Colgate-Palmolive Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Amounts are in millions of dollars, except per-share data and percentages. The company sells Oral, Personal and Home Care products and Hill’s Pet Nutrition products in more than 200 countries and territories; about 80% of sales came from outside the U.S.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $4,325 | $4,315 | Approximately flat |
| Organic sales growth | 6.5% | Not stated | Volume +5.0%; pricing +1.5%; foreign exchange −6.5% |
| Gross profit / margin | $2,524 / 58.4% | $2,515 / 58.3% | Adjusted margin 58.6% in both periods |
| Operating profit / margin | $634 / 14.7% | $742 / 17.2% | −15%; adjusted profit $1,003 vs. $985 and margin 23.2% vs. 22.8% |
| Net income attributable to Colgate | $388 | $460 | −16%; adjusted $636 vs. $626 |
| Diluted EPS | $0.42 | $0.48 | −13%; adjusted $0.68 vs. $0.66 |
| Operating cash flow | $820 | $777 | +6% |
| Capital expenditures | $168 | $94 | +$74 |
| Cash and cash equivalents | $1,795 | $962 at Dec. 31, 2013 | +$833 during quarter |
| Total debt | $6,659 | $5,657 at Dec. 31, 2013 | +$1,002 |
Q1 net income and EPS include after-tax Venezuela remeasurement losses of $174 ($0.19 per diluted share), restructuring costs of $73, and Mexico land-sale costs of $1. The company’s adjusted figures exclude these items and are non-GAAP measures. Interest expense, net, was $7 versus net interest income of $3; the effective tax rate was 31.1% versus 32.1%.
Segments and material changes
- Oral, Personal and Home Care: Sales were $3,772, flat year over year; organic growth was 6.5%. Segment operating profit was $975, unchanged. Latin America sales fell 5% to $1,152 as 16% adverse currency effects outweighed 11% organic growth. North America sales rose 2.5%; Europe/South Pacific 2.0%; Asia 2.5%; Africa/Eurasia declined 0.5%.
- Hill’s Pet Nutrition: Sales rose 3.5% to $553, with 5.5% organic growth; operating profit increased 6% to $144.
- Company-wide GAAP operating profit fell substantially, chiefly reflecting the larger Venezuela remeasurement charge ($266 pretax versus $172) and higher restructuring charges ($102 versus $66). Excluding the specified unusual items, operating profit rose 2% and diluted EPS rose 3%.
- Gross margin excluding restructuring and Mexico land-sale costs was unchanged: higher pricing and savings were offset by higher raw and packaging material costs. Management reported ongoing competitive pressure, volatile currencies and elevated commodity costs.
Liquidity, debt and capital allocation
- Cash from operations was $820; investing used $249 and financing provided $303. Financing included $2,960 of debt issuance, $1,938 of principal repayments, $316 of dividends paid and $453 of treasury-share purchases.
- Current assets were $5,677 and current liabilities $4,702 at March 31. Long-term debt including its current portion was $6,635. The company had no commercial paper outstanding at quarter-end.
- Q1 debt issuance included $500 of five-year notes at 1.75% and $500 of ten-year notes at 3.25%. Proceeds were used for general corporate purposes and planned debt repayments. Management said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs.
- Capital spending for 2014 was expected to be about 4.5% of sales, above the historical approximately 3.5%, primarily due to the restructuring program. The annualized common dividend was increased 6% to $1.44 per share, effective Q2 2014. The filing reports $0.70 per share of dividends declared in Q1, noting two declarations in the period.
Outlook, risks and contingencies
- Management described global macroeconomic and market conditions as likely to remain highly challenging. It cited aggressive competition, currency volatility and high commodity costs. No specific company-wide sales or earnings guidance for the full year is provided in the filing text.
- The four-year 2012 Global Growth and Efficiency Program is expected to be substantially completed by the end of 2016. Estimated cumulative pretax charges are $1,100–$1,250; 2014 charges are estimated at $275–$325. Annual pretax savings are projected at $365–$435 by the program’s fourth year, including $105–$125 in 2014. About 75% of program charges are expected to require cash expenditure; the company had recorded cumulative pretax charges of $562 through March 31.
- Venezuela: New foreign-exchange rules led the company to remeasure most local-currency net monetary assets at the SICAD I rate of 10.70 bolivares per dollar, producing the $266 pretax Q1 charge. Management estimated an ongoing impact of about $0.03 per diluted share per quarter during 2014 based on that rate, subject to further exchange-rate changes. Venezuela was about 3% of company sales. Currency controls, limited access to U.S. dollars, price/profit controls, inflation, labor issues and potential further devaluations may impair operations and assets; approximately $226 of local fixed assets were identified as potentially subject to impairment under adverse conditions.
- Legal matters: The company estimated aggregate reasonably possible losses in excess of accruals of $0–approximately $250 for disclosed matters, excluding Australian competition proceedings and talc cases whose potential losses could not be estimated. Matters include Brazilian tax assessments of approximately $120 and $75, European competition proceedings, Australian competition allegations, talc-product asbestos allegations, and an ERISA class action settlement of about $40 subject to final court approval. Management said it did not expect resolution of disclosed contingencies to materially affect consolidated financial position or ongoing results, while noting adverse outcomes could materially affect a particular period.
- Management said disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether organic sales growth continues to translate into reported sales and profit amid foreign-exchange headwinds.
- Actual Venezuela exchange rates, access to foreign currency, subsequent remeasurement effects, and the implications of price and profit controls.
- Restructuring charges, cash costs, realized savings and progress against the 2014 and 2016 targets.
- Debt levels, maturities and funding needs, alongside capital spending, dividends and share repurchases.
- Developments in significant litigation and competition matters, including the Brazilian assessments and ERISA settlement approval.