Colgate-Palmolive Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Unless stated otherwise, financial amounts are in U.S. dollars in millions. The filing also presents unaudited quarterly data; it is not a standalone fourth-quarter filing.
Business context and reporting period
Colgate-Palmolive sells consumer and pet nutrition products in more than 200 countries and territories through two product segments: Oral, Personal and Home Care, and Hill’s Pet Nutrition. Approximately 70% of sales came from outside the U.S. in 2018. Product sales mix was Oral Care 47%, Personal Care 20%, Home Care 18% and Pet Nutrition 15%. Walmart and affiliates accounted for approximately 11% of net sales.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $15,544 | $15,454 |
| Gross profit / margin | $9,231 / 59.4% | $9,280 / 60.0% |
| Operating profit / margin | $3,694 / 23.8% | $3,707 / 24.0% |
| Net income attributable to Colgate-Palmolive | $2,400 | $2,024 |
| Diluted EPS | $2.75 | $2.28 |
| Net cash from operations | $3,056 | $3,054 |
| Capital expenditures | $436 | $553 |
| Cash and cash equivalents at year-end | $726 | $1,535 |
| Total debt at year-end | $6,366 | $6,577 |
| Current ratio | 1.1 | 1.4 |
Organic sales, a non-GAAP measure, increased 0.5%; reported sales rose 0.5%, with volume up 1.0% and pricing up 0.5%, offset by 1.0% adverse foreign exchange. Net income and diluted EPS excluding the filing’s specified special items were $2,590 and $2.97, respectively, increases of 2% and 3%. These adjusted figures are company-defined non-GAAP measures.
Gross margin excluding restructuring charges declined 90 basis points to 59.6%, chiefly reflecting raw and packaging material cost pressure (340 basis points), partly offset by cost savings (200 basis points) and pricing (40 basis points). Adjusted operating margin fell 130 basis points to 24.7%. Interest expense, net, rose to $143 from $102, primarily due to higher average interest rates.
Cash from operations was essentially unchanged year over year. Investing activities used $1,170, including approximately $730 for the PCA Skin and Elta MD acquisitions. Financing activities used $2,679, including $1,591 in dividends and $1,238 in share repurchases. The company reported $3,023 of unused domestic and foreign credit lines and a $2,650 revolving facility maturing in November 2023. Total equity was $197, while Colgate-Palmolive shareholders’ equity was negative $102.
Changes versus the prior comparable period
- Annual sales increased modestly, but organic sales for Oral, Personal and Home Care were flat; Pet Nutrition organic sales increased 3.5%.
- Hill’s Pet Nutrition sales rose 4.0% to $2,388, while operating margin declined 100 basis points to 28.5%. Latin America sales fell 7.5% and operating profit fell 15%, affected by foreign exchange and higher costs. Asia Pacific sales declined 1.5% and operating profit fell 8%.
- Global toothpaste share declined 1.3 percentage points to 42.0%; manual toothbrush share declined 0.7 points to 32.3%.
- Reported net income increased despite weaker operating profit, in part reflecting lower tax expense than in 2017, when the company recorded a $275 U.S. tax reform charge. The company recorded a further $80 tax expense related to U.S. tax reform in 2018.
- Fourth-quarter 2018 net sales were $3,811 versus $3,892 in fourth-quarter 2017; net income attributable to Colgate-Palmolive was $606 versus $323, and diluted EPS was $0.70 versus $0.37. Fourth-quarter 2017 results included the $275 tax reform charge.
Outlook, management commentary, risks and unusual items
- Management expected challenging macroeconomic and market conditions, with category growth below historical levels, heightened competition, retail customer inventory and shelf-space pressures, rapid e-commerce growth, currency volatility and high raw-material costs. The filing does not provide a specific 2019 sales or EPS growth forecast.
- Management forecast a 2019 effective tax rate of 25.5%–26.5%, both GAAP and excluding restructuring charges. 2019 capital expenditures were expected to be 2.5%–3.0% of net sales.
- The Global Growth and Efficiency Program was in its final year, ending December 31, 2019. Management estimated 2019 pretax charges of $100–$150 and savings of $25–$55; estimated eventual annual pretax savings were $590–$635. Program charges since inception were $1,722 pretax, and approximately 80% of total charges were expected to require cash spending.
- The January 2018 acquisitions of PCA Skin and Elta MD cost approximately $730 in cash. They added $397 of goodwill and $369 of other intangible assets.
- Key exposures include foreign currency movements, commodity and packaging costs, competition and retail concentration, supply-chain disruption, cyber incidents, product and regulatory matters, tax uncertainty, and execution of restructuring and acquisitions. The company cited Brexit uncertainty but did not expect a material business impact.
- For disclosed matters that could be reasonably estimated, possible losses in excess of accruals were estimated at $0–$225; this excludes talcum-powder and ERISA matters for which losses could not be reasonably estimated. Brazilian tax assessments include approximately $151 and $65; the company disputes them. There were 239 pending talcum-powder cases at year-end, up from 193 a year earlier.
- In 2018 the company adopted revenue recognition guidance using the modified retrospective method, with no material financial statement impact. It adopted lease accounting on January 1, 2019 and expected to recognize approximately $450 of right-of-use assets and $575 of lease liabilities.
Most important facts for investors to verify
- Whether modest organic sales growth and declining core oral-care market shares persisted after year-end, and how market-share data limitations affect interpretation.
- Whether pricing and productivity can offset commodity inflation, foreign exchange pressure and the reported margin deterioration.
- Whether Hill’s growth and the PCA Skin and Elta MD acquisitions deliver returns sufficient to support the added intangible assets and goodwill.
- Actual 2019 restructuring charges and savings versus management’s estimates, including cash costs and timing of benefits.
- Debt refinancing capacity, liquidity and capital returns given year-end cash of $726, debt of $6,366 and negative parent-company shareholders’ equity.
- Developments in Brazilian tax disputes, talcum-powder litigation, the ERISA class action and other contingencies; the disclosed reasonably possible loss range excludes some matters.