Edgar Filing: COLGATE PALMOLIVE CO

CL-6.30.2014-10Q

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, 2014



¨	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 ¨

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 x	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	913,309,818	June 30, 2014

PART I. FINANCIAL INFORMATION

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Statements of Income

(Dollars in Millions Except Per Share Amounts)

(Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2014		2013			2014		2013
Net sales	$	4,352	$	4,346		$	8,677	$	8,661
Cost of sales	1,800		1,812			3,601		3,612
Gross profit	2,552		2,534			5,076		5,049
Selling, general and administrative expenses	1,507		1,526			3,051		3,062
Other (income) expense, net	65		102			411		339
Operating profit	980		906			1,614		1,648
Interest (income) expense, net	9		(5		)	16		(8		)
Income before income taxes	971		911			1,598		1,656
Provision for income taxes	310		307			505		546
Net income including noncontrolling interests	661		604			1,093		1,110
Less: Net income attributable to noncontrolling interests	39		43			83		89
Net income attributable to Colgate-Palmolive Company	$	622	$	561		$	1,010	$	1,021

Earnings per common share, basic	$	0.68	$	0.60		$	1.10	$	1.09

Earnings per common share, diluted	$	0.67	$	0.60		$	1.09	$	1.08

Dividends declared per common share *	$	0.36	$	0.34		$	1.06	$	0.99

* Two dividends were declared in the first quarter of 2014 and 2013.

See Notes to Condensed Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Statements of Comprehensive Income

(Dollars in Millions)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Net income including noncontrolling interests	$	661		$	604		$	1,093		$	1,110
Other comprehensive income (loss), net of tax:
Cumulative translation adjustments	25			(200		)	(19		)	(255		)
Retirement plans and other retiree benefit adjustments	8			18			21			38
Gains (losses) on available-for-sale securities	4			8			(52		)	4
Gains (losses) on cash flow hedges	(4		)	3			(4		)	5
Total Other comprehensive income (loss), net of tax	33			(171		)	(54		)	(208		)
Total Comprehensive income including noncontrolling interests	694			433			1,039			902
Less: Net income attributable to noncontrolling interests	39			43			83			89
Less: Cumulative translation adjustments attributable to noncontrolling interests	—			(4		)	(1		)	(4		)
Total Comprehensive income attributable to noncontrolling interests	39			39			82			85
Total Comprehensive income attributable to Colgate-Palmolive Company	$	655		$	394		$	957		$	817

See Notes to Condensed Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Balance Sheets

(Dollars in Millions)

(Unaudited)



	June 30, 2014			December 31, 2013
Assets
Current Assets
Cash and cash equivalents	$	1,161		$	962
Receivables (net of allowances of $59 and $67, respectively)	1,803			1,636
Inventories	1,508			1,425
Other current assets	702			799
Total current assets	5,174			4,822
Property, plant and equipment:
Cost	8,476			8,330
Less: Accumulated depreciation	(4,399		)	(4,247		)
	4,077			4,083
Goodwill, net	2,489			2,474
Other intangible assets, net	1,486			1,496
Deferred income taxes	74			77
Other assets	688			924
Total assets	$	13,988		$	13,876
Liabilities and Shareholders’ Equity
Current Liabilities
Notes and loans payable	$	20		$	13
Current portion of long-term debt	300			895
Accounts payable	1,251			1,343
Accrued income taxes	244			239
Other accruals	2,246			1,980
Total current liabilities	4,061			4,470
Long-term debt	5,741			4,749
Deferred income taxes	393			444
Other liabilities	1,722			1,677
Total liabilities	11,917			11,340
Shareholders’ Equity
Common stock	1,466			1,466
Additional paid-in capital	1,056			1,004
Retained earnings	17,991			17,952
Accumulated other comprehensive income (loss)	(2,504		)	(2,451		)
Unearned compensation	(22		)	(33		)
Treasury stock, at cost	(16,208		)	(15,633		)
Total Colgate-Palmolive Company shareholders’ equity	1,779			2,305
Noncontrolling interests	292			231
Total shareholders’ equity	2,071			2,536
Total liabilities and shareholders’ equity	$	13,988		$	13,876

See Notes to Condensed Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Statements of Cash Flows

(Dollars in Millions)

(Unaudited)



	Six Months Ended
	June 30,
	2014			2013
Operating Activities
Net income including noncontrolling interests	$	1,093		$	1,110
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operations:
Depreciation and amortization	215			221
Restructuring and termination benefits, net of cash	68			105
Voluntary benefit plan contribution	—			(100		)
Venezuela remeasurement charges	266			172
Stock-based compensation expense	54			52
Deferred income taxes	(37		)	(48		)
Cash effects of changes in:
Receivables	(198		)	(194		)
Inventories	(90		)	(118		)
Accounts payable and other accruals	(8		)	89
Other non-current assets and liabilities	26			36
Net cash provided by operations	1,389			1,325
Investing Activities
Capital expenditures	(314		)	(243		)
Purchases of marketable securities and investments	(165		)	(246		)
Proceeds from sale of marketable securities and investments	177			92
Payment for acquisitions, net of cash acquired	(25		)	—
Other	13			(1		)
Net cash used in investing activities	(314		)	(398		)
Financing Activities
Principal payments on debt	(4,282		)	(3,425		)
Proceeds from issuance of debt	4,707			3,803
Dividends paid	(662		)	(625		)
Purchases of treasury shares	(746		)	(771		)
Proceeds from exercise of stock options and excess tax benefits	153			172
Net cash used in financing activities	(830		)	(846		)
Effect of exchange rate changes on Cash and cash equivalents	(46		)	(81		)
Net increase (decrease) in Cash and cash equivalents	199			—
Cash and cash equivalents at beginning of the period	962			884
Cash and cash equivalents at end of the period	$	1,161		$	884
Supplemental Cash Flow Information
Income taxes paid	$	514		$	561

See Notes to Condensed Consolidated Financial Statements.

