Colgate-Palmolive Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Unless noted, financial amounts are in millions of dollars. Colgate sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries and territories.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $3,762 | $4,070 | (7.5%) |
| Gross profit / margin | $2,248 / 59.8% | $2,392 / 58.8% | Margin +100 bps |
| Operating profit / margin | $867 / 23.0% | $860 / 21.1% | Profit +1% |
| Net income attributable to Colgate | $533 | $542 | (2%) |
| Diluted EPS | $0.59 | $0.59 | Flat |
| Cash from operations | $614 | $727 | (16%) |
Organic sales, a non-GAAP measure excluding foreign exchange, acquisitions, divestitures and Venezuela’s deconsolidation, rose 5.0%. Reported sales reflected a 1.5% benefit from net pricing, a 1.0% volume decline and an 8.0% foreign-exchange headwind. Excluding divestitures and Venezuela’s deconsolidation, volume grew 3.5%.
Gross margin improvement reflected cost savings and pricing, partly offset by higher raw and packaging costs, including foreign-exchange transaction costs. Excluding restructuring charges, gross margin increased 110 bps to 60.0%; adjusted operating profit was $922, down 4%, and adjusted diluted EPS was $0.63 versus $0.66. These are company-reported non-GAAP measures.
Balance sheet and liquidity
At March 31, cash and cash equivalents were $1,014, versus $970 at year-end. Current assets were $4,490 and current liabilities $4,463. Total debt was $6,580, slightly above $6,548 at December 31, 2015; $698 was classified as current, versus $298 at year-end. Total liabilities were $12,521 and total equity was negative $73.
Operating cash flow was $614. Investing activities used $144, including $114 of capital expenditures; financing activities used $441, including $340 of dividends paid and $229 of treasury-share purchases. Management expects operating cash flow and debt issuance to cover foreseeable operating and recurring cash requirements. 2016 capital expenditures are expected to be about 4.5% of net sales.
Changes and operating trends
- Venezuela’s operations were deconsolidated effective December 31, 2015; 2016 reported results exclude them, while prior periods were not restated. This materially affects reported comparisons, particularly in Latin America.
- Oral, Personal and Home Care sales fell 9.0% to $3,210; organic sales increased 5.0%. Hill’s Pet Nutrition sales rose 2.5% to $552, with organic sales up 5.0%.
- Regional organic sales grew 2.0% in North America, 9.5% in Latin America, 1.0% in Europe/South Pacific, 4.0% in Asia and 8.0% in Africa/Eurasia. Foreign exchange and divestitures drove reported declines in several regions.
- Global toothpaste share was 43.8%, down 1.0 percentage point year over year; manual toothbrush share was 33.5%, down 0.2 point.
- Cash from operations declined partly because of Venezuela’s deconsolidation, higher tax payments and a $50 voluntary contribution to U.S. postretirement plans.
Outlook, restructuring and risks
Management expects global macroeconomic and market conditions to remain highly challenging. It cites intense competition, currency volatility and high raw and packaging material costs as potential pressures on future results. No specific company-wide revenue or EPS forecast is provided in the supplied filing text.
The expanded 2012 Restructuring Program runs through December 31, 2017. Estimated cumulative pretax charges are $1,405–$1,585, with annual savings projected at $430–$495 pretax once approved projects are implemented. For 2016, charges are expected to be $270–$310 pretax and savings $60–$70 pretax. The program is expected to reduce the workforce by approximately 3,300–3,800 positions; about 75% of total charges are expected to require cash expenditures.
The company intends to repatriate an incremental $1,500 of foreign earnings in connection with a $210 U.S. tax benefit related principally to Venezuela’s foreign-exchange changes; it recorded a $210 tax charge during the quarter. Its estimated full-year effective tax rate before discrete items is 31.5%. The annualized common dividend was increased 3% to $1.56 per share effective Q2 2016.
Contingencies include Brazilian tax matters, European competition matters, talcum-powder litigation and an N8 Medical/BYU/N8 Pharma lawsuit. Management estimates reasonably possible losses above accrued liabilities of $0–approximately $200 for specified matters, but this range excludes talc cases, for which losses cannot currently be estimated. Plaintiffs in the N8 matter allege approximately $2,500 in damages; the company disputes the allegations. The Australian competition settlement of $13 plus $1 in costs was approved by a court in April 2016.
The Mexico City land sale remains subject to closing conditions. Those conditions were not expected to be met by May 31, 2016; the purchaser has options including termination and return of the first two installments. Management expected an amendment and transfer by Q3 2016.
Key facts for investors to verify
- How much of organic sales growth and margin improvement persists as currency, pricing and input-cost pressures continue.
- The effects of Venezuela’s deconsolidation on reported sales, earnings, cash generation and future tax or repatriation requirements.
- Restructuring execution, cash costs, timing and delivery of projected savings.
- Debt maturities, refinancing access and the ability to fund dividends, repurchases and capital investment while maintaining liquidity.
- Developments in the Mexico property sale and legal matters, particularly the unestimable talc exposure and N8 damages allegations.