Edgar Filing: COLGATE PALMOLIVE CO

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________

FORM 10-Q

_________________________

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2017



☐	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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☒ No ☐

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



Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

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	880,841,977	June 30, 2017

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,
	2017		2016		2017		2016
Net sales	$	3,826	$	3,845	$	7,588	$	7,607
Cost of sales	1,526		1,541		3,019		3,055
Gross profit	2,300		2,304		4,569		4,552
Selling, general and administrative expenses	1,333		1,320		2,695		2,674
Other (income) expense, net	114		40		136		67
Operating profit	853		944		1,738		1,811
Interest (income) expense, net	24		25		47		53
Income before income taxes	829		919		1,691		1,758
Provision for income taxes	269		281		520		546
Net income including noncontrolling interests	560		638		1,171		1,212
Less: Net income attributable to noncontrolling interests	36		38		77		79
Net income attributable to Colgate-Palmolive Company	$	524	$	600	$	1,094	$	1,133

Earnings per common share, basic	$	0.59	$	0.67	$	1.24	$	1.27

Earnings per common share, diluted	$	0.59	$	0.67	$	1.23	$	1.26

Dividends declared per common share *	$	0.40	$	0.39	$	1.19	$	1.16

* Two dividends were declared in the first quarter of 2017 and 2016.

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,
	2017			2016			2017			2016
Net income including noncontrolling interests	$	560		$	638		$	1,171		$	1,212
Other comprehensive income (loss), net of tax:
Cumulative translation adjustments	98			(43		)	230			83
Retirement plans and other retiree benefit adjustments	12			12			25			23
Gains (losses) on available-for-sale securities	—			—			—			—
Gains (losses) on cash flow hedges	(3		)	7			(13		)	(4		)
Total Other comprehensive income (loss), net of tax	107			(24		)	242			102
Total Comprehensive income including noncontrolling interests	667			614			1,413			1,314
Less: Net income attributable to noncontrolling interests	36			38			77			79
Less: Cumulative translation adjustments attributable to noncontrolling interests	2			(6		)	9			(5		)
Total Comprehensive income attributable to noncontrolling interests	38			32			86			74
Total Comprehensive income attributable to Colgate-Palmolive Company	$	629		$	582		$	1,327		$	1,240

See Notes to Condensed Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Condensed Consolidated Balance Sheets

(Dollars in Millions)

(Unaudited)



	June 30, 2017			December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	1,241		$	1,315
Receivables (net of allowances of $75 and $73, respectively)	1,526			1,411
Inventories	1,199			1,171
Other current assets	589			441
Total current assets	4,555			4,338
Property, plant and equipment:
Cost	8,261			7,942
Less: Accumulated depreciation	(4,331		)	(4,102		)
	3,930			3,840
Goodwill	2,191			2,107
Other intangible assets, net	1,340			1,313
Deferred income taxes	360			301
Other assets	204			224
Total assets	$	12,580		$	12,123
Liabilities and Shareholders’ Equity
Current Liabilities
Notes and loans payable	$	13		$	13
Current portion of long-term debt	—			—
Accounts payable	1,131			1,124
Accrued income taxes	404			441
Other accruals	2,232			1,727
Total current liabilities	3,780			3,305
Long-term debt	6,506			6,520
Deferred income taxes	195			246
Other liabilities	2,011			2,035
Total liabilities	12,492			12,106
Shareholders’ Equity
Common stock	1,466			1,466
Additional paid-in capital	1,854			1,691
Retained earnings	19,952			19,922
Accumulated other comprehensive income (loss)	(3,947		)	(4,180		)
Unearned compensation	(2		)	(7		)
Treasury stock, at cost	(19,565		)	(19,135		)
Total Colgate-Palmolive Company shareholders’ equity	(242		)	(243		)
Noncontrolling interests	330			260
Total equity	88			17
Total liabilities and equity	$	12,580		$	12,123

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,
	2017			2016
Operating Activities
Net income including noncontrolling interests	$	1,171		$	1,212
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operations:
Depreciation and amortization	226			215
Restructuring and termination benefits, net of cash	78			8
Stock-based compensation expense	53			48
Deferred income taxes	(64		)	(41		)
Voluntary benefit plan contributions	(57		)	(50		)
Cash effects of changes in:
Receivables	(64		)	(132		)
Inventories	9			(35		)
Accounts payable and other accruals	(61		)	69
Other non-current assets and liabilities	14			26
Net cash provided by operations	1,305			1,320
Investing Activities
Capital expenditures	(229		)	(248		)
Purchases of marketable securities and investments	(201		)	(183		)
Proceeds from sale of marketable securities and investments	114			87
Other	4			4
Net cash used in investing activities	(312		)	(340		)
Financing Activities
Principal payments on debt	(1,841		)	(4,078		)
Proceeds from issuance of debt	1,761			4,123
Dividends paid	(716		)	(704		)
Purchases of treasury shares	(660		)	(482		)
Proceeds from exercise of stock options	337			274
Net cash used in financing activities	(1,119		)	(867		)
Effect of exchange rate changes on Cash and cash equivalents	52			2
Net increase (decrease) in Cash and cash equivalents	(74		)	115
Cash and cash equivalents at beginning of the period	1,315			970
Cash and cash equivalents at end of the period	$	1,241		$	1,085
Supplemental Cash Flow Information
Income taxes paid	$	639		$	507

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. The Company reclassifies certain prior year amounts, as applicable, 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, 2016, 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 10, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s Consolidated Financial Statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.

