form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
 
FORM 10-Q
___________________________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from________ to________ .
Commission File Number: 1-644

COLGATE-PALMOLIVE COMPANY
(Exact name of registrant as specified in its charter)
 
DELAWARE
13-1815595
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
300 Park Avenue, New York, New York
10022
(Address of principal executive offices)
(Zip Code)

(212) 310-2000
(Registrant’s telephone number, including area code)

NO CHANGES
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer T
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Shares Outstanding
 
Date
Common stock, $1.00 par value
 
486,495,953
 
June 30, 2011
 


 
 

 

PART I.
FINANCIAL INFORMATION

COLGATE-PALMOLIVE COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
                         
   
2011
   
2010
   
2011
   
2010
 
                         
Net sales
  $ 4,185     $ 3,814     $ 8,179     $ 7,643  
Cost of sales
    1,781       1,572       3,444       3,133  
Gross profit
    2,404       2,242       4,735       4,510  
Selling, general and administrative expenses
    1,421       1,292       2,825       2,647  
Other (income) expense, net
    15       2       27       237  
Operating profit
    968       948       1,883       1,626  
Interest expense, net
    11       14       27       30  
Income before income taxes
    957       934       1,856       1,596  
Provision for income taxes
    311       304       603       579  
Net income including noncontrolling interests
    646       630       1,253       1,017  
Less: Net income attributable to noncontrolling interests
    24       27       55       57  
Net income attributable to Colgate-Palmolive Company
  $ 622     $ 603     $ 1,198     $ 960  
                                 
Earnings per common share, basic
  $ 1.27     $ 1.21     $ 2.44     $ 1.92  
                                 
Earnings per common share, diluted
  $ 1.26     $ 1.17     $ 2.42     $ 1.86  
                                 
Dividends declared per common share*
  $ -     $ -     $ 1.11     $ 0.97  
_________
*
Two dividends were declared in the first quarters of 2011 and 2010.
 
See Notes to Condensed Consolidated Financial Statements.

 
2

 

COLGATE-PALMOLIVE COMPANY
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Dollars in Millions)
(Unaudited)

             
   
June 30,
2011
   
December 31,
2010
 
Assets
 
 
   
 
 
Current Assets
 
 
   
 
 
Cash and cash equivalents
  $ 739     $ 490  
Receivables (net of allowances of $55 and $53, respectively)
    1,819       1,610  
Inventories
    1,417       1,222  
Other current assets
    495       408  
Total current assets
    4,470       3,730  
Property, plant and equipment:
               
Cost
    7,575       7,160  
Less: Accumulated depreciation
    (3,744 )     (3,467 )
      3,831       3,693  
Goodwill, net
    2,920       2,362  
Other intangible assets, net
    1,457       831  
Deferred income taxes
    90       84  
Other assets
    476       472  
Total assets
  $ 13,244     $ 11,172  
                 
Liabilities and Shareholders’ Equity
               
Current Liabilities
               
Notes and loans payable
  $ 38     $ 48  
Current portion of long-term debt
    953       561  
Accounts payable
    1,236       1,165  
Accrued income taxes
    373       272  
Other accruals
    1,649       1,682  
Total current liabilities
    4,249       3,728  
                 
Long-term debt
    4,020       2,815  
Deferred income taxes
    180       108  
Other liabilities
    1,651       1,704  
                 
Shareholders’ Equity
               
Common stock
    733       733  
Additional paid-in capital
    1,218       1,132  
Retained earnings
    14,983       14,329  
Accumulated other comprehensive income (loss)
    (1,748 )     (2,115 )
      15,186       14,079  
Unearned compensation
    (80 )     (99 )
Treasury stock, at cost
    (12,137 )     (11,305 )
Total Colgate-Palmolive Company shareholders’ equity
    2,969       2,675  
Noncontrolling interests
    175       142  
Total shareholders’ equity
    3,144       2,817  
Total liabilities and shareholders’ equity
  $ 13,244     $ 11,172  

See Notes to Condensed Consolidated Financial Statements.

 
3

 

COLGATE-PALMOLIVE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
 
   
Six Months Ended
June 30,
   
2011
   
2010
Operating Activities
 
 
   
 
Net income including noncontrolling interests
  $ 1,253     $ 1,017  
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operations:
               
Depreciation and amortization
    202       185  
Venezuela hyperinflationary transition charge
          271  
Stock-based compensation expense
    56       60  
Deferred income taxes
    46       55  
Cash effects of changes in:
               
Receivables
    (153 )     (35 )
Inventories
    (148 )     (85 )
Accounts payable and other accruals
    (50 )     (206 )
Other non-current assets and liabilities
    (52 )     40  
Net cash provided by operations
    1,154       1,302  
                 
Investing Activities
               
Capital expenditures
    (225 )     (204 )
Purchases of marketable securities and investments
    (80 )     (13 )
Proceeds from sale of marketable securities and investments
    171        
Payment for acquisitions, net of cash acquired
    (960 )      
Other
    (17 )     2  
Net cash used in investing activities
    (1,111 )     (215 )
                 
Financing Activities
               
Principal payments on debt
    (1,869 )     (2,514 )
Proceeds from issuance of debt
    3,433       2,757  
Dividends paid
    (568 )     (520 )
Purchases of treasury shares
    (1,017 )     (978 )
Proceeds from exercise of stock options and excess tax benefits
    220       141  
Net cash provided by (used in) financing activities
    199       (1,114 )
                 
Effect of exchange rate changes on Cash and cash equivalents
    7       (18 )
Net increase (decrease) in Cash and cash equivalents
    249       (45 )
Cash and cash equivalents at beginning of period
    490       600  
Cash and cash equivalents at end of period
  $ 739     $ 555  
                 
Supplemental Cash Flow Information
               
Income taxes paid
  $ 513     $ 621  

See Notes to Condensed Consolidated Financial Statements.

 
4

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

1.
Basis of Presentation

The Condensed Consolidated Financial Statements reflect all normal recurring adjustments which, in management’s opinion, are necessary for a fair statement of the results for interim periods. Results of operations for interim periods may not be representative of results to be expected for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

For a complete set of financial notes, including the significant accounting policies of Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”), refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission.

2.
Use of Estimates

Provision for certain expenses, including income taxes, media advertising and consumer promotion, are based on full year assumptions and are included in the accompanying Condensed Consolidated Financial Statements in proportion with estimated annual tax rates, the passage of time or estimated annual sales.

3.
Acquisitions

On June 20, 2011, the Company, Colgate-Palmolive Europe Sàrl, Unilever N.V. and Unilever PLC (together with Unilever N.V., “Unilever”) finalized the Company’s acquisition from Unilever of the Sanex personal care business in accordance with a Business and Share Sale and Purchase Agreement (the “Purchase Agreement”) for an aggregate purchase price of  €672 ($960), subject to certain post-closing purchase price adjustments. The acquisition was financed with available cash, proceeds from the sale of the Company’s Euro-denominated investment portfolio and the issuance of commercial paper.

Sanex is a personal care brand with a distinct positioning around healthy skin with strong market share positions and 2010 net sales of  €187 (approximately $265), primarily in Western Europe.  This strategic acquisition is expected to strengthen Colgate’s personal care business in Europe, primarily in the liquid body cleansing and deodorants businesses.

Total purchase price consideration of $960 has been allocated on a preliminary basis to the net assets acquired based on their respective estimated fair values at June 20, 2011, as follows:
 
Recognized amounts of assets acquired and liabilities assumed:
     
Inventories
  $ 21  
Property, plant and equipment, net
    7  
Other intangible assets, net
    605  
Goodwill, net
     411  
Accrued income taxes
    (80 )
Long-term other liabilities
    (4 )
Fair value of net assets acquired
  $ 960  

Other intangible assets acquired include trademarks of $425 with an indefinite useful life and customer relationships of $180 with useful lives ranging from 12 to 14 years.

Goodwill of $411 was allocated between Europe/South Pacific segment (95%) and Greater Asia/Africa segment (5%). The Company expects that substantially all of the goodwill will be deductible for tax purposes.

The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values discussed above.

 
5

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
 
Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial statements is not material. The Company expects to finalize the purchase price allocation by the end of 2011. For the six months ended June 30, 2011, Other (income) expense, net includes $10 in transaction costs related to the acquisition, of which $7 relates to the second quarter.