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 statement 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, 2013, filed with the Securities and Exchange Commission.


2.	Use of Estimates

Provisions 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.	Recent Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued their final converged standard on revenue recognition. The standard, issued as Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers” by the FASB, provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes current revenue recognition guidance. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The new standard also includes enhanced disclosures which are significantly more comprehensive than those in existing revenue standards. This new guidance is effective for the Company beginning January 1, 2017, with no early adoption permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently assessing the impact of the new standard on its Consolidated Financial Statements.

On April 10, 2014, the FASB issued ASU No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for the Company beginning with its Consolidated Financial Statements for the year ending December 31, 2015. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


4.	Acquisitions and Divestitures

Sale of Land in Mexico

On September 13, 2011, the Company’s Mexican subsidiary entered into an agreement to sell to the United States of America the Mexico City site on which its commercial operations, technology center and soap production facility are located. The sale price is payable in three installments, with the final installment due upon the transfer of the property, which is expected to occur in 2014. During the third quarter of 2011, the Company received the first installment of $24 upon signing the agreement. During the third quarter of 2012, the Company received the second installment of $36. The Company is reinvesting these payments to relocate its soap production to a new state-of-the-art facility at its Mission Hills, Mexico site, to relocate its commercial and technology operations within Mexico City and to prepare the existing site for transfer. Exit costs incurred during the project primarily relate to staff leaving indemnities, accelerated depreciation and demolition to make the site building-ready. During the three months ended June 30, 2014 and 2013, the Company recorded $2 and $6 of pretax costs ($1 and $4 of aftertax costs), respectively, related to the sale. During the six months ended June 30, 2014 and 2013, the Company recorded $3 and $11 of pretax costs ($2 and $7 of aftertax costs), respectively, related to the sale.


5.	Restructuring and Related Implementation Charges

In the fourth quarter of 2012, the Company commenced a four-year Global Growth and Efficiency Program (the “2012 Restructuring Program”) for sustained growth. The program’s initiatives are expected to help Colgate ensure continued solid worldwide growth in unit volume, organic sales and earnings per share and enhance its global leadership positions in its core businesses.

Implementation of the 2012 Restructuring Program is projected to result in cumulative pretax charges, once all phases are approved and implemented, totaling between $1,100 and $1,250 ($775 and $875 aftertax), which are currently estimated to be comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits (50%); asset-related costs, primarily Incremental Depreciation and Asset Impairments (15%); and Other charges, which include contract termination costs, consisting primarily of implementation-related charges resulting directly from exit activities (20%) and the implementation of new strategies (15%). Anticipated pretax charges for 2014 are expected to amount to approximately $275 to $325 ($200 to $230 aftertax). Over the course of the 2012 Restructuring Program, it is estimated that approximately 75% of the charges will result in cash expenditures.

It is expected that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America (15%), Europe/South Pacific (20%), Latin America (5%), Asia (5%), Africa/Eurasia (5%), Hill’s Pet Nutrition (10%) and Corporate (40%), which includes substantially all of the costs related to the implementation of new strategies, noted above, on a global basis. It is expected that by the end of 2016, the 2012 Restructuring Program will reduce the Company’s global employee workforce by approximately 6% from the 2012 level of approximately 38,000.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

For the three and six months ended June 30, 2014 and 2013, restructuring and implementation-related charges are reflected in the income statement as follows:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Cost of sales	$	6	$	10	$	16	$	18
Selling, general and administrative expenses	12		14		29		22
Other (income) expense, net	56		78		131		128
Total 2012 Restructuring Program charges, pretax	$	74	$	102	$	176	$	168

Total 2012 Restructuring Program charges, aftertax	$	53	$	79	$	126	$	131

Restructuring and related implementation charges in the preceding table are recorded in the Corporate segment as these initiatives are predominantly centrally directed and controlled and are not included in internal measures of segment operating performance.

Total charges incurred for the 2012 Restructuring Program relate to initiatives undertaken in the following reportable operating segments:



	Three Months Ended				Six Months Ended				Program-to-date
	June 30,				June 30,				Accumulated Charges
	2014		2013		2014		2013
North America	11	%	35	%	10	%	21	%	10	%
Latin America	5	%	—	%	4	%	6	%	3	%
Europe/South Pacific	16	%	42	%	19	%	38	%	29	%
Asia	—	%	—	%	—	%	—	%	—	%
Africa/Eurasia	2	%	3	%	2	%	4	%	5	%
Hill’s Pet Nutrition	11	%	4	%	9	%	4	%	8	%
Corporate	55	%	16	%	56	%	27	%	45	%

Since the inception of the 2012 Restructuring Program in the fourth quarter of 2012, the Company has incurred pretax cumulative charges of $636 ($474 aftertax) in connection with the implementation of various projects as follows:



	Cumulative Charges
	as of June 30, 2014
Employee-Related Costs	$	259
Incremental Depreciation	37
Asset Impairments	1
Other	339
Total	$	636

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

The majority of costs incurred since inception relate to the following projects: restructuring how the Company will provide future retirement benefits to substantially all of its U.S.-based employees by shifting them from the Company’s defined benefit retirement plan to the Company’s defined contribution plan; the closing of the Morristown, New Jersey personal care facility; the simplification and streamlining of the Company’s research and development capabilities and oral care supply chain, both in Europe; the consolidation of facilities; the implementation of the Company’s hubbing strategy in Europe; and the extension of shared business services and streamlining global functions.

