Why did reported earnings fall so sharply in 1995?

Net income dropped to $172.0 million from $580.2 million mainly because of a $460.5 million pretax restructuring charge recorded in the third quarter of 1995, which reduced net income by $369.2 million. Higher interest costs from acquisition financing, a 52.7% effective tax rate, and weaker results in Mexico and at Hill's also contributed. Excluding the charge, earnings were $541.2 million, or $3.58 per share, compared with $3.82 per share in 1994.

What was the Kolynos acquisition and how is it affecting the company?

Colgate acquired the worldwide Kolynos oral care business from American Home Products for $1,040.0 million in cash on January 10, 1995. The business is strong in South America, particularly Brazil. The purchase was financed with debt, which raised long-term debt by about $1.2 billion and increased interest expense and goodwill amortization. Management expects dilution in the first year, and the acquisition is still under review by Brazilian antitrust authorities, with management believing it will eventually be approved in some form.

What are the expected benefits and timing of the 1995 restructuring program?

The program closes or significantly reconfigures 24 of 112 factories and reduces the workforce by about 3,000 employees (8.5%), with about 150 cuts made in 1995. The changes are expected to be substantially complete during 1997, mainly in North America and Europe. Savings are expected to begin in the second half of 1996 and reach $100 million annually by 1998. As of year-end 1995, the restructuring reserve totaled $435.6 million, of which $100.0 million was a current liability.

Is Colgate's balance sheet and dividend safe after the Kolynos deal?

Leverage increased substantially: net debt to total capitalization rose to 64% from 49%, and market-based debt to capitalization rose to 23% from 16%. Management says internally generated cash flows are adequate for planned operations, acquisitions, and capital spending, but significant acquisitions require external financing. Colgate has $2,093.4 million in unused credit lines and A1/P1 commercial paper ratings. Dividend payments totaled $276.5 million, which is covered by operating cash flow of $810.2 million, though cash generation fell 2% and the dividend was raised 15% in 1995.

Which parts of the business are driving growth, and which are struggling?

Oral, Personal and Household Care is the main growth driver, with sales up 12% and segment EBIT up 13% excluding the restructuring charge. Asia/Africa (sales up 17%) and Latin America (up 14%, or 24% excluding Mexico and Kolynos) led growth, while Europe grew 10% mainly on currency effects, with flat volumes. Pet Nutrition and Other is the weak spot: its EBIT fell 27% because of Hill's sales force realignment and the 1994 sale of non-core businesses. Mexico, which had a severe recession and devaluation, was a notable drag on Latin America's results.

CL 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 25, 1996. Cited figures are marked; the original filing is the authoritative source.

Colgate-Palmolive's 1995 results were dominated by two forces: the January 1995 acquisition of Kolynos (about $1.04 billion^a) and a $460.5 million pretax restructuring charge taken in Q3 1995.

Reported net sales rose 10% to $8,358.2 million^b, or 8% excluding Kolynos and 1994 divestitures, led by Asia/Africa (+17%), Latin America (+14%), and Europe (+10% on flat volumes). Reported net income fell to $172.0 million ($1.04 per share, $1.02 fully diluted) from $580.2 million, but excluding the restructuring charge, earnings were $541.2 million ($3.58 per share), down from $3.82 per share in 1994. The core oral, personal and household care segment remained the growth engine, with segment EBIT excluding the charge up 13%, while Pet Nutrition (Hill's) was a drag, with EBIT down 27%.

The balance sheet and cash flow picture weakened. Long-term debt more than doubled to $2,992.0 million, net interest expense rose to $205.4 million^c from $86.7 million, and the net debt-to-capitalization ratio climbed to 64% from 49%. Operating cash flow declined 2% to $810.2 million, and capital expenditures were $431.8 million (about 5.2% of sales).

The effective tax rate jumped to 52.7%, largely because the restructuring charge carried a tax benefit of only 20%. Dividends were raised 15% to $1.76^d per share, but total dividend payments of $276.5 million were covered by operating cash flow only with less headroom than before. Looking ahead, management expects restructuring savings of about $100 million annually by 1998, beginning in the second half of 1996, as 24 of 112 factories are closed or reconfigured and roughly 3,000 jobs are eliminated.