Pursuant to the Purchase Agreement, Colgate and Unilever also entered into a Transition Services Agreement, pursuant to which Unilever agreed to provide certain transitional services in various countries for up to six months following the closing and a Supply Agreement, pursuant to which Unilever will supply certain Sanex products to Colgate Europe for up to two years following the closing.

In connection with the Sanex acquisition, Colgate agreed to sell its laundry detergent brands in Colombia to Unilever for approximately $215. The detergent sale is expected to close on or about July 29, 2011 and as a result of the sale, the Company expects to recognize a pretax gain of approximately $203 and aftertax gain of approximately $130 in the third quarter.
 
4.
Inventories

Inventories by major class are as follows:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Raw materials and supplies
  $ 333     $ 295  
Work-in-process
    70       50  
Finished goods
    1,014       877  
Total Inventories
  $ 1,417     $ 1,222  
 
5.
Shareholders’ Equity

Major changes in the components of Shareholders’ Equity for the first half of 2011 are as follows:
 
         
Noncontrolling
 
   
Colgate-Palmolive Company Shareholders’ Equity
   
Interests
 
                                 
Accumulated
       
   
Common
   
Additional
Paid-in
   
Unearned
   
Treasury
   
Retained
   
Other
Comprehensive
       
   
Stock
   
Capital
   
Compensation
   
Stock
   
Earnings
   
Income (Loss)
       
Balance, December 31, 2010
  $ 733     $ 1,132     $ (99 )   $ (11,305 )   $ 14,329     $ (2,115 )   $ 142  
Net income
                                    1,198               55  
Other comprehensive income, net of tax
                                            367       2  
Dividends
                                    (544 )             (24 )
Stock-based compensation expense
            56                                          
Shares issued for stock options
            51               157                          
Treasury stock acquired
                            (1,017 )                        
Other
            (21 )     19       28                          
Balance, June 30, 2011
  $ 733     $ 1,218     $ (80 )   $ (12,137 )   $ 14,983     $ (1,748 )   $ 175  

Accumulated Other comprehensive income (loss), as reflected in the Condensed Consolidated Balance Sheets, primarily consists of cumulative foreign currency translation adjustments and unrecognized pension and other retiree benefit costs. Refer to Note 6 for the components of Other comprehensive income (loss).

 
6

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
 
6.
Comprehensive Income

The following are components of comprehensive income:

   
Three Months Ended
 
   
June 30, 2011
   
June 30, 2010
 
   
Colgate-Palmolive Company
   
Noncontrolling interests
   
Total
   
Colgate-Palmolive Company
   
Noncontrolling interests
   
Total
 
Net income
  $ 622     $ 24     $ 646     $ 603     $ 27     $ 630  
                                                 
Other comprehensive income (loss), net of tax:
                                               
Cumulative translation adjustment
    175       1       176       (148 )     (1 )     (149 )
Retirement Plan and other retiree benefit adjustments
    14      
      14       11      
      11  
Gains (losses) on cash flow hedges
    (4 )    
      (4 )     (2 )    
      (2 )
Other
    8      
      8       (5 )    
      (5 )
Total Other comprehensive income (loss), net of tax
  $ 193     $ 1     $ 194     $ (144 )   $ (1 )   $ (145 )
                                                 
Comprehensive income
  $ 815     $ 25     $ 840     $ 459     $ 26     $ 485  


   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
 
   
Colgate-Palmolive Company
   
Noncontrolling interests
   
Total
   
Colgate-Palmolive Company
   
Noncontrolling interests
   
Total
 
Net income
  $ 1,198     $ 55     $ 1,253     $ 960     $ 57     $ 1,017  
                                                 
Other comprehensive income (loss), net of tax:
                                               
Cumulative translation adjustment
    295       2       297       (181 )     (1 )     (182 )
Retirement Plan and other retiree benefit adjustments
    28      
      28       22      
      22  
Gains (losses) on cash flow hedges
    (4 )    
      (4 )     (4 )    
      (4 )
Other
    48      
      48       (16 )    
      (16 )
Total Other comprehensive income (loss), net of tax
  $ 367     $ 2     $ 369     $ (179 )   $ (1 )   $ (180 )
                                                 
Comprehensive income
  $ 1,565     $ 57     $ 1,622     $ 781     $ 56     $ 837  
 
 
7

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

7.
Earnings Per Share
 
   
Three Months Ended
 
   
June 30, 2011
   
June 30, 2010
 
   
Income
   
Shares
(millions)
   
Per
Share
   
Income
   
Shares
(millions)
   
Per
Share
 
Net income attributable to Colgate-Palmolive Company
  $ 622    
 
   
 
    $ 603    
 
   
 
 
Preferred dividends
   
   
 
   
 
      (8 )  
 
   
 
 
Basic EPS
    622       489.5     $ 1.27       595       490.1     $ 1.21  
Stock options and restricted stock
            3.8                       4.6          
Convertible preference stock
   
     
              8       20.0          
Diluted EPS
  $ 622       493.3     $ 1.26     $ 603       514.7     $ 1.17  

For the three months ended June 30, 2011 and 2010, the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 18,734 and 18,300, respectively.

   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
 
   
Income
   
Shares
(millions)
   
Per
Share
   
Income
   
Shares
(millions)
   
Per
Share
 
Net income attributable to Colgate-Palmolive Company
  $ 1,198                 $ 960              
Preferred dividends
   
                  (16 )            
Basic EPS
    1,198       491.5     $ 2.44       944       491.9     $ 1.92  
Stock options and restricted stock
            3.4                       4.6          
Convertible preference stock
   
     
              16       20.2          
Diluted EPS
  $ 1,198       494.9     $ 2.42     $ 960       516.7     $ 1.86  

For the six months ended June 30, 2011 and 2010, the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 34,719 and 18,300, respectively.

As a result of recent rules issued by the Internal Revenue Service related to employer stock held in defined contribution plans, the Company issued a notice of redemption with respect to the 2,405,192 shares of Preference stock outstanding on December 29, 2010.  At the direction of the Company’s ESOP trustee, the preference shares were converted into 19,241,536 shares of common stock.

 
8

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
 
8.
Retirement Plans and Other Retiree Benefits

Components of net periodic benefit cost for three and six months ended June 30, 2011 and 2010 were as follows:
 
   
Pension Benefits
   
Other Retiree Benefits
 
   
United States
   
International
   
 
   
 
 
   
Three Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
Service cost
  $ 6     $ 13     $ 5     $ 4     $ 3     $ 4  
Interest cost
    25       24       10       8       10       11  
Annual ESOP allocation
                                  (2 )
Expected return on plan assets
    (28 )     (26 )     (7 )     (6 )            
Amortization of transition and prior service costs (credits)
    3       1       1             1        
Amortization of actuarial loss
    12       11       3       4       4       4  
Net periodic benefit cost
  $ 18     $ 23     $ 12     $ 10     $ 18     $ 17  
 
 
   
Pension Benefits
   
Other Retiree Benefits
 
   
United States
   
International
   
 
   
 
 
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
Service cost
  $ 13     $ 25     $ 10     $ 9     $ 6     $ 7  
Interest cost
    51       48       19       17       21       21  
Annual ESOP allocation
                            (1 )     (4 )
Expected return on plan assets
    (56 )     (51 )     (14 )     (12 )     (1 )     (1 )
Amortization of transition and prior service costs (credits)
    5       2       2             3        
Amortization of actuarial loss
    23       22       5       5       9       7  
Net periodic benefit cost
  $ 36     $ 46     $ 22     $ 19     $ 37     $ 30  

9.
Contingencies

As a global company serving consumers in more than 200 countries and territories, the Company is routinely subject to a wide variety of legal proceedings.  These include disputes relating to intellectual property, contracts, product liability, marketing, advertising, foreign exchange controls, antitrust and trade regulation, as well as labor and employment, environmental and tax matters.

Management proactively reviews and monitors the Company’s exposure to, and the impact of, environmental matters. The Company is party to various environmental matters and, as such, may be responsible for all or a portion of the cleanup, restoration and post-closure monitoring of several sites.