The following table summarizes the activity for the restructuring and implementation-related charges discussed above and the related accruals:



	Three Months Ended June 30, 2014
	Employee-Related Costs			Incremental Depreciation			Asset Impairments		Other			Total
Balance at March 31, 2014	$	103		$	—		$	—	$	94		$	197
Charges	17			5			—		52			74
Cash payments	(16		)	—			—		(33		)	(49		)
Charges against assets	—			(5		)	—		—			(5		)
Foreign exchange	1			—			—		(1		)	—
Balance at June 30, 2014	$	105		$	—		$	—	$	112		$	217



	Six Months Ended June 30, 2014
	Employee-Related Costs			Incremental Depreciation			Asset Impairments		Other			Total
Balance at December 31, 2013	$	116		$	—		$	—	$	42		$	158
Charges	37			11			—		128			176
Cash payments	(47		)	—			—		(56		)	(103		)
Charges against assets	(1		)	(11		)	—		—			(12		)
Foreign exchange	—			—			—		(2		)	(2		)
Balance at June 30, 2014	$	105		$	—		$	—	$	112		$	217

Employee-Related Costs primarily include severance and other termination benefits and are calculated based on long-standing benefit practices, local statutory requirements and, in certain cases, voluntary termination arrangements. Employee-Related Costs also included pension enhancements amounting to $1 for the six months ended June 30, 2014, which are reflected as Charges against assets within Employee-Related Costs in the preceding tables as the corresponding balance sheet amounts are reflected as a reduction of pension assets or an increase in pension liabilities.

Incremental Depreciation is recorded to reflect changes in useful lives and estimated residual values for long-lived assets that will be taken out of service prior to the end of their normal service period. Asset Impairments are recorded to write down assets held for sale or disposal to their fair value based on amounts expected to be realized. Charges against assets within Asset Impairments are net of cash proceeds pertaining to the sale of certain assets.

Other charges consist primarily of charges resulting directly from exit activities and the implementation of new strategies as a result of the 2012 Restructuring Program. These charges for the three and six months ended June 30, 2014 included third-party incremental costs related to the development and implementation of new business and strategic initiatives of $16 and $32, respectively, and contract termination costs and charges resulting directly from exit activities of $6 and $27, respectively, directly related to the 2012 Restructuring Program. These charges were expensed as incurred. Also included in Other charges for the three and six months ended June 30, 2014 are other exit costs related to the consolidation of facilities of $30 and $69, respectively.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


6.	Inventories

Inventories by major class are as follows:



	June 30, 2014		December 31, 2013
Raw materials and supplies	$	328	$	340
Work-in-process	70		60
Finished goods	1,110		1,025
Total Inventories	$	1,508	$	1,425


7.	Shareholders’ Equity

Changes in the components of Shareholders’ Equity for the six months ended June 30, 2014 are as follows:



	Colgate-Palmolive Company Shareholders’ Equity																	Noncontrolling Interests
	Common Stock		Additional Paid-in Capital			Unearned Compensation			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2013	$	1,466	$	1,004		$	(33	)	$	(15,633	)	$	17,952		$	(2,451	)	$	231
Net income												1,010						83
Other comprehensive income (loss), net of tax															(53		)	(1		)
Dividends												(971		)				(21		)
Stock-based compensation expense			54
Shares issued for stock options			36						128
Shares issued for restricted stock awards			(44		)				44
Treasury stock acquired									(746		)
Other			6			11			(1		)
Balance, June 30, 2014	$	1,466	$	1,056		$	(22	)	$	(16,208	)	$	17,991		$	(2,504	)	$	292

Accumulated other comprehensive income (loss) includes cumulative translation losses of $1,790 and $1,772 at June 30, 2014 and December 31, 2013, respectively, and unrecognized retirement plan and other retiree benefits costs of $714 and $735 at June 30, 2014 and December 31, 2013, respectively.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


8.	Earnings Per Share



	Three Months Ended
	June 30, 2014					June 30, 2013
	Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share		Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share
Basic EPS	$	622	916.1	$	0.68	$	561	933.1	$	0.60
Stock options and restricted stock units			9.8					9.2
Diluted EPS	$	622	925.9	$	0.67	$	561	942.3	$	0.60

For the three months ended June 30, 2014 and 2013, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 48,362 and 30,428, respectively.



	Six Months Ended
	June 30, 2014					June 30, 2013
	Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share		Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share
Basic EPS	$	1,010	917.8	$	1.10	$	1,021	934.8	$	1.09
Stock options and restricted stock units			9.5					8.8
Diluted EPS	$	1,010	927.3	$	1.09	$	1,021	943.6	$	1.08

For the six months ended June 30, 2014 and 2013, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 36,266 and 46,303, respectively.

