Colgate-Palmolive Company — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual filing also reports unaudited fourth-quarter results. Unless stated otherwise, 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 80% of net sales came from outside the United States, and approximately 50% came from emerging markets.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $16,734 | $15,564 |
| Gross profit / margin | $9,590 / 57.3% | $9,204 / 59.1% |
| Operating profit | $3,841 | $3,489 |
| Net income attributable to Colgate-Palmolive | $2,431 | $2,203 |
| Diluted earnings per share | $4.94 | $4.31 |
| Net cash provided by operations | $2,896 | $3,211 |
| Capital expenditures | $537 | $550 |
- Worldwide sales grew 7.5%: volume increased 3.5%, net selling prices 1.0%, and foreign exchange contributed 3.0%. Organic sales growth was 4.0%.
- Gross margin fell 180 basis points, principally due to higher raw and packaging material costs (390 basis points); funding-the-growth savings contributed 190 basis points and pricing 50 basis points to offset the pressure.
- Reported operating profit rose 10%, but increased 2% excluding the specified unusual items. Adjusted net income was $2,473 versus $2,474 in 2010; adjusted diluted EPS increased 4% to $5.03. These are company-presented non-GAAP measures.
- Fourth-quarter net sales were $4,172 versus $3,978 in 2010; attributable net income was $590 versus $624, and diluted EPS was $1.21 versus $1.24. Quarterly figures are unaudited.
Segments
- Oral, Personal and Home Care: Sales of $14,562, up 8.0%; organic growth was 4.5%. Latin America grew 12.0% and Greater Asia/Africa 9.5%; North America sales declined 0.5%, while Europe/South Pacific sales rose 9.0%, including Sanex acquisition contribution.
- Hill’s Pet Nutrition: Sales of $2,172, up 4.5%, with flat volume and 1.5% organic growth. Operating profit was $560, essentially unchanged, and margin declined to 25.8% from 26.9%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $878 at year-end, up from $490. Current assets were $4,402 and current liabilities $3,716; the reported historical summary shows a 1.2 current ratio.
- Total debt was $4,810, including $4,776 classified as long-term debt (including current maturities), versus $3,424 total debt at year-end 2010. Long-term debt increased primarily in connection with financing and refinancing activity, including the Sanex acquisition.
- The company had access to $2,705 of unused domestic and foreign credit lines and a $1,850 five-year revolving facility expiring in November 2016. It reported compliance with applicable debt covenants.
- Dividends paid were $1,203; share repurchases totaled $1,806. A new authorization permits repurchase of up to 50 million shares. Management expects operating cash flow and debt issuance to meet foreseeable operating and recurring cash needs.
- Management expected 2012 capital expenditures to be approximately 3.5% of net sales. No specific sales or earnings forecast was provided in the filing.
Material changes and unusual items
- Colgate acquired Sanex for approximately $966 in June 2011; Sanex contributed $140 of sales after acquisition. In connection with the transaction, it sold its Colombian laundry detergent business for $215 and recorded a $207 pretax gain.
- FY 2011 included $190 of costs for business realignment and cost-saving initiatives, $13 of costs related to the Mexico City land sale, a $21 French competition-law charge related to a divested business, and $12 of Sanex transaction costs. The company also expects relocation, exit and capital-improvement costs over the next three years related to the Mexico site sale.
- These items, together with the Colombian sale gain, produced a net after-tax charge of $42 to attributable income in 2011. The 2010 comparison included a $271 charge for Venezuela’s transition to hyperinflationary accounting and other specified items.
- Operating cash flow declined by $315, primarily due to higher voluntary benefit-plan contributions. Investing cash use increased to $1,213, chiefly reflecting the Sanex acquisition.
Outlook, risks and contingencies
- Management expected global economic and market conditions to remain highly challenging, citing intense competition, volatile currencies, and high commodity costs. It emphasized brand investment, innovation, efficiency and cost savings as strategic priorities.
- Venezuela remained a significant exposure: it represented approximately 5% of sales in 2011, and the subsidiary had a local-currency monetary net asset position of approximately $311. Currency devaluations, import and exchange controls, inflation and new price controls could constrain pricing and earnings repatriation.
- Other identified risks include consumer trade-down, retailer bargaining power, commodity and supplier disruption, foreign-exchange movements, product liability and regulatory changes, and interruption of global manufacturing or information systems.
- For disclosed legal matters, the company estimated reasonably possible losses in excess of accrued liabilities of $0 to approximately $200, while noting outcomes could differ materially. Brazilian tax assessments included approximately $113 and $67; the company disputed them. A $46 French competition fine was under appeal, with other European competition investigations and claims pending. An ERISA class action had not been certified.
- Management stated that it did not expect the ultimate resolution of the disclosed contingencies to materially affect consolidated financial position or ongoing results, but acknowledged an adverse outcome could materially affect a particular quarter or year.
Important facts for investors to verify
- Whether organic growth and underlying earnings improve after separating acquisition, divestiture, currency and restructuring effects.
- Whether pricing and cost savings can offset continued commodity inflation and protect gross margin.
- Sanex integration performance and the expected costs, timing and proceeds of the Mexico City site relocation and sale.
- Venezuela’s currency access, price-control environment, asset exposure and ability to repatriate earnings.
- Developments in the Brazilian tax disputes, European competition matters, ERISA litigation and the aggregate contingency estimate.
- Debt maturities, refinancing needs, cash generation, pension contributions and the sustainability of dividends and share repurchases.