Colgate-Palmolive Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unless otherwise stated, financial amounts are in millions of dollars. Comparisons are with Q1 2016.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net sales | $3,762 | $3,762 | Flat; organic sales grew 0.5%. Price increases of 2.5% were offset by volume declines of 2.0% and unfavorable foreign exchange of 0.5%. |
| Gross profit / margin | $2,269 / 60.3% | $2,248 / 59.8% | Margin increased 50 basis points; excluding restructuring charges, margin was 60.7% versus 60.0%. |
| Operating profit / margin | $885 / 23.5% | $867 / 23.0% | Profit increased 2%; excluding restructuring charges, operating profit was $931 versus $922. |
| Net income attributable to Colgate | $570 | $533 | Up about 7%; adjusted for restructuring charges, $601 versus $571. |
| Diluted EPS | $0.64 | $0.59 | Adjusted for restructuring charges: $0.67 versus $0.63. |
| Operating cash flow | $691 | $614 | Up 13%, which management attributed to operating earnings and working-capital discipline. |
| Capital expenditures | $121 | $114 | 2017 spending is expected to be about 4.0% of net sales. |
| Cash and cash equivalents | $1,347 | $1,315 at Dec. 31, 2016 | Approximately $1,310 was held by foreign subsidiaries. |
| Total debt | $6,473 | $6,533 at Dec. 31, 2016 | Long-term debt was $6,466; commercial paper outstanding was $633. |
Interest expense, net, declined to $23 from $28. The effective tax rate was 29.1% versus 31.6%; Q1 2017 included an $18 discrete tax benefit from share-based compensation. The prior-year comparison was affected by Venezuela-related tax and repatriation items, including a $210 tax charge recorded in Q1 2016.
Balance-sheet liquidity included $4,596 of current assets and $3,809 of current liabilities. Total liabilities of $12,453 slightly exceeded total assets of $12,448, leaving total equity negative by $5 at March 31, 2017.
Segments and material changes
- Oral, Personal and Home Care: Sales were $3,208, flat year over year; organic sales increased 0.5%. North America sales fell 5.0%, Europe fell 5.0%, and Asia Pacific fell 3.0%; Latin America rose 9.0% and Africa/Eurasia rose 6.5%.
- Hill’s Pet Nutrition: Sales increased 0.5% to $554, while organic sales were flat. Price increases and favorable currency were offset by a 4.0% volume decline.
- Company-wide pricing supported sales, but volume was weaker in several regions and categories. Toothpaste global share was 43.8%, unchanged year over year; manual toothbrush share was 32.7%, down 0.6 percentage point.
- The 2012 Restructuring Program generated $46 of pretax charges in the quarter, versus $55 a year earlier. Reported results and management’s non-GAAP comparisons exclude these charges in the adjusted measures.
Cash, capital allocation and outlook
- Investing activities used $158; financing activities used $520, including $345 of dividends and $333 of treasury-share purchases. Cash increased $32 during the quarter.
- Management said operating cash flow and debt issuance should cover foreseeable operating and recurring needs, including debt service, dividends, capital spending, restructuring and repurchases. The company reported compliance with its borrowing covenants.
- The annualized common dividend was increased 3% to $1.60 per share, effective Q2 2017. Q1 dividends declared were $0.79 per share; two dividends were declared during the quarter.
- The restructuring program is expected to incur $180–$360 of pretax charges in 2017, with $40–$60 of pretax savings expected that year. Once fully implemented, annual pretax savings are projected at $430–$495. The program is scheduled to conclude by December 31, 2017.
- Management expects challenging macroeconomic conditions and slow category growth, with risks from competition, foreign exchange volatility, raw and packaging material costs, and changing sales channels. No specific company-wide sales or EPS forecast is provided in this filing.
Risks, contingencies and unusual items
- For disclosed matters other than talcum-powder and ERISA claims discussed separately, the company estimated reasonably possible losses in excess of accruals at $0–approximately $225. Management said ultimate outcomes could differ and an adverse result could materially affect a particular period.
- Brazilian tax proceedings include assessments of approximately $149 and $62; the company is contesting them and believes it should prevail, but cannot assure the outcome.
- There were 146 pending U.S. talcum-powder cases at March 31, 2017, up from 115 at year-end. Potential losses could not be reasonably estimated and were excluded from the disclosed loss range; the company expects insurance to cover a significant portion of defense and resolution costs, subject to policy terms.
- A putative ERISA class action survived a motion to dismiss; the case had not been certified as a class, and potential loss could not be reasonably estimated. A separate N8 Pharma appeal remained pending after dismissal of its claims.
- Colgate no longer consolidates CP Venezuela’s operating results, beginning in 2016. The filing also notes that roughly 75% of sales are outside the U.S., exposing results to currency, economic and regulatory risks.
Important facts for investors to verify
- Whether sales volumes and organic growth improve, particularly in North America, Asia Pacific and Hill’s Pet Nutrition.
- Whether pricing and cost savings continue to offset raw-material inflation, currency effects and competitive promotional activity.
- Progress against 2017 restructuring charges and savings expectations, and the program’s eventual realized cash costs and benefits.
- Debt, commercial-paper and foreign-cash levels, along with the sustainability of dividends and share repurchases.
- Developments in Brazilian tax, competition, talcum-powder and ERISA proceedings, including any change in estimated exposure.
- Changes in tax rates and the treatment or potential repatriation of foreign earnings; Q1 2017 included a discrete share-based compensation tax benefit, while the prior-year comparison included Venezuela-related tax items.