Colgate-Palmolive Company — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Amounts are in millions of dollars except per-share data. Colgate sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries and territories.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $3,943 | $3,998 | $11,586 | $11,246 |
| Gross profit | $2,344 | $2,367 | $6,854 | $6,581 |
| Operating profit | $958 | $926 | $2,584 | $2,624 |
| Net income attributable to Colgate | $619 | $590 | $1,579 | $1,660 |
| Diluted EPS | $1.21 | $1.12 | $3.07 | $3.16 |
| Net cash from operations | Not separately provided | Not separately provided | $2,243 | $2,375 |
- Q3 sales fell 1.5% year over year as 3.0% volume growth and flat pricing were more than offset by a 4.5% adverse foreign-exchange impact. Organic sales grew 3.0%.
- Q3 gross margin was 59.4%, versus 59.2%; management credited cost savings with more than offsetting foreign exchange and higher promotional investment. SG&A was 35.3% of sales, versus 35.1%, primarily reflecting higher advertising.
- For the first nine months, sales grew 3.0%, with 4.0% volume growth, flat pricing and a 1.0% adverse currency impact. Gross margin improved to 59.2% from 58.5%; SG&A rose to 34.9% of sales from 34.5%.
- Nine-month operating profit declined 2% as reported, but increased 9% excluding the $271 Venezuela accounting-transition charge. Nine-month net income and diluted EPS also included that charge; excluding it, management reported net income of $1,850, up 11%, and diluted EPS of $3.59, up 14%. These are non-GAAP comparisons.
- Q3 net income and diluted EPS rose despite lower reported sales. Net interest expense fell to $13 from $17 in Q3 and to $43 from $59 for the nine-month period, primarily due to lower average interest rates.
Segments and regional trends
- Q3 Oral, Personal and Home Care sales were $3,422, down 1.5% reported but up 3.5% organically. Greater Asia/Africa grew 12% reported; North America grew 2%. Latin America fell 6% and Europe/South Pacific fell 8.5%, mainly reflecting currency and, in Europe/South Pacific, lower pricing.
- Q3 Hill’s Pet Nutrition sales fell 2% to $521; organic sales declined 1.5%. Operating profit rose 1% to $138 as cost savings and lower advertising offset lower sales and higher material costs.
- For the first nine months, Oral, Personal and Home Care sales rose 4% to $10,058; Hill’s sales fell 2.5% to $1,528.
Cash, debt and liquidity
- At September 30, cash was $654, current assets $4,091 and current liabilities $3,176. The current ratio was approximately 1.29. Total debt shown on the balance sheet was $3,388, versus $3,182 at December 31, 2009; cash less that debt was approximately negative $2,734.
- Nine-month operating cash flow declined 6% to $2,243, which management attributed to increased working capital. Investing activities used $438, including $318 of capital expenditures; financing activities used $1,745, including $804 of dividends and $1,385 of treasury-share purchases.
- Commercial paper outstanding was $575 at September 30. The company said it intended and was able to refinance commercial paper and certain current maturities on a long-term basis, including through credit lines expiring in 2012. It reported compliance with relevant borrowing requirements.
- The quarterly common dividend increased 20% to $0.53 per share. A February 2010 authorization permits repurchases of up to 40 million shares; 5.0 million shares were repurchased under the public program in Q3.
Unusual items, outlook and risks
- Venezuela: From January 1, 2010, hyperinflationary accounting required the subsidiary’s functional currency to become the U.S. dollar, resulting in a one-time $271 charge. The January currency devaluation also produced a one-time $46 pretax gain and a reported $59 after-tax gain related to balance-sheet remeasurement and lower taxes on accrued remittances. Management estimated a net 2010 diluted-EPS reduction of $0.10–$0.15 from the devaluation, including the first-quarter gain. Venezuela represented 4% of nine-month sales; currency controls and limited access to dollars create ongoing risks to reported results and repatriation.
- Management expected 2010 capital expenditures to be about 3.5% of net sales and estimated a full-year effective tax rate of 32.2% before discrete items. The filing provides no broader quantitative sales or earnings guidance. Management described global macroeconomic and market conditions as highly challenging.
- U.S. benefit-plan amendments triggered a remeasurement charge of $550, or $344 after tax, in other comprehensive income, primarily due to a 100-basis-point discount-rate reduction. The company said the amendments’ incremental effect on remaining-2010 net income was not significant.
- Risks cited include foreign-exchange and political uncertainty, raw-material and packaging costs, ability to maintain pricing and reduce costs, Venezuelan currency controls, and competition-law investigations. Pending Brazilian tax assessments include approximately $121 and $72; the company disputes them. European competition proceedings and consolidated ERISA litigation also remain. Management stated these contingencies were not expected to materially affect financial position, ongoing results or cash flows, while acknowledging a particular quarter or year could be materially affected.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether organic volume growth and margin gains can continue to offset foreign-exchange pressure, pricing declines and higher advertising or input costs.
- The realized earnings, cash-flow and repatriation effects of Venezuela’s exchange controls and the 2010 currency changes, including the stated EPS-impact estimate.
- Debt refinancing needs and the effect of ongoing share repurchases and dividend growth on liquidity and leverage.
- Developments and potential financial exposure in Brazilian tax disputes, European competition investigations and ERISA litigation.
- Actual full-year capital spending, tax rate and results compared with management’s stated estimates; interim results may not represent full-year performance.