01—Abstract
Summary
Summary of the 10-K/A filed February 21, 2018. Cited figures are marked; the original filing is the authoritative source.
Colgate-Palmolive's 2017 10-K shows a company with modest top-line growth but margin and earnings pressure.
Worldwide Net sales rose 1.5% to $15,454 milliona, driven by 0.5% volume growth, 0.5% net price and 0.5% favorable FX, while organic sales grew 1.0%. GAAP operating profit fell 6% to $3,589 million, with the operating margin down 210 bps to 23.2%. The decline was driven by higher raw and packaging material costs, a 100 bp rise in SG&A (advertising up 10.2% to $1,573 million) and $333 million of Global Growth and Efficiency Program charges.
Diluted EPS was $2.28b GAAP versus $2.72 in 2016, and $2.87 on a non-GAAP basis, which excludes the $275 million provisional U.S. tax reform charge and program costs. Non-GAAP EPS rose 2%, the main positive in an otherwise soft year. Balance sheet and cash flow remain solid but the mix shifted.
Operating cash flow was $3,054 millionc, down from $3,141 million, mainly on the timing of tax payments. Capex was $553 million and dividends paid were $1,529 million ($1.59 per share, up from $1.55). The company repurchased $1,399 million of stock under its $5 billion 2015 program.
Total debt was $6,577 milliond, and shareholders' equity remains near zero at $(60) million after buybacks and the accumulated OCI drag. The company guides to a 2018 effective tax rate of 26% to 27% and expects restructuring savings of $90 to $120 million in 2018. Management describes the environment as highly challenging, with slow category growth, heightened competition from local and multinational rivals, retailer de-stocking and e-commerce disruption.
About 75% of sales come from outside the U.S., and about 50% from emerging markets, which adds currency and volatility risk. Key legal exposures include Brazilian tax assessments of roughly $165 million plus $74 million, competition fines in France and Greece, and talc-related asbestos suits that rose to 193 cases. Management does not believe these will have a material effect on financial position.
02—Key points
Key Highlights
- Worldwide Net sales were $15,454 million, up 1.5%, with organic sales up 1.0%, led by Oral Care toothpaste growth and Latin America (organic +5.5%).
- GAAP operating profit fell 6% to $3,589 million; operating margin declined 210 bps to 23.2%, reflecting raw material inflation and higher advertising spend.
- GAAP diluted EPS was $2.28 (down from $2.72), while non-GAAP diluted EPS rose 2% to $2.87, excluding the $275 million U.S. tax reform charge and restructuring costs.
- Global Growth and Efficiency Program was expanded and extended through 2019, with projected annual pretax savings of $560 to $635 million and cumulative pretax charges of $1,730 to $1,885 million.
- Operating cash flow was $3,054 million; the company paid $1,529 million in dividends ($1.59/share) and repurchased $1,399 million of stock.
- North America sales declined 2.0% and operating margin fell 80 bps, while Hill's Pet Nutrition sales rose 1.0% with a stable 28.5% operating margin.
- Equity remains negative at $(60) million, and total debt is $6,577 million, with the company citing strong access to credit markets.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Colgate-Palmolive kept $0.13.
- Revenue$15.45B100.0%
- Cost of revenue−$6.17B40.0%
- Gross profit$9.28B60.0%
- Operating costs−$5.57B36.1%
- Operating income$3.71B24.0%
- Interest, other & tax−$1.68B10.9%
- Net income$2.02B13.1%
Where FY2017 revenue went
$15.45B- Cost of revenue: $6.17B, 40% of revenue
- SG&A: $5.40B, 35% of revenue
- Net income: $2.02B, 13% of revenue
- R&D: $285.0M, 1.8% of revenue
- Interest, other & tax: $1.68B, 11% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-K/AFY2017filed February 21, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $15.45B$15.20B | +1.7% |
| Cost of Revenue | $6.17B$6.07B | +1.7% |
| Gross Profit | $9.28B$9.12B | +1.7% |
| R&D Expenses | $285.00M$289.00M | −1.4% |
| SG&A Expenses | $5.40B$5.14B | +5.0% |
| Operating Income | $3.71B$3.96B | −6.3% |
| Interest Expense | $156.00M$155.00M | +0.6% |
| Net Income | $2.02B$2.44B | −17.1% |
| EPS (Basic) | $2.30$2.74 | −16.1% |
| EPS (Diluted) | $2.28$2.72 | −16.2% |
| Shares Outstanding (Basic) | 881.80M891.80M | −1.1% |
| Shares Outstanding (Diluted) | 887.80M898.40M | −1.2% |
05—Questions
Frequently Asked Questions
Why did reported earnings fall in 2017 despite sales growth?
Reported diluted EPS fell to $2.28 from $2.72 mainly because of the $275 million provisional charge from U.S. tax reform (about $0.31 per share), $333 million of pretax Global Growth and Efficiency Program charges, and higher raw and packaging material costs. Excluding these items, non-GAAP EPS rose 2% to $2.87.
What is the outlook for margins and tax rate in 2018?
Management expects the 2018 effective tax rate to be 26% to 27%, reflecting U.S. tax reform. It expects 2018 restructuring savings of about $90 to $120 million pretax and 2018 program charges of $100 to $175 million. Management also says the category environment will remain highly challenging, so margin recovery is not assured.
How concentrated is the business by customer and geography?
Wal-Mart and its affiliates accounted for about 11% of 2017 Net sales, and no other customer exceeded 10%. About 75% of Net sales come from outside the U.S., and about 50% from emerging markets, which increases exposure to foreign currency swings and local competition.
What are the main legal and regulatory risks investors should watch?
The most significant items are Brazilian tax and civil proceedings (about $165 million plus a separate $74 million assessment), French and Greek competition fines, growing talc-related asbestos litigation (193 pending U.S. cases, up from 115), and triclosan regulation. The company estimates a reasonably possible loss range of $0 to about $250 million in excess of accruals and does not expect a material effect on financial position.
Is the balance sheet a concern given negative shareholders' equity?
Shareholders' equity was $(60) million at year-end 2017, largely because of cumulative buybacks and dividends and an accumulated OCI deficit of $(3,855) million. The company maintains access to about $2,949 million of unused credit lines, holds $1,535 million of cash, and says operating cash flow is sufficient to fund dividends, capex and buybacks.
06—Continue