01—Abstract
Summary
Summary of the 10-K filed February 21, 2019. Cited figures are marked; the original filing is the authoritative source.
Colgate-Palmolive's 2018 10-K shows a company with steady but modest top-line growth and margin pressure.
Worldwide Net sales were $15,544 milliona, up 0.5% from 2017, driven by 1.0% volume growth and 0.5% net selling price increases, partly offset by 1.0% negative foreign exchange. Organic sales grew 0.5%, with Hill's Pet Nutrition (+3.5% organic) the strongest contributor and Oral, Personal and Home Care flat on an organic basis. Gross margin fell about 90 basis points on an adjusted basis to 59.6%, driven mainly by roughly 340 bps of higher raw and packaging material costs.
Operating profit was essentially flat at $3,694 millionb on a GAAP basis, but non-GAAP operating profit declined 4% to $3,846 million. Latin America (operating profit down 15%) and Asia Pacific (down 8%) were the weakest segments. Bottom-line results were supported by a lower effective tax rate.
Diluted EPS was $2.75c on a GAAP basis versus $2.28 in 2017, but the 2017 comparison was distorted by the $275 million U.S. tax reform charge. Excluding restructuring charges, the 2018 tax benefit and the 2018 U.S. tax reform adjustment, non-GAAP diluted EPS rose 3% to $2.97. Cash generation was steady, with operating cash flow of $3,056 million, but free cash flow was constrained by $1,170 million of investing outflows, including $730 million for the PCA Skin and Elta MD acquisitions.
The company returned capital through $1,591 milliond in dividends and $1,238 million in share repurchases. The filing highlights ongoing headwinds: heightened competition, retailer concentration (Wal-Mart is about 11% of sales), e-commerce disruption, commodity inflation, and the Global Growth and Efficiency Program, which runs through 2019 with projected annual pretax savings of $590 to $635 million once fully implemented.
Long-term debt is $6,354 million against equity that is slightly negative at about -$102 million, a function of heavy buybacks and accumulated pension and translation losses rather than balance sheet distress. The company also faces contingent exposure, including Brazilian tax matters and talc litigation, with reasonably possible losses in excess of accruals of $0 to about $225 million.
02—Key points
Key Highlights
- Net sales of $15,544M, up 0.5% (volume +1.0%, net price +0.5%, FX -1.0%, acquisitions +1.0%); organic sales +0.5%
- Adjusted gross margin declined 90 bps to 59.6% as raw and packaging material inflation (~340 bps) outweighed funding-the-growth savings (~200 bps)
- GAAP operating profit flat at $3,694M; non-GAAP operating profit down 4% to $3,846M, with operating margin at 24.7% (non-GAAP)
- GAAP diluted EPS of $2.75 vs. $2.28; non-GAAP diluted EPS up 3% to $2.97, aided by a lower tax rate (24.2% non-GAAP) from U.S. tax reform
- Hill's Pet Nutrition grew 4.0% (organic +3.5%) with stable operating profit; Latin America operating profit fell 15% and Asia Pacific fell 8%
- Operating cash flow of $3,056M; returned $1,591M in dividends ($1.66/share) and $1,238M through share repurchases; acquired PCA Skin and Elta MD for ~$730M
- Global Growth and Efficiency Program enters its final year (through 2019) with cumulative pretax charges of $1,820–$1,870M and expected annual savings of $590–$635M when fully implemented
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Colgate-Palmolive kept $0.15.
- Revenue$15.54B100.0%
- Cost of revenue−$6.31B40.6%
- Gross profit$9.23B59.4%
- Operating costs−$5.54B35.6%
- Operating income$3.69B23.8%
- Interest, other & tax−$1.29B8.3%
- Net income$2.40B15.4%
Where FY2018 revenue went
$15.54B- Cost of revenue: $6.31B, 41% of revenue
- SG&A: $5.39B, 35% of revenue
- Net income: $2.40B, 15% of revenue
- R&D: $277.0M, 1.8% of revenue
- Interest, other & tax: $1.29B, 8.3% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 21, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $15.54B$15.45B | +0.6% |
| Cost of Revenue | $6.31B$6.17B | +2.3% |
| Gross Profit | $9.23B$9.28B | −0.5% |
| R&D Expenses | $277.00M$285.00M | −2.8% |
| SG&A Expenses | $5.39B$5.40B | −0.2% |
| Operating Income | $3.69B$3.71B | −0.4% |
| Interest Expense | $195.00M$156.00M | +25.0% |
| Net Income | $2.40B$2.02B | +18.6% |
| EPS (Basic) | $2.76$2.30 | +20.0% |
| EPS (Diluted) | $2.75$2.28 | +20.6% |
| Shares Outstanding (Basic) | 870.60M881.80M | −1.3% |
| Shares Outstanding (Diluted) | 873.00M887.80M | −1.7% |
05—Questions
Frequently Asked Questions
How did Colgate's underlying growth perform in 2018?
Growth was modest. Net sales rose 0.5% reported and 0.5% organically, with volume up 1.0% and net pricing up 0.5%, offset by a 1.0% currency headwind. Pet Nutrition (+3.5% organic) outpaced Oral, Personal and Home Care, which was flat organically. Toothpaste global share fell 1.3 points to 42.0%.
Why did margins decline in 2018?
Raw and packaging material costs rose sharply (about 340 bps headwind to gross margin), particularly resins, pulp and tropical oils. Savings from funding-the-growth initiatives (about 200 bps) and higher pricing (40 bps) only partly offset this. Higher logistics costs also pushed overhead expense up, contributing to a 90 bps drop in non-GAAP operating margin.
Is the 2018 EPS increase real, and what affected it?
GAAP EPS rose to $2.75 from $2.28, but 2017 included a $275M U.S. tax reform charge, so the comparison is inflated. On a non-GAAP basis (excluding restructuring, tax reform and a foreign tax benefit), EPS rose 3% to $2.97. Much of that improvement came from a lower effective tax rate (24.2% non-GAAP vs. 29.5% in 2017) rather than operating profit growth, which declined 4%.
What are the main risks and contingent liabilities investors should watch?
Key risks include retailer concentration (Wal-Mart ~11% of sales), e-commerce disruption, commodity cost volatility, foreign currency exposure (about 70% of sales outside the U.S.), and cyber-security incidents. Contingencies include Brazilian tax assessments totaling about $151M plus additional matters, French and Greek competition fines, talc-related asbestos suits (239 pending cases), and an ERISA class action. Management expects the aggregate reasonably possible excess loss to range from $0 to about $225M and does not believe these will be material.
How is the company funding its shareholder returns and balance sheet?
Operating cash flow of about $3.1B covers capital expenditures ($436M), dividends ($1,591M) and buybacks ($1,238M), but acquisitions and debt reduction drew down cash, which fell $809M to $726M. Long-term debt is $6,354M, and total shareholders' equity is slightly negative (about -$102M) because of cumulative buybacks and pension and translation losses. The company maintains a $2.65B revolving credit facility through 2023 and states that cash flow from operations is sufficient to meet foreseeable needs.
06—Continue