Colgate-Palmolive Company 10-K 2011
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 2010
For the transition period from to .
Commission File Number 1-644
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code 212-310-2000
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes T No £
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ NoT
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 T 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 T No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £>
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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£ NoT>
The aggregate market value of Colgate-Palmolive Company Common Stock held by non-affiliates as of June 30, 2010 (the last business day of its most recently completed second quarter) was approximately $38.1 billion.
There were 493,871,199 shares of Colgate-Palmolive Company Common Stock outstanding as of January 31, 2011.
DOCUMENTS INCORPORATED BY REFERENCE:
Table of Contents
(a) General Development of the Business
Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”) is a leading consumer products company whose products are marketed in over 200 countries and territories throughout the world. Colgate was founded in 1806 and incorporated under the laws of the State of Delaware in 1923.
For recent business developments and other information, refer to the information set forth under the captions “Executive Overview and Outlook,” “Results of Operations” and “Liquidity and Capital Resources” in Part II, Item 7 of this report.
(b) Financial Information about Segments
Worldwide Net sales and Operating profit by business segment and geographic region during the last three years appear under the caption “Results of Operations” in Part II, Item 7 of this report and in Note 15 to the Consolidated Financial Statements.
(c) Narrative Description of the Business
The Company manages its business in two product segments: Oral, Personal and Home Care; and Pet Nutrition. Colgate is a global leader in Oral Care with the leading toothpaste and manual toothbrush brands throughout many parts of the world according to value share data provided by ACNielsen. Colgate’s Oral Care products include Colgate Total and Colgate Max Fresh toothpastes, Colgate 360™ manual toothbrushes and Colgate and Colgate Plax mouth rinses. Colgate’s Oral Care business also includes dental floss and pharmaceutical products for dentists and other oral health professionals.
Colgate is a leader in many product categories of the Personal Care market with global leadership in liquid hand soap. Colgate’s Personal Care products include Palmolive and Softsoap brand shower gels, Palmolive, Irish Spring and Protex bar soaps and Speed Stick and Lady Speed Stick deodorants and antiperspirants. Colgate is the market leader in liquid hand soap in the U.S. with its line of Softsoap brand products according to value share data provided by ACNielsen. Colgate’s Personal Care business outside the U.S. also includes Palmolive and Caprice shampoo and conditioners.
Colgate manufactures and markets a wide array of products for Home Care, including Palmolive and Ajax dishwashing liquids, Fabuloso and Ajax household cleaners and Murphy’s Oil Soap. Colgate is a market leader in fabric conditioners with leading brands including Suavitel in Latin America and Soupline in Europe.
Sales of Oral, Personal and Home Care products accounted for 43%, 22% and 22%, respectively, of total worldwide sales in 2010. Geographically, Oral Care is a significant part of the Company’s business in Greater Asia/Africa, comprising approximately 70% of sales in that region for 2010.
Colgate, through its Hill’s Pet Nutrition segment (Hill’s), is a world leader in specialty pet nutrition products for dogs and cats with products marketed in over 95 countries around the world. Hill’s markets pet foods primarily under two trademarks: Hill’s Science Diet, which is sold by authorized pet supply retailers and veterinarians for everyday nutritional needs; and Hill’s Prescription Diet, a range of therapeutic products sold by veterinarians and authorized pet supply retailers to help nutritionally manage disease conditions in dogs and cats. Sales of Pet Nutrition products accounted for 13% of the Company’s total worldwide sales in 2010.
For more information regarding the Company’s worldwide sales by product categories, refer to Notes 1 and 15 to the Consolidated Financial Statements.
Research and Development
Strong research and development capabilities and alliances enable Colgate to support its many brands with technologically sophisticated products to meet consumers’ oral, personal, home care and pet nutrition needs. The Company’s spending related to research and development activities was $256 million, $256 million and $240 million during 2010, 2009 and 2008, respectively.
Distribution; Raw Materials; Competition; Trademarks and Patents
The Company’s products are generally marketed by a direct sales force at individual operating subsidiaries or business units. In some instances, distributors or brokers are used. No single customer accounts for 10% or more of the Company’s sales.
Most raw and packaging materials are purchased from other companies and are available from several sources. No single raw or packaging material represents, and no single supplier provides, a significant portion of the Company’s total material requirements. For certain materials, however, new suppliers may have to be qualified under industry, government and Colgate standards, which can require additional investment and take some period of time. Raw and packaging material commodities such as resins, tallow, essential oils, tropical oils, corn and soybeans are subject to market price variations.
The Company’s products are sold in a highly competitive global marketplace, which has experienced increased trade concentration and the growing presence of large-format retailers and discounters. Products similar to those produced and sold by the Company are available from competitors in the U.S. and overseas. Certain of the Company’s competitors are larger and have greater resources than the Company. In addition, private label brands sold by retail trade chains are a source of competition for certain product lines of the Company. Product quality and innovation, brand recognition, marketing capability and acceptance of new products largely determine success in the Company’s business segments.
Trademarks are considered to be of material importance to the Company’s business. The Company follows a practice of seeking trademark protection in the U.S. and throughout the world where the Company’s products are sold. Principal global and regional trademarks include Colgate, Palmolive, Mennen, Speed Stick, Lady Speed Stick, Softsoap, Irish Spring, Protex, Sorriso, Kolynos, Elmex, Tom’s of Maine, Ajax, Axion, Fabuloso, Soupline, Suavitel, Hill’s Science Diet and Hill’s Prescription Diet. The Company’s rights in these trademarks endure for as long as they are used and registered. Although the Company actively develops and maintains a portfolio of patents, no single patent is considered significant to the business as a whole.
The Company has programs that are designed to ensure that its operations and facilities meet or exceed standards established by applicable environmental rules and regulations. Capital expenditures for environmental control facilities totaled $24 million for 2010. For future years, expenditures are currently expected to be of a similar magnitude. For additional information regarding environmental matters refer to Note 13 to the Consolidated Financial Statements.
As of December 31, 2010, the Company employed approximately 39,200 employees.
Executive Officers of the Registrant
The following is a list of executive officers as of February 24, 2011:
Each of the executive officers listed above has served the registrant or its subsidiaries in various executive capacities for the past five years with the exception of Victoria L. Dolan, who joined the Company in 2008 as Vice President, Finance and Strategic Planning, Colgate Europe. Ms. Dolan joined Colgate from Marriott International, Inc. (“Marriott”), where she served as Executive Vice President, Finance and Chief Financial Officer of its vacation ownership division. Prior to joining Marriott in 2000, Ms. Dolan spent nine years at The Coca-Cola Company in several leadership positions that included Chief Financial Officer and Executive Vice President for the Japan division.
Stephen C. Patrick retired as Chief Financial Officer as of December 31, 2010 and was succeeded by Dennis J. Hickey effective January 1, 2011. Prior to becoming Chief Financial Officer, Mr. Hickey served as Vice President and Corporate Controller, a position he assumed in 1998.
Under the Company’s By-Laws, the officers of the corporation hold office until their respective successors are chosen and qualified or until they have resigned, retired or been removed by the affirmative vote of a majority of the Board of Directors. There are no family relationships between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was elected.
(d) Financial Information about Geographic Areas
For financial data by geographic region, refer to the information set forth under the caption “Results of Operations” in Part II, Item 7, of this report and in Note 15 to the Consolidated Financial Statements. For a discussion of risks associated with our international operations, see Item 1A, “Risk Factors.”
(e) Available Information
The Company’s web site address is www.colgate.com. The information contained on the Company’s web site is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company makes available, free of charge, on its web site its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its interactive data files posted pursuant to Rule 405 of Regulation S-T, its current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practicable after the Company has electronically filed such material with, or furnished it to, the United States Securities and Exchange Commission (the SEC). Also available on the Company’s web site are the Company’s Code of Conduct and Corporate Governance Guidelines, the charters of the Committees of the Board of Directors, reports under Section 16 of the Exchange Act of transactions in Company stock by directors and officers and its proxy statements.
