Colgate-Palmolive Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. All financial amounts are in U.S. dollars; figures are in millions except per-share amounts. Unaudited interim results.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $4,383 | $3,943 | $12,562 | $11,586 |
| Operating profit | $1,035 | $958 | $2,918 | $2,584 |
| Net income attributable to Colgate | $643 | $619 | $1,841 | $1,579 |
| Diluted EPS | $1.31 | $1.21 | $3.73 | $3.07 |
| Gross margin | 56.2% | 59.4% | 57.3% | 59.2% |
Q3 sales rose 11.0%, reflecting volume growth of 4.5%, pricing of 2.0% and favorable foreign exchange of 4.5%. Organic sales growth was 5.0%. For the nine months, sales rose 8.5%; organic sales increased 3.5%. Q3 operating margin was 23.6% versus 24.3% a year earlier; excluding specified unusual items, it was 22.9% versus 24.3%. Nine-month operating profit increased 13% as reported, but 1% excluding specified unusual items.
Q3 diluted EPS included a $0.27-per-share after-tax gain from the Colombian brand sale, offset by $0.26 of restructuring and other initiative costs and $0.01 of Mexico land-sale costs. Nine-month adjusted net income was $1,839 versus $1,850 in 2010, while adjusted diluted EPS was $3.73 versus $3.59.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $2,057, down 8% from $2,243; management attributed the decrease primarily to higher voluntary benefit-plan contributions ($178 versus $35).
- Investing activities used $998, including $972 net cash paid for acquisitions; capital expenditures were $324. Financing activities used $566. Cash increased $455 to $945.
- Total debt was $4,756 at September 30, compared with $3,424 at December 31, 2010. Long-term debt, including current maturities, was $4,689 versus $3,376. Commercial paper outstanding was $986.
- Current assets were $4,443 and current liabilities $4,317. The filing reports working capital, under the company’s defined measure, at 0.6% of sales versus 1.7% in the comparable 2010 period.
- The company said it was in compliance with debt covenants and believed the likelihood of noncompliance was remote. It had lines of credit expiring in 2012 and stated it intended and was able to refinance certain short-term obligations on a long-term basis.
Material changes and unusual items
- Colgate acquired the Sanex personal care business on June 20 for €672 (approximately $960), funded with cash, liquidation of its euro investment portfolio and commercial paper. Sanex contributed 2.0% to Q3 worldwide sales growth.
- Colgate sold its Colombian laundry detergent brands to Unilever for $215, recognizing a $207 pretax gain ($135 after tax) in Q3.
- Q3 business realignment and cost-saving initiative costs were $168 pretax ($128 after tax); these covered Sanex integration, Colombia restructuring and facility closures. The company expected further after-tax costs of $10–$12 in Q4 2011 and $10–$15 in 2012.
- A Mexico City site sale is expected to transfer in 2014; the company received a first installment of $24 and recorded $7 of Q3 pretax costs. It plans to reinvest proceeds in relocation and a new facility.
- Gross margin pressure reflected higher raw and packaging-material costs: 530 basis points in Q3 and 350 basis points for the nine-month period, partly offset by cost savings and pricing. Q3 adjusted gross margin, excluding initiative costs, was 56.8%.
Outlook, risks and contingencies
The filing provides no specific consolidated sales or earnings forecast. Management expects global macroeconomic and market conditions to remain highly challenging, citing intensified competition and promotional activity, sharp commodity-cost increases, foreign-exchange movements and uncertainty in international markets. It said sustained pressures could adversely affect results. Capital expenditures for 2011 were expected to run at approximately 3.5% of net sales.
Venezuela remains exposed to inflation, currency devaluations, import authorization and exchange controls, price controls and limits on repatriating earnings. It represented 5% of nine-month sales; its monetary net asset position was approximately $277, excluding $233 of devaluation-protected government bonds.
The company disclosed varied legal and regulatory matters, including Brazilian tax disputes, European competition investigations and an ERISA class-action matter. It estimated reasonably possible losses in excess of accrued liabilities of $0–$250 in aggregate, while cautioning that actual outcomes could differ materially. Management did not expect the matters to materially affect consolidated financial position or ongoing results or cash flows, but acknowledged an adverse outcome could be material for a particular period.
Other notable items include a $271 Venezuela hyperinflationary transition charge in 2010, affecting comparability. The board authorized a new repurchase program for up to 50 million shares in September 2011. The annualized common dividend was increased 12% to $2.27 per share effective in Q2.
Investor verification priorities
- Assess underlying growth and profitability apart from foreign exchange, acquisitions/divestitures and the Colombian sale, restructuring and Mexico land-sale items.
- Monitor commodity-cost pass-through, gross-margin recovery, promotional intensity and volume trends, particularly in North America and Hill’s Pet Nutrition.
- Review debt and commercial-paper refinancing needs, liquidity, and planned investment and shareholder returns following the Sanex acquisition.
- Track Sanex integration, remaining realignment costs, Mexico site-sale milestones and the expected facility relocation spending.
- Follow developments in Venezuela, the disclosed legal matters and the potential-loss range; confirm whether estimates or exposures have changed.