Colgate-Palmolive Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Dollar amounts are in millions except per-share data. Colgate sells oral, personal and home care products and pet nutrition products in more than 200 countries and territories; approximately 80% of sales came from outside the U.S.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $4,200 | $3,994 | +5.0% |
| Gross profit / margin | $2,437 / 58.0% | $2,331 / 58.4% | +5.0% / down 40 bps |
| Operating profit / margin | $938 / 22.3% | $915 / 22.9% | +3% / down 60 bps |
| Net income attributable to Colgate | $593 | $576 | +3% |
| Diluted EPS | $1.23 | $1.16 | +6% |
| Net cash from operations | $662 | $680 | Down 3% |
- Sales growth reflected volume growth of 3.5% and net price increases of 3.5%, offset by a 2.0% adverse foreign-exchange impact. Organic sales growth, a non-GAAP measure, was 6.5%.
- Gross margin pressure primarily reflected higher raw and packaging material costs (280 bps); funding-the-growth savings and higher pricing each offset 140 bps. Excluding specified land-sale and realignment costs, gross margin was 58.2%, down 20 bps.
- Net income included after-tax costs of $5 related to the Mexico land sale and $3 for realignment and cost-saving initiatives. Excluding these items, management reported non-GAAP net income of $601 and diluted EPS of $1.24.
- Cash and cash equivalents were $1,044 at March 31, versus $878 at year-end 2011. Current assets were $4,849 and current liabilities $4,107.
- Total debt was $4,967, up from $4,810 at December 31, 2011; long-term debt including current portion was $4,929. Commercial paper outstanding was $832. The company said it was in compliance with its debt covenants.
- Cash used in investing was $41, including $60 of capital expenditures. Cash used in financing was $465, including $278 of dividends and $463 of treasury-share purchases; debt issuance and repayments were $1,183 and $1,013, respectively.
Segment and period comparisons
- Oral, Personal and Home Care sales rose 6% to $3,658; Pet Nutrition sales rose 1.5% to $542. Hill’s Pet Nutrition volume declined 1.5%, partly offset by pricing.
- Latin America sales increased 6.5% and operating profit 6%; Greater Asia/Africa sales increased 8% and operating profit 8%. North America sales rose 5%, but operating profit fell 5%. Europe/South Pacific sales increased 2.5%, while operating profit declined 1%; organic sales there fell 2%, with Sanex acquisition contribution offsetting weak organic growth.
- Reported operating margin fell to 22.3% from 22.9%. Excluding specified costs, management reported a 22.6% margin versus 22.9% a year earlier.
- Operating cash flow declined mainly because of higher income-tax payments and payment of a fine related to a French competition matter involving a divested detergent business. Capital expenditures fell to $60 from $78.
Outlook, risks and unusual items
- Management expected global macroeconomic and market conditions to remain highly challenging, citing intense competition, volatile foreign exchange and elevated commodity costs. It did not provide specific full-year sales or earnings guidance in the supplied filing text.
- 2012 capital expenditures were expected to run at approximately 3.5% of net sales. Management expected operating cash flow and debt issuances to cover foreseeable operating and recurring cash needs, including debt service, dividends, capital spending and share repurchases.
- The annualized common dividend was increased 7% to $2.48 per share, effective in Q2 2012. The filing’s income statement reports $1.20 of dividends declared per share for the quarter and notes that two dividends were declared in each comparison period.
- Venezuela was a significant exposure: about 5% of consolidated sales came from CP Venezuela. Currency exchange, import and price controls, high inflation and potential further government action constrain operations and repatriation. New price controls affecting most of its products took effect April 1, 2012. Approximately 40% of cash and cash equivalents was subject to Venezuelan currency controls; $1,018 of cash was held by foreign subsidiaries overall.
- Legal matters include Brazilian tax disputes and European competition investigations and fines. For disclosed matters, the company estimated reasonably possible losses in excess of accrued liabilities of $0 to approximately $200; outcomes could differ materially. Management did not expect the matters to materially affect consolidated financial position or ongoing results, but acknowledged that an adverse outcome could materially affect a particular quarter or year.
- The Mexico City property sale is expected to transfer in 2014 and requires relocation and exit spending; $7 of pretax costs were incurred in Q1 2012. The Sanex acquisition, completed in 2011 for $966, contributed to sales and increased intangible-asset amortization.
Investor verification priorities
- Track organic volume, pricing, foreign-exchange effects and acquisition/divestiture contributions, particularly the contrast between reported and organic regional growth.
- Monitor commodity costs, pricing actions and cost savings for their effects on gross and operating margins.
- Assess Venezuela’s price and currency controls, cash access, sales contribution and $370 net monetary asset position.
- Follow the disclosed litigation and competition matters, including the estimated $0–$200 range of possible losses above accruals and the status of appeals.
- Reconcile cash generation with debt levels, commercial-paper refinancing, capital spending, dividends and share repurchases.
- Compare GAAP results with management’s non-GAAP adjustments and verify the timing and total cost of Mexico relocation and other realignment initiatives.