Colgate-Palmolive Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Dollar amounts are in millions except per-share data. Financial statements are unaudited. Colgate sells oral, personal and home care products and pet nutrition products in more than 200 countries and territories.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $4,185 | $3,814 | $8,179 | $7,643 |
| Gross profit | $2,404 | $2,242 | $4,735 | $4,510 |
| Operating profit | $968 | $948 | $1,883 | $1,626 |
| Net income attributable to Colgate | $622 | $603 | $1,198 | $960 |
| Diluted EPS | $1.26 | $1.17 | $2.42 | $1.86 |
| Gross margin | 57.4% | 58.8% | 57.9% | 59.0% |
- Q2 sales rose 9.5%: volume +3.0%, net pricing +0.5%, and foreign exchange +6.0%. Organic sales growth was 3.5%.
- First-half sales rose 7.0%, driven by volume growth of 2.5% and foreign exchange of 4.5%; net selling prices were level.
- Q2 operating profit increased 2%, while first-half operating profit increased 16%. The prior-year first half included a $271 Venezuela hyperinflationary transition charge; excluding it, first-half 2011 operating profit decreased 1%.
- First-half net income increased 25% as reported, but decreased 3% excluding the prior-year Venezuela charge. Diluted EPS increased 2% on that adjusted comparison.
- Gross margin fell 140 basis points in Q2 and 110 basis points in the first half, chiefly because of higher raw and packaging material costs. Cost-saving initiatives partly offset the pressure.
Cash flow, balance sheet and capital
- First-half operating cash flow was $1,154, down from $1,302. Working capital rose to 2.5% of sales from 1.9%, with higher receivables and inventory coverage cited as drivers.
- Investing activities used $1,111, including $960 for the Sanex acquisition; capital expenditures were $225 versus $204.
- Financing activities provided $199, compared with $1,114 used in the prior-year period. The company paid $568 in dividends and repurchased $1,017 of treasury shares.
- Cash and cash equivalents were $739 at June 30, 2011, versus $490 at December 31, 2010. Current assets were $4,470 and current liabilities $4,249.
- Total debt was $5,011 at June 30, 2011, compared with $3,424 at year-end 2010; long-term debt, including current maturities, was $4,973 versus $3,376. Commercial paper outstanding was $1,233. The company said it was in compliance with debt covenants and had intent and ability to refinance certain short-term obligations.
- The company raised its annualized common dividend 12% to $2.27 per share, effective in Q2. It expected 2011 capital expenditures of approximately 3.5% of sales.
Segments and material developments
- Q2 Oral, Personal and Home Care sales were $3,648, up 10%; Pet Nutrition sales were $537, up 9.5%. Latin America delivered the strongest reported regional growth, while North America sales declined 3% and Europe/South Pacific organic sales declined 2%.
- Q2 segment operating profit increased in Latin America, Greater Asia/Africa and Pet Nutrition, but declined in North America and Europe/South Pacific. Margin pressure from commodities affected most businesses.
- On June 20, Colgate completed its $960 acquisition of Unilever’s Sanex personal-care business, financed with cash, sale of euro-denominated investments and commercial paper. Purchase-price allocation remained preliminary; the company expected to finalize it by year-end.
- Colgate agreed to sell its Colombian laundry detergent brands to Unilever for approximately $215. The sale was expected to close around July 29, 2011, with an anticipated pretax gain of about $203 and after-tax gain of about $130 in Q3. Management expected the gain to be fully offset in the second half by business realignment and cost-saving initiatives.
Outlook, risks and contingencies
- Management expected global macroeconomic and market conditions to remain challenging. It cited heightened competition and promotional activity, sharply higher commodity costs, and uncertainty in consumer spending and foreign exchange.
- Venezuela remained a significant operating risk due to currency devaluations, inflation, import authorization and currency controls, price controls, and limits on repatriating earnings. Venezuela contributed 5% of first-half sales; its local-currency monetary net asset position was approximately $207.
- The estimated full-year effective tax rate, before discrete items, was 32.5%. No specific full-year sales or earnings guidance was provided in the filing text.
- For disclosed legal matters, the company estimated reasonably possible losses in excess of accrued liabilities of $0 to approximately $425. Management did not expect ultimate resolution to materially affect consolidated financial position or ongoing results, but acknowledged an adverse outcome could materially affect a particular period.
- Brazilian tax and civil proceedings and several European competition matters remained unresolved; certain European fines were being appealed. The European Commission and Dutch investigations closed without action against Colgate. The company also disclosed a pending ERISA class-action matter in mediation.
- Disclosure controls were concluded to be effective as of June 30, 2011, with no reported material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether organic growth and pricing can offset persistent commodity inflation and margin declines.
- Sanex integration, final purchase-price allocation, and the timing and realized proceeds of the Colombian detergent divestiture.
- Debt and commercial-paper levels, refinancing capacity, and cash generation after acquisition spending, dividends and repurchases.
- Developments in Venezuela’s currency and operating controls and the recoverability or value of related assets.
- Updates to the $0–$425 estimate of reasonably possible legal losses and outcomes of the Brazilian, competition and ERISA proceedings.