As a matter of course, the Company is regularly audited by the IRS and other tax authorities around the world in countries where it conducts business. In this regard, the IRS has completed its examination of the Company’s federal income tax returns through 2005.  Estimated incremental tax payments related to potential disallowances for subsequent periods are not expected to be material.

The Company establishes accruals for loss contingencies when it has determined that a loss is probable and that the amount of loss, or range of loss, can be reasonably estimated.  Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances.

 
9

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates.  For those matters disclosed below, the Company currently estimates that the aggregate range of reasonably possible losses in excess of any accrued liabilities is $0 to approximately $425 (based on current exchange rates).  The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change.  Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the matters in question.  Thus, the Company’s exposure and ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued or the range disclosed above.

Based on current knowledge, management does not believe that the ultimate resolution of loss contingencies arising from the matters discussed herein will have a material effect on the Company’s consolidated financial position or its ongoing results of operations or cash flows.  However, in light of the inherent uncertainties noted above, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular quarter or year.

Brazilian Matters

In 2001, the Central Bank of Brazil sought to impose a substantial fine on the Company’s Brazilian subsidiary (approximately $167 at the current exchange rate) based on alleged foreign exchange violations in connection with the financing of the Company’s 1995 acquisition of the Kolynos oral care business from Wyeth (formerly American Home Products) (the Seller), as described in the Company’s Form 8-K dated January 10, 1995. The Company appealed the imposition of the fine to the Brazilian Monetary System Appeals Council (the Council), and on January 30, 2007, the Council decided the appeal in the Company’s favor, dismissing the fine entirely. However, certain tax and civil proceedings that began as a result of this Central Bank matter are still outstanding as described below.

The Brazilian internal revenue authority has disallowed interest deductions and foreign exchange losses taken by the Company’s Brazilian subsidiary for certain years in connection with the financing of the Kolynos acquisition. The tax assessments with interest, at the current exchange rate, approximate $134. The Company has been disputing the disallowances by appealing the assessments within the internal revenue authority’s appellate process with the following results to date:
 
 
§
In June 2005, the First Board of Taxpayers ruled in the Company’s favor and allowed all of the previously claimed deductions for 1996 through 1998. In March 2007, the First Board of Taxpayers ruled in the Company’s favor and allowed all of the previously claimed deductions for 1999 through 2001. The tax authorities appealed these decisions to the next administrative level.

 
§
In August 2009, the First Taxpayers’ Council (the next and final administrative level of appeal) overruled the decisions of the First Board of Taxpayers, upholding the majority of the assessments, disallowing a portion of the assessments and remanding a portion of the assessments for further consideration by the First Board of Taxpayers.
 
The Company has filed a motion for reconsideration with the First Taxpayers’ Council and further appeals are available within the Brazilian federal courts.  The Company intends to challenge these assessments vigorously. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel and other advisors, that the disallowances are without merit and that the Company should ultimately prevail on appeal, if necessary, in the Brazilian federal courts.
 
In 2002, the Brazilian Federal Public Attorney filed a civil action against the federal government of Brazil, Laboratorios Wyeth-Whitehall Ltda. (the Brazilian subsidiary of the Seller) and the Company, as represented by its Brazilian subsidiary, seeking to annul an April 2000 decision by the Brazilian Board of Tax Appeals that found in favor of the Seller’s Brazilian subsidiary on the issue of whether it had incurred taxable capital gains as a result of the divestiture of Kolynos. The action seeks to make the Company’s Brazilian subsidiary jointly and severally liable for any tax due from the Seller’s Brazilian subsidiary. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the Company should ultimately prevail in this action. The Company intends to challenge this action vigorously.
 
In December 2005, the Brazilian internal revenue authority issued to the Company’s Brazilian subsidiary a tax assessment with interest and penalties of approximately $79, at the current exchange rate, based on a claim that certain purchases of U.S. Treasury bills by the subsidiary and their subsequent disposition during the period 2000 to 2001 were subject to a tax on foreign exchange transactions. The Company is disputing the assessment within the internal revenue authority’s administrative appeals process. In October 2007, the Second Board of Taxpayers, which has jurisdiction over these matters, ruled in favor of the internal revenue authority. In January 2008, the Company appealed this decision to the next administrative level. Although there can be no assurances, management believes, based on the advice of its Brazilian legal counsel, that the tax assessment is without merit and that the Company should prevail on appeal either at the administrative level or, if necessary, in the Brazilian federal courts. The Company intends to challenge this assessment vigorously.

 
10

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

European Competition Matters

Since February 2006, the Company has learned that investigations relating to potential competition law violations involving the Company’s subsidiaries had been commenced by governmental authorities in a number of European countries and by the European Commission.  The Company understands that many of these investigations also involve other consumer goods companies and/or retail customers.  The status of the various pending matters is discussed below.

Fines have been imposed on the Company in the following matters, although the Company is appealing these fines:

 
§
In December 2009, the Swiss competition law authority imposed a fine of $5 on the Company’s GABA subsidiary for alleged violations of restrictions on parallel imports into Switzerland.  The Company is appealing the fine in the Swiss courts.

 
§
In January 2010, the Spanish competition law authority found that four suppliers of shower gel had entered into an agreement regarding product down-sizing, for which Colgate’s Spanish subsidiary was fined $3. The Company is appealing the fine in the Spanish courts.

 
§
In December 2010, the Italian competition law authority found that 16 consumer goods companies, including the Company’s Italian subsidiary, exchanged competitively sensitive information in the cosmetics sector, for which the Company’s Italian subsidiary was fined $3.  The Company is appealing the fine in the Italian courts.

Currently, formal claims of violations, or statements of objections, are pending against the Company as follows:
 
 
§
The French competition authority alleges agreements on pricing and promotion of heavy duty detergents among four consumer goods companies, including the Company’s French subsidiary.

 
§
The French competition authority alleges violations of competition law by three pet food producers, including the Company’s Hill’s France subsidiary, focusing on exclusivity arrangements.

 
§
The German competition authority alleges that 17 branded goods companies, including the Company’s German subsidiary, exchanged sensitive information related to the German market.

The Company has responded to each of these formal claims of violations.  Investigations are ongoing in Belgium, France and Greece, but no formal claims of violations have been filed in these jurisdictions except in France as noted above.

Since December 31, 2010, the following matters have been resolved:

 
§
In April 2011, the investigation by the European Commission was resolved with no formal claims of violations or decisions made against the Company.  To the Company’s knowledge, there are no other investigations by the European Commission relating to potential competition law violations involving the Company or its subsidiaries.

 
§
In May 2011, the Dutch competition authority closed its investigation and no decision was made against the Company or its Dutch subsidiary.

 
11

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

The Company’s policy is to comply with antitrust and competition laws and, if a violation of any such laws is found, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. The Company has undertaken a comprehensive review of its selling practices and related competition law compliance in Europe and elsewhere and, where the Company has identified a lack of compliance, it has undertaken remedial action. Competition and antitrust law investigations often continue for several years and can result in substantial fines for violations that are found. Such fines, depending on the gravity and duration of the infringement as well as the value of the sales involved, have amounted, in some cases, to hundreds of millions of dollars. While the Company cannot predict the final financial impact of these competition law issues as these matters may change, the Company evaluates developments in these matters quarterly and accrues liabilities as and when appropriate.

ERISA Matters

In October 2007, a putative class action claiming that certain aspects of the cash balance portion of the Colgate-Palmolive Company Employees’ Retirement Income Plan (the Plan) do not comply with the Employee Retirement Income Security Act was filed against the Plan and the Company in the United States District Court for the Southern District of New York. Specifically, Proesel, et al. v. Colgate-Palmolive Company Employees’ Retirement Income Plan, et al. alleges improper calculation of lump sum distributions, age discrimination and failure to satisfy minimum accrual requirements, thereby resulting in the underpayment of benefits to Plan participants. Two other putative class actions filed earlier in 2007, Abelman, et al. v. Colgate-Palmolive Company Employees’ Retirement Income Plan, et al., in the United States District Court for the Southern District of Ohio, and Caufield v. Colgate-Palmolive Company Employees’ Retirement Income Plan, in the United States District Court for the Southern District of Indiana, both alleging improper calculation of lump sum distributions and, in the case of Abelman, claims for failure to satisfy minimum accrual requirements, were transferred to the Southern District of New York and consolidated with Proesel into one action, In re Colgate-Palmolive ERISA Litigation. The complaint in the consolidated action alleges improper calculation of lump sum distributions and failure to satisfy minimum accrual requirements, but does not include a claim for age discrimination. The relief sought includes recalculation of benefits in unspecified amounts, pre- and post-judgment interest, injunctive relief and attorneys’ fees. This action has not been certified as a class action as yet.  The parties are in discussions via non-binding mediation to determine whether the action can be settled.  The Company and the Plan intend to contest this action vigorously should the parties be unable to reach a settlement.
 
