Colgate-Palmolive Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Unless otherwise noted, dollar amounts are in millions. Comparisons are with the corresponding 2013 period.
Business context
Colgate-Palmolive sells Oral, Personal and Home Care products and Hill’s Pet Nutrition products in more than 200 countries and territories. Approximately 80% of sales came from outside the U.S., and more than half came from emerging markets.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $4,379 | $4,398 | $13,056 | $13,059 |
| Gross profit | $2,558 | $2,585 | $7,634 | $7,634 |
| Operating profit | $948 | $1,016 | $2,562 | $2,664 |
| Net income attributable to Colgate | $542 | $656 | $1,552 | $1,677 |
| Diluted EPS | $0.59 | $0.70 | $1.68 | $1.78 |
| Operating margin | 21.6% | 23.1% | 19.6% | 20.4% |
- Q3 organic sales growth was 3.5%, while reported sales fell 0.5%: volume rose 2.0% and net selling prices rose 1.5%, offset by a 4.0% foreign-exchange impact. For the first nine months, organic sales grew 4.5%; reported sales were essentially flat as 4.5% volume growth and 1.5% pricing were offset by 4.5% negative FX.
- Q3 GAAP gross margin was 58.4%, down 40 basis points. Excluding restructuring and Mexico land-sale costs, it was 58.6%, also down 40 basis points, as higher raw and packaging costs outweighed pricing and cost savings. Nine-month adjusted gross margin was 58.7%, unchanged year over year.
- Q3 GAAP operating profit fell 7% and nine-month GAAP operating profit fell 4%. Excluding specified restructuring, Venezuela, Mexico land-sale and competition-law items (and, for nine months, other listed special charges), non-GAAP operating profit increased 3% in Q3 and 2% year to date. These are company-reported non-GAAP measures, not substitutes for GAAP results.
- Q3 diluted EPS declined 16% to $0.59; company-reported adjusted diluted EPS was $0.76, up 4%. Nine-month diluted EPS declined 6% to $1.68; adjusted diluted EPS was $2.17, up 4%.
- Q3 SG&A was $1,497, or 34.2% of sales, compared with $1,549 and 35.2% a year earlier. Advertising investment declined 10.5% to $428. Nine-month advertising investment declined 5% to $1,374.
- Segment trends in Q3: Pet Nutrition sales rose 4% and operating profit rose 8%; Europe/South Pacific operating profit rose 10% and Asia rose 7%. Latin America sales fell 4.5% and operating profit fell 8%, with currency headwinds and higher costs; Africa/Eurasia sales fell 3.5% and operating profit fell 8%.
- Operating cash flow was $2,392 for nine months, versus $2,365. Capital expenditures were $493, versus $419. Cash and cash equivalents were $1,355 at September 30, compared with $962 at year-end 2013.
- Total debt was $6,055 at September 30, 2014, up from $5,657 at December 31, 2013; long-term debt, including current maturities, was $6,041. Current assets were $5,181 and current liabilities $4,412. Cash held by foreign subsidiaries was $1,301, including $68 subject to Venezuelan exchange controls.
- Financing cash outflow was $1,437, including $990 of dividends paid and $1,119 of treasury-share purchases. The company declared dividends of $0.36 per share in Q3; it had raised the annualized dividend 6% to $1.44 per share effective Q2.
Material changes and unusual items
- Venezuela: Currency-regime changes led to a $266 pretax first-quarter remeasurement loss and a $61 pretax third-quarter loss; the Q3 loss was $40 after tax, or $0.04 per diluted share. The nine-month cash-flow reconciliation also includes $327 of Venezuela remeasurement charges. CP Venezuela represented about 3% of nine-month sales. Its net monetary asset position exposed to further remeasurement was approximately $444; local non-monetary assets were approximately $328, including $233 of fixed assets potentially subject to impairment.
- Foreign tax matter: An adverse foreign-court decision prompted a $66 Q3 income-tax charge, comprising a $30 increase in unrecognized tax benefits and a $36 deferred-tax-asset write-off. The company plans to appeal. Q3 GAAP effective tax rate was 38.6%, versus 31.2%; management’s estimated full-year rate before discrete items was 31.5%.
- Restructuring: The four-year 2012 program incurred $231 pretax charges in the first nine months of 2014 and $691 cumulatively through September. After quarter-end, the board expanded the program: estimated cumulative pretax charges increased to $1,285–$1,435, with completion still expected by December 31, 2016. Annual pretax savings by the program’s fourth year were projected at $405–$475; approximately 75% of program charges are expected to be cash expenditures. The company projected 2014 program charges of $300–$350 after the expansion.
- Subsequent events: On October 3, 2014, Colgate acquired a Myanmar oral-care business for $62 cash plus contingent consideration. On October 17, it extended its revolving credit facility to November 2019 and increased capacity by $520 to $2,370.
- Contingencies: Management estimated reasonably possible losses above accruals at $0–$250 for disclosed matters, excluding Australian competition proceedings and talc cases for which losses could not be estimated. It stated that current knowledge did not indicate a material effect on consolidated financial position or ongoing results, while acknowledging that an adverse outcome could materially affect a particular period.
Outlook, commentary and risks
Management expected global macroeconomic and market conditions to remain highly challenging, citing intense competition, volatile currencies, high commodity costs and promotional activity. It said cost, efficiency and growth initiatives were intended to mitigate these pressures, but persistent conditions could adversely affect results. The filing gives no specific consolidated sales or EPS forecast. Management expected cash from operations and debt issuance to cover foreseeable operating and recurring cash needs, including debt service, dividends, capital expenditures, restructuring and repurchases. 2014 capital expenditures were expected to remain at approximately 4.5% of sales.
Key risks include foreign-exchange movements and controls, inflation and price/profit controls, import access and labor unrest in Venezuela; raw-material costs and ability to implement pricing; restructuring execution and realized savings; and legal, tax and competition proceedings. The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic sales and volume growth continue to offset unfavorable foreign exchange, and whether regional market-share trends improve.
- How much of the reported earnings decline reflects recurring operating performance versus Venezuela, tax, restructuring and legal charges; review management’s non-GAAP reconciliations alongside GAAP results.
- Developments in Venezuelan exchange rates, import-dollar access, price controls, bond valuations and potential asset impairment.
- Actual restructuring cash costs, timing and savings compared with the expanded estimates.
- Debt maturities, refinancing access, foreign cash availability and the outcomes of material legal and tax matters.