Edgar Filing: COLGATE PALMOLIVE CO

10-Q

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 September 30, 2015



¨	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	896,922,057	September 30, 2015

PART I. FINANCIAL INFORMATION

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Statements of Income

(Dollars in Millions Except Per Share Amounts)

(Unaudited)



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2015			2014		2015		2014
Net sales	$	3,999		$	4,379	$	12,135	$	13,056
Cost of sales	1,652			1,821		5,029		5,422
Gross profit	2,347			2,558		7,106		7,634
Selling, general and administrative expenses	1,347			1,497		4,178		4,548
Other (income) expense, net	(136		)	113		—		524
Operating profit	1,136			948		2,928		2,562
Interest (income) expense, net	5			4		19		20
Income before income taxes	1,131			944		2,909		2,542
Provision for income taxes	361			364		940		869
Net income including noncontrolling interests	770			580		1,969		1,673
Less: Net income attributable to noncontrolling interests	44			38		127		121
Net income attributable to Colgate-Palmolive Company	$	726		$	542	$	1,842	$	1,552

Earnings per common share, basic	$	0.81		$	0.59	$	2.04	$	1.69

Earnings per common share, diluted	$	0.80		$	0.59	$	2.02	$	1.68

Dividends declared per common share *	$	0.38		$	0.36	$	1.50	$	1.42

* Two dividends were declared in the first quarter of 2015 and 2014.

See Notes to Condensed Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Statements of Comprehensive Income

(Dollars in Millions)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Net income including noncontrolling interests	$	770		$	580		$	1,969		$	1,673
Other comprehensive income (loss), net of tax:
Cumulative translation adjustments	(350		)	(367		)	(635		)	(386		)
Retirement plans and other retiree benefit adjustments	25			(17		)	52			4
Gains (losses) on available-for-sale securities	—			(4		)	(8		)	(56		)
Gains (losses) on cash flow hedges	7			3			4			(1		)
Total Other comprehensive income (loss), net of tax	(318		)	(385		)	(587		)	(439		)
Total Comprehensive income including noncontrolling interests	452			195			1,382			1,234
Less: Net income attributable to noncontrolling interests	44			38			127			121
Less: Cumulative translation adjustments attributable to noncontrolling interests	(9		)	(2		)	(9		)	(3		)
Total Comprehensive income attributable to noncontrolling interests	35			36			118			118
Total Comprehensive income attributable to Colgate-Palmolive Company	$	417		$	159		$	1,264		$	1,116

See Notes to Condensed Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Balance Sheets

(Dollars in Millions)

(Unaudited)



	September 30, 2015			December 31, 2014
Assets
Current Assets
Cash and cash equivalents	$	1,445		$	1,089
Receivables (net of allowances of $58 and $54, respectively)	1,561			1,552
Inventories	1,277			1,382
Other current assets	806			840
Total current assets	5,089			4,863
Property, plant and equipment:
Cost	8,312			8,385
Less: Accumulated depreciation	(4,353		)	(4,305		)
	3,959			4,080
Goodwill	2,139			2,307
Other intangible assets, net	1,367			1,413
Deferred income taxes	137			76
Other assets	872			720
Total assets	$	13,563		$	13,459
Liabilities and Shareholders’ Equity
Current Liabilities
Notes and loans payable	$	10		$	16
Current portion of long-term debt	226			488
Accounts payable	1,109			1,231
Accrued income taxes	340			294
Other accruals	2,252			1,917
Total current liabilities	3,937			3,946
Long-term debt	6,554			5,644
Deferred income taxes	234			261
Other liabilities	2,248			2,223
Total liabilities	12,973			12,074
Shareholders’ Equity
Common stock	1,466			1,466
Additional paid-in capital	1,351			1,236
Retained earnings	19,323			18,832
Accumulated other comprehensive income (loss)	(4,085		)	(3,507		)
Unearned compensation	(8		)	(20		)
Treasury stock, at cost	(17,792		)	(16,862		)
Total Colgate-Palmolive Company shareholders’ equity	255			1,145
Noncontrolling interests	335			240
Total shareholders’ equity	590			1,385
Total liabilities and shareholders’ equity	$	13,563		$	13,459

See Notes to Condensed Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Statements of Cash Flows

(Dollars in Millions)

(Unaudited)