Basic and diluted earnings per share are computed independently for each quarter and any year-to-date period presented. As a result of changes in shares outstanding during the year and rounding, the sum of the quarters’ earnings per share may not necessarily equal the earnings per share for any year-to-date period.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


9.	Other Comprehensive Income (Loss)

Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the three months ended June 30, 2014 and 2013 were as follows:



	2014						2013
	Pretax			Net of Tax			Pretax			Net of Tax

Cumulative translation adjustments	$	29		$	25		$	(207	)	$	(196	)
Retirement plans and other retiree benefits:
Net actuarial gain (loss) and prior service costs arising during the period	—			—			—			—
Amortization of net actuarial loss, transition and prior service costs ⁽¹⁾	14			8			29			18
Retirement plans and other retiree benefits adjustments	14			8			29			18
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities ⁽²⁾	6			4			13			8
Reclassification of (gains) losses into net earnings on available-for-sale securities	—			—			—			—
Gains (losses) on available-for-sale securities	6			4			13			8
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges	(8		)	(4		)	4			3
Reclassification of (gains) losses into net earnings on cash flow hedges ⁽³⁾	—			—			(1		)	—
Gains (losses) on cash flow hedges	(8		)	(4		)	3			3
Total Other comprehensive income (loss)	$	41		$	33		$	(162	)	$	(167	)

⁽¹⁾These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 10, Retirement Plans and Other Retiree Benefits for additional details.

⁽²⁾For the three months ended June 30, 2014, these amounts included a pretax gain of $4 related to the remeasurement of the bolivar denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela.

⁽³⁾These (gains) losses are reclassified into Cost of sales. See Note 14, Fair Value Measurements and Financial Instruments for additional details.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the six months ended June 30, 2014 and 2013 were as follows:



	2014						2013
	Pretax			Net of Tax			Pretax			Net of Tax

Cumulative translation adjustments	$	(10	)	$	(18	)	$	(252	)	$	(251	)
Retirement plans and other retiree benefits:
Net actuarial gain (loss) and prior service costs arising during the period	3			2			3			2
Amortization of net actuarial loss, transition and prior service costs ⁽¹⁾	28			19			55			36
Retirement plans and other retiree benefits adjustments	31			21			58			38
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities ⁽²⁾	(292		)	(190		)	(128		)	(82		)
Reclassification of (gains) losses into net earnings on available-for-sale securities ⁽³⁾	211			138			133			86
Gains (losses) on available-for-sale securities	(81		)	(52		)	5			4
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges	(6		)	(3		)	11			8
Reclassification of (gains) losses into net earnings on cash flow hedges ⁽⁴⁾	(3		)	(1		)	(5		)	(3		)
Gains (losses) on cash flow hedges	(9		)	(4		)	6			5
Total Other comprehensive income (loss)	$	(69	)	$	(53	)	$	(183	)	$	(204	)

⁽¹⁾These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 10, Retirement Plans and Other Retiree Benefits for additional details.

⁽²⁾For the six months ended June 30, 2014, these amounts included pretax net losses of $272 related to the remeasurement of the bolivar denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela.

For the six months ended June 30, 2013, these amounts included pretax losses of $133 related only to the remeasurement of the bolivar denominated fixed interest rate bonds in Venezuela as a result of the devaluation in the first quarter of 2013. No remeasurement charge was required on the devaluation-protected bonds in the first quarter of 2013 since the official exchange rate changed from 4.30 to 6.30 bolivares per dollar and the devaluation-protected bonds revalued to the official exchange rate. See Note 14, Fair Value Measurements and Financial Instruments for additional details.

⁽³⁾Represents reclassification of losses on the Venezuela bonds into Other (income) expense, net due to an impairment in the fair value of the bonds as a result of the effective devaluation in the first quarter of 2014 and the devaluation in the first quarter of 2013. See Note 14, Fair Value Measurements and Financial Instruments for additional details.

⁽⁴⁾These (gains) losses are reclassified into Cost of sales. See Note 14, Fair Value Measurements and Financial Instruments for additional details.

There were no tax impacts on Other comprehensive income (loss) attributable to Noncontrolling interests.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


10.	Retirement Plans and Other Retiree Benefits

Components of Net periodic benefit cost for the three and six months ended June 30, 2014 and 2013 were as follows:



	Pension Benefits												Other Retiree Benefits
	United States						International
	Three Months Ended June 30,
	2014			2013			2014			2013			2014			2013
Service cost	$	1		$	7		$	5		$	4		$	3		$	3
Interest cost	26			23			9			7			11			10
ESOP offset	—			—			—			—			(1		)	(1		)
Expected return on plan assets	(29		)	(30		)	(8		)	(6		)	(1		)	—
Amortization of transition and prior service costs (credits)	—			3			2			—			—			—
Amortization of actuarial loss (gain)	8			16			—			4			4			6
Net periodic benefit cost	$	6		$	19		$	8		$	9		$	16		$	18



	Pension Benefits												Other Retiree Benefits
	United States						International
	Six Months Ended June 30,
	2014			2013			2014			2013			2014			2013
Service cost	$	1		$	14		$	10		$	10		$	6		$	7
Interest cost	51			46			18			14			21			20
ESOP offset	—			—			—			—			(1		)	(1		)
Expected return on plan assets	(56		)	(59		)	(15		)	(12		)	(1		)	(1		)
Amortization of transition and prior service costs (credits)	—			5			3			—			—			—
Amortization of actuarial loss (gain)	16			32			1			7			8			11
Net periodic benefit cost	$	12		$	38		$	17		$	19		$	33		$	36

For the six months ended June 30, 2014, the Company did not make any voluntary contributions to its U.S. postretirement plans. For the six months ended June 30, 2013, the Company made voluntary contributions of $100 to its U.S. postretirement plans.


11.	Income Taxes

At December 31, 2013, the Company had unrecognized tax benefits of $199. In July 2014, the Company received notice of an adverse decision in a foreign court regarding a tax position taken in prior years. Although it plans to appeal this decision, the Company, as required, reassessed its tax position in light of the decision and concluded it needs to increase its unrecognized tax benefits by $31 and write-off a $37 deferred tax asset. The Company intends to record this $68 income tax charge in the quarter ending September 30, 2014.

