Colgate-Palmolive Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollars are in millions except per-share amounts. Colgate operates Oral, Personal and Home Care across five regions and Hill’s Pet Nutrition; approximately 70% of sales come from outside the U.S.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $4,414 (+6.5%) | $4,153 | $13,018 (+7.0%) | $12,147 |
| Organic sales growth | 4.5% | Not stated here | 5.0% | Not stated here |
| Gross profit / margin | $2,623 / 59.4% | $2,540 / 61.2% | $7,816 / 60.0% | $7,374 / 60.7% |
| Operating profit / margin | $967 / 21.9% | $1,018 / 24.5% | $2,967 / 22.8% | $2,916 / 24.0% |
| Net income attributable to Colgate | $634 | $698 | $2,018 | $2,048 |
| Diluted EPS | $0.75 | $0.81 | $2.38 | $2.38 |
| Operating cash flow | Not separately stated | Not separately stated | $2,219 | $2,756 |
- Sales mix and segments: Q3 Oral, Personal and Home Care sales rose 3.5% to $3,569, with flat volume; Hill’s Pet Nutrition rose 20% to $845, including 11% volume growth. Nine-month Pet Nutrition sales increased 16% to $2,426; Oral, Personal and Home Care increased 5.5% to $10,592.
- Margin pressure: Q3 gross margin fell 180 basis points, principally from higher raw and packaging material costs (510 bps), partly offset by cost savings (220 bps) and pricing (110 bps). Nine-month gross margin declined 70 bps. Q3 adjusted operating margin was 21.9%, down 220 bps from adjusted prior-year margin; nine-month adjusted margin was 22.6%, down 130 bps.
- Adjusted earnings: Excluding identified unusual items, Q3 diluted EPS was $0.81 versus $0.79 a year earlier; nine-month adjusted diluted EPS was $2.42 versus $2.29. These are company-presented non-GAAP measures, not substitutes for GAAP results.
- Cash, liquidity and debt: Cash was $958 at September 30, 2021, versus $888 at year-end 2020. Total debt was $7,696, versus $7,601; long-term debt including current portion was $7,693. Nine-month operating cash flow declined 19%, primarily due to working capital and higher taxes paid. Capital expenditures were $374; dividends paid were $1,183 and treasury-share purchases were $964. The company said operating cash flow and debt issuance should meet foreseeable operating and recurring cash needs.
Changes, unusual items and management outlook
- Q3 sales growth reflected volume +1.5%, pricing +3.0% and foreign exchange +2.0%. For the first nine months, the components were volume +1.5%, pricing +3.5% and foreign exchange +2.0%.
- Q3 results included a $75 pretax ($55 after-tax) loss from redeeming high-coupon Canadian notes. Nine-month results included a $26 pretax ($20 after-tax) Brazilian VAT benefit. In Q3, reported net income and EPS declined, while the company’s adjusted measures increased.
- Operating cash flow was lower year over year; capital spending rose to $374 from $249. The company expects 2021 capital expenditures of approximately 3.0%–3.5% of net sales and raised its quarterly dividend to $0.45 per share effective Q2 2021.
- Management expected higher raw-material, packaging and logistics costs to continue at least through the remainder of 2021. It cited COVID-19 uncertainty, supply-chain and capacity disruptions, changing consumer demand, foreign-exchange volatility, competitive activity, retailer inventory actions and pricing pressures. The filing gives no specific revenue or EPS guidance.
- COVID-19 effects varied by market and category; demand for some hygiene products had eased from pandemic peaks but remained above historical levels. Management said the pandemic had not significantly affected liquidity through the nine-month period.
Risks and contingencies
- For disclosed matters where losses could be estimated, the company reported reasonably possible losses above accrued liabilities in an aggregate range of $0 to approximately $425. Management did not expect the matters, based on current knowledge, to materially affect consolidated financial position or ongoing results or cash flows, but noted an adverse outcome could materially affect a particular period.
- Brazilian tax and civil proceedings relate to the 1995 Kolynos acquisition. Other disclosed matters include a Greek competition-law appeal, an ERISA class action under appeal, and talcum-powder litigation. There were 168 talc cases pending at September 30, 2021, versus 137 at year-end 2020; management considers the cases without merit and says some defense and resolution costs are insured, subject to policy terms.
- Filorga’s reporting unit had less than 5% estimated fair-value headroom at its annual impairment test; modest changes in growth or discount-rate assumptions could reduce headroom to approximately zero. The company said future impairment charges were possible.
Key facts for investors to verify
- Whether pricing and cost-saving measures offset ongoing material and logistics inflation without further margin deterioration.
- Whether Pet Nutrition growth and regional Oral, Personal and Home Care performance persist as pandemic-related demand and channel conditions change.
- Cash conversion, working-capital trends, capital spending and debt levels, including commercial-paper funding and refinancing capacity.
- Reconciliations and assumptions behind adjusted earnings, especially the debt-redemption loss and Brazilian VAT benefit.
- Updates on the estimated legal-loss range, talc claims and Filorga impairment sensitivity.