	Nine Months Ended
	September 30,
	2015			2014
Operating Activities
Net income including noncontrolling interests	$	1,969		$	1,673
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operations:
Depreciation and amortization	337			329
Restructuring and termination benefits, net of cash	68			69
Voluntary benefit plan contribution	—			(2		)
Venezuela remeasurement charges	34			327
Charge for a foreign tax matter	—			66
Stock-based compensation expense	104			109
Gain on sale of South Pacific laundry detergent business	(187		)	—
Deferred income taxes	(42		)	(35		)
Cash effects of changes in:
Receivables	(172		)	(222		)
Inventories	1			(51		)
Accounts payable and other accruals	(18		)	100
Other non-current assets and liabilities	14			29
Net cash provided by operations	2,108			2,392
Investing Activities
Capital expenditures	(459		)	(493		)
Purchases of marketable securities and investments	(499		)	(232		)
Proceeds from sale of marketable securities and investments	398			277
Proceeds from sale of South Pacific laundry detergent business	221			—
Payment for acquisitions, net of cash acquired	(13		)	(25		)
Other	8			18
Net cash used in investing activities	(344		)	(455		)
Financing Activities
Principal payments on debt	(6,691		)	(6,220		)
Proceeds from issuance of debt	7,293			6,597
Dividends paid	(1,033		)	(990		)
Purchases of treasury shares	(1,196		)	(1,119		)
Proceeds from exercise of stock options and excess tax benefits	301			295
Net cash used in financing activities	(1,326		)	(1,437		)
Effect of exchange rate changes on Cash and cash equivalents	(82		)	(107		)
Net increase in Cash and cash equivalents	356			393
Cash and cash equivalents at beginning of the period	1,089			962
Cash and cash equivalents at end of the period	$	1,445		$	1,355
Supplemental Cash Flow Information
Income taxes paid	$	967		$	781

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, 2014, 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 July 22, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out (“LIFO”) and the retail inventory method. The new guidance is effective for the Company beginning on January 1, 2017, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

On April 7, 2015, the FASB issued ASU No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of related debt liability, consistent with debt discounts. Under current accounting standards, such costs are recorded as an asset. On August 18, 2015, the FASB clarified that the guidance in ASU No. 2015-03 does not apply to line-of-credit arrangements. Accordingly, line-of-credit arrangements may continue to present debt issuance costs as an asset and subsequently amortize the deferred debt costs ratably over the term of the arrangement. The new guidance in ASU No. 2015-03 is effective for the Company beginning January 1, 2016, with early adoption permitted and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

On February 18, 2015, the FASB issued ASU No. 2015-02 “Consolidation (Topic 810): Amendments to the Consolidation Analysis” that amends the current consolidation guidance. The amendments affect both the variable interest entity and voting interest entity consolidation models. The new guidance is effective for the Company beginning January 1, 2016, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

On May 28, 2014, the FASB and the International Accounting Standards Board (“IASB”) issued their final converged standard on revenue recognition. The standard, issued as 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. ASU No. 2014-09 was to be effective for the Company beginning January 1, 2017. However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is now expected to be effective for the Company beginning January 1, 2018. 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. While the

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Company is currently assessing the impact of the new standard, it does not expect this new guidance to have a material impact on its Consolidated Financial Statements.


4.	Acquisitions and Divestitures

Sale of Laundry Detergent Business in the South Pacific

In August 2015, the Company completed the previously disclosed sale of its laundry detergent business in the South Pacific to Henkel AG & Co. KGaA for an aggregate purchase price of approximately 310 Australian dollars ($221) and recorded a pretax gain of $187 ($120 aftertax gain or $0.13 per diluted share) in Other (income) expense, net. The gain is net of charges related to the right-sizing of the Company’s South Pacific business, asset write-offs related to the divested laundry detergent business and other costs related to the sale. The funds from the sale will be reinvested to expand the 2012 Restructuring Program (see Note 5, Restructuring and Related Implementation Changes).

Acquisition

On October 3, 2014, the Company acquired an oral care business in Myanmar for $62 in cash plus additional consideration contingent upon achievement of performance targets under a distribution services agreement.