On March 10, 2017, the FASB issued ASU No. 2017-07, “Compensation–Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” changing the presentation of the net periodic benefit cost on the Statement of Income and limiting the amount of net periodic benefit cost eligible for capitalization to assets. The new guidance permits only the service cost component of net periodic benefit cost to be eligible for capitalization. The new guidance also requires entities to present the service cost component of net periodic benefit cost together with compensation costs arising from services rendered by employees during the period. Other components of net periodic benefit cost, which include interest, expected return on assets, amortization of prior service costs and actuarial gains and losses, are required to be presented outside of Operating profit. The line item or items used to present the other components of net periodic benefit cost must be disclosed in the Notes to the Consolidated Financial Statements, if not separately described on the Statement of Income. The new presentation requirement is required to be adopted on a “full retrospective” basis, meaning the standard is applied to all of the periods presented in the financial statements, while the limitation on capitalization can only be adopted on a prospective basis. The new guidance is effective for the Company beginning on January 1, 2018, with early adoption permitted. While the Company is currently assessing the impact of the new standard on its Consolidated Financial Statements, based on its historical results, it anticipates that, as a result of the reclassification, full year Operating profit will increase by approximately $100 annually with no impact on Net income attributable to Colgate-Palmolive Company.

On January 26, 2017, the FASB issued ASU No. 2017-04, “Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard is effective for the Company on a prospective basis beginning on January 1, 2020, with early adoption permitted. 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)

On January 5, 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which provides additional guidance on evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the new guidance would define this as an asset acquisition; otherwise, the entity then evaluates whether the asset meets the requirement that a business include, at a minimum, an input and substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

On October 24, 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory,” which eliminates the requirement to defer recognition of income taxes on intra-entity asset transfers until the asset is sold to an outside party. The new guidance requires the recognition of current and deferred income taxes on intra-entity transfers of assets other than inventory, such as intellectual property and property, plant and equipment, when the transfer occurs. As permitted, the Company early-adopted the new standard on a “modified retrospective” basis, meaning the standard is applied only to the most recent period presented in the financial statements, as of January 1, 2017. This new guidance did not have a material impact on the Company’s Consolidated Financial Statements.

On August 26, 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. The guidance is effective for the Company beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amended accounting for income taxes related to share-based compensation, the related classification in the statement of cash flows and share award forfeiture accounting. The new guidance was effective for the Company beginning on January 1, 2017. As required subsequent to the adoption of this new guidance, the Company recognized excess tax benefits of $8 and $26 (resulting from an increase in the fair value of an award from grant date to the vesting or exercise date, as applicable) in the Provision for income taxes as a discrete item during the three and six months ended June 30, 2017, respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. Prior to January 1, 2017, excess tax benefits were recognized in equity. As permitted, the Company elected to classify excess tax benefits as an operating activity in the Statement of Cash Flows instead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods. Also, as permitted by the new standard, the Company elected to account for forfeitures as they occur.

On March 15, 2016, the FASB issued ASU No. 2016-07, “Investments–Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,” which eliminated the requirement to retroactively adjust an investment that subsequently qualifies for equity method accounting (as a result of an increase in level of ownership interest or degree of influence) as if the equity method of accounting had been applied during all prior periods that the investment was held. The new standard requires that the investor add the cost of acquiring additional ownership interest in the investee to its current basis and prospectively apply the equity method of accounting. For an available-for-sale investment, any unrealized gains or losses should be recognized in earnings at the date the investment qualifies as an equity method investment. The new guidance was effective for the Company beginning on January 1, 2017. This new guidance did not 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)

On February 25, 2016, the FASB issued its final standard on lease accounting, ASU No. 2016-02, “Leases (Topic 842),” which supersedes Topic 840, “Leases.” The new accounting standard requires the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. The new standard also provides additional guidance on the measurement of the right-of-use assets and lease liabilities and will require enhanced disclosures about the Company’s leasing arrangements. Under current accounting standards, substantially all of the Company’s leases are considered operating leases and, as such, are not recognized on the Consolidated Balance Sheet. This new standard is effective for the Company beginning on January 1, 2019, with early adoption permitted. The standard requires a “modified retrospective” adoption, meaning the standard is applied to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact of the new standard on its Consolidated Financial Statements.

On January 5, 2016, the FASB issued ASU No. 2016-01, “Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated guidance enhances the reporting model for financial instruments which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The amendment to the standard is effective for the Company beginning on January 1, 2018. While the 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.

On July 22, 2015, the FASB issued 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 was effective for the Company beginning on January 1, 2017. This new guidance did not have a material impact on the Company’s Consolidated Financial Statements.

On May 28, 2014, the FASB and the International Accounting Standards Board issued their final converged standard on revenue recognition. The standard, issued as ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by the FASB, provides a 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 its 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. During 2016, the FASB issued several accounting updates (ASU No. 2016-08, 2016-10 and 2016-12) to clarify implementation guidance and correct unintended application of the guidance. The standard allows for either full retrospective adoption or modified retrospective adoption. The Company plans to adopt the new standard on January 1, 2018, on a “modified retrospective” basis. The Company continues to make progress in its assessment and implementation of the new standard and while the completion of this assessment is still ongoing, based on the progress to date, the Company does not expect the new standard will have a material impact on its revenue recognition accounting policy or its Consolidated Financial Statements.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


4.	Restructuring and Related Implementation Charges

In the fourth quarter of 2012, the Company commenced a Global Growth and Efficiency Program (as expanded in 2014 and 2015 as described below, the “2012 Restructuring Program”) for sustained growth. The program’s initiatives are expected to help Colgate ensure sustained 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 (the “Board”) approved an expansion of the 2012 Restructuring Program to take advantage of additional savings opportunities.