Although it is possible that the amount of unrecognized tax benefits with respect to our uncertain tax positions will further increase or decrease during the remainder of 2014, the Company does not expect material changes.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

12. 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 and consumer class actions. 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, all U.S. federal income tax returns through December 31, 2009 have been audited by, and settled with, the IRS. With a few exceptions, the Company is no longer subject to U.S., state and local income tax examinations for the years prior to 2009. In addition, the Company has subsidiaries in various foreign jurisdictions that have statutes of limitations for tax audits generally ranging from three to six years.

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.

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 $250 (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.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Brazilian Matters

There are certain tax and civil proceedings outstanding, as described below, related to the Company’s 1995 acquisition of the Kolynos oral care business from Wyeth (the “Seller”).

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, are approximately $125. 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 clarification with a special appeals chamber of the 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 $80, 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, and in January 2012, a special appeals chamber of the Taxpayers’ Council denied the Company’s appeal. The Company has filed a motion for clarification with a special appeals chamber of the Taxpayers’ Council and further appeals are available within the Brazilian federal courts. 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, if not at the administrative level, in the Brazilian federal courts. The Company intends to challenge this assessment vigorously.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Competition Matters

European Competition Matters

Certain of the Company’s subsidiaries in Europe are subject to investigations, and in some cases, fines by governmental authorities in a number of European countries related to potential competition law violations. The Company understands that substantially all of these matters 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, as noted below, the Company has appealed each of these fines:


▪	In December 2009, the Swiss competition law authority imposed a fine of $6 on the Company’s GABA subsidiary for alleged violations of restrictions on parallel imports into Switzerland, which the Company appealed. In January 2014, this appeal was denied. The Company is appealing before the Swiss Supreme Court.

▪

In January 2010, the Company’s Spanish subsidiary was fined $3 by the Spanish competition law authority on the basis that it had entered an agreement with other shower gel manufacturers regarding product downsizing, which the Company contested. The fine was annulled by the Court of Appeal in July 2013. The Spanish competition law authority is appealing this judgment before the Spanish Supreme Court.


▪	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.

▪

In March 2012, the French competition law authority found that three pet food producers, including the Company’s Hill’s French subsidiary, had violated the competition law, for which it imposed a fine of $7 on the Company’s Hill’s French subsidiary for alleged restrictions on exports from France, which the Company contested. In October 2013, the Company’s appeal was denied. The Company is appealing before the French Supreme Court.

Currently, formal claims of violations, or statements of objections, are pending against the Company as follows:


▪	In October 2012, the Belgian competition law authority alleged that 11 branded goods companies, including the Company’s Belgian subsidiary, assisted retailers to coordinate their retail prices on the Belgian market. The Company is in the process of responding to this statement of objections.


▪	In June 2013, the French competition law authority issued a statement of objections alleging that the Company’s French subsidiary and a number of its competitors exchanged sensitive information related to the French home care and personal care sectors. The Company has responded to this statement of objections.

▪

In July 2014, the Greek competition law authority issued a statement of objections alleging the Company and its Greek subsidiary restricted parallel imports into Greece. The Company is in the process of reviewing the statement of objections. Since the amount of any potential losses from this matter currently cannot be estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to this matter.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Since December 31, 2013, the following matter has been resolved:


▪	In January 2014, the French Court of Appeal confirmed the French competition law authority’s December 2011 fine of the Company’s French subsidiary, in the amount of $46, in connection with a divested heavy duty detergent business.

Australian Competition Matter

In December 2013, the Australian competition law authority instituted civil proceedings in the Sydney registry of the Federal Court of Australia alleging that three consumer goods companies, including the Company’s Australian subsidiary, a retailer and a former employee of the Company’s Australian subsidiary violated the Australian competition law by coordinating the launching and pricing of ultra concentrated laundry detergents. The Company intends to challenge these proceedings vigorously. Since the amount of any potential losses from these proceedings currently cannot be estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to these proceedings.

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. Competition and antitrust law investigations often continue for several years and can result in substantial fines for violations that are found. 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.

Talcum Powder Matters

The Company is a defendant in a number of civil actions alleging that certain talc products it sold prior to 1996 were contaminated with asbestos. Since 2008, the Company has challenged and will continue to challenge these cases vigorously, and although there can be no assurances, it believes, based on the advice of its legal counsel, that they are without merit and the Company should ultimately prevail. Currently, there are 15 single plaintiff cases pending against the Company in state courts in California, Delaware, Illinois, Maryland, New Jersey and New York and one case pending in federal court in North Carolina. Fifteen similar cases previously filed against the Company have been dismissed and final judgment entered in favor of the Company. To date, there have been no findings of liability against the Company in any of these cases. Since the amount of any potential losses from these cases at trial currently cannot be estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to these cases.

In 2014, two of these cases are tentatively scheduled to go to trial, although the Company may succeed in dismissing one or both of them prior to trial. As stated above, the Company believes that it should ultimately prevail as it has in all similar cases.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

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. In October 2013, the parties executed a settlement agreement under which the Plan would pay approximately $40 after application of certain offsets to resolve the litigation. The settlement agreement is subject to court approval. On December 16, 2013, a motion for preliminary approval of a class action settlement, class certification and appointment of class counsel was approved and on July 8, 2014, final approval was granted by the court. The settlement will be implemented following the expiration of a 30-day appeals period, assuming no appeals are filed. The Company and the Plan intend to contest this action vigorously should the settlement not be finalized.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


13.	Segment Information

The Company operates in two product segments: Oral, Personal and Home Care; and Pet Nutrition. The operations of the Oral, Personal and Home Care product segment are managed geographically in five reportable operating segments: North America, Latin America, Europe/South Pacific, Asia and Africa/Eurasia.