10.
Segment Information

The Company evaluates segment performance based on several factors, including Operating profit. The Company uses Operating profit as a measure of the operating segment performance because it excludes the impact of corporate-driven decisions related to interest expense and income taxes. Corporate operations include stock-based compensation related to stock options and restricted stock awards, research and development costs, Corporate overhead costs, restructuring and related implementation costs, and gains and losses on sales of non-core product lines and assets. The Company reports these items within Corporate operations as they relate to Corporate-based responsibilities and decisions and are not included in the internal measures of segment operating performance used by the Company in order to measure the underlying performance of the business segments.  In 2010, Corporate Operating profit also includes the one-time $271 charge related to the transition to hyperinflationary accounting in Venezuela as of January 1, 2010.  For further information regarding Venezuela, refer to Note 12.

 
12

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

Net sales and Operating profit by segment were as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net sales
                       
Oral, Personal and Home Care
                       
North America
  $ 744     $ 768     $ 1,462     $ 1,521  
Latin America
    1,231       1,055       2,328       2,061  
Europe/South Pacific
    857       770       1,689       1,594  
Greater Asia/Africa
    816       730       1,629       1,460  
Total Oral, Personal and Home Care
    3,648       3,323       7,108       6,636  
Pet Nutrition
    537       491       1,071       1,007  
Total Net sales
  $ 4,185     $ 3,814     $ 8,179     $ 7,643  
                                 
Operating profit
                               
Oral, Personal and Home Care
                               
North America
  $ 194     $ 227     $ 386     $ 444  
Latin America
    360       303       686       643  
Europe/South Pacific
    170       184       355       375  
Greater Asia/Africa
    199       189       402       378  
Total Oral, Personal and Home Care
    923       903       1,829       1,840  
Pet Nutrition
    140       134       281       275  
Corporate
    (95 )     (89 )     (227 )     (489 )
Total Operating profit
  $ 968     $ 948     $ 1,883     $ 1,626  

11.
Fair Value Measurements and Financial Instruments

The Company uses available market information and other valuation methodologies in assessing the fair value of financial instruments. Judgment is required in interpreting market data to develop the estimates of fair value and, accordingly, changes in assumptions or the estimation methodologies may affect the fair value estimates.  The Company is exposed to credit losses in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely as it is the Company’s policy to contract only with diverse, highly rated counterparties.

The Company is exposed to market risk from foreign currency exchange rates, interest rates and commodity price fluctuations. Volatility relating to these exposures is managed on a global basis by utilizing a number of techniques, including working capital management, supplier agreements management, selling price increases, selective borrowings in local currencies and entering into selective derivative instrument transactions, issued with standard features, in accordance with the Company’s treasury and risk management policies, which prohibit the use of derivatives for speculative purposes and leveraged derivatives for any purpose.  It is the Company’s policy to enter into derivative instrument contracts with terms that match the underlying exposure being hedged.  Hedge ineffectiveness, if any, is not material for any period presented.

The Company’s derivative instruments include interest rate swap contracts, foreign currency contracts and commodity contracts.  The Company utilizes interest rate swap contracts to manage its targeted mix of fixed and floating rate debt, and these swaps are valued using observable benchmark rates (Level 2 valuation). Foreign currency contracts consist of forward, option and swap contracts utilized to hedge a portion of the Company’s foreign currency purchases, assets and liabilities created in the normal course of business as well as the net investment in certain foreign subsidiaries. These contracts are valued using observable market rates (Level 2 valuation). Commodity futures contracts are utilized to hedge the purchases of raw materials used in the Company’s operations. These contracts are measured using quoted commodity exchange prices (Level 1 valuation). The duration of foreign currency and commodity contracts generally does not exceed 12 months.

 
13

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

The following summarizes the fair value of the Company’s derivative instruments and other financial instruments at June 30, 2011 and December 31, 2010:

 
Assets
 
Liabilities
 
   
Account
 
Fair Value
 
Account
 
Fair Value
 
Designated derivative instruments
   
6/30/11
   
12/31/10
     
6/30/11
   
12/31/10
 
Interest rate swap contracts
Other assets   $ 26     $ 22  
Other liabilities
  $ 2     $ 7  
Foreign currency contracts
Other current assets     9       10  
Other accruals
    11       10  
Commodity contracts
Other current assets     ¾       4  
Other accruals
    1       ¾  
Total designated
    $ 35     $ 36       $ 14     $ 17  
                                     
Derivatives not designated
                                   
Foreign currency contracts
Other current assets     ¾       ¾  
Other accruals
  $ 1     $ 2  
Total not designated
      ¾       ¾       $ 1     $ 2  
                                     
Total derivative instruments
    $ 35     $ 36       $ 15     $ 19  
                                     
Other financial instruments
                                   
Marketable securities
Other current assets   $ 53     $ 74                    
Available-for-sale securities
Other assets     229       228                    
Total other financial instruments
    $ 282     $ 302                    

The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of June 30, 2011 and December 31, 2010.  The estimated fair value of the Company’s long-term debt, including the current portion, as of June 30, 2011 and December 31, 2010, was $5,224 and $3,613, respectively, and the related carrying value was $4,973 and $3,376, respectively.  The estimated fair value of long-term debt was derived principally from quoted prices on the Company’s outstanding fixed-term notes (Level 2 valuation).

Fair value hedges

The Company has designated all interest rate swap contracts and certain foreign currency forward and option contracts as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings.  The impact of foreign currency contracts is recognized in Selling, general and administrative expenses and the impact of interest rate swap contracts is recognized in Interest expense, net.

During the second quarter of 2011, the Company issued $250 of six-year notes at a fixed rate of 2.625% and $250 of three-year notes at a fixed rate of 1.250% under the Company’s shelf registration statement. The Company simulteneously entered into interest rate swaps to effectively convert the fixed rate of the notes to a variable rate.
 
 
14

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

Activity related to fair value hedges recorded during the three-month periods ended June 30, 2011 and 2010 was as follows:

   
2011
   
2010
 
   
Foreign
Currency
Contracts
   
Interest
Rate
Swaps
   
 
Total
   
Foreign
Currency
Contracts
   
Interest
Rate
Swaps
   
 
Total
 
Notional Value at June 30,
  $ 538     $ 1,288     $ 1,826     $ 1,090     $ 600     $ 1,690  
Gain (loss) on derivative
    ¾       11       11       (8 )     5       (3 )
Gain (loss) on hedged items
    ¾       (11 )     (11 )     8       (5 )     3  

Activity related to fair value hedges recorded during the six-month periods ended June 30, 2011 and 2010 was as follows:

   
2011
   
2010
 
   
Foreign
Currency
Contracts
   
Interest
Rate
Swaps
   
 
Total
   
Foreign
Currency
Contracts
   
Interest
Rate
Swaps
   
 
Total
 
Notional Value at June 30,
  $ 538     $ 1,288     $ 1,826     $ 1,090     $ 600     $ 1,690  
Gain (loss) on derivative
    6       8       14       (4 )     9       5  
Gain (loss) on hedged items
    (6 )     (8 )     (14 )     4       (9 )     (5 )

Cash flow hedges

All of the Company’s commodity contracts and certain foreign currency forward contracts have been designated as cash flow hedges, for which the effective portion of the gain or loss is reported as a component of Other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

Activity related to cash flow hedges recorded during the three-month periods ended June 30, 2011 and 2010 was as follows:

   
2011
   
2010
 
   
Foreign
Currency
Contracts
   
Commodity
Contracts
   
 
Total
   
Foreign
Currency
Contracts
   
Commodity
Contracts
   
 
Total
 
Notional Value at June 30,
  $ 350     $ 30     $ 380     $ 219     $ 17     $ 236  
Gain (loss) recognized in OCI
    (4 )     (2 )     (6 )     ¾       (1 )     (1 )
Gain (loss) reclassified into Cost of sales
    (4 )     2       (2 )     2       (1 )     1  

Activity related to cash flow hedges recorded during the six-month periods ended June 30, 2011 and 2010 was as follows:

   
2011
   
2010
 
   
Foreign
Currency
Contracts
   
Commodity
Contracts
   
 
Total
   
Foreign
Currency
Contracts
   
Commodity
Contracts
   
 
Total
 
Notional Value at June 30,
  $ 350     $ 30     $ 380     $ 219     $ 17     $ 236  
Gain (loss) recognized in OCI
    (7 )     ¾       (7 )     1       (3 )     (2 )
Gain (loss) reclassified into Cost of sales
    (8 )     5       (3 )     3       (1 )     2  
 
 
15

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

The net gain (loss) recognized in OCI for both foreign currency contracts and commodity contracts is expected to be recognized in Cost of sales within the next twelve months.