On October 29, 2015, the Board 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. The Board approved the implementation plan for this expansion on March 10, 2016. Initiatives under the 2012 Restructuring Program 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 continually seeks new projects and ways to advance the implementation of existing projects in order to accelerate savings under the program and, given the challenging market conditions and slowing category growth experienced in the first six months of 2017, it has identified additional opportunities and now estimates charges to be at the upper end of its previously disclosed range. Cumulative pretax charges resulting from the 2012 Restructuring Program, once all phases are approved and implemented, are now estimated to be $1,500 to $1,585 ($1,120 to $1,170 aftertax) as compared to the previous estimate of $1,405 to $1,585 ($1,050 to $1,170 aftertax).

The pretax charges resulting from the 2012 Restructuring Program are currently estimated to be comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits (45%); asset-related costs, primarily Incremental Depreciation and Asset Impairments (10%); and Other charges, which include contract termination costs, consisting primarily of related implementation charges resulting directly from exit activities (20%) and the implementation of new strategies (25%). Over the course of the 2012 Restructuring Program, it is currently estimated that approximately 75% of the charges will result in cash expenditures. Anticipated pretax charges for 2017 are now expected to approximate $275 to $360 ($210 to $260 aftertax) as compared to the previous estimate of $180 to $360 ($140 to $260 aftertax). It is expected that substantially all charges resulting from the 2012 Restructuring Program will be incurred by December 31, 2017.

It is currently expected that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America (15%), Europe (25%), Latin America (5%), Asia Pacific (5%), Africa/Eurasia (5%), Hill’s Pet Nutrition (5%) 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, when it has been fully implemented, the 2012 Restructuring Program will contribute a net reduction of approximately 3,300 to 3,800 positions from the Company’s global employee workforce.

For the three and six months ended June 30, 2017 and 2016, restructuring and related implementation charges are reflected in the Condensed Consolidated Statements of Income as follows:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Cost of sales	$	21	$	12	$	35	$	20
Selling, general and administrative expenses	17		14		38		40
Other (income) expense, net	104		33		115		54
Total 2012 Restructuring Program charges, pretax	$	142	$	59	$	188	$	114

Total 2012 Restructuring Program charges, aftertax	$	115	$	44	$	146	$	82

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

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				Six Months Ended				Program-to-date
	June 30,				June 30,				Accumulated Charges
	2017		2016		2017		2016
North America	17	%	23	%	22	%	32	%	17	%
Latin America	3	%	6	%	3	%	7	%	4	%
Europe	55	%	6	%	42	%	7	%	24	%
Asia Pacific	3	%	9	%	3	%	6	%	3	%
Africa/Eurasia	2	%	22	%	2	%	15	%	6	%
Hill’s Pet Nutrition	2	%	17	%	4	%	9	%	7	%
Corporate	18	%	17	%	24	%	24	%	39	%

Since the inception of the 2012 Restructuring Program in the fourth quarter of 2012, the Company has incurred cumulative pretax charges of $1,416 ($1,053 aftertax) in connection with the implementation of various projects as follows:



	Cumulative Charges
	as of June 30, 2017
Employee-Related Costs	$	573
Incremental Depreciation	86
Asset Impairments	29
Other	728
Total	$	1,416

The majority of costs incurred since inception relate to the following projects: the implementation of the Company’s overall hubbing strategy; the extension of shared business services and streamlining of global functions; the consolidation of facilities; 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; redesigning the European commercial organization; and 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.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

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



	Three Months Ended June 30, 2017
	Employee-Related Costs			Incremental Depreciation			Asset Impairments		Other			Total
Balance at March 31, 2017	$	44		$	—		$	—	$	123		$	167
Charges	100			4			—		38			142
Cash payments	(8		)	—			—		(46		)	(54		)
Charges against assets	(1		)	(4		)	—		—			(5		)
Foreign exchange	3			—			—		1			4
Balance at June 30, 2017	$	138		$	—		$	—	$	116		$	254



	Six Months Ended June 30, 2017
	Employee-Related Costs			Incremental Depreciation			Asset Impairments			Other			Total
Balance at December 31, 2016	$	56		$	—		$	—		$	125		$	181
Charges	108			6			2			72			188
Cash payments	(27		)	—			—			(82		)	(109		)
Charges against assets	(2		)	(6		)	(2		)	—			(10		)
Foreign exchange	3			—			—			1			4
Balance at June 30, 2017	$	138		$	—		$	—		$	116		$	254

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 $1 and $2 for the three and six months ended June 30, 2017, 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 (see Note 9, Retirement Plans and Other Retiree Benefits).

