Colgate-Palmolive Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollars are in millions except per-share amounts. Colgate operates Oral, Personal and Home Care and Pet Nutrition businesses, selling in more than 200 countries and territories.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $4,455 | $4,414 | $13,338 | $13,018 |
| Operating profit | $947 | $967 | $2,691 | $2,967 |
| Net income attributable to Colgate | $618 | $634 | $1,780 | $2,018 |
| Diluted EPS | $0.74 | $0.75 | $2.12 | $2.38 |
| Gross margin | 57.2% | 59.4% | 57.5% | 60.0% |
| Operating margin | 21.3% | 21.9% | 20.2% | 22.8% |
- Q3 sales rose 1.0%; price increases of 11.5% more than offset volume declines of 4.5% and foreign-exchange headwinds of 6.0%. Organic sales growth was 7.0% (a non-GAAP measure). For the nine months, sales rose 2.5% and organic sales grew 6.5%, with pricing partly offset by lower volume and currency effects.
- Margin pressure reflected sharply higher raw and packaging-material costs. Q3 gross margin fell 220 basis points; pricing contributed 440 basis points and cost-saving initiatives 260 basis points, versus a 920-basis-point materials-cost headwind. Nine-month gross margin fell 250 basis points.
- Management-reported adjusted operating profit was $920 in Q3, down 5%, and $2,740 for nine months, down 7%. Adjusted diluted EPS was $0.74 in Q3 versus $0.81, and $2.20 for nine months versus $2.42. These non-GAAP measures exclude specified unusual items.
- Q3 segment performance was mixed: Latin America and Africa/Eurasia operating profit rose, while Europe, Asia Pacific and Hill’s Pet Nutrition operating profit declined. Hill’s Q3 sales grew 3% (7.5% organic), but operating profit fell 14%, primarily amid input-cost pressure.
- Operating cash flow was $1,883 for nine months, down from $2,219, mainly reflecting lower net income and increased inventory. Capital expenditures were $475. Cash and cash equivalents were $938 at September 30, versus $832 at year-end 2021.
- Total debt was $8,248, up from $7,245 at year-end; long-term debt including current maturities was $8,232. In August, the company issued $1,500 of senior notes at fixed coupons of 3.100% (three- and five-year notes) and 3.250% (ten-year notes). Current assets were $5,278 and current liabilities $4,492. The company reported compliance with borrowing covenants.
Material changes and unusual items
- On September 30, Colgate acquired three U.S. dry pet-food manufacturing plants from Red Collar Pet Foods for $727, funded with a combination of debt and cash. Preliminary purchase accounting included $407 of goodwill allocated to Pet Nutrition; the allocation remains subject to revision. The company also acquired Italian pet-food manufacturing assets in April; its impact was not material.
- The 2022 Global Productivity Initiative generated $92 of pretax charges ($72 after tax) in the first nine months. The company estimates total pretax charges of $200–$240 and annualized pretax savings of $90–$110 when approved projects are implemented; completion is expected by mid-2024. It estimates 80%–90% of charges will require cash expenditures.
- A land sale generated a $47 pretax gain in Q3. Q3 results also included $17 of acquisition-related costs. In 2021, comparable results included a $75 pretax loss on early debt extinguishment; nine-month 2021 results also included a $26 pretax Brazilian VAT benefit.
- A domestic postretirement-plan amendment and higher discount rates led to a $398 actuarial gain recorded in accumulated other comprehensive income, to be amortized over future periods.
Outlook, risks and contingencies
- Management expected elevated raw-material, packaging and logistics costs to continue through 2022 and said it was taking additional pricing to offset them. It warned pricing, inflation and rising interest rates could weaken demand, reduce volumes, or shift purchases toward lower-priced products. Foreign-exchange volatility, supply-chain constraints, competition and changing retailer practices also pose risks. The filing provides no specific full-year sales or EPS guidance; expected 2022 capital expenditures were approximately 3.5%–4.0% of net sales.
- COVID-19 effects were described as largely abated, but uncertainty remained, particularly in China and travel retail. The war in Ukraine continued to affect operations in Ukraine and Russia; the company said the impact had not been material to consolidated results to date, while noting possible effects through costs, supply chains and currencies.
- For disclosed matters where losses could be reasonably estimated, the company estimated aggregate reasonably possible losses in excess of accrued liabilities of $0–approximately $450. Management did not expect the ultimate resolution of disclosed contingencies to materially affect consolidated financial position or ongoing results, but noted an adverse outcome could materially affect a particular period.
- There were 224 pending U.S. talcum-powder cases at September 30, up from 203 at June 30 and 171 at year-end 2021. The company disputes the claims; some defense and resolution costs are covered by insurance, subject to policy terms. Brazilian tax disputes and an ERISA class action also remain pending.
- The company’s current estimate of its full-year effective tax rate before discrete items was 23.8%. It was evaluating the tax provisions of the Inflation Reduction Act, including the corporate alternative minimum tax.
Important facts for investors to verify
- Whether pricing can continue to offset input-cost and currency pressures without further volume or mix deterioration.
- Whether inventory levels and working-capital demands improve enough to restore operating cash flow.
- Progress, cash costs, completion timing and realized savings from the productivity initiative.
- Integration and returns from the Red Collar acquisition, including final purchase-price allocation and goodwill.
- Debt growth, refinancing needs and sensitivity to higher interest rates.
- Developments in talc, Brazilian tax and ERISA proceedings, including potential exposure beyond accrued amounts.