Key risks include the Brazilian antitrust review of Kolynos, economic instability in Mexico and Venezuela, and competitive pressure in Western Europe. Investors will need to judge whether the margin recovery and deleveraging can keep pace with the higher debt load from the acquisition-driven growth.

02—Key points

Key Highlights

Net sales grew 10% to $8,358.2 million in 1995 (8% organic), with Oral, Personal and Household Care up 12% to $7,565.7 million.
A $460.5 million pretax restructuring charge (about $2.54 per share) cut reported net income to $172.0 million, versus $580.2 million in 1994; excluding the charge, earnings were $541.2 million ($3.58 per share).
Long-term debt rose to $2,992.0 million from $1,751.5 million, mainly to fund the $1,040 million Kolynos acquisition, pushing net debt-to-capitalization to 64% from 49%.
Net interest expense more than doubled to $205.4 million from $86.7 million, and the effective tax rate rose to 52.7% (34.3% excluding the charge).
Gross margin slipped to 47.9% from 48.4%, reflecting higher raw material and packaging costs, the Mexican recession, and lower Hill's volume.
Restructuring is expected to eliminate about 3,000 jobs and close or reconfigure 24 of 112 factories, with about $100 million in annual savings by 1998.
Operating cash flow was $810.2 million, down 2%, and the dividend was raised 15% to $1.76 per share; the Kolynos purchase remains under review by Brazilian antitrust authorities.

03—Questions

Frequently Asked Questions

Why did reported earnings fall so sharply in 1995?
Net income dropped to $172.0 million from $580.2 million mainly because of a $460.5 million pretax restructuring charge recorded in the third quarter of 1995, which reduced net income by $369.2 million. Higher interest costs from acquisition financing, a 52.7% effective tax rate, and weaker results in Mexico and at Hill's also contributed. Excluding the charge, earnings were $541.2 million, or $3.58 per share, compared with $3.82 per share in 1994.
What was the Kolynos acquisition and how is it affecting the company?
Colgate acquired the worldwide Kolynos oral care business from American Home Products for $1,040.0 million in cash on January 10, 1995. The business is strong in South America, particularly Brazil. The purchase was financed with debt, which raised long-term debt by about $1.2 billion and increased interest expense and goodwill amortization. Management expects dilution in the first year, and the acquisition is still under review by Brazilian antitrust authorities, with management believing it will eventually be approved in some form.
What are the expected benefits and timing of the 1995 restructuring program?
The program closes or significantly reconfigures 24 of 112 factories and reduces the workforce by about 3,000 employees (8.5%), with about 150 cuts made in 1995. The changes are expected to be substantially complete during 1997, mainly in North America and Europe. Savings are expected to begin in the second half of 1996 and reach $100 million annually by 1998. As of year-end 1995, the restructuring reserve totaled $435.6 million, of which $100.0 million was a current liability.
Is Colgate's balance sheet and dividend safe after the Kolynos deal?
Leverage increased substantially: net debt to total capitalization rose to 64% from 49%, and market-based debt to capitalization rose to 23% from 16%. Management says internally generated cash flows are adequate for planned operations, acquisitions, and capital spending, but significant acquisitions require external financing. Colgate has $2,093.4 million in unused credit lines and A1/P1 commercial paper ratings. Dividend payments totaled $276.5 million, which is covered by operating cash flow of $810.2 million, though cash generation fell 2% and the dividend was raised 15% in 1995.
Which parts of the business are driving growth, and which are struggling?
Oral, Personal and Household Care is the main growth driver, with sales up 12% and segment EBIT up 13% excluding the restructuring charge. Asia/Africa (sales up 17%) and Latin America (up 14%, or 24% excluding Mexico and Kolynos) led growth, while Europe grew 10% mainly on currency effects, with flat volumes. Pet Nutrition and Other is the weak spot: its EBIT fell 27% because of Hill's sales force realignment and the 1994 sale of non-core businesses. Mexico, which had a severe recession and devaluation, was a notable drag on Latin America's results.

04—Continue

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