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, 2017 include third-party incremental costs related to the development and implementation of new business and strategic initiatives of $37 and $70, respectively, and contract termination costs and charges resulting directly from exit activities of $1 and $2, respectively. These charges were expensed as incurred.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

5. Inventories

Inventories by major class are as follows:



	June 30, 2017		December 31, 2016
Raw materials and supplies	$	241	$	266
Work-in-process	47		42
Finished goods	911		863
Total Inventories	$	1,199	$	1,171

6. Shareholders’ Equity

Changes in the components of Shareholders’ Equity for the six months ended June 30, 2017 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, 2016	$	1,466	$	1,691		$	(7	)	$	(19,135	)	$	19,922		$	(4,180	)	$	260
Net income												1,094						77
Other comprehensive income (loss), net of tax															233			9
Dividends												(1,053		)				(16		)
Stock-based compensation expense			53
Shares issued for stock options			126						208
Shares issued for restricted stock units			(17		)				17
Treasury stock acquired									(660		)
Other			1			5			5			(11		)
Balance, June 30, 2017	$	1,466	$	1,854		$	(2	)	$	(19,565	)	$	19,952		$	(3,947	)	$	330

Accumulated other comprehensive income (loss) includes cumulative translation losses of $2,991 and $3,212 at June 30, 2017 and December 31, 2016, respectively, and unrecognized retirement plan and other retiree benefits costs of $952 and $977 at June 30, 2017 and December 31, 2016, respectively.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

7. Earnings Per Share



	Three Months Ended
	June 30, 2017					June 30, 2016
	Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share		Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share
Basic EPS	$	524	883.8	$	0.59	$	600	893.9	$	0.67
Stock options and restricted stock units			7.0					7.2
Diluted EPS	$	524	890.8	$	0.59	$	600	901.1	$	0.67

For the three months ended June 30, 2017 and 2016, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 5,299,933 and 598,857, respectively.



	Six Months Ended
	June 30, 2017					June 30, 2016
	Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share		Net income attributable to Colgate-Palmolive Company		Shares (millions)	Per Share
Basic EPS	$	1,094	884.2	$	1.24	$	1,133	893.8	$	1.27
Stock options and restricted stock units			6.7					6.9
Diluted EPS	$	1,094	890.9	$	1.23	$	1,133	900.7	$	1.26

For the six months ended June 30, 2017 and 2016, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 9,051,702 and 356,541, 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)


8.	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, 2017 and 2016 were as follows:



	2017						2016
	Pretax			Net of Tax			Pretax			Net of Tax

Cumulative translation adjustments	$	57		$	96		$	(8	)	$	(37	)
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⁾	19			12			16			12
Retirement plans and other retiree benefits adjustments	19			12			16			12
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities	—			—			—			—
Reclassification of (gains) losses into net earnings on available-for-sale securities	—			—			—			—
Gains (losses) on available-for-sale securities	—			—			—			—
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges	(7		)	(4		)	7			6
Reclassification of (gains) losses into net earnings on cash flow hedges ⁽²⁾	1			1			2			1
Gains (losses) on cash flow hedges	(6		)	(3		)	9			7
Total Other comprehensive income (loss)	$	70		$	105		$	17		$	(18	)

⁽¹⁾These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 9, Retirement Plans and Other Retiree Benefits for additional details.

⁽²⁾These (gains) losses are reclassified into Cost of sales. See Note 13, 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)

Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the six months ended June 30, 2017 and 2016 were as follows:



	2017						2016
	Pretax			Net of Tax			Pretax			Net of Tax

Cumulative translation adjustments	$	160		$	221		$	86		$	88
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⁾	37			25			32			23
Retirement plans and other retiree benefits adjustments	37			25			32			23
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities	—			—			—			—
Reclassification of (gains) losses into net earnings on available-for-sale securities	—			—			—			—
Gains (losses) on available-for-sale securities	—			—			—			—
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges	(20		)	(12		)	(7		)	(4		)
Reclassification of (gains) losses into net earnings on cash flow hedges ⁽²⁾	(2		)	(1		)	—			—
Gains (losses) on cash flow hedges	(22		)	(13		)	(7		)	(4		)
Total Other comprehensive income (loss)	$	175		$	233		$	111		$	107

⁽¹⁾These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 9, Retirement Plans and Other Retiree Benefits for additional details.

⁽²⁾These (gains) losses are reclassified into Cost of sales. See Note 13, 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)


9.	Retirement Plans and Other Retiree Benefits

Components of Net periodic benefit cost for the three and six months ended June 30, 2017 and 2016 were as follows:



	Pension Benefits												Other Retiree Benefits
	United States						International
	Three Months Ended June 30,
	2017			2016			2017			2016			2017		2016
Service cost	$	1		$	1		$	3		$	4		$	4	$	3
Interest cost	23			26			5			6			10		11
ESOP offset	—			—			—			—			—		(1		)
Expected return on plan assets	(28		)	(28		)	(5		)	(6		)	—		—
Amortization of transition and prior service costs (credits)	—			—			—			—			—		—
Amortization of actuarial loss (gain)	12			10			3			2			4		4
Net periodic benefit cost	$	8		$	9		$	6		$	6		$	18	$	17



	Pension Benefits												Other Retiree Benefits
	United States						International
	Six Months Ended June 30,
	2017			2016			2017			2016			2017		2016
Service cost	$	1		$	1		$	7		$	8		$	8	$	6
Interest cost	47			53			10			12			21		22
ESOP offset	—			—			—			—			—		(1		)
Expected return on plan assets	(55		)	(55		)	(10		)	(11		)	—		—
Amortization of transition and prior service costs (credits)	—			—			—			—			—		—
Amortization of actuarial loss (gain)	24			20			5			4			8		8
Net periodic benefit cost	$	17		$	19		$	12		$	13		$	37	$	35

For the six months ended June 30, 2017, the Company made voluntary contributions of $57 to its U.S. postretirement plans. For the six months ended June 30, 2016, the Company made voluntary contributions of $50 to its U.S. postretirement plans.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

10. Income Taxes

On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amended accounting for income taxes related to share-based compensation. As a result of adopting the standard effective January 1, 2017, the Company recognized excess tax benefits of $8 and $26 (resulting from an increase in the fair value of an award from the grant date to the vesting or exercise date, as applicable) in the Provision for income taxes as a discrete item during the three and six months ended June 30, 2017, respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. Prior to January 1, 2017, excess tax benefits were recognized in equity. See Note 3, Recent Accounting Pronouncements for additional information.

