Colgate-Palmolive Company — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter filing; quarterly figures are noted separately below. Unless stated otherwise, amounts are in millions of U.S. dollars.
Business context
Colgate-Palmolive sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries and territories. About 75% of sales came from outside the U.S. and about 50% from emerging markets. Oral Care represented 48% of 2017 sales, Personal Care 19%, Home Care 18% and Pet Nutrition 15%.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $15,454; up 1.5% | $15,195 |
| Organic sales growth (non-GAAP) | 1.0% | 4.0% |
| Gross profit / GAAP margin | $9,280 / 60.0% | $9,123 / 60.0% |
| Operating profit / GAAP margin | $3,589 / 23.2% | $3,837 / 25.3% |
| Net income attributable to Colgate | $2,024 | $2,441 |
| Diluted EPS | $2.28 | $2.72 |
| Cash from operations | $3,054 | $3,141 |
| Capital expenditures | $553 | $593 |
| Cash and cash equivalents at year-end | $1,535 | $1,315 |
| Total debt at year-end | $6,577 | $6,533 |
Gross margin excluding Global Growth and Efficiency Program charges rose 20 basis points to 60.5%; adjusted operating margin fell 80 basis points to 25.4%. Operating cash flow less capital expenditures was approximately $2,501 in 2017 (calculated from reported figures). The current ratio was approximately 1.4. The company reported $2,949 of available domestic and foreign credit lines and was in compliance with debt covenants. Shareholders’ equity attributable to Colgate was negative $60, while total equity was $243.
Reported earnings included $246 of after-tax restructuring costs and a provisional $275 U.S. tax reform charge. Excluding specified items, management reported non-GAAP net income of $2,545 and diluted EPS of $2.87, up 1% and 2%, respectively, from 2016. These non-GAAP measures are company-defined and should be considered alongside GAAP results.
For Q4 2017, sales were $3,892 versus $3,721 in Q4 2016; net income attributable to Colgate was $323 versus $606, and diluted EPS was $0.37 versus $0.68. Q4 2017 results included $61 of after-tax restructuring charges and the $275 tax reform charge.
Material changes versus prior year
- Annual sales increased modestly, but organic growth slowed to 1.0% from 4.0%. Volume, pricing and foreign exchange each contributed 0.5 percentage points to reported sales growth.
- GAAP operating profit declined 6% and net income declined 17%. Excluding specified items, operating profit declined 2%; adjusted operating margin contracted 80 basis points.
- Higher raw and packaging material costs weighed on margins. Company-wide cost savings and higher pricing partly offset those pressures; advertising investment rose 10.2% to $1,573.
- Oral, Personal and Home Care sales rose 2.0%; Pet Nutrition sales rose 1.0%, with Hill’s volume down 1.0%. North America sales fell 2.0%, while Latin America rose 6.5%.
- Operating cash flow decreased $87, primarily due to timing of income-tax payments. Debt increased slightly; cash increased $220.
Outlook, commentary and notable items
- Management described global economic and category conditions as highly challenging, with slow category growth, heightened competition, retailer inventory de-stocking, e-commerce changes, currency volatility and elevated material costs. The filing provides no specific 2018 sales or EPS growth guidance.
- Management expected a 2018 effective tax rate of 26%–27%, on both GAAP and a basis excluding restructuring charges. The $275 provisional tax reform charge could be adjusted during 2018 and was expected to be finalized by Q4 2018.
- The Global Growth and Efficiency Program was extended through December 31, 2019. Total pretax charges were estimated at $1,730–$1,885, with annual pretax savings of $560–$635 once projects are implemented. For 2018, the company expected pretax charges of $100–$175 and savings of approximately $90–$120 pretax; the filing separately gives an after-tax savings range of $100–$125, which is higher than the stated pretax range and merits verification. The program is expected to reduce the workforce by about 3,800–4,400 positions.
- Capital expenditures for 2018 were expected to be approximately 3.5% of sales. The company expected operating cash flow and debt issuance to cover foreseeable operating and recurring cash needs.
- In January 2018, after year-end, Colgate acquired Physicians Care Alliance and Elta MD Holdings for approximately $730 in cash.
- Key risks include international currency and political exposure, commodity and supply-chain disruption, competition and retailer bargaining power, regulatory and product-ingredient changes, cyber incidents, and execution risk in restructuring and cost-saving programs.
- Legal matters include Brazilian tax assessments of approximately $165 and $74, French and Greek competition matters, and 193 pending talcum-powder cases at year-end. The company estimated reasonably possible losses of $0–$250 in excess of accruals for estimable matters; this range excludes talc and ERISA claims whose potential losses could not be reasonably estimated. Management said it did not expect the disclosed matters to materially affect consolidated financial position or ongoing results, while acknowledging an adverse outcome could affect a particular period.
Important facts for investors to verify
- Reconcile the decline in GAAP earnings with the reported adjusted results, including the $275 tax reform charge and restructuring costs.
- Track whether organic sales, volumes and global toothpaste and manual toothbrush market shares stabilize; both global category shares declined in 2017.
- Assess whether pricing and efficiency savings can offset raw-material inflation, advertising spending and competitive promotions.
- Monitor the restructuring program’s actual charges, cash outlays, savings, workforce effects and the stated 2018 pretax/after-tax savings ranges.
- Review the final tax reform accounting, the forecast 2018 tax rate and developments in Brazilian tax, competition, talc and ERISA proceedings.
- Evaluate debt, foreign cash, capital returns and the funding and integration of the approximately $730 post-year-end acquisitions.