Net investment hedges

The Company has designated certain foreign currency forward and option contracts and certain foreign currency-denominated debt as net investment hedges, for which the gain or loss on the instrument is reported as a component of Currency translation adjustments within OCI, along with the offsetting gain or loss on the hedged items.

Activity related to net investment hedges recorded during the three-month periods ended June 30, 2011 and 2010 was as follows:

   
2011
   
2010
 
   
Foreign
Currency
Contracts
   
Foreign
Currency
Debt
   
 
Total
   
Foreign
Currency
Contracts
   
Foreign
Currency
Debt
   
 
Total
 
Notional Value at June 30,
  $ 88     $ 333     $ 421     $ 123     $ 337     $ 460  
Gain (loss) on instruments
    (3 )     (19 )     (22 )     5       16       21  
Gain (loss) on hedged items
    3       19       22       (5 )     (16 )     (21 )

Activity related to net investment hedges recorded during the six-month periods ended June 30, 2011 and 2010 was as follows:

   
2011
   
2010
 
   
Foreign
Currency
Contracts
   
Foreign
Currency
Debt
   
 
Total
   
Foreign
Currency
Contracts
   
Foreign
Currency
Debt
   
 
Total
 
Notional Value at June 30,
  $ 88     $ 333     $ 421     $ 123     $ 337     $ 460  
Gain (loss) on instruments
    (10 )     (33 )     (43 )     4       34       38  
Gain (loss) on hedged items
    10       33       43       (4 )     (34 )     (38 )

Derivatives Not Designated as Hedging Instruments

Derivatives not designated as hedging instruments for each period consist of a cross-currency swap which serves as an economic hedge of a foreign currency deposit, for which the gain or loss on the instrument and the offsetting gain or loss on the hedged item are recognized in Other (income) expense, net for each period.  The cross-currency swap outstanding at December 31, 2010 was settled during the quarter, resulting in a realized loss of $6 which was offset by a corresponding gain on an underlying deposit.  A new cross-currency swap with similar terms and an underlying foreign currency deposit was entered into during June 2011.

Activity related to these contracts during the three-month periods ended June 30, 2011 and 2010 was as follows:

   
2011
   
2010
 
   
Cross-currency
Swap
   
Cross-currency
Swap
 
Notional Value at June 30,
  $ 96     $ 90  
Gain (loss) on instrument
    ¾       ¾  
Gain (loss) on hedged item
    ¾       ¾  

 
16

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

Activity related to these contracts during the six-month periods ended June 30, 2011 and 2010 was as follows:

   
2011
   
2010
 
   
Cross-currency
Swap
   
Cross-currency
Swap
 
Notional Value at June 30,
  $ 96     $ 90  
Gain (loss) on instrument
    (4 )     6  
Gain (loss) on hedged item
    4       (6 )

Other Financial Instruments
 
Marketable securities consist of bank deposits with original maturities greater than 90 days (Level 1 valuation).

Available-for-sale securities consist of the fixed income investments discussed below.

In 2010, the Company invested in a portfolio of euro-denominated investment grade fixed income securities, including corporate bonds, with maturities generally ranging from one to three years. During the second quarter of 2011, the Company liquidated the investment portfolio as part of the cash management strategy to fund the acquisition of the Sanex business.  The portfolio was considered a Level 1 investment as all of the securities had quoted prices on an active exchange with daily liquidity. At December 31, 2010, the portfolio’s fair value was $132 and was reported in Other assets in the Condensed Consolidated Balance Sheet.

Through its subsidiary in Venezuela, the Company is also invested in U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government. As of December 31, 2010, these bonds were considered Level 3 as there was no trading activity in the market at the end of 2010 and their value was determined using unobservable inputs reflecting the Company’s own assumptions. As of June 30, 2011, these bonds are actively traded and, therefore, are considered Level 2 as their value is determined based upon observable market-based inputs or unobservable inputs that are corroborated by market data.

The following table presents a reconciliation of the Venezuelan investments at fair value for the six months ended June 30:

   
2011
   
2010
 
Beginning balance as of January 1
  $ 96     $ 46  
Unrealized gain (loss) on investment
    62       (16 )
Purchases and sales during the period
    71       ¾  
Ending balance as of June 30
  $ 229     $ 30  

As a result of the Venezuelan government’s elimination of the two-tier exchange rate structure effective January 1, 2011, these bonds have revalued and, based on recent market activity, the Company recorded an unrealized gain of $62 in the first quarter of 2011. For further information regarding Venezuela, refer to Note 12 below.

 
17

 

COLGATE-PALMOLIVE COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)

12.
Venezuela

Effective January 1, 2010, Venezuela was designated as hyperinflationary and therefore the functional currency for the Company’s Venezuelan subsidiary (CP Venezuela) became the U.S. dollar. As a result, the impact of Venezuelan currency fluctuations is reported in income. The change in the reporting currency from the Venezuelan bolivar fuerte to the U.S. dollar resulted in a one-time charge of $271 recorded within Other (income) expense, net in the first quarter of 2010. This charge primarily represented the premium paid to acquire U.S. dollar-denominated cash ($150) and bonds ($152) at the parallel market rate, offset by $31 for U.S. dollar-denominated payables. Previously these items had been remeasured at the parallel market rate and then translated for financial reporting purposes at the official rate of 2.15.

On January 8, 2010, the Venezuelan government announced its decision to devalue its currency and implement a two-tier exchange rate structure. As a result, the official exchange rate changed from 2.15 to 2.60 for essential goods and 4.30 for non-essential goods.  The devaluation resulted in a one-time pretax gain of $46 recorded in Other (income) expense and an aftertax gain of $59 in the first quarter of 2010 related to the remeasurement of the local balance sheet and lower taxes on accrued but unpaid remittances from Venezuela.  In December 2010, the Venezuelan government announced that effective January 1, 2011 the 2.60 exchange rate for essential goods would be abolished.  As a result, CP Venezuela incurred an aftertax loss of $36 in the fourth quarter of 2010 related to the remeasurement of certain local balance sheet items for which the 2.60 exchange rate will no longer be received.  This loss was offset by lower taxes on accrued but unpaid remittances.

The Company remeasures the financial statements of CP Venezuela at the rate at which it expects to remit future dividends, which currently is 4.30. As a result of the devaluations of the Venezuelan bolivar fuerte, the local currency operations of CP Venezuela now translate into fewer U.S. dollars.

For the six months ended June 30, 2011, CP Venezuela represented 5% of the Company’s consolidated Net sales.  At June 30, 2011, CP Venezuela’s bolivar fuerte-denominated monetary net asset position was approximately $207, which does not include $229 of devaluation-protected bonds issued by the Venezuelan government, as these bonds provide protection against devaluations by adjusting the amount of bolivares fuertes received at maturity for any devaluation subsequent to issuance.  As described in Note 11, these bonds are considered a Level 2 investment.

 
18

 

COLGATE-PALMOLIVE COMPANY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

(Dollars in Millions Except Share and Per Share Amounts)

Executive Overview and Outlook

Colgate-Palmolive Company seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers on a global basis with products that make their lives healthier and more enjoyable.