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 “Purchaser”) the Mexico City site on which its commercial operations, technology center and soap production facility were located. The sale price is payable in three installments. 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 parties have subsequently amended the agreement to extend the closing date. Under the existing agreement, the final installment of the purchase price is due upon the transfer of the property, which is subject to the Company’s satisfaction of certain closing conditions relating to site preparation by November 29, 2015. If these conditions are not fully satisfied by such date, the agreement will automatically be extended to December 29, 2015. While these conditions are not expected to be fully satisfied by December 29, 2015, in which case the Purchaser has several options under the agreement (including termination and the return to it of the first two installments of the purchase price), based on the discussions to date, the Company believes that an additional amendment will be negotiated and the transfer of the property is expected to occur in the first half of 2016. The Company has reinvested the first two installments 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 September 30, 2015 and 2014, the Company recorded $0 and $1 of pretax costs ($0 and $1 of aftertax costs), respectively, related to the sale. During the nine months ended September 30, 2015 and 2014, the Company recorded $0 and $4 of pretax costs ($0 and $3 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 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.

On October 23, 2014, the Company’s Board of Directors approved an expansion of the Global Growth and Efficiency Program (as expanded, the “2012 Restructuring Program”) to take advantage of additional savings opportunities.

On October 29, 2015, the Company’s Board of Directors approved the reinvestment of the funds from the sale of the Company’s laundry detergent business in the South Pacific to expand the 2012 Restructuring Program and extend it for one year through December 31, 2017. Initiatives under the expanded 2012 Restructuring Program will continue to fit within the program’s three focus areas of expanding commercial hubs, extending shared business services and streamlining global functions and optimizing the global supply chain and facilities. The Company expects the initiatives under the expanded program to have a similar aftertax rate of return to the existing program, which on average has been 30%. The Company will update its disclosure to reflect the impact the expansion will have on the range of estimated charges and savings for the

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

2012 Restructuring Program when the additional initiatives under the expanded program are approved. The charges discussed below do not reflect the impact of the expansion.

Cumulative pretax charges related to the 2012 Restructuring Program, once all phases are approved and implemented, are estimated to be $1,285 to $1,435 ($950 to $1,050 aftertax). Anticipated pretax charges for 2015 are now expected to approximate $265 to $290 ($195 to $215 aftertax), as compared to the previously disclosed range of $330 to $385 ($245 to $285 aftertax).

The pretax charges related to the 2012 Restructuring Program 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 (10%); 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 (20%). Over the course of the 2012 Restructuring Program, it is currently 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 now expected that, by the end of 2016, the 2012 Restructuring Program will contribute a net reduction of approximately 2,700-3,200 positions from the Company’s global employee workforce.

For the three and nine months ended September 30, 2015 and 2014, restructuring and implementation-related charges are reflected in the Condensed Consolidated Statements of Income as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Cost of sales	$	3	$	7	$	11	$	23
Selling, general and administrative expenses	15		13		44		42
Other (income) expense, net	28		35		143		166
Total 2012 Restructuring Program charges, pretax	$	46	$	55	$	198	$	231

Total 2012 Restructuring Program charges, aftertax	$	35	$	41	$	142	$	167

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 by the following reportable operating segments:



	Three Months Ended				Nine Months Ended				Program-to-date
	September 30,				September 30,				Accumulated Charges
	2015		2014		2015		2014
North America	21	%	9	%	17	%	9	%	11	%
Latin America	7	%	3	%	3	%	4	%	4	%
Europe/South Pacific	17	%	17	%	13	%	18	%	25	%
Asia	—	%	15	%	3	%	4	%	2	%
Africa/Eurasia	5	%	4	%	4	%	3	%	5	%
Hill’s Pet Nutrition	(3	)%	6	%	5	%	9	%	7	%
Corporate	53	%	46	%	55	%	53	%	46	%

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Since the inception of the 2012 Restructuring Program in the fourth quarter of 2012, the Company has incurred pretax cumulative charges of $944 ($698 aftertax) in connection with the implementation of various projects as follows:



	Cumulative Charges
	as of September 30, 2015
Employee-Related Costs	$	384
Incremental Depreciation	66
Asset Impairments	5
Other	489
Total	$	944

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

The following tables summarize the activity for the restructuring and implementation-related charges discussed above and the related accruals:



	Three Months Ended September 30, 2015
	Employee-Related Costs			Incremental Depreciation			Asset Impairments			Other			Total
Balance at June 30, 2015	$	94		$	—		$	—		$	137		$	231
Charges	22			6			2			16			46
Cash payments	(17		)	—			—			(20		)	(37		)
Charges against assets	(8		)	(6		)	(2		)	—			(16		)
Foreign exchange	—			—			—			—			—
Balance at September 30, 2015	$	91		$	—		$	—		$	133		$	224



	Nine Months Ended September 30, 2015
	Employee-Related Costs			Incremental Depreciation			Asset Impairments			Other			Total
Balance at December 31, 2014	$	85		$	—		$	—		$	107		$	192
Charges	89			15			3			91			198
Cash payments	(61		)	—			—			(64		)	(125		)
Charges against assets	(17		)	(15		)	(3		)	—			(35		)
Foreign exchange	(5		)	—			—			(1		)	(6		)
Balance at September 30, 2015	$	91		$	—		$	—		$	133		$	224

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 include pension and other retiree benefit enhancements amounting to $8 and $17 for the three and nine months ended September 30, 2015, respectively, 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 and other retiree benefit liabilities.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

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 nine months ended September 30, 2015 include third-party incremental costs related to the development and implementation of new business and strategic initiatives of $13 and $39, respectively, and contract termination costs and charges resulting directly from exit activities of $1 and $5, respectively, directly related to the 2012 Restructuring Program. These charges were expensed as incurred. Also included in Other charges for the three and nine months ended September 30, 2015 are other exit costs related to the consolidation of facilities of $2 and $47, respectively.


6.	Inventories

Inventories by major class are as follows:



	September 30, 2015		December 31, 2014
Raw materials and supplies	$	311	$	349
Work-in-process	54		55
Finished goods	912		978
Total Inventories	$	1,277	$	1,382

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


7.	Shareholders’ Equity

Changes in the components of Shareholders’ Equity for the nine months ended September 30, 2015 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, 2014	$	1,466	$	1,236		$	(20	)	$	(16,862	)	$	18,832		$	(3,507	)	$	240
Net income												1,842						127
Other comprehensive income (loss), net of tax															(578		)	(9		)
Dividends												(1,351		)				(23		)
Stock-based compensation expense			104
Shares issued for stock options			74						200
Shares issued for restricted stock units			(66		)				66
Treasury stock acquired									(1,196		)
Other			3			12
Balance, September 30, 2015	$	1,466	$	1,351		$	(8	)	$	(17,792	)	$	19,323		$	(4,085	)	$	335

Accumulated other comprehensive income (loss) includes cumulative translation losses of $3,079 and $2,453 at September 30, 2015 and December 31, 2014, respectively, and unrecognized retirement plan and other retiree benefits costs of $1,012 and $1,064 at September 30, 2015 and December 31, 2014, 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
	September 30, 2015					September 30, 2014
	Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share		Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share
Basic EPS	$	726	900.1	$	0.81	$	542	913.8	$	0.59
Stock options and restricted stock units			6.8					9.0
Diluted EPS	$	726	906.9	$	0.80	$	542	922.8	$	0.59

For the three months ended September 30, 2015 and 2014, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 4,389,790 and 1,369,775, respectively.



	Nine Months Ended
	September 30, 2015					September 30, 2014
	Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share		Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share
Basic EPS	$	1,842	904.1	$	2.04	$	1,552	916.4	$	1.69
Stock options and restricted stock units			7.7					9.3
Diluted EPS	$	1,842	911.8	$	2.02	$	1,552	925.7	$	1.68

For the nine months ended September 30, 2015 and 2014, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 3,515,898 and 484,913, 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 September 30, 2015 and 2014 were as follows:



	2015						2014
	Pretax			Net of Tax			Pretax			Net of Tax

Cumulative translation adjustments	$	(352	)	$	(341	)	$	(362	)	$	(365	)
Retirement plans and other retiree benefits:
Net actuarial gain (loss) and prior service costs arising during the period	14			9			(43		)	(26		)
Amortization of net actuarial loss, transition and prior service costs ⁽¹⁾	22			16			17			9
Retirement plans and other retiree benefits adjustments	36			25			(26		)	(17		)
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities ⁽²⁾	(7		)	(5		)	(62		)	(40		)
Reclassification of (gains) losses into net earnings on available-for-sale securities ⁽³⁾	7			5			56			36
Gains (losses) on available-for-sale securities	—			—			(6		)	(4		)
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges	16			11			5			2
Reclassification of (gains) losses into net earnings on cash flow hedges ⁽⁴⁾	(5		)	(4		)	2			1
Gains (losses) on cash flow hedges	11			7			7			3
Total Other comprehensive income (loss)	$	(305	)	$	(309	)	$	(387	)	$	(383	)

⁽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 September 30, 2015, these amounts included a pretax loss of $22 related to the remeasurement of the bolivar-denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela. For the three months ended September 30, 2014, these amounts included a pretax loss of $52 related to the remeasurement of the bolivar-denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela.

