Colgate-Palmolive Company — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; dollar amounts are in millions except per-share data. Colgate operates in Oral, Personal and Home Care and Pet Nutrition, selling in more than 200 countries and territories.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $3,826 | $3,845 | $7,588 | $7,607 |
| Operating profit | $853 | $944 | $1,738 | $1,811 |
| Net income attributable to Colgate | $524 | $600 | $1,094 | $1,133 |
| Diluted EPS | $0.59 | $0.67 | $1.23 | $1.26 |
| Operating margin, GAAP | 22.3% | 24.6% | 22.9% | 23.8% |
| Gross margin, GAAP | 60.1% | 59.9% | 60.2% | 59.8% |
- Q2 sales declined 0.5%; pricing rose 1.0%, offset by a 1.0% volume decline and 0.5% adverse foreign exchange. Organic sales were flat. For the first half, sales declined $19, with pricing gains offset by lower volume; organic sales were flat.
- Q2 GAAP operating profit fell 10% and GAAP attributable net income fell 13%. Results included restructuring charges of $142 pretax ($115 after tax), versus $59 pretax ($44 after tax) a year earlier. Excluding disclosed restructuring items and, for 2016, a foreign-tax benefit, Q2 operating profit was $995 versus $1,003, while adjusted net income was $639 versus $631 and adjusted diluted EPS was $0.72 versus $0.70. These are company-reported non-GAAP measures.
- First-half GAAP operating profit declined 4%; excluding restructuring charges, it was approximately flat at $1,926 versus $1,925. Adjusted diluted EPS was $1.39 versus $1.33, excluding restructuring charges and the 2016 foreign-tax benefit.
- Q2 adjusted gross margin increased 50 basis points to 60.7%, supported by cost savings and pricing, partly offset by higher raw and packaging costs. Adjusted operating margin was 26.0%, down 10 basis points, as higher SG&A and other expense offset gross-margin improvement.
- Regional Q2 sales were mixed: Latin America increased 7% and Africa/Eurasia 1%; North America declined 3.5%, Europe 3.5%, and Asia Pacific 5%. Hill’s Pet Nutrition sales were unchanged, with organic sales up 0.5%.
Cash flow, debt and liquidity
- First-half operating cash flow was $1,305, down from $1,320 in 2016, principally due to timing of tax payments. Capital expenditures were $229, versus $248; cash and cash equivalents ended at $1,241, down $74 from year-end.
- Investing activities used $312; financing activities used $1,119. Financing included $716 of dividends and $660 of treasury-share purchases. Total debt was $6,519 at June 30, down from $6,533 at December 31, 2016; long-term debt was $6,506.
- Current assets were $4,555 and current liabilities $3,780. The company reported total equity of $88, including negative Colgate-Palmolive shareholders’ equity of $242 and noncontrolling interests of $330.
- Management expects operating cash flow and debt issuance to cover foreseeable operating and recurring cash needs, including debt service, dividends, capital expenditures, restructuring and share repurchases. The company reported compliance with bank covenant requirements. Commercial paper outstanding was $883 at June 30, 2017.
Outlook, material developments and risks
- Management expects challenging global conditions and slow category growth to continue, alongside heightened competition, volatile currencies and high raw and packaging material costs. It cautioned these factors could adversely affect future results. No specific company-wide sales or EPS guidance is provided in the filing.
- The 2012 Restructuring Program was extended through December 31, 2017. In light of challenging markets and slower category growth, management raised the lower end of estimated cumulative pretax charges to $1,500–$1,585 (after tax $1,120–$1,170); estimated 2017 charges are $275–$360 pretax. Annual pretax savings after implementation are estimated at $455–$495, with $50–$60 expected in 2017. Approximately 75% of total charges are expected to require cash; substantially all charges are expected by year-end 2017. The program is expected to reduce global positions by 3,300–3,800.
- Legal matters include Brazilian tax proceedings, competition matters, talcum-powder litigation and an ERISA case. The estimated aggregate range of reasonably possible losses above accrued liabilities is $0–$225 for matters that can be estimated; this excludes talc and ERISA matters, for which losses could not be reasonably estimated. Management does not currently expect the disclosed matters to materially affect consolidated financial position or ongoing results, but notes an adverse outcome could materially affect a particular period.
- Other notable items: Q2 restructuring costs were substantially higher than a year earlier; adoption of share-based compensation guidance generated $26 of first-half excess tax benefits. The company’s estimated full-year effective tax rate before discrete items was 31.3%. Management reported no material change in risk factors or internal controls.
Important facts for investors to verify
- Whether flat organic sales and regional volume declines improve, particularly in North America and Asia Pacific, and whether toothpaste and toothbrush market-share declines persist.
- Whether restructuring savings and 2017 charge estimates are achieved, including the timing and cash impact of implementation.
- How raw-material, packaging and foreign-exchange costs affect margins, pricing and cash generation.
- Developments in Brazilian tax disputes, competition proceedings, talcum-powder cases and the ERISA matter, including any change to the disclosed exposure range.
- Debt refinancing and liquidity needs, dividend and repurchase spending, and the impact of future tax or accounting changes.