Set forth below is a summary of the material risks to an investment in our securities. These risks are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also have an adverse effect on us. If any of the below risks actually occur, our business, results of operations, cash flows or financial condition could suffer, which might cause the value of our securities to decline.
We face risks associated with significant international operations.
We operate on a global basis with approximately 75% of our net sales coming from markets outside the U.S. While geographic diversity helps to reduce the Company’s exposure to risks in any one country or part of the world, it also means that we are subject to the full range of risks associated with significant international operations, including, but not limited to:
These risks could have a significant impact on our ability to sell our products on a competitive basis in international markets and may have a material adverse effect on our results of operations, cash flows and financial condition. We manage our foreign currency exposure to minimize the impact on earnings of foreign currency rate movements through a combination of cost-containment measures, selling price increases and foreign currency hedging. We cannot provide assurances, however, that these measures will succeed in offsetting any negative impact of foreign currency rate movements on our business and results of operations.
For example, in 2010 our results of operations were adversely impacted by the designation of Venezuela as hyperinflationary and the subsequent currency devaluations in Venezuela. Going forward, another currency devaluation or continued exchange control limitations in Venezuela could have an adverse impact on our results of operations. For additional information regarding the risks associated with our operations in Venezuela, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Overview and Outlook” and Note 14 to the Consolidated Financial Statements.
Uncertain global economic conditions and disruptions in the credit markets may adversely affect our business.
Uncertain global economic conditions could adversely affect our business. Recent global economic trends pose challenges to our business and could result in declining revenues, profitability and cash flow. Although we continue to devote significant resources to support our brands, during periods of economic uncertainty consumers may switch to economy brands, which could reduce sales volumes of our products or result in a shift in our product mix from higher margin to lower margin product offerings. Additionally, retailers may increase pressure on our selling prices or increase promotional activity for lower-priced or value offerings as they seek to maintain sales volumes and margins.
While we currently generate significant cash flows from our ongoing operations and have access to global credit markets through our various financing activities, any disruption in the credit markets could limit the availability of credit or the ability or willingness of financial institutions to extend credit, which could adversely affect our liquidity and capital resources or significantly increase our cost of capital. If any financial institutions that are parties to our revolving credit facility supporting our commercial paper program or other financing arrangements, such as interest rate or foreign exchange hedging instruments, were to declare bankruptcy or become insolvent, they may be unable to perform under their agreements with us. This could leave us with reduced borrowing capacity or unhedged against certain interest rate or foreign currency exposures. In addition, tighter credit markets may lead to business disruptions for certain of our suppliers, contract manufacturers or trade customers which could, in turn, adversely impact our business.
Significant competition in our industry could adversely affect our business.
We face vigorous competition around the world, including from other large, multinational companies, some of which have greater resources than we do. We face this competition in several aspects of our business, including, but not limited to, the pricing of products, promotional activities and new product introductions. Such competition also extends to administrative and legal challenges of product claims and advertising. Our ability to compete also depends on the strength of our brands and on our ability to defend our patent, trademark and trade dress rights against legal challenges brought by competitors.
We may be unable to anticipate the timing and scale of such initiatives or challenges by competitors or to successfully counteract them, which could harm our business. In addition, the cost of responding to such initiatives and challenges, both in terms of management time and out-of-pocket expenses, may affect our performance in the relevant period. A failure to compete effectively could adversely affect our growth and profitability.
Changes in the policies of our retail trade customers and increasing dependence on key retailers in developed markets may adversely affect our business.
Our products are sold in a highly competitive global marketplace which has experienced increased trade concentration and the growing presence of large-format retailers and discounters. With the growing trend toward retail trade consolidation, we are increasingly dependent on key retailers, and some of these retailers, including large-format retailers, may have greater bargaining strength than we do. They may use this leverage to demand higher trade discounts, allowances or slotting fees, which could lead to reduced sales or profitability. We may also be negatively affected by changes in the policies of our retail trade customers, such as inventory de-stocking, limitations on access to shelf space, delisting of our products, environmental or sustainability initiatives and other conditions. In addition, private label products sold by retail trade chains, which are typically sold at lower prices than branded products, are a source of competition for certain of our product lines, including liquid hand soap and shower gel.
The growth of our business depends on the successful development and introduction of innovative new products.
Our growth depends on the continued success of existing products as well as the successful development and introduction of innovative new products and line extensions, which face the uncertainty of retail and consumer acceptance and reaction from competitors. In addition, our ability to create new products and line extensions and to sustain existing products is affected by whether we can successfully:
The failure to develop and launch successful new products could hinder the growth of our business and any delay in the development or launch of a new product could result in the Company not being the first to market, which could compromise our competitive position.
Volatility in material and other costs and our increasing dependence on key suppliers could adversely impact our profitability.
Raw and packaging material commodities such as resins, tallow, essential oils, tropical oils, corn and soybeans are subject to wide price variations. Increases in the costs and availability of these commodities and the costs of energy, transportation and other necessary services may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies such as in manufacturing and distribution. In addition, our move to global suppliers for materials and other services in order to achieve cost reductions and simplify our business has resulted in an increasing dependence on key suppliers. For certain materials, new suppliers may have to be qualified under industry, government and Colgate standards, which can require additional investment and take some period of time. While we believe that the supplies of raw materials needed to manufacture our products are adequate, global economic conditions, supplier capacity constraints and other factors could affect the availability of, or prices for, those raw materials.
Damage to our reputation could have an adverse effect on our business.
Maintaining our strong reputation with consumers and our trade partners globally is critical to selling our branded products. Accordingly, we devote significant time and resources to programs designed to protect and preserve our reputation, such as our Ethics and Compliance, Sustainability, Brand Protection and Product Safety, Regulatory and Quality initiatives.
Adverse publicity about product safety or quality, or allegations of product contamination or tampering, whether or not valid, may result in a product recall or reduced demand for our products. A significant product recall could tarnish the image of the affected brands and cause consumers to choose other products.
In addition, from time to time, third parties sell counterfeit versions of our products, which are often inferior or may pose safety risks. As a result, consumers of our brands could confuse our products with these counterfeit products, which could cause them to refrain from purchasing our brands in the future and in turn could impair our brand equity and adversely affect our business.
Similarly, adverse publicity regarding our responses to health concerns, our environmental impacts, including packaging, energy and water use and waste management, or other sustainability issues, whether or not deserved, could jeopardize our reputation. Damage to our reputation or loss of consumer confidence in our products for any of these reasons could have a material adverse effect on our business, as well as require resources to rebuild our reputation.
Our business is subject to regulation in the U.S. and abroad.
Our business is subject to extensive regulation in the U.S. and abroad. Such regulation applies to most aspects of our products, including their development, ingredients, manufacture, packaging, labeling, storage, transportation, distribution, export, import, advertising and sale. Also, our selling practices are regulated by competition law authorities in the U.S. and abroad. U.S. federal authorities, including the Food and Drug Administration (FDA), the Federal Trade Commission, the Consumer Product Safety Commission and the Environmental Protection Agency (EPA), regulate different aspects of our business, along with parallel authorities at the state and local level and comparable authorities overseas.
While it is our policy and practice to comply with all regulatory requirements applicable to our business, a finding that we are in violation of, or out of compliance with, applicable laws or regulations could subject us to civil remedies, including fines, damages, injunctions or product recalls, or criminal sanctions, any of which could have a material adverse effect on our business. Even if a claim is unsuccessful, is without merit or is not fully pursued, the negative publicity surrounding such assertions regarding our products, processes or business practices could adversely affect our reputation and brand image. For information regarding our European competition matters, see Item 3, “Legal Proceedings” and Note 13 to the Consolidated Financial Statements.
