01—Abstract
Summary
Summary of the 10-K filed February 21, 2020. Cited figures are marked; the original filing is the authoritative source.
Colgate-Palmolive's 2019 Form 10-K shows a company with flat reported results but solid underlying momentum.
Worldwide Net sales rose 1.0% to $15,693 milliona, driven by 4.0% organic sales growth (volume +2.5%, net price +2.0%) that was largely offset by a 3.5% foreign exchange headwind. Reported operating profit fell 4% to $3,554 million and diluted EPS was flat at $2.75, but excluding Global Growth and Efficiency Program charges and other one-time items, non-GAAP diluted EPS declined 5% to $2.83. Gross margin was stable at 59.4%, while raw and packaging material inflation (roughly 300 bps) was offset by funding-the-growth savings and pricing.
Advertising investment rose to 10.8% of sales, pressuring SG&A and operating margin, which fell 120 bps to 22.6% on a GAAP basis. The balance sheet and capital allocation shifted notably in 2019. Colgate closed the Filorga skin health acquisition (about $1.7 billionb) and the Nigeria joint venture, and in January 2020 agreed to buy Hello Products for $351 million.
Total debt rose to $7.8 billionc from $6.4 billion, and management moderated share repurchases in Q4 2019 to reduce leverage into 2021. Operating cash flow was $3.1 billion, capital spending fell to $335 million, and the dividend was raised to $0.43 per quarter. The Global Growth and Efficiency Program concluded in 2019 with cumulative pretax charges of $1.85 billion against targeted annual savings of $640 to $660 million.
The key risks flagged for investors are the 2020 outlook (management expects category growth below historical levels and near-term COVID-19 impact), continued retailer and eCommerce pressure, and a set of legal matters, most notably Brazilian tax assessments totaling about $152 milliond plus other claims, a talc-related litigation docket, and a Hill's Pet Nutrition recall with 37 putative class actions. Management believes none of these will be material on its own, but the reasonably possible loss range in excess of accruals is up to about $225 million.
02—Key points
Key Highlights
- Net sales of $15.7 billion (+1.0% reported, +4.0% organic), with Pet Nutrition the fastest-growing segment at +6.0% reported and +7.5% organic.
- GAAP diluted EPS was flat at $2.75; non-GAAP diluted EPS fell 5% to $2.83, with the decline reflecting higher advertising spend and raw material inflation.
- Operating margin fell to 22.6% (GAAP) from 23.8%, and to 23.4% excluding special items, as advertising rose to 10.8% of sales.
- Acquisitions of Filorga (about $1.7 billion) and the Nigeria JV were financed with debt, pushing total debt to $7.8 billion and prompting a slowdown in share buybacks through 2021.
- Operating cash flow of $3.1 billion covered capex of $335 million and dividends of $1.6 billion, with the quarterly dividend raised to $0.43 per share.
- Global Growth and Efficiency Program ended with $1.85 billion in cumulative pretax charges against targeted annual savings of $640 to $660 million, substantially realized.
- Legal exposure includes Brazilian tax disputes (about $152 million plus a $63 million assessment), talc claims, and Hill's recall class actions, with total reasonably possible losses above accruals of up to about $225 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Colgate-Palmolive kept $0.15.
- Revenue$15.69B100.0%
- Cost of revenue−$6.37B40.6%
- Gross profit$9.32B59.4%
- Operating costs−$5.77B36.8%
- Operating income$3.55B22.6%
- Interest, other & tax−$1.19B7.6%
- Net income$2.37B15.1%
Where FY2019 revenue went
$15.69B- Cost of revenue: $6.37B, 41% of revenue
- SG&A: $5.58B, 36% of revenue
- Net income: $2.37B, 15% of revenue
- R&D: $281.0M, 1.8% of revenue
- Interest, other & tax: $1.19B, 7.6% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 21, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $15.69B$15.54B | +1.0% |
| Cost of Revenue | $6.37B$6.31B | +0.9% |
| Gross Profit | $9.32B$9.23B | +1.0% |
| R&D Expenses | $281.00M$277.00M | +1.4% |
| SG&A Expenses | $5.58B$5.39B | +3.5% |
| Operating Income | $3.55B$3.69B | −3.8% |
| Interest Expense | $193.00M$195.00M | −1.0% |
| Net Income | $2.37B$2.40B | −1.4% |
| EPS (Basic) | $2.76$2.76 | 0.0% |
| EPS (Diluted) | $2.75$2.75 | 0.0% |
| Shares Outstanding (Basic) | 859.10M870.60M | −1.3% |
| Shares Outstanding (Diluted) | 861.10M873.00M | −1.4% |
05—Questions
Frequently Asked Questions
How did Colgate perform on an underlying basis in 2019?
On an organic basis, sales grew 4.0%, led by 2.5% volume growth and 2.0% net price increases. Reported sales growth was only 1.0% because foreign exchange reduced sales by 3.5%. Excluding restructuring, acquisition costs, and tax items, non-GAAP diluted EPS fell 5% to $2.83, mainly due to higher advertising and raw material costs.
Why did margins decline in 2019?
Gross margin was flat at 59.4% because raw and packaging material inflation of about 300 bps was offset by funding-the-growth savings and pricing. The margin decline came below gross profit: advertising rose to 10.8% of sales from 10.2%, and other expense increased, including write-offs of investments and fixed assets. GAAP operating margin fell 120 bps to 22.6%.
What are the main risks for 2020?
Management expects challenging macroeconomic conditions, category growth below historical levels, and heightened competition from local players and eCommerce entrants. The company also cites retailer pressure, foreign currency volatility (about 70% of sales come from outside the U.S.), and near-term COVID-19 disruption to China and supply chains. Its 2020 outlook notes that the coronavirus will likely hurt results in the near term.
How is the company's balance sheet positioned after the acquisitions?
Total debt rose to $7.8 billion from $6.4 billion, largely from the Filorga acquisition, and goodwill and intangibles increased substantially. The company has access to about $4.6 billion in unused credit lines and says its cash flow is sufficient for operating needs, dividends, and capex. Management reduced share repurchases in Q4 2019 to lower leverage, and a $351 million Hello Products acquisition was announced for January 2020.
What legal matters could affect investors?
The main matters are Brazilian tax assessments on Kolynos-related interest deductions (about $152 million) and a separate $63 million tax assessment, both of which the company is contesting. Talc-related asbestos claims (121 pending cases) and an ERISA class action are also outstanding, along with a Hill's voluntary recall that has produced 37 putative class actions in the U.S. Management believes none is likely to be material, but the company estimates reasonably possible losses above accruals of up to about $225 million.
06—Continue