Colgate-Palmolive Company — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; amounts are in millions of dollars except per-share data. Colgate sells Oral, Personal and Home Care products and Pet Nutrition in more than 200 countries and territories.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $3,867 | $3,999 | $11,474 | $12,135 |
| Gross profit | $2,324 | $2,347 | $6,876 | $7,106 |
| Gross margin | 60.1% | 58.7% | 59.9% | 58.6% |
| Operating profit | $1,071 | $1,136 | $2,882 | $2,928 |
| Net income attributable to Colgate | $702 | $726 | $1,835 | $1,842 |
| Diluted EPS | $0.78 | $0.80 | $2.04 | $2.02 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2,317 | $2,108 |
- Sales mix and underlying trend: Q3 reported sales fell 3.5%; price increases of 3.0% were outweighed by a 4.0% volume decline and 2.5% unfavorable foreign exchange. Excluding currency, divestitures and Venezuela’s deconsolidation, volume rose 1.5% and organic sales grew 4.5%. Nine-month reported sales fell 5.5%, while organic sales rose 4.5%.
- Margins and adjusted results: Q3 GAAP gross margin rose 140 basis points year over year; excluding restructuring charges, it rose 160 basis points to 60.4%. Q3 adjusted operating profit increased 1% to $1,022 and adjusted diluted EPS increased to $0.73 from $0.72. For nine months, adjusted operating profit declined 1% to $2,947 and adjusted diluted EPS fell 1% to $2.06 from $2.08. Adjusted measures exclude specified unusual and restructuring items and are not GAAP measures.
- Cash flow and capital use: Nine-month operating cash flow increased 10% to $2,317, which management attributed to operating earnings and tax-payment timing, partly offset by Venezuela’s deconsolidation and $53 of voluntary postretirement-plan contributions. Investing activities used $445; financing activities used $1,547. Capital expenditures were $392; dividends paid were $1,053 and treasury-share purchases were $913.
- Debt and liquidity: Cash and equivalents were $1,298 at September 30, up from $970 at year-end 2015. Total debt was $6,523, down from $6,548; long-term debt including current maturities was $6,520. Current assets were $4,764 and current liabilities $4,655. No commercial paper was outstanding at quarter-end. The company said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs.
Material changes and segment trends
- Reported sales and earnings were affected by the deconsolidation of Venezuelan operations, effective December 31, 2015, and unfavorable foreign exchange. For the nine-month comparison, reported sales were also affected by the South Pacific laundry-detergent divestiture; 2015 included its $187 pretax gain.
- Q3 Oral, Personal and Home Care sales fell 4.5% to $3,306, while organic sales grew 4.5%. Pet Nutrition sales rose 2.5% to $561, with 1.5% organic growth. Latin America’s reported sales fell 13.0%, but organic sales rose 10.5%; North America organic sales rose 1.0%, Europe 1.5%, Asia Pacific 3.0%, and Africa/Eurasia 8.5%.
- Cost savings and higher pricing supported margins, but higher raw and packaging costs—including foreign-exchange transaction costs—and increased advertising investment were offsets. Q3 advertising investment rose 3% to $339.
Outlook, unusual items and risks
- Outlook: Management expects global macroeconomic and market conditions to remain highly challenging and cited competition, currency volatility and elevated raw-material costs. The filing provides no specific full-year sales or EPS guidance. It estimates 2016 restructuring charges of $270–$310 pretax and savings of $60–$70 pretax; once fully implemented, annual savings are projected at $430–$495 pretax. The program is expected to continue through December 31, 2017, with a projected workforce reduction of approximately 3,300–3,800 positions.
- Unusual items: The Mexico City land sale generated a $97 pretax gain ($63 after tax) in Q3. A favorable foreign tax decision produced a $17 tax benefit in Q3; additional contested deductions of approximately $14 could result in future tax benefits if resolved favorably. Venezuela’s operations are no longer consolidated, and income is recognized only to the extent cash is received for sales, dividends or royalties.
- Restructuring: Nine-month program charges were $156 pretax ($114 after tax); cumulative charges since inception were $1,156 pretax. Approximately 75% of total expected program charges are projected to require cash expenditures.
- Legal contingencies: Management estimated reasonably possible losses above accrued liabilities across specified matters at $0–approximately $250; that estimate excludes talcum-powder cases, for which losses could not be reasonably estimated. There were 101 pending talcum-powder cases at quarter-end. Brazilian tax assessments included approximately $142 relating to acquisition-financing deductions and a separate approximately $59 assessment; the company is contesting them. French competition fines of $57 and $25 were under appeal, with the company entitled to indemnification from Unilever for the latter fine. Management did not believe the disclosed matters would materially affect consolidated financial position or ongoing results, but noted an adverse outcome could materially affect a particular period.
- Other: The company reported compliance with bank covenants and effective disclosure controls. It cited risks including competition, foreign-exchange movements and controls, input costs, pricing, restructuring execution, regulation and litigation outcomes.
Investor verification points
- Reconcile reported sales declines with organic growth, including the effects of Venezuela, foreign exchange and divestitures.
- Assess earnings quality by separating recurring performance from the Mexico land-sale gain, tax benefits, restructuring costs and prior-year divestiture/Venezuela items.
- Monitor whether restructuring savings and cost reductions offset commodity, currency and advertising pressures, and whether projected cash charges remain on plan.
- Review cash generation, debt maturities and refinancing needs, foreign-held cash and the company’s repatriation and tax assumptions.
- Track developments in Brazilian tax disputes, competition matters and talcum-powder litigation, including exposures excluded from the disclosed loss range.