In addition, new or more stringent regulations, or more restrictive interpretations of existing regulations, could have a material adverse impact on our business. For example, from time to time, various regulatory authorities and consumer groups in Europe, the U.S. and other countries request or conduct reviews of the use of various ingredients in consumer products. Triclosan, an ingredient used in Colgate Total toothpaste and certain of our liquid and bar soaps, is an example of an ingredient which has undergone reviews by various regulatory authorities around the world. The reviews by regulatory authorities of triclosan and other ingredients continue to support their current uses in our products. However, a finding by a regulatory authority that triclosan, or any other of our ingredients, should not be used in certain consumer products or should otherwise be newly regulated, could have a material adverse impact on our business, as could negative reactions by our consumers, trade customers or non-governmental organizations to our use of such ingredients. Additionally, an inability to timely obtain regulatory approval of new or reformulated products containing alternative ingredients could likewise have a material adverse effect on our business.
Our business is subject to the risks inherent in global manufacturing and sourcing activities.
The Company is engaged in manufacturing and sourcing of products and materials on a global scale. We are subject to the risks inherent in such activities, including, but not limited to:
While we have business continuity and contingency plans for key manufacturing sites and the supply of raw materials, significant disruption of manufacturing for any of the above reasons could interrupt product supply and, if not remedied, have an adverse impact on our business. In addition, if our products, or raw materials contained in our products, are found or perceived to be defective or unsafe, we may need to recall some of our products. Such a recall could cause our reputation and brand image to be diminished and, consequently, we could lose market share or become subject to liability claims, any of which could have a material adverse effect on our business.
A failure of a key information technology system could adversely impact the Company’s ability to conduct business.
The Company relies extensively on information technology systems, including some which rely on third-party service providers, in order to conduct business. These systems include, but are not limited to, programs and processes relating to communicating within the Company and with other parties, ordering and managing materials from suppliers, converting materials to finished products, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory legal or tax requirements and other processes involved in managing the business. Although the Company has network security measures in place, the systems may be vulnerable to computer viruses, security breaches and other similar disruptions from unauthorized users. While the Company has business continuity plans in place, if the systems are damaged or cease to function properly due to any number of causes, including the poor performance or failure of third-party service providers, catastrophic events, power outages, security breaches, network outages, failed upgrades or other similar events, and if the business continuity plans do not effectively resolve such issues on a timely basis, the Company may suffer interruptions in the ability to manage or conduct business which may adversely impact the Company’s business.
Our success depends upon our ability to attract and retain key employees and the succession of senior management.
Our success largely depends on the performance of our management team and other key employees. If we are unable to attract and retain talented, highly qualified senior management and other key people, our future operations could be adversely affected. In addition, if we are unable to effectively provide for the succession of senior management, including our Chief Executive Officer, our business may be materially adversely affected. While we follow a disciplined, ongoing succession planning process and have succession plans in place for senior management and other key executives, these do not guarantee that the services of qualified senior executives will continue to be available to us at particular moments in time.
The Company owns or leases approximately 340 properties which include manufacturing, distribution, research and office facilities worldwide. Our corporate headquarters is located in leased property at 300 Park Avenue, New York, New York.
In the U.S., the Company operates approximately 60 properties of which 15 are owned. Major U.S. manufacturing and warehousing facilities used by the Oral, Personal and Home Care segment of our business are located in Morristown, New Jersey; Morristown, Tennessee; and Cambridge, Ohio. The Pet Nutrition segment has major facilities in Bowling Green, Kentucky; Topeka, Kansas; Emporia, Kansas; Commerce, California; and Richmond, Indiana. The primary research center for Oral, Personal and Home Care products is located in Piscataway, New Jersey and the primary research center for Pet Nutrition products is located in Topeka, Kansas. Our global data center is also located in Piscataway, New Jersey.
Overseas, the Company operates approximately 280 properties, of which 72 are owned, in over 70 countries. Major overseas facilities used by the Oral, Personal and Home Care segment of our business are located in Australia, Brazil, China, Colombia, France, Italy, Mexico, Poland, South Africa, Thailand, Venezuela, Vietnam and elsewhere throughout the world. The Pet Nutrition segment has a major facility in the Czech Republic.
All of the facilities we operate are well maintained and adequate for the purpose for which they are intended.
As a global company serving consumers in more than 200 countries and territories, the Company is routinely subject to a wide range of legal proceedings. These include disputes relating to intellectual property, contracts, product liability, advertising, foreign exchange controls, antitrust and trade regulation, as well as labor and employment, environmental and tax matters.
In 2001, the Central Bank of Brazil sought to impose a substantial fine on the Company’s Brazilian subsidiary (approximately $157 million at the current exchange rate) based on alleged foreign exchange violations in connection with the financing of the Company’s 1995 acquisition of the Kolynos oral care business from Wyeth (formerly American Home Products) (the Seller), as described in the Company’s Form 8-K dated January 10, 1995. The Company appealed the imposition of the fine to the Brazilian Monetary System Appeals Council (the Council), and on January 30, 2007, the Council decided the appeal in the Company’s favor, dismissing the fine entirely. However, certain tax and civil proceedings that began as a result of this Central Bank matter are still outstanding as described below.
The Brazilian internal revenue authority has disallowed interest deductions and foreign exchange losses taken by the Company’s Brazilian subsidiary for certain years in connection with the financing of the Kolynos acquisition. The tax assessments with interest, at the current exchange rate, approximate $123 million. The Company has been disputing the disallowances by appealing the assessments within the internal revenue authority’s appellate process with the following results to date:
The Company has filed a motion for reconsideration with the First Taxpayers’ Council and further appeals are available within the Brazilian federal courts. The Company intends to challenge these assessments vigorously. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel and other advisors, that the disallowances are without merit and that the Company should ultimately prevail on appeal, if necessary, in the Brazilian federal courts.
In 2002, the Brazilian Federal Public Attorney filed a civil action against the federal government of Brazil, Laboratorios Wyeth-Whitehall Ltda. (the Brazilian subsidiary of the Seller) and the Company, as represented by its Brazilian subsidiary, seeking to annul an April 2000 decision by the Brazilian Board of Tax Appeals that found in favor of the Seller’s Brazilian subsidiary on the issue of whether it had incurred taxable capital gains as a result of the divestiture of Kolynos. The action seeks to make the Company’s Brazilian subsidiary jointly and severally liable for any tax due from the Seller’s Brazilian subsidiary. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the Company should ultimately prevail in this action. The Company intends to challenge this action vigorously.
In December 2005, the Brazilian internal revenue authority issued to the Company’s Brazilian subsidiary a tax assessment with interest and penalties of approximately $73 million, at the current exchange rate, based on a claim that certain purchases of U.S. Treasury bills by the subsidiary and their subsequent disposition during the period 2000 to 2001 were subject to a tax on foreign exchange transactions. The Company is disputing the assessment within the internal revenue authority’s administrative appeals process. In October 2007, the Second Board of Taxpayers, which has jurisdiction over these matters, ruled in favor of the internal revenue authority. In January 2008, the Company appealed this decision to the next administrative level. Although there can be no assurances, management believes, based on the advice of its Brazilian legal counsel, that the tax assessment is without merit and that the Company should prevail on appeal either at the administrative level or, if necessary, in the Brazilian federal courts. The Company intends to challenge this assessment vigorously.
European Competition Matters
Since February 2006, the Company has learned that investigations relating to potential competition law violations involving the Company’s subsidiaries had been commenced by governmental authorities in the European Union (EU), Belgium, France, Germany, Greece, Italy, The Netherlands, Romania, Spain, Switzerland and the United Kingdom (UK). The Company understands that many of these investigations also involve other consumer goods companies and/or retail customers. While several of the investigations are ongoing, there have been the following results to date:
Currently, formal claims of violations, or statements of objections, are pending against the Company as follows:
The Company has responded, or will have an opportunity to respond, to each of these formal claims of violations. Investigations are ongoing in the EU, Belgium, France and Greece, but no formal claims of violations have been filed in these jurisdictions except in France as noted above.