⁽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 third quarter of 2015. 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.

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 nine months ended September 30, 2015 and 2014 were as follows:



	2015						2014
	Pretax			Net of Tax			Pretax			Net of Tax

Cumulative translation adjustments	$	(628	)	$	(626	)	$	(372	)	$	(383	)
Retirement plans and other retiree benefits:
Net actuarial gain (loss) and prior service costs arising during the period	13			8			(40		)	(24		)
Amortization of net actuarial loss, transition and prior service costs ⁽¹⁾	66			44			45			28
Retirement plans and other retiree benefits adjustments	79			52			5			4
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities ⁽²⁾	(27		)	(18		)	(354		)	(230		)
Reclassification of (gains) losses into net earnings on available-for-sale securities ⁽³⁾	14			10			267			174
Gains (losses) on available-for-sale securities	(13		)	(8		)	(87		)	(56		)
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges	17			12			(1		)	(1		)
Reclassification of (gains) losses into net earnings on cash flow hedges ⁽⁴⁾	(12		)	(8		)	(1		)	—
Gains (losses) on cash flow hedges	5			4			(2		)	(1		)
Total Other comprehensive income (loss)	$	(557	)	$	(578	)	$	(456	)	$	(436	)

⁽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 nine months ended September 30, 2015, these amounts included a pretax loss of $50 related to the remeasurement of the bolivar-denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela.

For the nine months ended September 30, 2014, these amounts included a pretax loss of $324 related to the remeasurement of the bolivar-denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela. 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 devaluations in the second and third quarters of 2015 and the first quarter of 2014. 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 nine months ended September 30, 2015 and 2014 were as follows:



	Pension Benefits												Other Retiree Benefits
	United States						International
	Three Months Ended September 30,
	2015			2014			2015			2014			2015			2014
Service cost	$	—		$	—		$	4		$	5		$	5		$	2
Interest cost	25			25			6			8			11			11
ESOP offset	—			—			—			—			—			—
Expected return on plan assets	(29		)	(28		)	(6		)	(7		)	(1		)	(1		)
Amortization of transition and prior service costs (credits)	—			—			1			—			—			—
Amortization of actuarial loss (gain)	12			11			3			2			6			4
Net periodic benefit cost	$	8		$	8		$	8		$	8		$	21		$	16



	Pension Benefits												Other Retiree Benefits
	United States						International
	Nine Months Ended September 30,
	2015			2014			2015			2014			2015			2014
Service cost	$	1		$	1		$	14		$	15		$	13		$	8
Interest cost	75			76			21			26			34			32
ESOP offset	—			—			—			—			(1		)	(1		)
Expected return on plan assets	(87		)	(84		)	(20		)	(22		)	(2		)	(2		)
Amortization of transition and prior service costs (credits)	—			—			2			3			—			—
Amortization of actuarial loss (gain)	36			27			8			3			20			12
Net periodic benefit cost	$	25		$	20		$	25		$	25		$	64		$	49

For the nine months ended September 30, 2015, the Company did not make any voluntary contributions to its U.S. retirement plans. For the nine months ended September 30, 2014, the Company made a voluntary contribution of $2 to its U.S. retirement plans.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

11. Income Taxes

At December 31, 2014, the Company had unrecognized tax benefits of $218. In May 2015, the Company became aware of several Supreme Court rulings in a foreign jurisdiction disallowing certain tax deductions which had the effect of reversing prior decisions. The Company had taken deductions in prior years similar to those now disallowed by the Court. As a result, as required, the Company reassessed its tax position in light of the recent rulings and concluded it needed to increase its unrecognized tax benefits by $15. The Company recorded this $15 income tax charge in the quarter ended June 30, 2015.