Since 2002, the Company has taken a tax position in a foreign jurisdiction that has been challenged by the local tax authorities. In May 2015, the Company became aware of several rulings by the Supreme Court in this 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 disallowed by such court and as a result, as required, reassessed its tax position and increased its unrecognized tax benefits in 2015.

During the quarter ended June 30, 2016, the Supreme Court in this foreign jurisdiction decided the matter in the Company’s favor for the years 2002 through 2005 and, as a result, the Company recorded a net tax benefit of $13, including interest. The Administrative Court in this jurisdiction has also decided the matter in the Company’s favor for the years 2008 through 2011 by acknowledging the Supreme Court’s ruling for the years 2002 through 2005, which eliminated the possibility for future appeals. The tax benefit of deductions related to this tax position taken for the years 2006 through 2007 and 2012 through 2014 totals approximately $15 at current exchange rates. These deductions are currently being challenged by the tax authorities either in the lower courts or at the administrative level and, if resolved in the Company’s favor, will result in the Company recording additional tax benefits, including interest.


11.	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, privacy, 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 for which the amount of any potential losses can be reasonably estimated, the Company currently estimates that the aggregate range of reasonably possible losses in excess of any accrued liabilities is $0 to approximately $225 (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, penalties and any court-mandated fees, at the current exchange rate, are approximately $162. This amount includes additional assessments received from the Brazilian internal revenue authority in April 2016 relating to net operating loss carryforwards used by the Company’s Brazilian subsidiary to offset taxable income that had also been deducted from the authority’s original assessments. The Company has been disputing the disallowances by appealing the assessments since October 2001. 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 filed a lawsuit in Brazilian federal court. In February 2017, the Company lost an additional administrative appeal and filed a similar action in Brazilian federal court. 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 disallowances 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, penalties and any court-mandated fees of approximately $71, 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 had been disputing the assessment within the internal revenue authority’s administrative appeals process. However, in November 2015, the Superior Chamber of Administrative Tax Appeals denied the Company’s final administrative appeal and the Company has filed 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 tax assessment is without merit and that the Company should ultimately prevail. 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

Certain of the Company’s subsidiaries have been subject to investigations, and, in some cases, fines, by governmental authorities in a number of countries related to alleged competition law violations. Substantially all of these matters also have involved other consumer goods companies and/or retail customers. These investigations often continue for several years and can result in substantial fines for violations that are found as well as associated private actions for damages. While the Company cannot predict the final financial impact of pending competition law matters, as these matters may change, the Company evaluates developments in these matters quarterly and accrues liabilities as and when appropriate. The Company’s policy is to comply with antitrust and competition laws and, if a violation of any such laws is found, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. The current status of pending competition law matters as of June 30, 2017 (except as noted below) is set forth below.

▪

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 fines were confirmed by the Court of Appeal in October 2016. The Company is appealing the decision of the Court of Appeal on behalf of the Company and Sara Lee in the French Supreme Court.

▪

In July 2014, the Greek competition law authority issued a statement of objections alleging a restriction of parallel imports into Greece. The Company responded to this statement of objections. In July 2017, the Company received the decision from the Greek competition law authority in which the Company was fined $11 (based on current exchange rates), which approximates reserves previously taken by the Company for this matter. The Company is currently reviewing the decision, and will likely appeal to the Greek courts.

Talcum Powder Matters

The Company has been named as a defendant in civil actions alleging that certain talcum powder products that were sold prior to 1996 were contaminated with asbestos. Most of these actions involve a number of co-defendants from a variety of different industries, including suppliers of asbestos and manufacturers of products that, unlike the Company’s products, were designed to contain asbestos. As of June 30, 2017, there were 174 individual cases pending against the Company in state and federal courts throughout the United States, as compared to 146 cases as of March 31, 2017 and 115 cases as of December 31, 2016. During the three months ended June 30, 2017, 36 new cases were filed and eight cases were resolved by voluntary dismissal or settlement. During the six months ended June 30, 2017, 77 new cases were filed and 18 cases were resolved by voluntary dismissal or settlement. The value of settlements in the quarter and the year-to-date period presented was not material, either individually or in the aggregate, to each such period’s results of operations.

A number of the pending cases are expected to go to trial in 2017. The Company believes that a significant portion of its costs incurred in defending and resolving these claims will be covered by insurance policies issued by several primary and excess insurance carriers, subject to deductibles, exclusions, retentions and policy limits.

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 regarding the ultimate resolution of these matters. Since the amount of any potential losses from these cases currently cannot be reasonably estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to these cases.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

The Company was a defendant in a lawsuit that was brought in Utah federal court by N8 Medical, Inc. (“N8 Medical”), Brigham Young University (“BYU”) and N8 Pharmaceuticals, Inc. (“N8 Pharma”). The complaint, originally filed in November 2013, alleged 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 2016, the Company resolved the claims brought by BYU and N8 Medical. These claims were each resolved in an amount that is not material to the Company’s results of operations. In the first quarter of 2017, the court dismissed the claims of N8 Pharma, which has filed a Notice of Appeal.