The Company’s policy is to comply with antitrust and competition laws and, if a violation of any such laws is found, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. The Company has undertaken a comprehensive review of its selling practices and related competition law compliance in Europe and elsewhere and, where the Company has identified a lack of compliance, it has undertaken remedial action. Competition and antitrust law investigations often continue for several years and can result in substantial fines for violations that are found. Such fines, depending on the gravity and duration of the infringement as well as the value of the sales involved, have amounted, in some cases, to hundreds of millions of dollars. While the Company cannot predict the final financial impact of these competition law issues as these matters may change, the Company has taken and will, as necessary, take additional reserves as and when appropriate.
In October 2007, a putative class action claiming that certain aspects of the cash balance portion of the Colgate-Palmolive Company Employees’ Retirement Income Plan (the Plan) do not comply with the Employee Retirement Income Security Act was filed against the Plan and the Company in the United States District Court for the Southern District of New York. Specifically, Proesel, et al. v. Colgate-Palmolive Company Employees’ Retirement Income Plan, et al. alleges improper calculation of lump sum distributions, age discrimination and failure to satisfy minimum accrual requirements, thereby resulting in the underpayment of benefits to Plan participants. Two other putative class actions filed earlier in 2007, Abelman, et al. v. Colgate-Palmolive Company Employees’ Retirement Income Plan, et al., in the United States District Court for the Southern District of Ohio, and Caufield v. Colgate-Palmolive Company Employees’ Retirement Income Plan, in the United States District Court for the Southern District of Indiana, both alleging improper calculation of lump sum distributions and, in the case of Abelman, claims for failure to satisfy minimum accrual requirements, were transferred to the Southern District of New York and consolidated with Proesel into one action, In re Colgate-Palmolive ERISA Litigation. The complaint in the consolidated action alleges improper calculation of lump sum distributions and failure to satisfy minimum accrual requirements, but does not include a claim for age discrimination. The relief sought includes recalculation of benefits in unspecified amounts, pre- and post-judgment interest, injunctive relief and attorneys’ fees. This action has not been certified as a class action as yet. The parties are in discussions via non-binding mediation to determine whether the action can be settled. The Company and the Plan intend to contest this action vigorously should the parties be unable to reach a settlement.
While it is possible that the Company’s cash flows and results of operations in a particular quarter or year could be materially affected by the impact of the above-noted contingencies, it is the opinion of management that these matters will not have a material impact on the Company’s financial position, ongoing results of operations or cash flows.
For information regarding the market for the Company’s common stock, including quarterly market prices and dividends, refer to “Market and Dividend Information.” For information regarding the number of common shareholders of record refer to “Historical Financial Summary.” For information regarding the securities authorized for issuance under our equity compensation plans, refer to “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” included in Item 12 of this report.
As a result of recent rules issued by the Internal Revenue Service related to employer stock held in defined contribution plans, the Company issued a notice of redemption with respect to the 2,405,192 shares of Preference stock outstanding on December 29, 2010. At the direction of the Company’s Employee Stock Ownership Plan trustee, the preference shares were converted into 19,241,536 shares of common stock. The common stock for the conversion was issued from treasury shares.
Issuer Purchases of Equity Securities
On February 4, 2010, the Company’s Board of Directors (the Board) authorized a share repurchase program (the 2010 Program). The 2010 Program authorizes the repurchase of up to 40 million shares of the Company’s common stock. The Board’s authorization also provides for share repurchases on an ongoing basis to fulfill certain requirements of the Company’s compensation and benefit programs. The shares are repurchased from time to time in open market transactions or privately negotiated transactions at the Company’s discretion, subject to market conditions, customary blackout periods and other factors.
The following table shows the stock repurchase activity for each of the three months in the quarter ended December 31, 2010:
Refer to the information set forth under the caption “Historical Financial Summary.”
(Dollars in Millions Except Per Share Amounts)
Executive Overview and Outlook
Colgate-Palmolive Company seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers on a global basis with products that make their lives healthier and more enjoyable.
To this end, the Company is tightly focused on two product segments: Oral, Personal and Home Care; and Pet Nutrition. Within these segments, the Company follows a closely defined business strategy to develop and increase market leadership positions in key product categories. These product categories are prioritized based on their capacity to maximize the use of the organization’s core competencies and strong global equities and to deliver sustainable long-term growth.
Operationally, the Company is organized along geographic lines with management teams having responsibility for the business and financial results in each region. The Company competes in more than 200 countries and territories worldwide with established businesses in all regions contributing to the Company’s sales and profitability. This geographic diversity and balance help to reduce the Company’s exposure to business and other risks in any one country or part of the world.
The Oral, Personal and Home Care segment is operated through four reportable operating segments: North America, Latin America, Europe/South Pacific and Greater Asia/Africa, all of which sell to a variety of retail and wholesale customers and distributors. The Company, through Hill’s Pet Nutrition, also competes on a worldwide basis in the pet nutrition market, selling its products principally through specialty pet retailers and the veterinary profession.
On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, sales (including volume, pricing and foreign exchange components), organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments), gross profit margin, operating profit, net income and earnings per share, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators, and the Company’s corporate governance practices (including the Company’s Code of Conduct), help to maintain business health and strong internal controls.
To achieve its business and financial objectives, the Company focuses the organization on initiatives to drive and fund growth. The Company seeks to capture significant opportunities for growth by identifying and meeting consumer needs within its core categories, through its focus on innovation and the deployment of valuable consumer and shopper insights in the development of successful new products regionally, which are then rolled out on a global basis. To enhance these efforts, the Company has developed key initiatives to build strong relationships with consumers, dental and veterinary professionals and retail customers. Growth opportunities are greater in those areas of the world in which economic development and rising consumer incomes expand the size and number of markets for the Company’s products.
The investments needed to fund this growth are developed through continuous, Company-wide initiatives to lower costs and increase effective asset utilization through which the Company seeks to become even more effective and efficient throughout its businesses. The Company also continues to prioritize its investments toward its higher margin businesses, specifically Oral Care, Personal Care and Pet Nutrition.
As disclosed in “Item 1A. Risk Factors”, with approximately 75% of its Net sales generated outside of the United States, the Company is exposed to changes in economic conditions and foreign currency exchange rates, as well as political uncertainty in some countries, all of which could impact future operating results.
(Dollars in Millions Except Per Share Amounts)
In particular, as a result of the devaluations of the Venezuelan bolivar fuerte, described more fully in Note 14 to the Consolidated Financial Statements, the local currency operations of the Company’s Venezuelan subsidiary (CP Venezuela) now translate into fewer U.S. dollars, which had, and will continue to have, an adverse effect on the Company’s reported results. The Company has taken, and continues to take, actions to mitigate the impact of both devaluations on its operations. Additionally, the Venezuelan government continues to impose currency exchange controls and during 2010 a new currency market was established which replaced the free-floating parallel market. Although CP Venezuela continues to have limited access to U.S. dollars at the official rate and currently only for imported goods, under the current restrictions, it is not permitted to access the new currency market. The Company’s business in Venezuela and our ability to repatriate its earnings continue to be negatively affected by these difficult conditions and would be further negatively affected by additional devaluations or the imposition of additional currency exchange controls. For the year ended December 31, 2010, CP Venezuela represented 4% of the Company’s consolidated Net sales. At December 31, 2010, CP Venezuela’s monetary local currency net asset position was approximately $200.
Looking forward, we expect global macroeconomic and market conditions to remain highly challenging. While the global marketplace in which we operate has always been highly competitive, the Company has recently experienced heightened competitive activity in certain markets from other large multinational companies, some of which may have greater resources than we do. Such activities have included more aggressive product claims and marketing challenges, as well as increased promotional spending. Additionally, we have experienced a sharp rise in commodity costs. While the Company has taken, and will continue to take, measures to address the heightened competitive activity and increased commodity costs, should these conditions persist, they could adversely affect the Company’s future results.
