Colgate-Palmolive Company — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Unaudited results; dollar amounts are in millions except per-share data. The company sells Oral, Personal and Home Care products and Hill’s Pet Nutrition products globally. Prior-period figures were reclassified following adoption of SFAS 160; the reclassification did not affect net income or EPS.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Net sales | $3,745.0 | $3,964.8 | $7,247.8 | $7,677.8 |
| Gross profit | $2,201.2 | $2,239.8 | $4,213.6 | $4,339.6 |
| Operating profit | $887.1 | $788.4 | $1,698.5 | $1,534.1 |
| Net income | $561.6 | $493.8 | $1,069.5 | $960.3 |
| Diluted EPS | $1.07 | $0.92 | $2.04 | $1.78 |
- Q2 sales declined 5.5% year over year; 7.5% higher net selling prices and 6.0% organic sales growth were offset by 1.5% lower volume and a 11.5% adverse foreign-exchange impact. First-half sales also declined 5.5%, while organic sales grew 5.5% (pricing +8.0%, volume -1.0%, FX -12.5%).
- Q2 gross margin rose to 58.8% from 56.5%; first-half margin rose to 58.1% from 56.5%. Higher pricing and cost savings drove improvement, partly offset by FX. SG&A fell to 34.6% of sales in Q2 from 35.9%, and to 34.2% for the half from 36.1%.
- Operating profit increased 13% in Q2 and 11% in the first half. Excluding 2008 restructuring charges, increases were 7% and 5%, respectively. Net income rose 14% in Q2 and 11% for the half. Prior-year comparisons included restructuring charges of $38.9 pretax in Q2 and $77.3 pretax in the first half.
- Interest expense was $21.5 in Q2 and $42.7 for the first half, down from $25.4 and $59.1, respectively, primarily due to lower average interest rates. The estimated full-year effective tax rate before discrete items was 32.1%.
Segments and material changes
- Oral, Personal and Home Care: Q2 sales were $3,215.1, down 6.0%; operating profit was $856.4, up from $792.9. Organic sales grew 7.5%. North America and Latin America operating profit increased 17% and 14%; Europe/South Pacific operating profit fell 12% as sales and volume weakened and FX was adverse; Greater Asia/Africa operating profit increased 14%.
- Hill’s Pet Nutrition: Q2 sales were $529.9, down 3.0%, with organic growth of 1.0%; volume fell 11.5%, partly offset by 12.5% pricing. Operating profit rose 7% to $139.4. First-half sales declined 1.5%, with volume down 9.5%.
- Advertising expense declined 15% to $391.7 in Q2 and 19% to $708.9 for the first half. The 2004 restructuring program was finalized at year-end 2008; no program charges were recorded in the first half of 2009.
Cash flow, liquidity and capital
- First-half operating cash flow was $1,210.7, up from $1,036.4, reflecting improved profitability, lower restructuring cash spending and working-capital improvement. Capital expenditures were $210.1; investing activities used $216.7.
- Financing activities used $664.8, including $454.1 of dividends and $395.7 of treasury-share purchases. Cash increased to $896.0 at June 30, 2009 from $554.9 at year-end 2008.
- Current assets were $4,217.8 and current liabilities $3,240.2. Reported debt consisted of $86.5 of notes and loans payable, $347.4 of current long-term debt and $3,367.9 of long-term debt. The company reported $3,715.3 carrying value of long-term debt including current maturities; commercial paper outstanding was $837.6, with $837.6 classified as long-term debt based on the company’s intent and ability to refinance. Credit lines expire in 2012.
- Management expected 2009 capital expenditures of approximately 4.5% of sales. The annualized common dividend was increased 10% to $1.76 per share in Q1. The board’s repurchase authorization permits up to 30 million shares; 10,868,132 shares remained available at quarter-end.
Outlook, risks and contingencies
- Management said global macroeconomic and market conditions were expected to remain challenging. It expected lower commodity and oil costs, higher pricing and savings programs to help offset the stronger U.S. dollar, but noted that results depend on the durability of cost relief and successful pricing and savings execution.
- The completed restructuring program was expected to generate annual savings of $475–$500 pretax ($350–$375 after tax), substantially all increasing future cash flow. Most of the remaining restructuring accrual of $23.7 was expected to be paid before year-end 2009.
- Risks include currency movements, commodity costs, economic and credit-market weakness, political uncertainty and disruption to suppliers, customers or consumers. Approximately 75% of sales were outside the U.S.; Venezuela represented 5% of sales, and exchange controls or significant devaluation there could adversely affect results.
- Competition-law investigations were ongoing in multiple countries; statements of objections or claims had been made in Switzerland, Greece and Spain. The company said outcomes and potential fines could not be predicted and that it would record reserves as appropriate.
- Brazilian tax disputes remained unresolved, including assessments of approximately $117 and $60. Management believed the assessments were without merit and intended to contest them. The Mexican transfer-pricing matter was settled in June 2009; the net impact was not material and approximated existing reserves. The company also disclosed consolidated ERISA litigation, not yet certified as a class, with non-binding mediation agreed in June 2009.
- Management stated that the contingencies were not expected to materially affect financial position, ongoing results or cash flows, while acknowledging that a particular quarter or year could be materially affected. No specific full-year sales or EPS guidance was provided.
Important facts for investors to verify
- Whether pricing and organic growth can continue to offset adverse currency effects and weak volumes, particularly at Hill’s and in Europe/South Pacific.
- The persistence of lower commodity costs, savings and margin gains, and delivery of the restructuring program’s projected savings.
- Commercial-paper refinancing and liquidity, including the company’s reliance on the stated intent and ability to refinance obligations long term.
- Developments and potential financial exposure from competition-law investigations, Brazilian tax disputes and ERISA litigation.
- Venezuela-related currency and exchange-control exposure, and the effect of currency changes on reported sales and profits.