ERISA Matter

In June 2016, a putative class action claiming that residual annuity payments made to certain participants in the Colgate-Palmolive Company Employees’ Retirement Income Plan (the “Plan”) did not comply with the Employee Retirement Income Security Act was filed against the Plan, the Company and certain individuals (the “Company Defendants”) in the United States District Court for the Southern District of New York. The Company Defendants filed a motion to dismiss this action, which was denied in February 2017. This action has not yet been certified as a class action. The relief sought includes recalculation of benefits, pre- and post-judgment interest, and attorneys’ fees. The Company is contesting this action vigorously. Since the amount of any potential loss from this case currently cannot be reasonably estimated, the range of possible losses in excess of accrued liabilities disclosed above does not include any amount relating to the case.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

12. 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, Asia Pacific 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, 2016. 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 charges 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.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)

Net sales and Operating profit by segment were as follows:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Net sales
Oral, Personal and Home Care
North America	$	764		$	793		$	1,524		$	1,593
Latin America	1,002			938			1,926			1,786
Europe	584			606			1,142			1,194
Asia Pacific	663			697			1,383			1,440
Africa/Eurasia	241			239			487			470
Total Oral, Personal and Home Care	3,254			3,273			6,462			6,483
Pet Nutrition	572			572			1,126			1,124
Total Net sales	$	3,826		$	3,845		$	7,588		$	7,607

Operating profit
Oral, Personal and Home Care
North America	$	241		$	250		$	474		$	489
Latin America	308			284			577			531
Europe	145			138			285			279
Asia Pacific	205			219			424			438
Africa/Eurasia	45			45			90			88
Total Oral, Personal and Home Care	944			936			1,850			1,825
Pet Nutrition	163			162			320			317
Corporate	(254		)	(154		)	(432		)	(331		)
Total Operating profit	$	853		$	944		$	1,738		$	1,811

Approximately 75% of the Company’s Net sales are generated from markets outside the U.S., with approximately 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, 2017, Corporate Operating profit (loss) included charges of $142 resulting from the 2012 Restructuring Program. For the six months ended June 30, 2017, Corporate Operating profit (loss) included charges of $188 resulting from the 2012 Restructuring Program.

For the three months ended June 30, 2016, Corporate Operating profit (loss) included charges of $59 resulting from the 2012 Restructuring Program. For the six months ended June 30, 2016, Corporate Operating profit (loss) included charges of $114 resulting from the 2012 Restructuring Program.

For further information regarding the 2012 Restructuring Program, refer to Note 4, Restructuring and Related Implementation Charges.

COLGATE-PALMOLIVE COMPANY

Notes to Condensed Consolidated Financial Statements (continued)

(Dollars in Millions Except Share and Per Share Amounts)

(Unaudited)


13.	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 table summarizes the fair value of the Company’s derivative instruments and other financial instruments which are carried at fair value in the Company’s Consolidated Balance Sheets at June 30, 2017 and December 31, 2016:



	Assets					Liabilities
	Account	Fair Value				Account	Fair Value
Designated derivative instruments		6/30/17		12/31/16			6/30/17		12/31/16
Interest rate swap contracts	Other current assets	$	—	$	1	Other accruals	$	—	$	—
Interest rate swap contracts	Other assets	—		1		Other liabilities	1		—
Foreign currency contracts	Other current assets	13		29		Other accruals	28		4
Foreign currency contracts	Other assets	—		5		Other liabilities	26		—
Commodity contracts	Other current assets	—		—		Other accruals	—		—
Total designated		$	13	$	36		$	55	$	4

Derivatives not designated
Foreign currency contracts	Other current assets	$	—	$	—	Other accruals	$	1	$	—
Total not designated		$	—	$	—		$	1	$	—

Total derivative instruments		$	13	$	36		$	56	$	4

Other financial instruments
Marketable securities	Other current assets	$	144	$	23
Total other financial instruments		$	144	$	23

The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of June 30, 2017 and December 31, 2016. The estimated fair value of the Company’s long-term debt, including the current portion, as of June 30, 2017 and December 31, 2016, was $6,710 and $6,717, respectively, and the related carrying value was $6,506 and $6,520, 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 six months ended June 30, 2017 and 2016 was as follows:



	2017									2016
	Foreign Currency Contracts			Interest Rate Swaps			Total			Foreign Currency Contracts			Interest Rate Swaps			Total
Notional Value at June 30,	$	930		$	600		$	1,530		$	347		$	1,250		$	1,597
Three months ended June 30,
Gain (loss) on derivatives	(3		)	—			(3		)	(6		)	1			(5		)
Gain (loss) on hedged items	3			—			3			6			(1		)	5
Six months ended June 30,
Gain (loss) on derivatives	(1		)	(2		)	(3		)	(5		)	9			4
Gain (loss) on hedged items	1			2			3			5			(9		)	(4		)

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, 2017 and 2016 was as follows:



	2017								2016
	Foreign Currency Contracts			Commodity Contracts		Total			Foreign Currency Contracts			Commodity Contracts		Total
Notional Value at June 30,	$	719		$	2	$	721		$	705		$	9	$	714
Three months ended June 30,
Gain (loss) recognized in OCI	(7		)	—		(7		)	5			2		7
Gain (loss) reclassified into Cost of sales	(1		)	—		(1		)	(3		)	1		(2		)
Six months ended June 30,
Gain (loss) recognized in OCI	(20		)	—		(20		)	(9		)	2		(7		)
Gain (loss) reclassified into Cost of sales	2			—		2			—			—		—