Although it is possible that the amount of unrecognized tax benefits with respect to the Company’s uncertain tax positions will further increase or decrease during the remainder of 2015, the Company does not expect material changes.

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. As a result, as required, the Company reassessed its tax position in light of the decision and concluded it needed to increase its unrecognized tax benefits by $30 and write off a $36 deferred tax asset. The Company recorded this $66 income tax charge in the quarter ended September 30, 2014.

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.

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 $175 (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. 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 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 $73. The Company has been disputing the disallowances by appealing the assessments within the internal revenue authority’s appellate process since October 2001. Numerous appeals are currently pending at the administrative level. In the event the Company is ultimately unsuccessful in its administrative appeals, further appeals are available within the Brazilian federal courts.

In September 2015, the Company lost one of its appeals at the administrative level, and now plans to file a lawsuit in Brazilian federal court. In the event the Company is unsuccessful in this filing, further appeals are available within the Brazilian federal courts. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the disallowances are without merit and that the Company should ultimately prevail. The Company is challenging these assessments vigorously.

In July 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, in the 6th. Lower Federal Court in the City of São Paulo, 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. The case has been pending since 2002, and the Lower Federal Court has not issued a decision. 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 is challenging 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 $46, 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 has been disputing the assessment within the internal revenue authority’s administrative appeals process. In November 2014, the Superior Chamber of Administrative Tax Appeals denied the Company’s most recent appeal. Further appeals are available both at the administrative level and within the Brazilian federal courts. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the tax assessment is without merit and that the Company should ultimately prevail on appeal, if not at the administrative level, in the Brazilian federal courts. The Company is challenging 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

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.

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 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 December 2014, the French competition law authority found that 13 consumer goods companies, including the Company’s French subsidiary, exchanged competitively sensitive information related to the French home care and personal care sectors, for which the Company’s French subsidiary was fined $57. In addition, as a result of the Company’s acquisition of the Sanex personal care business in 2011 from Unilever N.V. and Unilever PLC (together with Unilever N.V., “Unilever”) pursuant to a Business and Share Sale and Purchase Agreement (the “Sale and Purchase Agreement”), the French competition law authority found that the Company’s French subsidiary, along with Hillshire Brands Company (formerly Sara Lee Corporation (“Sara Lee”)), were jointly and severally liable for fines of $25 assessed against Sara Lee’s French subsidiary. The Company is entitled to indemnification for this fine from Unilever as provided in the Sale and Purchase Agreement. The Company is appealing both fines in the French courts.

As of September 30, 2015, the following formal claim of violations is pending against the Company:


▪	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 has responded to this statement of objections.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Since December 31, 2014, the following matters have been resolved:


▪	In March 2015, the French Supreme Court confirmed the French competition law authority’s March 2012 fine of the Company’s Hill’s French subsidiary in the amount of $7.


▪	In June 2015, the Spanish Supreme Court confirmed the annulment of the Spanish competition law authority’s January 2010 fine of the Company’s Spanish subsidiary.


▪	In June 2015, the Belgian competition law authority issued a final settlement decision related to price coordination involving 11 branded goods companies, including the Company’s Belgian subsidiary, and a number of retailers in Belgium. As the Company was an immunity applicant, the Company’s Belgian subsidiary was not fined.

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 is defending these proceedings. 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.

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. The Company is challenging these cases vigorously. Twenty-three cases filed against the Company have been voluntarily dismissed and/or had final judgment entered in favor of the Company. In addition, the Company has settled eight cases for amounts that are not material to the Company’s results of operations.

There are 32 additional individual cases pending against the Company in state and federal courts in California, Delaware, the District of Columbia, Illinois, Maryland, Massachusetts, Minnesota, Missouri, New Jersey, New York, South Carolina and Wisconsin. Nineteen of these cases have been filed against the Company since the quarter ended June 30, 2015; all but one of these cases have multiple defendants named in addition to the Company. Some of the cases are expected to go to trial in 2015. While the Company and its legal counsel believe that these cases are without merit and intend to challenge them vigorously, there can be no assurances of the outcome at trial. Since the amount of any potential losses from these cases 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.