The Company evaluates segment performance based on several factors, including Operating profit. The Company uses Operating profit as a measure of operating segment performance because it excludes the impact of corporate-driven decisions related to interest expense and income taxes. Corporate operations include costs related to stock options and restricted stock units, 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 operating segment performance used by the Company to measure the underlying performance of the operating segments.

Net sales and Operating profit by segment were as follows:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Net sales
Oral, Personal and Home Care
North America	$	770		$	762		$	1,555		$	1,526
Latin America	1,231			1,282			2,383			2,496
Europe/South Pacific	873			824			1,738			1,672
Asia	610			618			1,282			1,273
Africa/Eurasia	308			311			606			611
Total Oral, Personal and Home Care	3,792			3,797			7,564			7,578
Pet Nutrition	560			549			1,113			1,083
Total Net sales	$	4,352		$	4,346		$	8,677		$	8,661

Operating profit
Oral, Personal and Home Care
North America	$	231		$	227		$	447		$	442
Latin America	311			352			601			664
Europe/South Pacific	227			189			444			389
Asia	178			173			371			359
Africa/Eurasia	58			65			117			127
Total Oral, Personal and Home Care	1,005			1,006			1,980			1,981
Pet Nutrition	146			136			290			272
Corporate	(171		)	(236		)	(656		)	(605		)
Total Operating profit	$	980		$	906		$	1,614		$	1,648

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Approximately 80% of the Company’s Net sales are generated from markets outside the U.S., with over 50% of the Company’s Net sales coming from emerging markets (which consist of Latin America, Asia (excluding Japan), Africa/Eurasia and Central Europe).

For the three months ended June 30, 2014, Corporate Operating profit (loss) includes charges of $74 related to the 2012 Restructuring Program and costs of $2 related to the sale of land in Mexico. For the six months ended June 30, 2014, Corporate Operating profit (loss) includes charges of $176 related to the 2012 Restructuring Program, a charge of $266 related to the Venezuela remeasurement and costs of $3 related to the sale of land in Mexico. For the three months ended June 30, 2013, Corporate Operating profit (loss) included charges of $102 related to the 2012 Restructuring Program, costs of $6 related to the sale of land in Mexico and a charge of $18 for a competition law matter in France related to the home care and personal care sectors. For the six months ended June 30, 2013, Corporate Operating profit (loss) included charges of $168 related to the 2012 Restructuring Program, a charge of $172 related to the Venezuela remeasurement, costs of $11 related to the sale of land in Mexico and a charge of $18 for a competition law matter in France related to the home care and personal care sectors. For further information regarding the 2012 Restructuring Program, refer to Note 5, Restructuring and Related Implementation Charges. For further information regarding Venezuela, refer to Note 15, Venezuela. For further information regarding the sale of land in Mexico, refer to Note 4, Acquisitions and Divestitures.


14.	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 the risk of credit loss in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely and any nonperformance is unlikely to be material, as it is the Company’s policy to contract only with diverse, credit-worthy counterparties based upon both strong credit ratings and other credit considerations.

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, sourcing strategies, 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). The Company utilizes foreign currency contracts, including forward, option and swap contracts, local currency deposits and local currency borrowings to hedge portions of its foreign currency purchases, assets and liabilities arising in the normal course of business and 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 production. 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.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(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, 2014 and December 31, 2013:



	Assets					Liabilities
	Account	Fair Value				Account	Fair Value
Designated derivative instruments		6/30/14		12/31/13			6/30/14		12/31/13
Interest rate swap contracts	Other current assets	$	—	$	1	Other accruals	$	—	$	—
Interest rate swap contracts	Other assets	18		20		Other liabilities	2		1
Foreign currency contracts	Other current assets	4		14		Other accruals	9		8
Foreign currency contracts	Other assets	—		—		Other liabilities	4		10
Commodity contracts	Other current assets	—		—		Other accruals	1		—
Total designated		$	22	$	35		$	16	$	19

Derivatives not designated
Foreign currency contracts	Other current assets	$	—	$	—	Other accruals	$	—	$	3
Total not designated		$	—	$	—		$	—	$	3

Total derivative instruments		$	22	$	35		$	16	$	22

Other financial instruments
Marketable securities	Other current assets	$	155	$	173
Available-for-sale securities	Other assets	399		685
Total other financial instruments		$	554	$	858

The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of June 30, 2014 and December 31, 2013. The estimated fair value of the Company’s long-term debt, including the current portion, as of June 30, 2014 and December 31, 2013, was $6,208 and $5,690, respectively, and the related carrying value was $6,041 and $5,644, 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).

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

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 primarily recognized in Selling, general and administrative expenses and the impact of interest rate swap contracts is recognized in Interest (income) expense, net.

