01—Abstract
Summary
Summary of the 10-K filed February 19, 2015. Cited figures are marked; the original filing is the authoritative source.
Colgate-Palmolive's 2014 10-K shows a company with flat-to-slightly-down reported results but solid underlying performance.
Worldwide Net sales fell 1.0% to $17,277 milliona, as 5.0% organic sales growth (volume +3.0%, net pricing +2.0%) was more than offset by a 6.0% foreign exchange headwind, driven largely by Latin America and Venezuela. GAAP operating profit was flat at $3,557 million, but excluding restructuring, Venezuela remeasurement losses, European competition fines and other items, non-GAAP operating profit rose 2% to $4,215 million, and non-GAAP diluted EPS grew 3% to $2.93. GAAP diluted EPS fell 1% to $2.36, weighed down by $327 million of Venezuela remeasurement losses and a $66 million foreign tax charge.
The company's strategic focus is on Oral, Personal and Home Care (about 87% of sales) plus Hill's Pet Nutrition (about 13%), with Oral Care (toothpaste, toothbrushes) as the main growth engine. Management's 2012 Restructuring Program has been expanded, with cumulative pretax charges now estimated at $1,285 to $1,435 millionb and annual savings targeted at $405 to $475 million by 2016. Gross margin slipped to 58.5% as raw material inflation (about 290 bps) was only partly offset by funding-the-growth savings, while advertising spending was cut 5.7%, which lifted operating margins.
Investors should weigh several risks: heavy exposure to emerging markets (over 50% of sales) and Venezuela, where price controls and currency controls limit earnings and about $955 millionc of investment is at risk; a growing list of competition-law fines and investigations in Europe; and talc and triclosan litigation and regulatory scrutiny. Cash generation remained solid, with operating cash flow of $3,298 million, and the board authorized a new $5 billion share repurchase program on February 19, 2015.
02—Key points
Key Highlights
- Worldwide Net sales declined 1.0% to $17,277M; organic sales grew 5.0%, but a 6.0% foreign exchange headwind (largely Latin America and Venezuela) offset the gain.
- Non-GAAP operating profit rose 2% to $4,215M and non-GAAP diluted EPS grew 3% to $2.93; GAAP diluted EPS fell 1% to $2.36 due to $327M in Venezuela remeasurement losses and a $66M foreign tax charge.
- Gross margin fell to 58.5% (58.7% non-GAAP) as raw and packaging material costs rose roughly 290 bps, partly offset by cost savings; advertising spend fell 5.7% to $1,784M, lifting SG&A leverage.
- The 2012 Restructuring Program was expanded in October 2014; cumulative pretax charges are now estimated at $1,285-$1,435M, targeting $405-$475M in annual pretax savings by 2016, with about 2,000-2,500 position reductions.
- Venezuela remains a significant risk: price controls since April 2012, multiple devaluations, and a total investment of $955M; CP Venezuela is about 3% of Net sales.
- Europe's competition enforcement is intensifying, with fines of $57M (French home care/personal care), $25M (Sanex-related) and others, plus pending statements of objections in Belgium and Greece.
- Operating cash flow rose to $3,298M, dividends paid were $1,446M ($1.42/share, up 6%), and a new $5B share repurchase program was authorized February 19, 2015.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Colgate-Palmolive kept $0.13.
- Revenue$17.28B100.0%
- Cost of revenue−$7.17B41.5%
- Gross profit$10.11B58.5%
- Operating costs−$6.55B37.9%
- Operating income$3.56B20.6%
- Interest, other & tax−$1.38B8.0%
- Net income$2.18B12.6%
Where FY2014 revenue went
$17.28B- Cost of revenue: $7.17B, 41% of revenue
- SG&A: $5.98B, 35% of revenue
- Net income: $2.18B, 13% of revenue
- R&D: $277.0M, 1.6% of revenue
- Other operating costs: $293.0M, 1.7% of revenue
- Interest, other & tax: $1.38B, 8.0% of revenue
Kept 13% as net incomeNet income $2.18B · 13%R&D $277.0M · 1.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 19, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $17.28B$17.42B | −0.8% |
| Cost of Revenue | $7.17B$7.22B | −0.7% |
| Gross Profit | $10.11B$10.20B | −0.9% |
| R&D Expenses | $277.00M$267.00M | +3.7% |
| SG&A Expenses | $5.98B$6.22B | −3.9% |
| Operating Income | $3.56B$3.56B | 0.0% |
| Interest Expense | $134.00M$119.00M | +12.6% |
| Net Income | $2.18B$2.24B | −2.7% |
| EPS (Basic) | $2.38$2.41 | −1.2% |
| EPS (Diluted) | $2.36$2.38 | −0.8% |
| Shares Outstanding (Basic) | 915.10M930.80M | −1.7% |
| Shares Outstanding (Diluted) | 924.30M939.90M | −1.7% |
05—Questions
Frequently Asked Questions
Why did GAAP earnings decline while management reports growth on an adjusted basis?
GAAP diluted EPS fell 1% to $2.36 because of $327M in pretax Venezuela remeasurement losses ($0.23/share), $286M in 2012 Restructuring Program charges, $41M in European competition charges, and a $66M foreign tax charge. Excluding these items, non-GAAP diluted EPS rose 3% to $2.93. Investors should weigh whether these recurring-looking 'one-time' charges will continue, since restructuring has run for three years.
How much of Colgate's business is exposed to foreign currency and emerging-market risk?
Approximately 80% of Net sales come from outside the U.S., and over 50% come from emerging markets. Foreign exchange cut 6.0 percentage points from 2014 sales growth, with Latin America down 14.5 points. Venezuela alone represents about 3% of sales but carries significant remeasurement and impairment risk.
What is the outlook for the 2012 Restructuring Program and its savings?
The program is expected to be substantially complete by December 31, 2016. Cumulative pretax charges are estimated at $1,285-$1,435M, of which about 75% will be cash. Expected savings are $405-$475M pretax annually by year four; 2015 charges are expected at $330-$385M and 2015 savings at $80-$100M. Through 2014, $746M of charges had been incurred.
What legal and regulatory risks could affect future results?
Key exposures include Brazilian tax assessments (about $107M for Kolynos-related interest deductions and about $66M for a financial transaction tax), multiple European competition investigations, talc-asbestos product liability suits (13 single-plaintiff cases pending, some trials expected in 2015), and regulatory reviews of triclosan and benzalkonium chloride. The company estimates reasonably possible losses above accruals of $0 to about $200M in aggregate, though management does not expect a material impact.
How is shareholder capital being returned, and is the dividend sustainable?
Colgate paid $1,446M in dividends in 2014 ($1.42/share, up from $1.33) and repurchased $1,530M of stock. The board authorized a new $5B repurchase program on February 19, 2015, replacing the 2011 program. Operating cash flow of $3,298M covered dividends and buybacks, though net debt rose as long-term debt increased to $6,132M from $5,644M.
06—Continue