The Company believes it is well prepared to meet the challenges ahead due to its strong financial condition, experience operating in challenging environments and continued focus on the Company’s strategic initiatives: getting closer to the consumer, the profession and customers; effectiveness and efficiency in everything; innovation everywhere; and leadership. This focus, together with the strength of the Company’s global brand names and its broad international presence in both mature and emerging markets, should position the Company well to increase shareholder value over the long-term.
Results of Operations
Worldwide Net sales were $15,564 in 2010, up 1.5% from 2009 as volume growth of 3.0% and level selling prices were partially offset by a negative foreign exchange impact of 1.5%. Worldwide organic sales (Net sales excluding the impact of foreign exchange, acquisitions and divestments) grew 3.0% in 2010.
Net sales in the Oral, Personal and Home Care segment were $13,484 in 2010, up 2.0% from 2009, as volume growth of 4.0% and level selling prices were partially offset by a negative foreign exchange impact of 2.0%. Organic sales in the Oral, Personal and Home Care segment grew 4.0% in 2010.
Net sales in Hill’s Pet Nutrition were $2,080 in 2010, down 2.5% from 2009 as 2.0% volume declines and net selling price decreases of 1.5% were partially offset by a 1.0% positive impact of foreign exchange. Organic sales in Hill’s Pet Nutrition decreased 3.5% in 2010.
Worldwide Net sales were $15,327 in 2009, level with 2008 as volume growth of 0.5% and net selling price increases of 6.0% were offset by a negative foreign exchange impact of 6.5%. Worldwide organic sales grew 6.5% in 2009.
(Dollars in Millions Except Per Share Amounts)
Worldwide gross profit margin was 59.1% in 2010, 58.8% in 2009 and 56.3% in 2008. The gross profit margin increase in 2010 was due to a continued focus on cost-saving initiatives, partially offset by rising commodity costs and negative foreign exchange.
The gross profit margin increase in 2009 was driven by higher pricing, a continued focus on cost-saving initiatives, and the absence of charges related to the 2004 Restructuring Program, partially offset by a negative foreign exchange impact and costs related to the remeasurement of liabilities related to inventory purchases in Venezuela. During 2008, restructuring and implementation-related charges incurred under the 2004 Restructuring Program included in Cost of sales were $59. The 2004 Restructuring Program lowered the reported gross profit margin by 40 bps in 2008. Excluding the impact of the 2004 Restructuring Program, gross profit margin was 56.7% in 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of Net sales were 34.8% in 2010, 34.5% in 2009 and 35.4% in 2008. The 30 bps increase in 2010 was primarily due to higher advertising spending (60 bps), partially offset by the impact of cost-saving initiatives. The 90 bps decrease in 2009 was driven primarily by the absence of charges related to the 2004 Restructuring Program in 2009, lower advertising spending (80 bps) and a continued focus on cost-saving initiatives, partially offset by higher pension and benefit costs. In 2008, Selling, general and administrative expenses included $81 (0.5% of Net sales) of charges related to the 2004 Restructuring Program.
Other (Income) Expense, Net
Other (income) expense, net was $301, $111 and $103 in 2010, 2009 and 2008, respectively. The components of Other (income) expense, net are presented below:
(Dollars in Millions Except Per Share Amounts)
In 2010, Operating profit decreased 3% to $3,489 from $3,615 in 2009, reflecting the one-time charge related to the transition to hyperinflationary accounting in Venezuela, termination benefits, higher advertising spending and the negative impact of foreign exchange, partially offset by the gain on sales of non-core product lines and a continued focus on cost-saving initiatives. In 2009, Operating profit increased 17% from $3,101 in 2008. Excluding the impact of the one-time charge related to the transition to hyperinflationary accounting in Venezuela, the 2004 Restructuring Program and other items set forth below, Operating profit increased 5% in 2010 and 11% in 2009 as follows:
Interest Expense, Net
Interest expense, net was $59 in 2010 compared with $77 in 2009 and $96 in 2008. The decrease in Interest expense, net from 2009 to 2010 was due to lower average interest rates. The decrease in Interest expense, net from 2008 to 2009 was due to lower average interest rates and lower debt levels.
The effective income tax rate was 32.6% in 2010 and 32.2% in both 2009 and 2008 and all years benefited from global tax strategies. The impact on the Company’s effective income tax rate of the one-time charge related to the transition to hyperinflationary accounting in Venezuela and other items in 2010 was as follows:
Net Income attributable to Colgate-Palmolive Company
Net income attributable to Colgate-Palmolive Company was $2,203, or $4.31 per share on a diluted basis in 2010 compared with $2,291, or $4.37 per share on a diluted basis in 2009 and $1,957 or $3.66 per share in 2008. In 2010, Net income attributable to Colgate-Palmolive Company included the $271 ($0.53 per share) one-time charge related to the transition to hyperinflationary accounting in Venezuela, $61 in aftertax charges ($0.12 per share) for termination benefits, a $30 ($0.06 per share) aftertax gain from the sale of non-core product lines in Latin America and a $31 ($0.06 per share) aftertax gain related to the reorganization of an overseas subsidiary.
Net income attributable to Colgate-Palmolive Company in 2008 included $113 ($0.21 per share) of charges related to the Company’s 2004 Restructuring Program.
(Dollars in Millions Except Per Share Amounts)
The Company markets its products in over 200 countries and territories throughout the world in two distinct business segments: Oral, Personal and Home Care; and Pet Nutrition. The Company evaluates segment performance based on several factors, including Operating profit. The Company uses Operating profit as a measure of the operating segment performance because it excludes the impact of corporate-driven decisions related to interest expense and income taxes.
Worldwide Net Sales by Business Segment and Geographic Region
Worldwide Operating Profit by Business Segment and Geographic Region
Net sales in North America increased 2.0% in 2010 to $3,005 as a result of 3.5% volume growth and a 1.0% positive impact of foreign exchange, partially offset by 2.5% net selling price decreases. Organic sales in North America grew 1.0% in 2010. Products contributing to growth in oral care included Colgate Triple Action, Colgate Sensitive MultiProtection and Colgate Total toothpastes, Colgate 360° ActiFlex, Colgate Max White and Colgate Extra Clean manual toothbrushes and the Colgate Wisp mini-brush. Products contributing to growth in other categories included Softsoap Body Butter Mega Moisture and Irish Spring Intensify body washes, Speed Stick Stainguard deodorant and Fabuloso Aroma Sensations liquid cleaner. Net sales in North America increased 3.5% in 2009 to $2,950 as a result of 4.0% volume growth and level selling prices, partially offset by a 0.5% negative impact of foreign exchange. Organic sales in North America grew 4.0% in 2009.
Operating profit in North America increased 5% to $884 in 2010 due to sales growth and cost-saving initiatives, partially offset by increased promotional investments. In 2009, Operating profit in North America increased 22% to $843 due to sales growth, cost-saving initiatives and lower raw and packaging material costs.
Net sales in Latin America decreased 1.5% in 2010 to $4,261, as 2.0% volume growth and net selling price increases of 5.5% were more than offset by a 9.0% negative impact of foreign exchange. Organic sales in Latin America grew 7.5% in 2010. Volume gains achieved in Mexico, Colombia, Ecuador, Dominican Republic and Central America were partially offset by volume declines in Venezuela. Products contributing to growth in oral care included Colgate Sensitive Pro-Relief and Colgate Total toothpastes, Colgate 360° ActiFlex, Colgate Twister and Colgate Zig Zag manual toothbrushes and Colgate Plax Whitening Tartar Control and Colgate Plax Complete Care mouthwashes. Products contributing to growth in other categories included Palmolive Naturals Yogurt and Almond Oil and Palmolive Natural Perfect Tone bar soaps, Lady Speed Stick Waterproof and Speed Stick Extreme deodorants and Protex Propolis bar soap. In 2009, Net sales in Latin America increased 5.5% to $4,319 as a result of 3.0% volume growth and net selling price increases of 13.5%, partially offset by an 11.0% negative impact of foreign exchange. Organic sales in Latin America grew 16.5% in 2009.