The Company is a defendant in a lawsuit pending in Utah federal court brought by N8 Medical, Inc. (“N8 Medical”), Brigham Young University (“BYU”), and N8 Pharmaceuticals, Inc. (“N8 Pharma”) (collectively “plaintiffs”). The complaint, originally filed in November 2013, alleges breach of contract and other torts arising out of the Company’s evaluation of a technology owned by BYU and licensed, at various times, to Ceragenix Pharmaceuticals, Inc., now in bankruptcy, N8 Medical and N8 Pharma.

In the third quarter of 2015, plaintiffs completed a submission of documents in the litigation alleging damages of approximately $2,500. The Company and its legal counsel believe these damages allegations are without merit and are vigorously challenging them and defending this case on its merits.

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.

The accounting policies of the operating segments are generally the same as those described in Note 2, Summary of Significant Accounting Policies to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Intercompany sales have been eliminated. 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 segment operating 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						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Net sales
Oral, Personal and Home Care
North America	$	791		$	789		$	2,360		$	2,344
Latin America	1,064			1,194			3,277			3,577
Europe/South Pacific	728			886			2,200			2,624
Asia	624			634			1,908			1,916
Africa/Eurasia	246			310			754			916
Total Oral, Personal and Home Care	3,453			3,813			10,499			11,377
Pet Nutrition	546			566			1,636			1,679
Total Net sales	$	3,999		$	4,379		$	12,135		$	13,056

Operating profit
Oral, Personal and Home Care
North America	$	258		$	240		$	699		$	687
Latin America	300			330			929			931
Europe/South Pacific	206			237			573			681
Asia	195			187			569			558
Africa/Eurasia	44			60			128			177
Total Oral, Personal and Home Care	1,003			1,054			2,898			3,034
Pet Nutrition	157			149			450			439
Corporate	(24		)	(255		)	(420		)	(911		)
Total Operating profit	$	1,136		$	948		$	2,928		$	2,562

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 September 30, 2015, Corporate Operating profit (loss) includes charges of $46 related to the 2012 Restructuring Program, a charge of $18 related to the remeasurement of the Company’s Venezuelan subsidiary’s local currency-denominated net monetary assets as a result of an effective devaluation and a gain of $187 on the sale of the Company’s laundry detergent business in the South Pacific. For the nine months ended September 30, 2015, Corporate Operating profit (loss) includes charges of $198 related to the 2012 Restructuring Program, charges of $34 related to the remeasurement of the Company’s Venezuelan subsidiary’s local currency-denominated net monetary assets as a result of effective devaluations and a gain of $187 on the sale of the Company’s laundry detergent business in the South Pacific.

For the three months ended September 30, 2014, Corporate Operating profit (loss) included charges of $55 related to the 2012 Restructuring Program, a charge of $61 related to the remeasurement of the Company’s Venezuelan subsidiary’s local currency-denominated net monetary assets as a result of an effective devaluation, costs of $1 related to the sale of land in Mexico and a charge of $11 for a European competition law matter. For the nine months ended September 30, 2014, Corporate Operating profit (loss) included charges of $231 related to the 2012 Restructuring Program, charges of $327 related to the remeasurement of the Company’s Venezuelan subsidiary’s local currency-denominated net monetary assets as a result of effective devaluations, costs of $4 related to the sale of land in Mexico and a charge of $11 for a European competition law matter.

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 and the sale of the Company’s laundry detergent business in the South Pacific, refer to Note 4, Acquisitions and Divestitures. For further information regarding the European competition law matter, refer to Note 12, Contingencies.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


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 and swap contracts, option 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 September 30, 2015 and December 31, 2014:



	Assets					Liabilities
	Account	Fair Value				Account	Fair Value
Designated derivative instruments		9/30/15		12/31/14			9/30/15		12/31/14
Interest rate swap contracts	Other current assets	$	—	$	1	Other accruals	$	—	$	—
Interest rate swap contracts	Other assets	19		12		Other liabilities	—		2
Foreign currency contracts	Other current assets	34		21		Other accruals	8		4
Foreign currency contracts	Other assets	102		60		Other liabilities	—		—
Commodity contracts	Other current assets	—		—		Other accruals	—		1
Total designated		$	155	$	94		$	8	$	7

Derivatives not designated
Foreign currency contracts	Other assets	$	11	$	8	Other liabilities	$	—	$	—
Total not designated		$	11	$	8		$	—	$	—

