Colgate-Palmolive Company — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results. Unless otherwise noted, financial amounts are in millions of U.S. dollars.
Business context and reporting period
Colgate-Palmolive sells oral, personal and home care products, and Hill’s pet nutrition products, in more than 200 countries and territories. Approximately 75% of net sales came from outside the United States. Oral, Personal and Home Care generated $13,484 of sales; Pet Nutrition generated $2,080.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $15,564 | $15,327 |
| Gross profit / gross margin | $9,204 / 59.1% | $9,008 / 58.8% |
| Operating profit | $3,489 | $3,615 |
| Net income attributable to Colgate-Palmolive | $2,203 | $2,291 |
| Diluted earnings per share | $4.31 | $4.37 |
| Cash provided by operations | $3,211 | $3,277 |
| Capital expenditures | $550 | $575 |
| Total debt at year-end | $3,424 | $3,182 |
Cash and cash equivalents were $490 at year-end, versus $600 a year earlier; the reported current ratio was 1.0. The company had $2,317 of unused domestic and foreign credit lines, including a $1,600 domestic revolving facility expiring in November 2012. Management said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs. Dividends paid were $1,142, and share repurchases totaled $2,020.
Material changes versus the prior comparable period
- Worldwide sales rose 1.5%; volume grew 3.0%, prices were level, and foreign exchange reduced sales by 1.5%. Organic sales growth was 3.0%.
- Gross margin improved to 59.1%, supported by cost savings, partly offset by commodity cost increases and foreign exchange. Reported operating profit fell 3%; net income fell 4% and diluted EPS declined from $4.37 to $4.31.
- Operating cash flow declined by $66, which management attributed primarily to increased working capital.
- Oral, Personal and Home Care sales increased 2.0%, while Hill’s Pet Nutrition sales declined 2.5%. Greater Asia/Africa sales grew 13.0%; Europe/South Pacific sales declined 1.5%.
- Debt increased, while cash declined. The company issued $438 of five- and ten-year notes in the fourth quarter and used the proceeds to reduce commercial paper borrowings.
Outlook, management commentary, risks and unusual items
- Management expected global macroeconomic and market conditions to remain challenging, citing heightened competition, increased promotional activity and a sharp rise in commodity costs. No quantified sales or earnings guidance is provided in the filing.
- A $271 pretax charge ($0.53 per diluted share) arose from Venezuela’s transition to hyperinflationary accounting. Venezuela represented 4% of consolidated sales; currency controls, further devaluations and restrictions on repatriating earnings remain risks.
- Other 2010 items included $86 of pretax termination benefits, a $50 pretax gain on sales of non-core Latin American product lines, and a $31 after-tax benefit related to an overseas subsidiary reorganization. Fourth-quarter diluted EPS was $1.24, compared with $1.21 in Q4 2009; fourth-quarter sales were $3,978 versus $4,081.
- Hill’s experienced lower volume amid competitive pressure and lingering effects of prior price increases; management reported improved unit consumption toward year-end following pricing, sizing and product changes.
- Key risks include foreign exchange and political or regulatory developments, commodity and supplier costs, retailer bargaining power, competition, product quality and safety, and successful product innovation.
- Contingencies include Brazilian tax assessments of approximately $123 and $73, European competition investigations and fines, and a pending ERISA benefits class action that had not been certified. Management stated these matters were not expected to materially affect financial position, ongoing results or cash flows, while noting particular periods could be affected.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- How much of reported profit and EPS movement reflects recurring operations versus the Venezuela charge and other unusual items.
- Whether Hill’s volume trends and Europe/South Pacific sales recover, and whether Greater Asia/Africa growth continues.
- The impact of commodity inflation, promotional spending and pricing actions on margins and organic growth.
- Venezuela’s exchange-rate access, repatriation constraints, monetary exposure and valuation of devaluation-protected bonds.
- Debt maturities, refinancing needs, liquidity availability and the sustainability of dividends and share repurchases.
- Developments and potential exposure in the Brazilian tax matters, European competition proceedings and ERISA litigation.