Colgate-Palmolive Company — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Colgate sells oral, personal and home care products and Hill’s pet nutrition products in more than 200 countries. Approximately 75% of sales came from outside the U.S. and more than half from emerging markets.
Financial performance
| Metric | 2015 | 2014 | Change or context |
|---|---|---|---|
| Net sales | $16.034 billion | $17.277 billion | Down 7%; organic sales grew 5.0%, while foreign exchange reduced sales by 11.5%. |
| Gross profit / margin | $9.399 billion / 58.6% | $10.109 billion / 58.5% | Adjusted margin, excluding specified items, was 58.7% in both years. |
| Operating profit / margin | $2.789 billion / 17.4% | $3.557 billion / 20.6% | 2015 included a $1.084 billion Venezuela accounting charge. Excluding specified items, operating profit was $3.988 billion, down 5%, and margin was 24.9%, up 50 basis points. |
| Net income attributable to Colgate | $1.384 billion | $2.180 billion | Down 37% reported. Excluding specified items, $2.556 billion, down 6%. |
| Diluted EPS | $1.52 | $2.36 | Down 36% reported; adjusted EPS was $2.81, down 4%. |
| Cash from operations | $2.949 billion | $3.298 billion | Down $349 million. |
| Capital expenditures | $691 million | $757 million | Management expected 2016 capex of about 4.5% of sales. |
| Debt and liquidity | Total debt $6.571 billion; cash $970 million | Total debt $6.148 billion; cash $1.089 billion | Unused credit lines were $2.976 billion; current ratio was 1.2. |
Fourth-quarter detail
Fourth-quarter sales were $3.899 billion, versus $4.221 billion in fourth-quarter 2014. The company reported a $458 million net loss attributable to Colgate and diluted loss per share of $0.51, primarily reflecting the $1.058 billion after-tax Venezuela accounting charge recorded in the quarter.
Material changes and segment trends
- Organic sales growth was positive in both major businesses: Oral, Personal and Home Care grew 4.5%; Hill’s Pet Nutrition grew 6.0%. Reported sales declined in both segments due largely to currency translation.
- Oral, Personal and Home Care sales fell 8% to $13.822 billion; Pet Nutrition sales fell 2% to $2.212 billion. Hill’s operating profit rose 3% to $612 million, while operating profit declined in Latin America, Europe/South Pacific and Africa/Eurasia.
- Foreign exchange and related transaction costs pressured results and margins. Cost savings and pricing partly offset higher raw-material and packaging costs.
- Reported effective tax rate rose to 44.0% from 33.8%; the company’s adjusted rate was 31.3% versus 31.5%.
- Shareholders’ equity attributable to Colgate was negative $299 million at year-end, compared with positive $1.145 billion in 2014. The company paid $1.493 billion in dividends and repurchased $1.551 billion of shares during 2015.
Outlook, unusual items and risks
- Venezuela: Severe currency restrictions, limited access to U.S. dollars, price controls, inflation and operating disruptions led the company to stop consolidating its Venezuelan subsidiary effective December 31, 2015. The $1.058 billion after-tax charge included a $952 million investment impairment and $111 million of reclassified cumulative translation losses. Future Venezuelan results will be recognized only to the extent cash is received from sales, dividends or royalties.
- Management outlook: Management expected global macroeconomic and market conditions to remain highly challenging, citing currency volatility, competitive intensity and elevated material costs. It highlighted brand building, innovation, efficiency and restructuring as priorities. The filing provides no specific 2016 sales or EPS guidance.
- Restructuring: The 2012 program was extended through December 31, 2017. Before the 2015 expansion, cumulative pretax charges were estimated at $1.285–$1.435 billion, with annual pretax savings of $405–$475 million by the program’s fourth year. For 2016, expected charges were $285–$435 million and savings $60–$70 million; estimates exclude the latest expansion.
- Other unusual item: The South Pacific laundry detergent business was sold for approximately $221 million; the company recorded a $187 million pretax gain and said proceeds would be reinvested in restructuring.
- Legal contingencies: The company estimated reasonably possible losses in excess of accrued liabilities of $0–$175 million, excluding talc cases whose potential losses could not be estimated. A Utah lawsuit alleged approximately $2.5 billion in damages; the company disputed the allegations. Talc claims and competition matters also remain pending. Management said adverse outcomes could materially affect a particular quarter or year.
- Other significant risks include international and currency exposure, competition, retailer concentration, commodity costs, product regulation and ingredient reviews, supply-chain disruption, cybersecurity incidents, and execution risk on savings initiatives. Walmart and affiliates represented approximately 11% of 2015 sales.
Investor verification priorities
- Assess the underlying trend using organic sales and adjusted profit measures, and review the company’s reconciliations of non-GAAP figures to GAAP.
- Monitor the consequences of deconsolidating Venezuela, including cash access, remittances, continuing tax treatment and any further impairment or charges.
- Verify restructuring costs, savings realization and the effect of the 2015 program extension on future estimates.
- Review debt maturities, refinancing needs, cash generation, capital spending and the sustainability of dividends and repurchases, particularly given negative year-end shareholders’ equity.
- Track developments in material litigation and competition cases, especially the N8 claim, talc cases and Brazilian tax disputes; disclosed loss estimates may not capture unestimable matters.