(Dollars in Millions Except Per Share Amounts)
Operating profit in Latin America decreased 5% in 2010 to $1,295, as higher raw and packaging material costs, higher advertising spending and increased promotional investments were partially offset by cost-saving initiatives. In 2009, Operating profit in Latin America increased 15% to $1,360 as a result of sales growth and cost-saving initiatives.
Net sales in Europe/South Pacific decreased 1.5% in 2010 to $3,220 as volume growth of 2.0% was more than offset by net selling price decreases of 3.0% and a 0.5% negative impact of foreign exchange. Organic sales in Europe/South Pacific declined 1.0% in 2010. Volume gains in the GABA business, the United Kingdom, Australia and Denmark were partially offset by volume declines in Romania, Portugal, Greece and France. Products contributing to growth in oral care included Colgate Sensitive Pro-Relief, Colgate Sensitive Pro-Relief Whitening, elmex Sensitive Professional and Colgate Max White One toothpastes, Colgate 360° ActiFlex manual toothbrush, Colgate 360° ActiFlex Sonic Power battery powered toothbrush and Colgate Plax Ice mouth rinse. Products contributing to growth in other categories included Palmolive Nutra-Fruit shower crème and the Natura Verde line of home care products. In 2009, Net sales in Europe/South Pacific decreased 8.5% to $3,271 as net selling price increases of 0.5% were more than offset by 0.5% in volume declines and an 8.5% negative impact of foreign exchange. The 2008 divestment of a non-core brand in Germany impacted sales growth for 2009 by 0.5% versus 2008. Excluding the impact of this divestment, Net sales decreased 8.0% in 2009 and volume was level with 2008. Organic sales in Europe/South Pacific grew 0.5% in 2009.
Operating profit in Europe/South Pacific decreased 1% in 2010 to $742, as a continued focus on cost-saving initiatives was more than offset by negative sales growth, higher advertising spending and increased promotional investments. In 2009, Operating profit in Europe/South Pacific was level at $748, as a continued focus on cost-saving initiatives, lower advertising spending and lower raw and packaging material costs offset the negative impact of foreign exchange.
Net sales in Greater Asia/Africa increased 13.0% in 2010 to $2,998 as volume growth of 10.5% and a 4.0% positive impact of foreign exchange were partially offset by net selling price decreases of 1.5%. Organic sales in Greater Asia/Africa grew 9.0% in 2010. Volume gains were led by the Greater China region, India, Thailand, Philippines, Malaysia, Turkey and Russia. Products driving oral care growth included Colgate Sensitive Pro-Relief, Colgate Sensitive Pro-Relief Whitening, Colgate Total and Colgate Herbal Salt toothpastes, Colgate 360° ActiFlex, Colgate Massager and Colgate Twister Gum Care manual toothbrushes and Colgate Plax Complete Care mouthwash. Products contributing to growth in other categories included Lady Speed Stick Breathing Skin and Mennen Speed Stick Breathe and Protect deodorants. In 2009, Net sales in Greater Asia/Africa were level at $2,655 as volume growth of 2% and net selling prices of 6.0% were offset by a 8.0% negative impact of foreign exchange. Organic sales in Greater Asia/Africa grew 8.0% in 2009.
Operating profit in Greater Asia/Africa increased 22% in 2010 to $767, reflecting higher sales growth and cost-saving initiatives, partially offset by higher advertising spending. In 2009, Operating profit in Greater Asia/Africa increased 20% to $631, reflecting higher pricing, lower raw and packaging material costs and cost-saving initiatives.
(Dollars in Millions Except Per Share Amounts)
Hill’s Pet Nutrition
Net sales for Hill’s Pet Nutrition decreased 2.5% in 2010 to $2,080 as 2.0% volume declines and 1.5% net selling price decreases were partially offset by a 1.0% positive impact of foreign exchange. Organic sales in Hill’s Pet Nutrition declined 3.5% in 2010. Volume declined in the U.S., Russia, Japan, the Nordic countries, France and Germany, while volume gains were achieved in Australia and South Africa. Volume was negatively impacted as a result of heightened competitive activity and in part due to residual effects of price increases taken in late 2008 and early 2009 in response to significantly higher commodity costs. The Company has taken steps to adjust on-shelf product pricing and sizing and this, combined with the introduction of innovative new products, has resulted in increased unit consumption towards the end of 2010 as compared to the prior year. Successful new products within the U.S. included Science Diet Small and Toy Breed Canine, Science Diet Healthy Mobility Canine, Science Diet Weight Loss System and Prescription Diet Therapeutic Weight Reduction Program. Successful products contributing to international sales included Science Diet Small and Toy Breed Canine, Science Diet Senior Advanced Canine and Feline, Science Plan Sterilized Cat and Science Plan VetEssentials Canine and Feline. In 2009, Net sales for Hill’s Pet Nutrition decreased 0.5% to $2,132 as 8.5% net selling price increases were more than offset by 7.5% volume declines and a 1.5% negative impact of foreign exchange. Organic sales in Hill’s Pet Nutrition grew 1.0% in 2009.
Operating profit for Hill’s Pet Nutrition increased 1% to $559 in 2010 due to cost-saving initiatives and lower raw and packaging material costs. In 2009, Operating profit increased 2% to $555 due to higher pricing, lower raw and packaging material costs and cost-saving initiatives.
Operating profit (loss) for the Corporate segment was ($758), ($522) and ($584) in 2010, 2009 and 2008, respectively. Corporate operations include Corporate overhead costs, research and development costs, stock-based compensation expense related to stock options and restricted stock awards, restructuring and related implementation costs and gains and losses on sales of non-core product lines and assets. The components of Operating profit (loss) for the Corporate segment are presented below:
(Dollars in Millions Except Per Share Amounts)
Corporate Operating profit (loss) in 2010 showed an increased loss as compared to 2009, primarily due to the one-time charge related to the transition to hyperinflationary accounting in Venezuela and termination benefits, primarily relating to ongoing overhead reduction initiatives at Hill’s of $48 and in Europe of $29, partially offset by the gain on sales of non-core product lines in Latin America and a decrease in Corporate overhead costs. Corporate Operating profit (loss) in 2009 showed a decreased loss as compared to 2008, primarily due to charges related to the 2004 Restructuring Program in 2008, offset by higher Corporate overhead costs, primarily pension and benefit costs.
For additional information regarding the Company’s 2004 Restructuring Program, refer to “Restructuring and Related Implementation Charges” below and Note 4 to the Consolidated Financial Statements.
Non-GAAP Financial Measures
Net sales growth, both worldwide and in relevant geographic divisions, is discussed in this Annual Report on Form 10-K both on a GAAP basis and excluding divestments (non-GAAP). Management believes this non-GAAP financial measure provides useful supplemental information to investors as it allows comparisons of Net sales growth from ongoing operations. This Annual Report on Form 10-K also discusses organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments) (non-GAAP). Management believes this measure provides investors with useful supplemental information regarding the Company’s underlying sales trends by presenting sales growth excluding the external factor of foreign exchange, as well as the impact of acquisitions and divestments.
Worldwide Gross profit margin, Operating profit and the effective tax rate are discussed in this Annual Report on Form 10-K both on a GAAP basis and excluding the impact of the one-time charge related to the transition to hyperinflationary accounting in Venezuela as of January 1, 2010, the 2004 Restructuring Program and certain other items described above (non-GAAP). Management believes these measures provide investors with useful supplemental information regarding the Company’s underlying business trends and performance of the Company’s ongoing operations and are useful for period-over-period comparisons of such operations.
The Company uses the above financial measures internally in its budgeting process and as a factor in determining compensation. While the Company believes that these non-GAAP financial measures are useful in evaluating the Company’s business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.
Restructuring and Related Implementation Charges
The Company’s four-year restructuring and business building program (the 2004 Restructuring Program) to enhance the Company’s global leadership position in its core businesses was finalized as of December 31, 2008. There were no charges incurred in the years ended December 31, 2010 and 2009. Charges incurred in 2008 amounted to $164. The restructuring accrual decreased from $15 at December 31, 2009 to $8 at December 31, 2010, primarily due to cash payments for termination benefits, exit activities and the implementation of strategies.