Total derivative instruments		$	166	$	102		$	8	$	7

Other financial instruments
Marketable securities	Other current assets	$	146	$	200
Note receivable	Other current assets	36		42
Available-for-sale securities	Other assets	370		322
Total other financial instruments		$	552	$	564

The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of September 30, 2015 and December 31, 2014. The estimated fair value of the Company’s long-term debt, including the current portion, as of September 30, 2015 and December 31, 2014, was $7,016 and $6,346, respectively, and the related carrying value was $6,780 and $6,132, 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 gain or loss 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 nine months ended September 30, 2015 and 2014 was as follows:



	2015									2014
	Foreign Currency Contracts			Interest Rate Swaps			Total			Foreign Currency Contracts			Interest Rate Swaps			Total
Notional Value at September 30,	$	899		$	1,438		$	2,337		$	1,372		$	1,438		$	2,810
Three months ended September 30:
Gain (loss) on derivatives	(1		)	7			6			7			(9		)	(2		)
Gain (loss) on hedged items	1			(7		)	(6		)	(7		)	9			2
Nine months ended September 30:
Gain (loss) on derivatives	(4		)	9			5			9			(12		)	(3		)
Gain (loss) on hedged items	4			(9		)	(5		)	(9		)	12			3

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 nine months ended September 30, 2015 and 2014 was as follows:



	2015							2014
	Foreign Currency Contracts		Commodity Contracts			Total		Foreign Currency Contracts			Commodity Contracts			Total
Notional Value at September 30,	$	735	$	10		$	745	$	509		$	11		$	520
Three months ended September 30:
Gain (loss) recognized in OCI	17		(1		)	16		8			(3		)	5
Gain (loss) reclassified into Cost of sales	5		—			5		(1		)	(1		)	(2		)
Nine months ended September 30:
Gain (loss) recognized in OCI	18		(1		)	17		1			(2		)	(1		)
Gain (loss) reclassified into Cost of sales	13		(1		)	12		—			1			1

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 Cumulative 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 nine months ended September 30, 2015 and 2014 was as follows:



	2015									2014
	Foreign Currency Contracts			Foreign Currency Debt			Total			Foreign Currency Contracts			Foreign Currency Debt			Total
Notional Value at September 30,	$	729		$	800		$	1,529		$	669		$	—		$	669
Three months ended September 30:
Gain (loss) on instruments	31			(2		)	29			44			1			45
Gain (loss) on hedged items	(32		)	2			(30		)	(44		)	(1		)	(45		)
Nine months ended September 30:
Gain (loss) on instruments	64			23			87			44			4			48
Gain (loss) on hedged items	(65		)	(23		)	(88		)	(44		)	(4		)	(48		)

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. Derivatives not designated as hedging instruments also include foreign currency contracts for which the gain or loss on the instrument is recognized in Other (income) expense, net for the nine months ended September 30, 2015.

Activity related to these contracts during the three and nine months ended September 30, 2015 and 2014 was as follows:



	2015								2014
	Foreign Currency Contracts		Cross-currency Swap			Total			Foreign Currency Contracts		Cross-currency Swap			Total
Notional Value at September 30,	$	—	$	102		$	102		$	—	$	102		$	102
Three months ended September 30:
Gain (loss) on instruments	6		3			9			—		5			5
Gain (loss) on hedged items	—		(3		)	(3		)	—		(5		)	(5		)
Nine months ended September 30:
Gain (loss) on instruments	7		2			9			—		2			2
Gain (loss) on hedged items	—		(2		)	(2		)	—		(2		)	(2		)

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 and a fixed interest rate note receivable. Marketable securities consist of bank deposits of $108 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 $38. As more fully discussed below, the long-term portion of these bonds in the amount of $370 is included in Other assets. The fixed interest rate note receivable of $36 is carried at cost, which approximated fair value as of September 30, 2015.

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 September 30, 2015, the fair market value of the Company’s U.S. dollar-linked devaluation-protected bonds and bolivar-denominated fixed interest rate bonds was $64 and $344, respectively. These bonds are considered available-for-sale securities and, as noted above, the long-term portion in the amount of $370 is included in Other assets.

The following table presents a reconciliation of the Venezuelan bonds at fair value for the nine months ended September 30, 2015 and 2014:



	2015		2014
Beginning balance as of January 1,	$	399	$	685