Activity related to fair value hedges recorded during the three and six months ended June 30, 2014 and 2013 was as follows:



	2014									2013
	Foreign Currency Contracts			Interest Rate Swaps			Total			Foreign Currency Contracts			Interest Rate Swaps			Total
Notional Value at June 30,	$	1,210		$	1,438		$	2,648		$	1,250		$	1,088		$	2,338
Three months ended June 30:
Gain (loss) on derivative	—			7			7			—			(13		)	(13		)
Gain (loss) on hedged items	—			(7		)	(7		)	—			13			13
Six months ended June 30:
Gain (loss) on derivative	2			(3		)	(1		)	12			(20		)	(8		)
Gain (loss) on hedged items	(2		)	3			1			(12		)	20			8

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 and six months ended June 30, 2014 and 2013 was as follows:



	2014									2013
	Foreign Currency Contracts			Commodity Contracts			Total			Foreign Currency Contracts		Commodity Contracts		Total
Notional Value at June 30,	$	521		$	14		$	535		$	420	$	12	$	432
Three months ended June 30:
Gain (loss) recognized in OCI	(7		)	(1		)	(8		)	3		1		4
Gain (loss) reclassified into Cost of sales	(1		)	1			—			1		—		1
Six months ended June 30:
Gain (loss) recognized in OCI	(7		)	1			(6		)	11		—		11
Gain (loss) reclassified into Cost of sales	1			2			3			4		1		5

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.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

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 and six months ended June 30, 2014 and 2013 was as follows:



	2014									2013
	Foreign Currency Contracts			Foreign Currency Debt			Total			Foreign Currency Contracts			Foreign Currency Debt			Total
Notional Value at June 30,	$	631		$	53		$	684		$	538		$	379		$	917
Three months ended June 30:
Gain (loss) on instruments	—			2			2			(4		)	(4		)	(8		)
Gain (loss) on hedged items	(1		)	(2		)	(3		)	4			4			8
Six months ended June 30:
Gain (loss) on instruments	—			3			3			10			9			19
Gain (loss) on hedged items	—			(3		)	(3		)	(9		)	(9		)	(18		)

Derivatives Not Designated as Hedging Instruments

Derivatives not designated as hedging instruments for each period consist of a cross-currency swap that 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.

Activity related to these contracts during the three and six months ended June 30, 2014 and 2013 was as follows:



	2014			2013
	Cross-currency Swap			Cross-currency Swap
Notional Value at June 30,	$	102		$	96
Three months ended June 30:
Gain (loss) on instrument	(2		)	—
Gain (loss) on hedged item	2			—
Six months ended June 30:
Gain (loss) on instrument	(3		)	6
Gain (loss) on hedged item	3			(6		)

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Other Financial Instruments

Other financial instruments are classified as Other current assets or Other assets.

Other financial instruments classified as Other current assets include marketable securities, which consist of bank deposits of $107 with original maturities greater than 90 days (Level 1 valuation) and the current portion of bonds issued by the Venezuelan government (Level 2 valuation) in the amount of $48. The long-term portion of these bonds in the amount of $399 is included in Other assets.

Through its subsidiary in Venezuela, the Company is invested in U.S. dollar-linked, devaluation-protected bonds and bolivar denominated fixed interest rate bonds, both of which are issued by the Venezuelan government. These bonds are actively traded and, therefore, are considered Level 2 investments as their values are determined based upon observable market-based inputs or unobservable inputs that are corroborated by market data. As of June 30, 2014, the fair market value of U.S. dollar-linked devaluation-protected bonds and bolivar denominated fixed interest rate bonds was $129 and $318, respectively. These bonds are considered available-for-sale securities and, as noted above, the long-term portion in the amount of $399 is included in Other assets.

The following table presents a reconciliation of the Venezuelan bonds at fair value for the six months ended June 30, 2014 and 2013:



	2014			2013
Beginning balance as of January 1,	$	685		$	642
Unrealized gain (loss) on investment	(292		)	(128		)
Purchases and sales during the period	54			97
Ending balance as of June 30,	$	447		$	611

Unrealized loss on investment for the six months ended June 30, 2014 consisted primarily of a net loss in the amount of $272 related to the remeasurement of the bolivar denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela.

Unrealized loss on investment for the six months ended June 30, 2013 consisted primarily of a charge in the amount of $133 related only to the remeasurement of the bolivar denominated fixed interest rate bonds in Venezuela as a result of the devaluation in the first quarter of 2013. No remeasurement charge was required on the devaluation-protected bonds in the first quarter of 2013 since the official exchange rate changed from 4.30 to 6.30 bolivares per dollar and the devaluation-protected bonds revalued to the official exchange rate.

For further information regarding Venezuela, refer to Note 15, Venezuela.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

15. Venezuela

Venezuela has been designated hyper-inflationary and, therefore, the functional currency for the Company’s Venezuelan subsidiary (“CP Venezuela”) is the U.S. dollar and Venezuelan currency fluctuations are reported in income.

During the first quarter of 2014, the Venezuelan government enacted several changes to Venezuela’s foreign exchange regime, introducing a multi-tier foreign exchange system whereby there are now three exchange rate mechanisms available to convert Venezuelan bolivares to U.S. dollars. The Venezuelan government replaced CADIVI with a new foreign currency administration, the National Center for Foreign Commerce (“CENCOEX”). Although the official exchange rate remains at 6.30 bolivares per dollar, the exchange rate for foreign investments moved to the rate available on the SICAD I (Supplementary System for the Administration of Foreign Currency) currency market. The Venezuelan government also introduced an alternative currency market known as SICAD II. The Company remeasures the financial statements of CP Venezuela at the end of each month at the rate at which it expects to remit future dividends which, based on the advice of legal counsel, is the SICAD I rate.

Effective with the quarter ended March 31, 2014, the Company remeasured the majority of CP Venezuela’s local currency-denominated net monetary assets at the quarter-end SICAD I rate of 10.70 bolivares per dollar and incurred a pretax loss of $266 ($174 aftertax loss or $0.19 per diluted common share). Included in the loss was a charge related to the devaluation-protected bonds issued by the Venezuelan government and held by CP Venezuela. Because the official exchange rate remains at 6.30 bolivares per dollar, the devaluation-protected bonds did not revalue at the rate available on the SICAD I currency market but remained at the official exchange rate which resulted in an impairment in the fair value of the bonds.

