01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Colgate-Palmolive's 2016 10-K shows a company whose reported results were distorted by large one-time items, but whose underlying business stabilized.
Reported net sales fell 5.0% to $15,195 milliona, driven by a 4.5-point foreign exchange headwind, while organic sales grew 4.0% on 2.5% net price increases, with volume down 3.0% reported (up 1.5% excluding divestitures and Venezuela). GAAP operating profit rose 38% to $3,837 million, but this was flattered by lower 2015 charges (the $1,084 million Venezuela deconsolidation) and a $97 million gain on sale of Mexico land. On a non-GAAP basis, operating profit was essentially flat at $3,985 million versus $3,988 million, and non-GAAP diluted EPS was flat at $2.81.
The GAAP operating margin of 25.3% compares with a non-GAAP margin of 26.2%, up 130 basis points, driven mainly by a 160 bps improvement in gross margin from funding-the-growth savings and pricing. The balance sheet and cash flow profile remained solid but with less financial flexibility than the earnings headline suggests. Operating cash flow rose to $3,141 million, capital expenditures fell to $593 millionb, and the company returned $1,508 million in dividends and $1,335 million in buybacks.
Total shareholders' equity of Colgate-Palmolive was slightly negative at $(243) million, a consequence of years of buybacks and the Venezuela write-down rather than operating weakness. Long-term debt was $6,520 millionc. Key risks include roughly 75% of sales from outside the U.S., emerging-market volatility, Wal-Mart concentration at about 11% of sales, regulatory pressure on triclosan and other ingredients, a Brazilian tax dispute with roughly $143 million of assessments, and the 2012 Restructuring Program, which carries about $180 to $360 million of further 2017 charges.
02—Key points
Key Highlights
- Reported net sales fell 5.0% to $15.2 billion, but organic sales grew 4.0%; the gap reflects a 4.5% FX headwind and divestitures and Venezuela deconsolidation.
- GAAP operating profit rose 38% to $3.84 billion; on a non-GAAP basis it was flat at $3.99 billion, so the headline increase is largely the absence of 2015's $1.08 billion Venezuela charge.
- Non-GAAP gross margin expanded 160 bps to 60.3%, driven by funding-the-growth savings (190 bps) and higher pricing (100 bps), partly offset by higher raw material and FX-related costs (170 bps).
- Non-GAAP diluted EPS was flat at $2.81; GAAP diluted EPS rose to $2.72 from $1.52, aided by the Mexico land gain and $35 million of tax benefits.
- Operating cash flow rose to $3.14 billion, and the company returned about $2.8 billion to shareholders through $1.51 billion of dividends and $1.34 billion of buybacks.
- Total Colgate shareholders' equity was negative $(243) million, reflecting cumulative buybacks and the Venezuela impairment; long-term debt was $6.52 billion.
- The 2012 Restructuring Program is nearing its end (through 2017), with cumulative pretax charges of $1.2 billion to date and expected annual savings of $430 to $495 million once fully implemented.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Colgate-Palmolive kept $0.16.
- Revenue$15.20B100.0%
- Cost of revenue−$6.07B40.0%
- Gross profit$9.12B60.0%
- Operating costs−$5.17B34.0%
- Operating income$3.96B26.0%
- Interest, other & tax−$1.51B10.0%
- Net income$2.44B16.1%
Where FY2016 revenue went
$15.20B- Cost of revenue: $6.07B, 40% of revenue
- SG&A: $5.14B, 34% of revenue
- Net income: $2.44B, 16% of revenue
- R&D: $289.0M, 1.9% of revenue
- Interest, other & tax: $1.51B, 10.0% of revenue
Kept 16% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $15.20B$16.03B | −5.2% |
| Cost of Revenue | $6.07B$6.63B | −8.5% |
| Gross Profit | $9.12B$9.40B | −2.9% |
| R&D Expenses | $289.00M$274.00M | +5.5% |
| SG&A Expenses | $5.14B$5.46B | −5.9% |
| Operating Income | $3.96B$2.79B | +41.8% |
| Interest Expense | $155.00M$139.00M | +11.5% |
| Net Income | $2.44B$1.38B | +76.4% |
| EPS (Basic) | $2.74$1.53 | +79.1% |
| EPS (Diluted) | $2.72$1.52 | +78.9% |
| Shares Outstanding (Basic) | 891.80M902.20M | −1.2% |
| Shares Outstanding (Diluted) | 898.40M909.70M | −1.2% |
05—Questions
Frequently Asked Questions
Is Colgate's 2016 earnings growth real, or is it driven by one-time items?
Largely one-time items. GAAP operating profit rose 38%, but that compares against a 2015 base depressed by the $1.08 billion Venezuela deconsolidation charge. Excluding special items, non-GAAP operating profit was flat at about $3.99 billion and non-GAAP EPS was flat at $2.81. The underlying improvement showed up in margins, not in profit growth.
How much of the business is exposed to currency and emerging-market risk?
Approximately 75% of net sales come from outside the U.S., and about 50% come from emerging markets. Foreign exchange reduced 2016 reported sales growth by 4.5 points, and Latin America sales fell 15.5% reported even though organic sales rose 10%. Currency and emerging-market volatility is the dominant swing factor for reported results.
Is the dividend and buyback program sustainable given the negative equity?
Negative total equity is typical for a company that has repurchased large amounts of stock and carries significant debt, and it does not by itself signal distress. Operating cash flow of $3.14 billion covered $1.51 billion of dividends and $1.34 billion of buybacks in 2016. Management also states that cash flow from operations and debt issuance will meet recurring needs, with $2.9 billion of unused credit lines available.
What are the main legal and regulatory risks investors should monitor?
Key items include the Brazilian tax disputes related to the Kolynos acquisition (about $143 million in assessments plus a separate $59 million assessment), European competition fines, talc-related lawsuits (115 pending cases), and FDA restrictions on triclosan and other antibacterial ingredients effective September 2017. The company estimates total reasonably possible losses above accruals at up to about $225 million.
06—Continue