Liquidity and Capital Resources
The Company expects cash flow from operations and debt issuances will be sufficient to meet foreseeable business operating and recurring cash needs (including debt service, dividends, capital expenditures and planned stock repurchases). The Company believes its strong cash generation and financial position should continue to allow it broad access to global capital markets.
(Dollars in Millions Except Per Share Amounts)
Net cash provided by operations in 2010 was $3,211 as compared with $3,277 in 2009 and $2,302 in 2008. The decrease in 2010 as compared to 2009 was due to increased working capital. The increase in 2009 as compared to 2008 reflects improved profitability, decreased working capital and lower cash spending related to the 2004 Restructuring Program, partially offset by higher tax payments.
The Company defines working capital as the difference between current assets (excluding cash and cash equivalents and marketable securities, the latter of which is reported in Other current assets) and current liabilities (excluding short-term debt). Overall, the Company’s working capital increased to 0.3% of Net sales in 2010 as compared with (0.4%) in 2009. The increase in working capital as a percentage of Net sales in 2010 was due primarily to lower accrued income taxes.
Investing activities used $658 of cash during 2010 compared with uses of $841 and $613 during 2009 and 2008, respectively. Capital expenditures were $550, $575 and $684 for 2010, 2009 and 2008, respectively. Lower capital expenditures in 2010 and 2009 reflected the completion of certain capacity expansions, as well as the completion of the 2004 Restructuring Program at the end of 2008. Capital spending continues to focus primarily on projects that yield high aftertax returns. Overall capital expenditures for 2011 are expected to represent approximately 3.5% of Net sales.
Net cash outflows from activity related to marketable securities and other investments were lower in 2010 than in 2009. During 2009, the Company purchased $210 of U.S. dollar-denominated bonds issued by a Venezuelan state-owned corporation and $50 of U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government. During 2010, CP Venezuela sold all of the U.S. dollar-denominated bonds to obtain U.S. dollars in order to support current and future operations and purchased an additional $67 of the U.S. dollar-linked, devaluation-protected bonds to reduce the Company’s exposure to the Venezuelan bolivar fuerte. See Notes 7 and 14 to the Consolidated Financial Statements. Separately, during 2010, the Company invested $136 in a portfolio of euro-denominated investment grade fixed income securities, including corporate bonds.
Financing activities used $2,624 of cash during 2010 compared to $2,270 and $1,530 during 2009 and 2008, respectively. The increase in 2010 was primarily due to higher repurchases of common stock and dividends paid, partially offset by higher net proceeds from issuances of debt. The increase in 2009 was primarily due to higher net debt payments and an increase in dividends paid.
Long-term debt increased to $3,376 as of December 31, 2010 as compared to $3,147 as of December 31, 2009 and total debt increased to $3,424 as of December 31, 2010 as compared to $3,182 as of December 31, 2009. During the fourth quarter of 2010, the Company issued $250 of ten-year notes at a fixed rate of 2.95% and $188 of five-year notes at a fixed rate of 1.375% under the Company’s shelf registration statement. Proceeds from the debt issuances were used to reduce commercial paper borrowings. During the third quarter of 2009, the Company issued $300 of U.S. dollar-denominated six-year notes at a fixed rate of 3.15% under the Company’s shelf registration statement. Proceeds from the debt issuance were used to reduce commercial paper and other borrowings.
At December 31, 2010, the Company had access to unused domestic and foreign lines of credit of $2,317 and could also issue medium-term notes pursuant to an effective shelf registration statement. The Company has borrowing capacity under its domestic revolving credit facility of $1,600, and the facility has an expiration date of November 2012. These domestic lines are available for general corporate purposes and to support the issuance of commercial paper.
(Dollars in Millions Except Per Share Amounts)
Domestic and foreign commercial paper outstanding was $214 and $0 as of December 31, 2010 and 2009, respectively. The average daily balances outstanding for commercial paper in 2010 and 2009 were $1,146 and $1,144, respectively. The maximum daily balance outstanding for commercial paper during 2010 and 2009 was $1,628 and $1,556, respectively. The Company regularly classifies commercial paper and certain current maturities of notes payable as long-term debt as it has the intent and ability to refinance such obligations on a long-term basis, including, if necessary, by utilizing its line of credit that expires in 2012.
Following is a summary of the Company’s commercial paper and global short-term borrowings as of December 31, 2010 and 2009:
Certain of the facilities with respect to the Company’s bank borrowings contain financial and other covenants as well as cross-default provisions. Noncompliance with these requirements could ultimately result in the acceleration of amounts owed. The Company is in full compliance with all such requirements and believes the likelihood of noncompliance is remote. See Note 6 to the Consolidated Financial Statements for further information about the Company’s long-term debt and credit facilities.
Dividend payments in 2010 were $1,142, an increase from $981 in 2009 and $889 in 2008. Common stock dividend payments increased to $2.03 per share in 2010 from $1.72 per share in 2009 and $1.56 per share in 2008. The Series B Preference stock dividend payments increased to $16.24 per share in 2010 from $13.76 per share in 2009 and $12.48 per share in 2008. On February 4, 2010, the Company’s Board of Directors increased the quarterly common stock cash dividend to $0.53 per share, effective as of the second quarter 2010.
The Company repurchases shares of its common stock in the open market and in private transactions to maintain its targeted capital structure and to fulfill certain requirements of its compensation and benefit plans. On February 4, 2010 the Company’s Board of Directors authorized a new share repurchase program (the 2010 Program) that replaced the Company’s previous share repurchase program which had been approved in 2008 (the 2008 Program). The 2010 Program authorizes the repurchase of up to 40 million shares of the Company’s common stock.
Aggregate repurchases in 2010 included 24.4 million common shares under both the 2010 Program and the 2008 Program, and 1.0 million common shares to fulfill the requirements of compensation and benefit plans, for a total purchase price of $2,020. Aggregate repurchases in 2009 included 13.9 million common shares under the 2008 Program and 1.0 million common shares to fulfill the requirements of compensation and benefit plans, for a total purchase price of $1,063. Aggregate repurchases in 2008 included 13.8 million common shares under the 2008 Program and the repurchase program approved by the Board in 2006, and 0.9 million common shares to fulfill the requirements of compensation and benefit plans, for a total purchase price of $1,073.
(Dollars in Millions Except Per Share Amounts)
The following represents the scheduled maturities of the Company’s contractual obligations as of December 31, 2010:
Long-term liabilities associated with the Company’s postretirement plans are excluded from the table above due to the uncertainty of the timing of these cash disbursements. The amount and timing of cash funding related to these benefit plans will generally depend on local regulatory requirements, various economic assumptions (the most significant of which are detailed in “Critical Accounting Policies and Use of Estimates,” below) and voluntary Company contributions. Based on current information, the Company does not anticipate having to make any mandatory contributions to its qualified U.S. pension plan until 2012. Management’s best estimate of cash requirements to be paid directly from the Company’s assets for its postretirement plans for the year ending December 31, 2011, is approximately $208, including approximately $100 of voluntary contributions to our U.S. pension plans.
Additionally, liabilities for unrecognized income tax benefits are excluded from the table above as the Company is unable to reasonably predict the ultimate amount or timing of a settlement of such liabilities. See Note 11 to the Consolidated Financial Statements for more information.
As more fully described in Note 13 to the Consolidated Financial Statements, the Company is contingently liable with respect to lawsuits, environmental matters, taxes and other matters arising in the ordinary course of business.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated special purpose entities.
(Dollars in Millions Except Per Share Amounts)
Managing Foreign Currency, Interest Rate and Commodity Price Exposure
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, 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. The Company’s treasury and risk management policies prohibit the use of derivatives for speculative purposes and leveraged derivatives for any purpose.