The net gain (loss) recognized in OCI for both foreign currency contracts and commodity contracts is generally 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 six months ended June 30, 2017 and 2016 was as follows:



	2017									2016
	Foreign Currency Contracts			Foreign Currency Debt			Total			Foreign Currency Contracts			Foreign Currency Debt			Total
Notional Value at June 30,	$	800		$	572		$	1,372		$	895		$	1,280		$	2,175
Three months ended June 30,
Gain (loss) on instruments	(28		)	(78		)	(106		)	10			26			36
Gain (loss) on hedged items	27			78			105			(7		)	(26		)	(33		)
Six months ended June 30,
Gain (loss) on instruments	(46		)	(93		)	(139		)	(16		)	(23		)	(39		)
Gain (loss) on hedged items	47			93			140			16			23			39

Derivatives not Designated as Hedging Instruments

Derivatives not designated as hedging instruments for the second quarter of 2017 include foreign currency contracts for which the gain or loss on the instrument is recognized in Other (income) expense, net for the three and six months ended June 30, 2017. During the second quarter of 2017, the Company de-designated foreign currency forward contracts previously designated as net investment hedges and entered into new derivative instruments with offsetting terms. Gains or losses on these de-designated derivatives were substantially offset by gains and losses on the new derivative instruments.

Derivatives not designated as hedging instruments for the second quarter of 2016 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, 2017 and 2016 was as follows:



	2017		2016
	Foreign Currency Contracts		Foreign Currency Contracts
Notional Value at June 30,	$	48	$	5
Three months ended June 30,
Gain (loss) on instruments	—		2
Gain (loss) on hedged items	—		(2		)
Six months ended June 30,
Gain (loss) on instruments	—		5
Gain (loss) on hedged items	—		(5		)

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 consisting of bank deposits of $144 with original maturities greater than 90 days carried at fair value (Level 1 valuation) and the current portion of bonds issued by the Argentinian government in the amount of $11 classified as held-to-maturity and carried at amortized cost.

Through its subsidiary in Argentina, the Company has invested in U.S. dollar-linked, devaluation-protected bonds issued by the Argentinian government. As of June 30, 2017, the amortized cost was $11 and their approximate fair value was $11 (Level 2 valuation).

COLGATE-PALMOLIVE COMPANY

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

(Dollars in Millions Except Per Share Amounts)

Executive Overview and Outlook

Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”) 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 75% of the Company’s Net sales are generated from markets outside the U.S., with approximately 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 product segment is managed geographically in five reportable operating segments: North America, Latin America, Europe, Asia Pacific 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. The Company’s products are also sold online through various e-commerce platforms and retailers.

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), a non-GAAP financial measure, and gross profit margin, operating profit, net income and earnings per share, in each case on a GAAP and non-GAAP basis, 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. For additional information regarding non-GAAP financial measures, see “Non-GAAP Financial Measures” below.

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. In addition, the Company has strengthened its capabilities in e-commerce, developing its relationships with online-only retailers and its digital marketing capabilities. 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, distribution and logistics, and advertising and promotional materials, among other things, 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 Per Share Amounts)

Effective December 31, 2015, the Company concluded it no longer met the accounting criteria for consolidation of its Venezuelan subsidiary (“CP Venezuela”) and began accounting for CP Venezuela using the cost method of accounting. As such, effective December 31, 2015, the Company’s Consolidated Balance Sheet no longer includes the assets and liabilities of CP Venezuela. Prior periods have not been restated and CP Venezuela’s Net sales, Operating profit and Net income are included in the Company’s Consolidated Statements of Income through December 31, 2015.

Since January 1, 2016, under the cost method of accounting, the Company no longer includes the local operating results of CP Venezuela in its Consolidated Financial Statements and includes income relating to CP Venezuela only to the extent it receives cash for sales of inventory to CP Venezuela or for dividends or royalties remitted by CP Venezuela, all of which have been immaterial. Although CP Venezuela’s local operating results are no longer included in the Company’s Consolidated Financial Statements for accounting purposes, under current tax rules, the Company is required to continue including CP Venezuela in its consolidated U.S. federal income tax return. In the first quarter of 2016, Provision for income taxes included a $210 U.S. income tax benefit principally related to changes in Venezuela’s foreign exchange regime implemented in March 2016.

In the fourth quarter of 2012, the Company commenced a Global Growth and Efficiency Program (as expanded in 2014 and 2015, as described below, the “2012 Restructuring Program”) for sustained growth. The program’s initiatives are expected to help the Company ensure sustained 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 (the “Board”) approved an expansion of the 2012 Restructuring Program to take advantage of additional savings opportunities. On October 29, 2015, the Board 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 through December 31, 2017. The Board approved the implementation plan for this expansion on March 10, 2016.

