Colgate-Palmolive Company — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also provides unaudited fourth-quarter results. Unless noted, financial amounts are in millions of U.S. dollars.
Business context and reporting period
Colgate-Palmolive sells products in more than 200 countries through two segments: Oral, Personal and Home Care, and Hill’s Pet Nutrition. Approximately 75% of net sales came from outside the United States. Oral Care, Home Care, Personal Care and Pet Nutrition represented 41%, 23%, 22% and 14% of 2009 sales, respectively.
Financial results and liquidity
| Metric | 2009 | 2008 |
|---|---|---|
| Net sales | $15,327 | $15,330 |
| Gross profit / gross margin | $9,008 / 58.8% | $8,626 / 56.3% |
| Operating profit / operating margin | $3,615 / 23.6% | $3,101 / 20.2% |
| Net income | $2,291 | $1,957 |
| Diluted EPS | $4.37 | $3.66 |
| Cash provided by operations | $3,277 | $2,302 |
| Capital expenditures | $575 | $684 |
| Cash and cash equivalents, year-end | $600 | $555 |
| Total debt, year-end | $3,182 | $3,783 |
Net cash provided by operations less capital expenditures was $2,702 in 2009, versus $1,618 in 2008. Current assets were $3,810 and current liabilities $3,599 at year-end; the reported current ratio was 1.1. The company had $3,014 of unused domestic and foreign credit lines. Long-term debt was rated AA- by S&P and Aa3 by Moody’s. Management said operating cash flow and debt issuance were expected to cover foreseeable operating and recurring cash needs.
Fourth-quarter 2009 net sales were $4,081, gross profit $2,427, net income $631 and diluted EPS $1.21, compared with $3,664, $2,050, $497 and $0.94, respectively, in fourth-quarter 2008. Quarterly figures are unaudited.
Changes versus prior comparable period
- Full-year sales were essentially flat in reported dollars, as 0.5% volume growth and 6.0% higher net selling prices were offset by a 6.5% adverse foreign-exchange impact. Organic sales grew 6.5%.
- Gross margin rose 2.5 percentage points, reflecting higher pricing and cost savings, partly offset by foreign exchange and Venezuela-related costs. SG&A declined to 34.5% of sales from 35.4%, including lower advertising expense.
- Operating profit increased 17%; net income increased 17% and diluted EPS increased 19%. Interest expense declined to $77 from $96, principally due to lower average rates and debt levels.
- Operating cash flow increased $975, attributed primarily to improved profitability, lower working capital and reduced restructuring cash spending, partly offset by higher tax payments.
- Total debt declined $601. Dividends paid increased to $981 from $889; share repurchases totaled $1,063, versus $1,073 in 2008.
Segment performance
- Oral, Personal and Home Care: Sales were $13,195, approximately level with 2008; organic sales grew 8.0%. Operating profit rose to $3,582 from $3,143.
- Hill’s Pet Nutrition: Sales declined 0.5% to $2,132; organic sales grew 1.0%. Volume fell 7.5%, partly in response to price increases, while operating profit rose 2% to $555.
- Regional trends: Latin America sales increased 5.5% reported and 16.5% organically; North America sales grew 3.5%. Europe/South Pacific sales fell 8.5% reported but grew 0.5% organically. Greater Asia/Africa sales were level reported and grew 8.0% organically.
Outlook, risks, contingencies and unusual items
- Management expected global macroeconomic and market conditions to remain highly challenging. It cited lower commodity and oil prices, continuing savings programs and favorable currency trends as potential offsets to pricing and demand pressures. Planned 2010 capital expenditures were approximately 3.5% of sales.
- Venezuela, which generated 6% of 2009 sales, was designated hyperinflationary effective January 1, 2010. Following currency devaluation and a two-tier exchange rate, management preliminarily estimated a net reduction of $0.06–$0.10 in 2010 diluted EPS. The filing also reported a one-time approximately $275 charge to other comprehensive income from the change in functional currency—not a 2009 income-statement charge. Exchange controls and access to U.S. dollars remain risks.
- Venezuela-related 2009 charges included $65 in cost of sales and $27 in other expense for remeasurement of U.S.-dollar liabilities. The company also purchased $210 of Venezuelan state-owned corporation bonds and $50 of government devaluation-protected bonds.
- The 2004 restructuring program was completed at year-end 2008; no new program charges were recorded in 2009. The remaining restructuring accrual was $15.
- Competition investigations and proceedings remained outstanding in Europe. Colgate reported a $5 Swiss fine under appeal, a $3 Spanish fine it intended to appeal, and pending formal objections in France and Italy. Brazilian tax assessments of approximately $115 and $69, plus a related civil action, remained disputed; the company said it would challenge them. A consolidated ERISA benefits lawsuit had not been certified as a class action. Management stated that contingencies were not expected to materially affect financial position, ongoing results or cash flows, while acknowledging possible period-specific effects.
- Key business risks include foreign exchange and political developments, commodity and supplier costs, competition and retailer bargaining power, product safety and reputation, regulation, and disruption to global manufacturing or sourcing. The company said disclosure controls and internal control over financial reporting were effective; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether organic growth and margin improvement persist when pricing, input costs and foreign-exchange effects change.
- Venezuela’s realized exchange rate, remittance capacity and actual 2010 earnings impact versus the preliminary EPS estimate.
- Hill’s volume recovery following price increases and the resulting effect on segment profitability.
- Potential outcomes, reserves and cash exposure for the Brazilian tax disputes, European competition matters and ERISA litigation.
- Cash-flow sustainability alongside dividends, planned repurchases and debt maturities; the board authorized a new 40-million-share repurchase program in February 2010.