2,105 and $2,171, respectively; dividends paid were $329 and treasury-share purchases were $374. The company said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs, including debt service, dividends, capital spending, restructuring and share repurchases. It reported compliance with its borrowing covenants.
- The board authorized a new share repurchase program of up to $5 billion in February 2015, replacing the 2011 program. The company began repurchases under the new program on February 19.
- 2015 capital expenditures were expected to remain at approximately 4.5% of net sales, above the historical 3.5% rate, primarily due to restructuring.
- The expanded 2012 Restructuring Program is expected to be substantially completed by December 31, 2016. Total pretax charges are estimated at $1,285–$1,435; 2015 charges at $330–$385. Annual pretax savings are projected at $405–$475 by the program’s fourth year, including $80–$100 in 2015. The program is expected to reduce the workforce by approximately 2,000–2,500 positions by the end of 2016.
- No quantified company-wide sales or EPS guidance for the remainder of 2015 is provided in the filing. Management expects challenging global market conditions, heightened competition, volatile currencies and high raw and packaging material costs.
Risks, contingencies and unusual items
- Venezuela: The subsidiary represented approximately 4% of consolidated sales. The SICAD exchange rate remained at 12 bolivars per dollar at quarter-end; the new SIMADI market was not used. A hypothetical remeasurement of its $589 local-currency net monetary asset position at the SIMADI rate would have produced an estimated $500 pretax loss ($321 after tax, or $0.35 per diluted share). Import-dollar access, price and currency controls, inflation, labor unrest and possible asset impairment remain risks. The company’s total investment in Venezuela was $987.
- Legal matters: Management estimated aggregate reasonably possible losses above accrued liabilities of $0–approximately $200, excluding matters whose potential losses could not be estimated, including Australian competition proceedings and additional talc cases. Management did not expect the disclosed matters, based on current knowledge, to materially affect consolidated financial position or ongoing results or cash flows, but noted an adverse outcome could be material in a particular period.
- Mexico land sale: Closing conditions were not expected to be fully satisfied by May 19, 2015. The purchaser may terminate and seek return of the first two installments; management nevertheless believed transfer was likely in 2015.
- Foreign currency translation: Q1 2015 other comprehensive income included a $351 loss from cumulative translation adjustments, reducing total comprehensive income attributable to Colgate-Palmolive to $202 from $302.
Important facts for investors to verify
- Whether organic growth and pricing can offset continuing foreign-exchange pressure, particularly in Latin America and Africa/Eurasia.
- How underlying earnings develop relative to reported results, given the prior-year Venezuela charge and current restructuring costs.
- Venezuela’s access to foreign currency, exchange-rate developments, pricing restrictions and exposure to potential remeasurement or impairment.
- Progress, cash costs and realized savings from the restructuring program, including the company’s 2015 estimates.
- Cash generation, debt and liquidity after dividends, capital spending and the $5 billion repurchase authorization.
- Developments in competition, tax, talc and other legal matters, and the status of the Mexico land transfer.