Business context and reporting period
Colgate-Palmolive Company’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012. The company sells Oral, Personal and Home Care products and Hill’s Pet Nutrition products in more than 200 countries and territories; about 80% of sales are generated outside the United States.
Financial performance
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $4,332 | $4,383 | $12,799 | $12,562 |
| Gross profit | $2,529 | $2,462 | $7,427 | $7,197 |
| Operating profit | $1,027 | $1,035 | $2,947 | $2,918 |
| Net income attributable to Colgate-Palmolive | $654 | $643 | $1,874 | $1,841 |
| Diluted EPS | $1.36 | $1.31 | $3.89 | $3.73 |
- Sales: Q3 sales declined 1% as 2% volume growth and 3% higher net selling prices were more than offset by 6% negative foreign exchange. Organic sales growth was 5%. For the first nine months, sales rose 2%; organic sales grew 6.5%.
- Margins: Q3 GAAP gross margin was 58.4%, up 220 basis points; excluding identified items, it was 58.6%, up 180 basis points. Q3 GAAP operating margin was 23.7%; adjusted for identified items, it was 23.9%, up 100 basis points. Nine-month GAAP operating margin was 23.0%, down 20 basis points; the company’s adjusted measure was 23.3%, up 30 basis points.
- Adjusted earnings: Excluding specified restructuring, Mexico land-sale and prior-year Colombia divestiture items, Q3 diluted EPS was $1.38, up 5%; nine-month adjusted diluted EPS was $3.95, up 6%. These are non-GAAP measures, not replacements for reported results.
- Cash flow: Nine-month operating cash flow was $2,133, versus $2,057 in 2011. Investing used $624 and financing used $1,458. Capital expenditures were $317. Cash and cash equivalents ended the period at $909, up from $878 at year-end 2011.
- Debt and liquidity: Total debt was $5,246 at September 30, compared with $4,810 at December 31, 2011; cash was $909. Long-term debt including current maturities was $5,193. The company issued $1 billion of ten-year notes during 2012 and used the proceeds to reduce commercial paper borrowings. Management expected operating cash flow and debt issuance to cover foreseeable operating and recurring cash needs and reported compliance with borrowing covenants.
- Shareholder returns: Nine-month dividends paid were $951 and treasury-share purchases were $1,344. The annualized dividend was raised 7% to $2.48 per share, effective in Q2.
Material changes versus the prior comparable period
- Q3 reported sales fell despite organic growth, principally reflecting unfavorable currency translation. Nine-month reported sales increased, also despite a significant currency headwind.
- Q3 operating profit decreased 1% on a reported basis, but increased 3% excluding identified items. The prior-year quarter included a $207 pretax gain on the sale of Colombia’s non-core detergent business, partly offset by substantial realignment costs.
- Nine-month reported operating profit rose 1%; excluding identified items, it rose 4%. Reported net income and diluted EPS increased 2% and 4%, respectively.
- Corporate operating loss widened to $139 in Q3 from $67, and to $404 for the nine months from $294, reflecting items including higher postretirement benefit expense and expense timing.
- Q3 segment sales were mixed: Greater Asia/Africa grew 5%, North America 2.5%, Latin America was flat, Europe/South Pacific fell 11%, and Pet Nutrition fell 1.5%. Foreign exchange materially affected several regions.
Outlook, risks and unusual items
- On October 24, 2012, after quarter-end, the board approved a four-year Global Growth and Efficiency Program, expected to be substantially completed by the end of 2016. Estimated cumulative pretax charges are $1.1–$1.25 billion ($775–$875 million after tax), including $110–$120 million pretax in Q4 2012 and $260–$310 million in 2013. About 75% of charges are expected to be cash expenditures.
- Management projected annual savings of $365–$435 million pretax by the program’s fourth year, including $40–$50 million in 2013, and an approximately 6% reduction in the workforce from 38,600 employees by the end of 2016. Capital expenditures during the program were expected to run at 4.0%–4.5% of sales, versus an approximately 3.5% rate for 2012 before the program.
- Management expected challenging macroeconomic and competitive conditions, volatile currencies and high commodity costs to persist. Risks include inability to pass through cost increases, foreign-exchange and political uncertainty, and changing regulations and retail practices.
- Venezuela represented about 5% of nine-month sales. Currency exchange, import and price controls, high inflation and restricted repatriation pose risks; the local-currency net monetary asset position was approximately $500 million. Cash held by foreign subsidiaries subject to Venezuelan currency controls included $165 million at quarter-end.
- Legal matters include Brazilian tax disputes and European competition proceedings. The company estimated reasonably possible losses in excess of accrued liabilities across disclosed matters at $0–approximately $225 million; outcomes remain uncertain. Management did not expect the matters to materially affect consolidated financial position or ongoing results, while noting an adverse outcome could affect a particular quarter or year.
- The Mexico City property sale and related relocation work generated $20 million of pretax costs in the first nine months of 2012; the final sale installment and property transfer were expected in 2014. Q3 and year-to-date results also include business realignment costs.
Important facts for investors to verify
- Whether organic sales growth, volume and pricing trends persist once currency effects and acquisitions or divestitures are considered.
- Whether the restructuring program achieves projected savings, timing and cash costs, and how it affects future margins and capital spending.
- Developments in Venezuela, including exchange-rate exposure, controls, asset recoverability and ability to repatriate cash.
- Debt, commercial paper and cash levels, and the effect of dividends and share repurchases on liquidity.
- Updates to legal contingencies, including the disclosed potential loss range and the status of significant Brazilian and European matters.