To this end, the Company is tightly focused on two product segments: Oral, Personal and Home Care; and Pet Nutrition. Within these segments, the Company follows a closely defined business strategy to develop and increase market leadership positions in key product categories. These product categories are prioritized based on their capacity to maximize the use of the organization’s core competencies and strong global equities and to deliver sustainable long-term growth.

Operationally, the Company is organized along geographic lines with management teams having responsibility for the business and financial results in each region. The Company competes in more than 200 countries and territories worldwide with established businesses in all regions contributing to the Company’s sales and profitability. This geographic diversity and balance help to reduce the Company’s exposure to business and other risks in any one country or part of the world.

The Oral, Personal and Home Care segment is operated through four reportable operating segments: North America, Latin America, Europe/South Pacific and Greater Asia/Africa, all of which sell to a variety of retail and wholesale customers and distributors. The Company, through Hill’s Pet Nutrition, also competes on a worldwide basis in the pet nutrition market, selling its products principally through specialty pet retailers and the veterinary profession.

On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, sales (including volume, pricing and foreign exchange components), organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments), gross profit margin, operating profit, net income and earnings per share, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators, and the Company’s corporate governance practices (including the Company’s Code of Conduct), help to maintain business health and strong internal controls.

To achieve its business and financial objectives, the Company focuses the organization on initiatives to drive and fund growth. The Company seeks to capture significant opportunities for growth by identifying and meeting consumer needs within its core categories, through its focus on innovation and the deployment of valuable consumer and shopper insights in the development of successful new products regionally, which are then rolled out on a global basis. To enhance these efforts, the Company has developed key initiatives to build strong relationships with consumers, dental and veterinary professionals and retail customers. Growth opportunities are greater in those areas of the world in which economic development and rising consumer incomes expand the size and number of markets for the Company’s products.

The investments needed to support this growth are developed through continuous, Company-wide initiatives to lower costs and  increase effective asset utilization through which the Company seeks to become even more effective and efficient throughout its businesses, which are referred to as the Company’s funding-the-growth initiatives. The Company also continues to prioritize its investments toward its higher margin businesses, specifically Oral Care, Personal Care and Pet Nutrition.

On June 20, 2011, the Company, Colgate-Palmolive Europe Sàrl, Unilever N.V. and Unilever PLC (together with Unilever N.V., “Unilever”) finalized the Company’s acquisition from Unilever of the Sanex personal care business in accordance with a Business and Share Sale and Purchase Agreement for an aggregate purchase price of €672 ($960), subject to certain post-closing purchase price adjustments. The acquisition was financed with available cash, proceeds from the sale of the Company’s Euro-denominated investment portfolio and the issuance of commercial paper.

Also in connection with the Sanex acquisition, Colgate agreed to sell its laundry detergent brands in Colombia to Unilever for approximately $215 resulting in an aftertax gain of approximately $130. The detergent sale recently received regulatory approval and is expected to close on or about July 29, 2011.  The Company now expects that this gain will be fully offset in the second half of 2011 as a result of the implementation of various business realignment and cost saving initiatives, further driving improvements in effectiveness and efficiency globally.
 
 
19

 

COLGATE-PALMOLIVE COMPANY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

(Dollars in Millions Except Share and Per Share Amounts)

With over 75% of its Net sales generated outside of the United States, the Company is exposed to changes in economic conditions and foreign currency exchange rates, as well as political uncertainty in some countries, all of which could impact future operating results.  For example, as discussed in detail below, the operating environment in Venezuela is challenging, with economic uncertainty fueled by currency devaluations and high inflation and governmental restrictions in the form of import authorization controls, currency exchange controls, price controls and periodic expropriation of property or other resources in non-consumer product industries.

In particular, as a result of the devaluations of the Venezuelan bolivar fuerte, described more fully in Note 12 “Venezuela” to the Condensed Consolidated Financial Statements, the local currency operations of the Company’s Venezuelan subsidiary (CP Venezuela) now translate into fewer U.S. dollars. The Company has taken, and continues to take, actions to mitigate the impact of both devaluations on its operations.

Additionally, the Venezuelan government continues to impose import authorization controls and currency exchange and payment controls.  During 2010, a new currency market was established and the government closed the free-floating parallel market.  Under existing regulations, CP Venezuela is not permitted to access the new currency market, but continues to have limited access to U.S. dollars at the official rate, and currently only for imported goods. As a result, CP Venezuela funds its requirements for imported goods through a combination of U.S. dollars obtained from the government at the official rate, intercompany borrowings and existing U.S. dollar cash balances, which were obtained previously through parallel market transactions and through the prior liquidation of its U.S. dollar-denominated bond portfolio.

The Company’s business in Venezuela and the Company’s ability to repatriate its earnings continue to be negatively affected by these difficult conditions and would be further negatively affected by additional devaluations or the imposition of additional import authorization controls and currency exchange controls.  For the six months ended June 30, 2011, CP Venezuela represented 5% of the Company’s consolidated Net sales.  At June 30, 2011, CP Venezuela’s monetary local currency net asset position was approximately $207.

Looking forward, we expect global macroeconomic and market conditions to remain highly challenging.  While the global marketplace in which we operate has always been highly competitive, the Company continues to experience heightened competitive activity in certain markets from other large multinational companies, some of which may have greater resources than we do.  Such activities have included more aggressive product claims and marketing challenges, as well as increased promotional spending.  Additionally, we have experienced a sharp rise in commodity costs.  While the Company has taken, and will continue to take, measures to address the heightened competitive activity and increased commodity costs, should these conditions persist, they could adversely affect the Company’s future results.

The Company believes it is well prepared to meet the challenges ahead due to its strong financial condition, experience operating in challenging environments and continued focus on the Company’s recently updated strategic initiatives: engaging to build our brands; innovation for growth; effectiveness and efficiency in everything; and leading to win. This focus, together with the strength of the Company’s global brand names and its broad international presence in both mature and emerging markets, should position the Company well to increase shareholder value over the long-term.

Results of Operations

Three Months

Worldwide Net sales were $4,185 in the second quarter of 2011, up 9.5% from the second quarter of 2010, driven by volume growth of 3%, net selling price increases of 0.5% and a positive foreign exchange impact of 6.0%. Organic sales (Net sales excluding foreign exchange, acquisitions and divestments) grew 3.5% in the second quarter of 2011.

Net sales in the Oral, Personal and Home Care segment were $3,648 in the second quarter of 2011, up 10% from the second quarter of 2010, driven by volume growth of 3%, net selling price increases of 0.5% and a positive foreign exchange impact of 6.5%. Organic sales in the Oral, Personal and Home Care segment grew 3.5% in the second quarter of 2011.

 
20

 

COLGATE-PALMOLIVE COMPANY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

(Dollars in Millions Except Share and Per Share Amounts)

Worldwide Gross profit margin decreased to 57.4% in the second quarter of 2011 from 58.8% in the second quarter of 2010.  The decrease in the second quarter of 2011 was primarily due to higher raw and packaging material costs (310 bps) driven by global commodity cost increases, partially offset by cost savings from the Company’s funding-the-growth initiatives (190 bps) and by higher pricing (20 bps).

Selling, general and administrative expenses as a percentage of Net sales increased to 34.0% in the second quarter of 2011 from 33.9% in the second quarter of 2010 primarily due to higher advertising as a percentage of Net sales.  In the second quarter of 2011, advertising increased 10.9% to $438 as compared with $395 in the second quarter of 2010.

Other (income) expense, net was $15 in the second quarter of 2011 as compared with $2 in the second quarter of 2010. In the second quarter of 2011, Other (income) expense, net includes transaction costs of $7 related to the Sanex acquisition.

Operating profit increased 2% to $968 in the second quarter of 2011 from $948 in 2010.

