Colgate-Palmolive Company — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. Dollar amounts are in millions except per-share data. Interim financial statements are unaudited.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $3,998 | $3,988 | $11,246 | $11,666 |
| Gross profit | $2,367 | $2,236 | $6,581 | $6,576 |
| Operating profit | $926 | $791 | $2,624 | $2,324 |
| Net income attributable to Colgate | $590 | $500 | $1,660 | $1,460 |
| Diluted EPS | $1.12 | $0.94 | $3.16 | $2.72 |
Margins: Gross margin was 59.2% in Q3 versus 56.1% and 58.5% for the nine months versus 56.4%. Operating margin was approximately 23.2% in Q3 versus 19.8%, and 23.3% for the nine months versus 19.9%. SG&A was 35.1% of sales in Q3 and 34.5% year to date, down from 35.5% and 35.9%, respectively.
Cash flow: Nine-month operating cash flow was $2,375, up 34% from $1,777. Capital expenditures were $347 versus $392; investing activities used $484. Financing activities used $1,620, including $702 in dividends and $664 in treasury-share purchases. Cash rose to $847 from $555 at year-end 2008.
Debt and liquidity: Total debt, including current maturities and notes payable, was approximately $3,263 at September 30, down from $3,783 at December 31, 2008. The company reported $3,591 of current liabilities and $4,204 of current assets. It had a $1,600 domestic revolving credit facility expiring in November 2012; $36 of commercial paper was outstanding at quarter-end. Long-term debt’s estimated fair value was $3,454 versus a $3,201 carrying value.
Changes versus the prior comparable period
- Q3 sales were essentially flat, while nine-month sales declined 3.5%. For Q3, 1.5% volume growth and 5.0% higher net selling prices were offset by 6.5% adverse foreign exchange. Organic sales grew 7.0%. Nine-month volume was level; 7.0% pricing was more than offset by 10.5% adverse foreign exchange.
- Q3 operating profit rose 17% and nine-month operating profit rose 13%. Excluding 2008 restructuring charges, management reported increases of 11% and 7%, respectively. Higher pricing, improved gross margin, cost savings and lower advertising helped; foreign exchange was a headwind.
- Net income increased 18% in Q3 and 14% year to date. Prior-year results included after-tax restructuring charges of $31 in Q3 and $82 for the nine months; there were no restructuring charges in 2009.
- Regional Q3 sales were strongest in Latin America (+5%) and North America (+3%); Europe/South Pacific declined 5.5%, Greater Asia/Africa declined 3%, and Hill’s Pet Nutrition increased 1.5%. Currency effects were significant in several regions.
Outlook, management commentary and notable items
- Management described global economic and market conditions as highly challenging. It expected lower commodity and oil costs, ongoing savings initiatives and a weakening dollar to help offset pricing or consumer-promotion pressures, while warning that the downturn and credit-market uncertainty could affect suppliers, customers and consumers.
- Management estimated annual pretax savings of $475–$500 from the completed 2004 Restructuring Program, substantially all expected to increase future cash flow. The program’s remaining accrual was $19, with substantially all expected to be paid before year-end 2009.
- Capital spending for 2009 was expected to be approximately 4.9% of net sales. The filing gives no specific full-year sales or earnings forecast. The estimated full-year effective tax rate before discrete items was 32.1%.
- Venezuela was a material exposure: it represented 6% of company sales, and exchange controls led the subsidiary to settle certain U.S.-dollar liabilities using dollars obtained through the parallel market. Q3 included $47 of related remeasurement costs ($25 in cost of sales and $22 in other expense). The subsidiary also purchased $122 of Venezuelan bonds during Q3.
- Contingencies include Brazilian tax assessments and litigation related to the Kolynos acquisition, competition-law investigations in multiple European jurisdictions, and a consolidated ERISA retirement-plan class action that had not been certified. The company said it would contest matters it considered without merit; management stated that contingencies were not expected to materially affect financial position, ongoing results or cash flows, though a particular quarter or year could be materially affected.
- A Mexican transfer-pricing dispute for 1999–2007 was settled in June 2009; the assessments for 1999–2001 were withdrawn, and the net settlement impact was not material. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Investor facts to verify
- Whether Venezuela’s exchange controls, parallel-market settlement costs and bond investments continue to affect earnings, cash flows or asset values.
- Progress and potential exposure in the Brazilian tax proceedings, European competition investigations and ERISA litigation, including any changes to reserves or management’s assessment.
- Whether organic sales momentum and pricing can offset currency headwinds without impairing volume, particularly in regions with reported declines.
- Whether gross-margin and cash-flow improvements persist as restructuring savings mature and commodity costs or consumer-promotion needs change.
- Debt maturities, refinancing capacity and capital allocation, including dividends and remaining share-repurchase authorization.