The initiatives under the 2012 Restructuring Program continue to be focused on the following areas:


▪	Expanding Commercial Hubs


▪	Extending Shared Business Services and Streamlining Global Functions


▪	Optimizing Global Supply Chain and Facilities

Implementation of the 2012 Restructuring Program remains on track. The Company continually seeks new projects and ways to advance the implementation of existing projects in order to accelerate savings under the program and, given the challenging market conditions and slowing category growth experienced in the first six months of 2017, it has identified additional opportunities and now estimates savings and charges to be at the upper end of its previously disclosed ranges. Savings, substantially all of which are expected to increase future cash flows, are now projected to be in the range of $455 to $495 pretax ($425 to $475 aftertax) annually, once all projects are approved and implemented, as compared to the previous estimate of $430 to $495 pretax ($400 to $475 aftertax). Cumulative pretax charges resulting from the 2012 Restructuring Program, once all phases are approved and implemented, are now estimated to be $1,500 to $1,585 ($1,120 to $1,170 aftertax) as compared to the previous estimate of $1,405 to $1,585 ($1,050 to $1,170 aftertax).

In the three and six months ended June 30, 2017, the Company incurred aftertax costs of $115 and $146, respectively, associated with the 2012 Restructuring Program.

For more information regarding the 2012 Restructuring Program, see “Restructuring and Related Implementation Charges” below.

COLGATE-PALMOLIVE COMPANY

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

(Dollars in Millions Except Per Share Amounts)

Looking forward, the Company expects global macroeconomic and market conditions to remain highly challenging and category growth rates to continue to be slow. While the global marketplace in which the Company operates has always been highly competitive, the Company continues to experience heightened competitive activity in certain markets from strong local competitors and from other large multinational companies, some of which have greater resources than the Company does. Such activities have included more aggressive product claims and marketing challenges, as well as increased promotional spending and geographic expansion. In addition, the emergence of new sales channels for the Company’s products, such as e-commerce, may affect consumer preferences and market dynamics. Given that approximately 75% of the Company’s Net sales originate in markets outside the U.S., the Company continues to experience volatile foreign currency fluctuations and high raw and packaging material costs, driven by foreign exchange transaction costs. While the Company has taken, and will continue to take, measures to mitigate the effect of these conditions, should they persist, they could adversely affect the Company’s future results. For additional information on factors that could impact the Company’s results, see “Cautionary Statement on Forward-Looking Statements” below.

The Company believes it is well prepared to meet the challenges ahead due to its strong financial condition, experience operating in challenging environments and continued focus on the Company’s strategic initiatives: engaging to build our brands; innovation for growth; effectiveness and efficiency; and leading to win. This focus, together with the strength of the Company’s global brands, its broad international presence in both developed and emerging markets and initiatives, such as the 2012 Restructuring Program, should position the Company well to increase shareholder value over the long term.

COLGATE-PALMOLIVE COMPANY

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

(Dollars in Millions Except Per Share Amounts)

Results of Operations

Three Months

Worldwide Net sales were $3,826 in the second quarter of 2017, down 0.5% from the second quarter of 2016, as net selling price increases of 1.0% were more than offset by volume declines of 1.0% and negative foreign exchange of 0.5%. Organic sales (Net sales excluding the impact of foreign exchange, acquisitions and divestments), a non-GAAP financial measure, were even with the second quarter of 2016. A reconciliation of net sales growth to organic sales growth is provided under “Non-GAAP Financial Measures” below.

Net sales in the Oral, Personal and Home Care product segment were $3,254 in the second quarter of 2017, down 0.5% from the second quarter of 2016, as net selling price increases of 1.0% were more than offset by volume declines of 1.0% and negative foreign exchange of 0.5%. Organic sales in the Oral, Personal and Home Care product segment were even with the second quarter of 2016.

The Company’s share of the global toothpaste market was 43.6% on a year-to-date basis, down 0.2 share points from the year ago period, and its share of the global manual toothbrush market was 32.8% on a year-to-date basis, down 0.5 share points from the year ago period. Year-to-date market shares in toothpaste were up in Africa/Eurasia and down in North America, Latin America, Europe and Asia Pacific versus the comparable 2016 period. In the manual toothbrush category, year-to-date market shares were up in Africa/Eurasia and down in North America, Latin America, Europe and Asia Pacific versus the comparable 2016 period. For additional information regarding market shares, see “Market Share Information” below.

Net sales in the Hill’s Pet Nutrition segment were $572 in the second quarter of 2017, even with the second quarter of 2016, as net selling price increases of 2.0% were offset by volume declines of 1.5% and negative foreign exchange of 0.5%. Organic sales in the Hill’s Pet Nutrition segment increased 0.5% in the second quarter of 2017.

COLGATE-PALMOLIVE COMPANY

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

(Dollars in Millions Except Per Share Amounts)

Gross Profit/Margin

Worldwide Gross profit decreased to $2,300 in the second quarter of 2017 from $2,304 in the second quarter of 2016. Gross profit in both periods included charges resulting from the 2012 Restructuring Program. Excluding these charges in both periods, Gross profit increased to $2,321 in the second quarter of 2017 from $2,316 in the second quarter of 2016. This increase in Gross profit reflects an increase of $17 resulting from higher Gross profit margin in the second quarter of 2017, partially offset by a decrease of $12, as a result of lower Net sales.

Worldwide Gross profit margin increased to 60.1% in the second quarter of 2017 from 59.9% in the second quarter of 2016. Excluding charges resulting from the 2012 Restructuring Program in both periods, Gross profit margin was 60.7% in the second quarter of 2017, an increase of 50 basis points (bps) from 60.2% in the second quarter of 2016. This increase in Gross profit margin was primarily driven by cost savings from the Company’s funding-the-growth initiatives (160 bps) and the 2012 Restructuring Program (10 bps), and higher pricing (40 bps), partially offset by higher raw and packaging material costs (180 bps), which included foreign exchange transaction costs.