North America

   
Three Months Ended June 30,
 
   
2011
   
2010
   
Change
 
Net sales
  $ 744     $ 768       (3.0 )%
Operating profit
  $ 194     $ 227       (15 )%
% of Net sales
    26.1 %     29.6 %  
(350
)bps

Net sales in North America decreased 3.0% in the second quarter of 2011 to $744, as volume growth of 0.5% and a positive foreign exchange impact of 1.0% were more than offset by net selling price decreases of 4.5%.  Organic sales in North America decreased 4.0% in the second quarter of 2011. Products contributing to volume gains in oral care included Colgate Sensitive Multi Protection, Colgate Max Clean SmartFoam toothpastes and the relaunch of Colgate Total toothpaste, Colgate 360° Surround, Colgate 360° ActiFlex, Colgate Total and Colgate Extra Clean manual toothbrushes.  Successful new products in other categories contributing to volume growth included Softsoap Body Butter Strawberry body wash and Palmolive Soft Touch with Vitamin E dish liquid.

Operating profit in North America decreased 15% in the second quarter of 2011 to $194, or 26.1% of Net sales.  This decrease was driven by a decrease in Gross profit as a percentage of Net sales and an increase in Selling, general and administrative expenses as a percentage of Net sales.  The decrease in Gross profit as a percentage of Net sales was due to higher raw and packaging material costs, reflecting global commodity cost increases, and increased promotional investments reflected in the net selling price decreases noted above.  The increase in Selling, general and administrative expenses as a percentage of Net sales was driven by higher advertising expenses as a percentage of Net sales.

Latin America

   
Three Months Ended June 30,
 
   
2011
   
2010
   
Change
 
Net sales
  $ 1,231     $ 1,055       17.0 %
Operating profit
  $ 360     $ 303       19 %
% of Net sales
    29.2 %     28.7 %  
50
bps

Net sales in Latin America increased 17% in the second quarter of 2011 to $1,231, driven by volume growth of 4.0%, net selling price increases of 6.5% and a positive foreign exchange impact of 6.5%. Organic sales in Latin America grew 10.5% in the second quarter of 2011. Volume gains were led by Brazil, Mexico and Colombia. Products contributing to the growth in oral care included Colgate Sensitive Pro-Relief, Colgate Sensitive Pro-Relief Whitening, Colgate Total and Colgate Triple Action toothpastes, Colgate 360° Surround, Colgate Twister, Colgate Triple Action and Colgate Zig Zag manual toothbrushes and Colgate Plax Whitening Tartar Control and Colgate Plax Complete Care mouthwashes.  Products contributing to growth in other categories included Palmolive Naturals Relaxing Softness Cream and Lavender and Protex Advanced Clean bar soaps, Lady Speed Stick Stainguard and Speed Stick Sensitive Power deodorants.

 
21

 

COLGATE-PALMOLIVE COMPANY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

(Dollars in Millions Except Share and Per Share Amounts)

Operating profit in Latin America increased 19% in the second quarter of 2011 to $360, or 29.2% of Net sales.  This increase was due to an increase in Gross profit as a percentage of Net sales partially offset by an increase in Selling, general and administrative expenses as a percentage of Net sales.  The increase in Gross profit as a percentage of Net sales was driven by higher pricing and cost savings from the Company’s funding-the-growth initiatives, partially offset by higher raw and packaging material costs reflecting global commodity cost increases. The increase in Selling, general and administrative expenses as a percentage of Net sales was primarily due to higher advertising investment supporting volume growth and increased logistics and overhead expenses.

Europe/South Pacific

   
Three Months Ended June 30,
 
   
2011
   
2010
   
Change
 
Net sales
  $ 857     $ 770       11.5 %
Operating profit
  $ 170     $ 184       (8 )%
% of Net sales
    19.8 %     23.9 %  
(410
)bps

Net sales in Europe/South Pacific increased 11.5% in the second quarter of 2011 to $857, as volume growth of 0.5% and the positive impact of foreign exchange of 13.5% were partially offset by net selling price decreases of 2.5%. Organic sales in Europe/South Pacific decreased 2.0% in the second quarter of 2011. Volume gains in the United Kingdom and Denmark were partially offset by volume declines in the GABA businesses and France. Successful products in oral care included Colgate Sensitive Pro-Relief Whitening, elmex Sensitive Professional, Colgate Max White One and Colgate Max Fresh Night toothpastes, Colgate 360° Surround and Meridol Halitosis manual toothbrushes and Colgate Max Sonic Power battery powered toothbrush.  Successful products in other categories included a new line of Palmolive shower gels and liquid hand soaps containing Mediterranean inspired fragrances and ingredients and the relaunch of Palmolive Aromatherapy and Thermal Spa shower gels with multi-sensory textures.

Operating profit in Europe/South Pacific decreased 8% in the second quarter of 2011 to $170, or 19.8% of Net sales. This decrease was due to a decrease in Gross profit as a percentage of Net sales and an increase in Selling, general and administrative expenses as a percentage of Net sales. The decrease in Gross profit as a percentage of Net sales was due to higher raw and packaging material costs reflecting global commodity cost increases, which were partially offset by cost savings from the Company’s funding-the-growth initiatives.  Selling, general and administrative expenses as a percentage of Net sales increased due to higher advertising investments and logistics and overhead expenses.

Greater Asia/Africa

   
Three Months Ended June 30,
 
   
2011
   
2010
   
Change
 
Net sales
  $ 816     $ 730       12.0 %
Operating profit
  $ 199     $ 189       5 %
% of Net sales
    24.4 %     25.9 %  
(150
)bps

Net sales in Greater Asia/Africa increased 12.0% in the second quarter of 2011 to $816 driven by volume growth of 6.5% and a 5.5% positive impact of foreign exchange while net selling prices were level. Organic sales in Greater Asia/Africa grew 6.5% in the second quarter of 2011. Volume gains were led by the Greater China region, India and Malaysia. Successful products driving the oral care growth included Colgate Sensitive Pro-Relief and Colgate Sensitive Pro-Relief Whitening and the relaunch of Colgate Total toothpastes, Colgate 360° Surround and Colgate Massager manual toothbrushes and Colgate Plax Sensitive and Colgate Plax Complete Care mouthwashes.  Successful products contributing to growth in other categories included Palmolive Naturals Black Orchid and Palmolive Thermal Spa shower gel and Lady Speed Stick and Mennen Speed Stick Waterproof deodorants.
 
 
22

 

COLGATE-PALMOLIVE COMPANY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

(Dollars in Millions Except Share and Per Share Amounts)

While Operating profit in Greater Asia/Africa increased 5% in the second quarter of 2011 to $199 driven by strong sales growth, it decreased as a percentage of Net sales to 24.4%.  This decrease in Operating profit as a percentage of Net sales was due to a decrease in Gross profit as a percentage to Net sales which was partially offset by a decrease in Selling, general and administrative expenses as a percentage of Net sales.  The decrease in Gross profit as a percentage of Net sales was due to higher raw and packaging material costs, reflecting global commodity cost increases, partially offset by cost savings from the Company’s funding-the-growth initiatives.  Selling, general and administrative expenses as a percentage of Net sales decreased due to lower advertising expenses in line with the timing of new product launches, planned for the later part of the year.

Pet Nutrition

   
Three Months Ended June 30,
 
   
2011
   
2010
   
Change
 
Net sales
  $ 537     $ 491       9.5 %
Operating profit
  $ 140     $ 134       5 %
% of Net sales
    26.1 %     27.3 %  
(120
)bps

Net sales for Hill’s Pet Nutrition increased 9.5% in the second quarter of 2011 to $537 driven by volume growth of 2.0%, a 6.0% positive impact of foreign exchange, and net selling price increases of 1.5%. Organic sales in Hill’s Pet Nutrition increased 3.5% in the second quarter of 2011.  Volume gains in Russia, Canada, Brazil and Australia were partially offset by volume declines in France and the United States. Successful new products within the U.S. included Science Diet Ideal Balance Canine, Science Diet Savory Stew Canine, Science Diet Age Defying Feline and the relaunch of Prescription Diet c/d Multicare Feline Bladder Health with improved efficacy and taste.  Successful new products contributing to international sales included Science Diet Senior Advanced (15 years plus) Canine and Feline, Science Diet Sterilized Cat and the relaunch of Prescription Diet c/d Multicare Feline Bladder Health with improved efficacy and taste.