During the second quarter of 2014, the SICAD I rate revalued slightly and the Company remeasured CP Venezuela’s local currency-denominated net monetary assets at the quarter-end SICAD I rate of 10.60 bolivares per dollar. The impact of the remeasurement during the quarter was insignificant in relation to the Company’s consolidated Net income.

CP Venezuela continues to be able to settle certain of its U.S. dollar obligations for imported materials at the official rate of 6.30 bolivares per dollar and records the gains related to such transactions when the funds are authorized by CENCOEX and the liabilities are paid.

In the first quarter of 2013, the Company incurred a pretax loss of $172 ($111 aftertax loss) related to the remeasurement of the net monetary assets in the local balance sheet at the date of the devaluation that changed the official exchange rate from 4.30 to 6.30 bolivares per dollar.

For the six months ended June 30, 2014, CP Venezuela represented approximately 3% of the Company’s consolidated Net sales. CP Venezuela generated a small operating profit for the six months ended June 30, 2014, which was insignificant in relation to the Company’s consolidated Operating profit. At June 30, 2014, CP Venezuela’s local currency-denominated net monetary asset position, which would be subject to remeasurement in the event of further changes in the SICAD I rate, was approximately $505. This amount includes the devaluation-protected bonds issued by the Venezuelan government. CP Venezuela’s local currency-denominated non-monetary assets were approximately $323 at June 30, 2014 and included approximately $229 of fixed assets that could be subject to impairment if CP Venezuela continues to be unable to implement price increases to offset the impacts of continued high inflation or further devaluations, or if it does not have sufficient access to U.S. dollars to fund imports.

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 globally 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. Approximately 80% of the Company’s Net sales are generated from markets outside the U.S., with over 50% of the Company’s Net sales coming from emerging markets (which consist of Latin America, Asia (excluding Japan), Africa/Eurasia and Central Europe). 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 five reportable operating segments: North America, Latin America, Europe/South Pacific, Asia and Africa/Eurasia, 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 authorized pet supply retailers and veterinarians.

On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, net 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 Code of Conduct and corporate governance practices 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 growth are developed through continuous, Company-wide initiatives to lower costs and increase effective asset utilization. Through these initiatives, which are referred to as the Company’s funding-the-growth initiatives, the Company seeks to become even more effective and efficient throughout its businesses. These initiatives are designed to reduce costs associated with direct materials, indirect expenses and distribution and logistics and encompass a wide range of projects, examples of which include raw material substitution, reduction of packaging materials, consolidating suppliers to leverage volumes and increasing manufacturing efficiency through SKU reductions and formulation simplification. The Company also continues to prioritize its investments toward its higher margin businesses, specifically Oral Care, Personal Care and Pet Nutrition.

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 approximately 80% of its Net sales generated outside 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 and payment controls, price and profit controls and the possibility of expropriation of property or other resources. Price controls, which became effective on April 1, 2012, affect most products in the portfolio of the Company’s Venezuelan subsidiary (“CP Venezuela”) and thereby further restrict the Company’s ability to implement price increases, which had been one of the key mechanisms to offset the effects of continuing high inflation and the impact of currency devaluations. In particular, the Company has been and will continue to be impacted as a result of the significant devaluations of the Venezuelan bolivar that occurred in 2010 and in February 2013, and the effective devaluation in 2014 as a result of the introduction of a multi-tier foreign exchange system implemented during the first quarter of 2014 (discussed below).

Effective with the quarter ended March 31, 2014, the Company remeasured the majority of CP Venezuela’s local currency-denominated net monetary assets at the quarter-end SICAD I rate of 10.70 bolivares per dollar (the “2014 Remeasurement”) and incurred a pretax loss of $266 ($174 aftertax loss or $0.19 per diluted common share). Included in the loss was a charge related to the devaluation-protected bonds issued by the Venezuelan government and held by CP Venezuela. Because the official exchange rate remains at 6.30 bolivares per dollar, the devaluation-protected bonds did not revalue at the rate available on the SICAD I currency market but remained at the official exchange rate which resulted in an impairment in the fair value of the bonds.

There will be ongoing impacts primarily related to the translation of the local financial statements and, to a lesser degree, the import of materials at the SICAD I exchange rate as some imports may still qualify for the official rate. Based on this assumption and the SICAD I rate at the quarter-end rate of 10.60 bolivares per dollar, the Company still estimates that the ongoing impacts would be approximately $0.03 per diluted common share per quarter during 2014. Because the SICAD I market is auction-based and auctions are held periodically during each quarter, the exchange rate available through SICAD I may vary throughout the year which would cause additional remeasurements of CP Venezuela’s local currency-denominated net monetary assets and further impact CP Venezuela’s ongoing results.

As part of the announcements during the first quarter of 2014, the Venezuelan government also issued a new Law on Fair Pricing, establishing a maximum profit margin of 30%. Because most of the products in CP Venezuela’s portfolio are subject to price controls, as described above, the new law does not impact the majority of its product portfolio. At this time, it remains unclear how this new law may affect the remainder of CP Venezuela’s portfolio and, as a result, its impact is not included in the range of estimated ongoing impacts outlined above.

COLGATE-PALMOLIVE COMPANY

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

(Dollars in Millions Except Share and Per Share Amounts)

In the first quarter of 2013, the Company incurred a pretax loss of $172 ($111 aftertax loss) related to the remeasurement of CP Venezuela’s local currency-denominated net monetary assets at the date of the devaluation that changed the official exchange rate from 4.30