Operating profit in Hill’s Pet Nutrition increased 5% in the second quarter of 2011 to $140, but decreased as a percentage of Net sales to 26.1%.  This decrease in Operating profit as a percentage of Net sales was due to a decrease in Gross profit as a percentage of Net sales, partially offset by a decrease in Selling, general and administrative expenses as a percentage of Net sales. The decrease in Gross profit as a percentage of Net sales was due to higher raw and packaging material costs and increased manufacturing overheads due to increased investments in capacity, partially offset by cost savings from the Company’s funding-the-growth initiatives and higher pricing. Selling, general and administrative expenses decreased as a percentage of Net sales due to lower advertising expenses as a percentage of Net sales.

Corporate

   
Three Months Ended June 30,
 
   
2011
   
2010
   
Change
 
Operating profit
  $ (95 )   $ (89 )     7 %

Operating profit (loss) related to Corporate was ($95) in the second quarter of 2011 as compared to ($89) in the second quarter of 2010. In the second quarter of 2011, Operating profit (loss) includes transaction costs of $7 related to the Sanex acquisition.

Interest expense, net decreased to $11 for the three months ended June 30, 2011 as compared with $14 in the comparable period of 2010, due to an increase in interest income.

Net income attributable to Colgate-Palmolive Company for the second quarter of 2011 increased to $622 from $603 in the comparable 2010 period, and earnings per common share on a diluted basis increased to $1.26 per share from $1.17 per share in the comparable 2010 period.
 
 
23

 

COLGATE-PALMOLIVE COMPANY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

(Dollars in Millions Except Share and Per Share Amounts)

Six Months

Net sales and Operating profit by segment were as follows:

   
Six Months Ended
June 30,
 
   
2011
   
2010
 
Net sales
           
Oral, Personal and Home Care
           
North America
  $ 1,462     $ 1,521  
Latin America
    2,328       2,061  
Europe/South Pacific
    1,689       1,594  
Greater Asia/Africa
    1,629       1,460  
Total Oral, Personal and Home Care
    7,108       6,636  
Pet Nutrition
    1,071       1,007  
Total Net sales
  $ 8,179     $ 7,643  
                 
Operating profit
               
Oral, Personal and Home Care
               
North America
  $ 386     $ 444  
Latin America
    686       643  
Europe/South Pacific
    355       375  
Greater Asia/Africa
    402       378  
Total Oral, Personal and Home Care
    1,829       1,840  
Pet Nutrition
    281       275  
Corporate
    (227 )     (489 )
Total Operating profit
  $ 1,883     $ 1,626  

Worldwide Net sales were $8,179 in the first half of 2011, up 7% from the first half of 2010, driven by volume growth of 2.5%, a positive foreign exchange impact of 4.5% and level net selling prices.

Net sales in the Oral, Personal and Home Care segment were $7,108 in the first half of 2011, up 7.0% from 2010, driven by volume growth of 2.5%, a positive foreign exchange impact of 4.5% and level net selling prices. Within this segment, North America sales decreased 4.0% as net selling prices decreased 4.5% and volume was level, Latin America sales increased 13.0%, driven by volume growth of 2.0% and net selling price increases of 5.5%, Europe/South Pacific sales increased 6.0% on volume growth of  0.5%  and net selling price decreases of 2.5%, Greater Asia/Africa sales increased 11.5% on volume growth of 7.5% and net selling price decreases of 0.5%, with the remainder of the change in each region due to foreign exchange.

Net sales for the Hill’s Pet Nutrition segment increased 6.5% in the first half of 2011 to $1,071, driven by volume growth of 2.5% and a positive foreign exchange impact of 4.0%, while net selling prices were level.

In the first half of 2011, Operating profit (loss) related to Corporate decreased to ($227) from ($489) in the comparable period of 2010. In the first half of 2010, Operating profit (loss) included a one-time $271 charge related to the transition to hyperinflationary accounting in Venezuela as of January 1, 2010.  In the first half of 2011, Operating profit (loss) included transaction costs of $10 related to the Sanex acquisition.

Worldwide gross profit margin decreased to 57.9% in the first half of 2011 from 59.0% in the first half of 2010. The decrease in the first half of 2011 was primarily due to higher raw and packaging material costs (280 bps) driven by global commodity cost increases and lower pricing (10 bps), partially offset by cost savings from the Company’s funding-the-growth initiatives (140 bps).

 
24

 

COLGATE-PALMOLIVE COMPANY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

(Dollars in Millions Except Share and Per Share Amounts)

Selling, general and administrative expenses as a percentage of Net sales decreased to 34.5% in the first half of 2011 from 34.6% in the first half of 2010 primarily due to lower advertising as a percentage of Net sales in line with the timing of new product launches, planned for the later part of the year. In the first half of 2011, advertising increased 4.6% to $856 as compared with $818 in the first half of 2010.

Other (income) expense, net was $27 in the first half of 2011 as compared to $237 in the first half of 2010. In the first half of 2011, Other (income) expense, net includes transaction costs of $10 related to the Sanex acquisition.  Other (income) expense, net for the first half of 2010 included a one-time $271 charge in Corporate related to the transition to hyperinflationary accounting in Venezuela as of January 1, 2010, partially offset by a one-time pre-tax gain of $46 recorded in Latin America related to the remeasurement of the CP Venezuela balance sheet as a result of the devaluation on January 8, 2010.

Operating profit increased 16% to $1,883 in the first half of 2011 from $1,626 in the first half of 2010. Excluding the one-time $271 charge related to the transition to hyperinflationary accounting in Venezuela incurred in the first quarter of 2010, Operating profit decreased 1% in the first half of 2011. This decrease was driven primarily by lower gross profit margins partially offset by a reduction in Selling, general and administrative expenses as a percentage of Net sales.

Interest expense, net decreased to $27 for the six months ended June 30, 2011, respectively, as compared with $30 in the comparable period of 2010, due to an increase in interest income.

The quarterly provision for income taxes is determined based on the Company’s estimated full year effective tax rate adjusted by the amount of tax attributable to infrequent and unusual items that are separately recognized on a discrete basis in the income tax provision in the quarter in which they occur. The Company’s current estimate of its full year effective income tax rate before discrete period items is 32.5%, which is consistent with the estimate in the first quarter of 2011.

The effective tax rate for the first half of 2010 was 36.3%, as the rate was impacted by the one-time $271 charge related to the transition to hyperinflationary accounting in Venezuela, as well as the one-time $59 gain from the remeasurement of the CP Venezuela balance sheet and lower taxes on accrued but unpaid remittances as a result of the devaluation also recorded in the first quarter of 2010.

Net income attributable to Colgate-Palmolive Company in the first half of 2011 increased to $1,198 from $960 in the comparable 2010 period, and earnings per common share on a diluted basis decreased to $2.42 per share from $1.86 per share in the comparable 2010 period.  Net income attributable to Colgate-Palmolive Company for the first half of 2010 included a one-time charge of $271 related to the transition to hyperinflationary accounting in Venezuela ($0.52 per share). Excluding this one-time charge, Net income attributable to Colgate-Palmolive Company for the first half of 2011 decreased 3% and earnings per common share on a diluted basis increased 2%.

Liquidity and Capital Resources

Net cash provided by operations decreased 11% to $1,154 in the first half of 2011, compared with $1,302 in the comparable period of 2010. The decrease in the first half of 2011 was primarily due to decreased operating profit, excluding the one-time $271 charge related to the transition to hyperinflationary accounting in Venezuela as of January 1, 2010, and increased working capital. The Company defines working capital as the difference between current assets (excluding cash and cash equivalents and marketable securities, the latter of which is reported in Other current assets) and current liabilities (excluding short-term debt).  Overall, the Company’s working capital increased to 2.5% of Net sales in the first half of 2011 as compared with 1.9% in the first half of 2010.  The increase in working capital as a percentage of Net sales in the first half of 2011 versus the comparable period of 2010 was due primarily to higher accounts receivable in the quarter and higher inventory coverage, partially offset by higher current liabilities.

Investing activities used $1,111 in the first half of 2011, compared with $215 in the comparable period of 2010. The increase was primarily due to the purchase of the Sanex business which was funded with available cash, including the proceeds from the sale of our Euro-denominated investment portfolio, and commercial paper.  Capital spending also increased in the first half of 2011 to $225 from $204 in the comparable period of 2010 and continues to focus primarily on projects that yield high aftertax returns.  Overall capital expenditures for 2011 are expected to be at an annual rate of approximately 3.5% of Net sales.