The sensitivity of our financial instruments to market fluctuations is discussed below. See Notes 2 and 7 to the Consolidated Financial Statements for further discussion of derivatives and hedging policies and fair value measurements.
Foreign Exchange Risk
As the Company markets its products in over 200 countries and territories, it is exposed to currency fluctuations related to manufacturing and selling its products in currencies other than the U.S. dollar. The Company’s foreign currency exposures primarily reflect the Company’s operations in Latin America (27% of Net sales), Europe/South Pacific (21% of Net sales) and Asia/Africa (19% of Net sales). The Company manages its foreign currency exposures through a combination of cost-containment measures, selling price increases and the hedging of certain costs in an effort to minimize the impact on earnings of foreign currency rate movements. See the “Results of Operations” section above for discussion of the foreign exchange impact on Net sales in each segment.
The assets and liabilities of foreign subsidiaries, other than those operating in highly inflationary environments, are translated into U.S. dollars at year-end exchange rates with resulting translation gains and losses accumulated in a separate component of shareholders’ equity. Income and expense items are translated into U.S. dollars at average rates of exchange prevailing during the year.
For subsidiaries operating in highly inflationary environments (currently, Venezuela), inventories, prepaids, goodwill and property, plant and equipment are remeasured at their historical exchange rates, while other assets and liabilities are remeasured at year-end exchange rates. Remeasurement adjustments for these operations are included in Net income attributable to Colgate-Palmolive Company.
The Company primarily utilizes foreign currency contracts, including forward, option and swap contracts, local currency deposits and local currency borrowings to hedge portions of its exposures relating to foreign currency purchases, assets and liabilities created in the normal course of business and the net investment in certain foreign subsidiaries. The duration of foreign currency contracts generally does not exceed 12 months and the contracts are valued using observable market rates.
The Company’s foreign currency forward contracts that qualify for cash flow hedge accounting resulted in net unrealized losses of $3 at December 31, 2010 and net unrealized gains of $4 at December 31, 2009. Changes in the fair value of cash flow hedges are recorded in Other comprehensive income (loss) and are reclassified into earnings in the same period or periods during which the underlying hedged transaction is recognized in earnings. At the end of 2010, an unfavorable 10% change in exchange rates would have resulted in a net unrealized loss of $40.
(Dollars in Millions Except Per Share Amounts)
Interest Rate Risk
The Company manages its targeted mix of fixed and floating rate debt with debt issuances and by entering into interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. The notional amount, interest payment and maturity date of the swaps match the principal, interest payment and maturity date of the related debt in all cases, and the swaps are valued using observable benchmark rates.
Based on year-end 2010 variable rate debt levels, a 1-percentage-point increase in interest rates would have increased Interest expense, net by $14 in 2010.
Commodity Price Risk
The Company is exposed to price volatility related to raw materials used in production, such as resins, tallow, essential oils, tropical oils, corn and soybeans. The Company manages its raw material exposures through a combination of cost containment measures, ongoing productivity initiatives and the limited use of commodity hedging contracts. Futures contracts are used on a limited basis, primarily in the Pet Nutrition segment, to manage volatility related to anticipated raw material inventory purchases of certain traded commodities.
The Company’s open commodity derivative contracts, which qualify for cash flow hedge accounting, resulted in net unrealized gains of $4 and $0 for the years ended December 31, 2010 and 2009, respectively. At the end of 2010, an unfavorable 10% change in commodity futures prices would have reduced the net unrealized gain to $2.
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 as it is the Company’s policy to contract with highly rated, diverse counterparties.
Recent Accounting Pronouncements
No new accounting pronouncement issued or which became effective during the fiscal year has had or is expected to have a material impact on the Consolidated Financial Statements.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires management to use judgment and make estimates. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could ultimately differ from those estimates. The accounting policies that are most critical in the preparation of the Company’s Consolidated Financial Statements are those that are both important to the presentation of the Company’s financial condition and results of operations and require significant or complex judgments and estimates on the part of management. The Company’s critical accounting policies are reviewed periodically with the Audit Committee of the Board of Directors.
In certain instances, accounting principles generally accepted in the United States of America allow for the selection of alternative accounting methods. The Company’s significant policies that involve the selection of alternative methods are accounting for shipping and handling costs and inventories.
(Dollars in Millions Except Per Share Amounts)
The areas of accounting that involve significant or complex judgments and estimates are pensions and other postretirement benefits, stock options, asset impairments, uncertain tax positions, tax valuation allowances and legal and other contingencies.
Average annual rates of return for the U.S. plans for the most recent 1-year, 5-year, 10-year, 15-year and 25-year periods were 12%, 5%, 5%, 7%, and 8%, respectively. In addition, the current rate of return assumption for the U.S. plans is based upon a targeted asset allocation of approximately 40% in fixed income securities, 52% in equity securities and 8% in real estate and alternative investments. A 1% change in the assumed rate of return on plan assets of the U.S. pension plans would impact future Net income attributable to Colgate-Palmolive Company by approximately $2. A 1% change in the discount rate for the U.S. pension plans would impact future Net income attributable to Colgate-Palmolive Company by approximately $7. A third assumption is the long-term rate of compensation increase, a change in which would partially offset the impact of a change in either the discount rate or the long-term rate of return. This rate was 4.0% as of December 31, 2010, 2009 and 2008. Refer to Note 10 to the Consolidated Financial Statements for further discussion of the Company’s pension and other postretirement plans.
(Dollars in Millions Except Per Share Amounts)
The Company generates revenue through the sale of well-known consumer products to trade customers under established trading terms. While the recognition of revenue and receivables requires the use of estimates, there is a short time frame (typically less than 60 days) between the shipment of product and cash receipt, thereby reducing the level of uncertainty in these estimates. Refer to Note 2 to the Consolidated Financial Statements for further description of the Company’s significant accounting policies.
Cautionary Statement on Forward-Looking Statements
This Annual Report on Form 10-K may contain “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases. Such statements may relate, for example, to sales or unit volume growth, organic sales growth, profit or profit margin growth, earnings growth, financial goals, the impact of currency devaluations and exchange controls, in particular, in Venezuela, cost-reduction plans, tax rates, new product introductions or commercial investment levels, among other matters. These statements are made on the basis of the Company’s views and assumptions as of this time and the Company undertakes no obligation to update these statements. Moreover, the Company does not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. The Company cautions investors that any such forward-looking statements are not guarantees of future performance and that actual events or results may differ materially from those statements. Actual events or results may differ materially because of factors that affect international businesses and global economic conditions, as well as matters specific to us and the markets we serve, including the uncertain economic environment in different countries and its effect on consumer spending habits, increased competition and evolving competitive practices, currency rate fluctuations, exchange controls, changes in foreign or domestic laws or regulations or their interpretation, political and fiscal developments, the availability and cost of raw and packaging materials, our ability to maintain or increase selling prices as needed, changes in the policies of retail trade customers and our ability to continue lowering costs. For information about these and other factors that could impact our business and cause actual results to differ materially from forward-looking statements, refer to “Risk Factors” in Item 1A.
(Dollars in Millions Except Per Share Amounts)
See “Managing Foreign Currency, Interest Rate and Commodity Price Exposure” in Item 7.
See “Index to Financial Statements.”
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of the Company’s Chairman of the Board, President and Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2010 (the Evaluation). Based upon the Evaluation, the Company’s Chairman of the Board, President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) are effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management, under the supervision and with the participation of the Company’s Chairman of the Board, President and Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s internal control over financial reporting based upon the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and concluded that it is effective as of December 31, 2010.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, and has expressed an unqualified opinion in their report, which appears in this report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Mr. David W. Johnson, 78, one of the independent directors of the Board of Directors of the Company, has advised the Company that he will not stand for re-election to the Board of Directors at the Annual Meeting of Stockholders to be held on May 6, 2011, in light of his desire to retire as a director at the end of his current term. Mr. Johnson has served as a director since 1991.
See “Executive Officers of the Registrant” in Part I of this report.
Additional information required by this Item relating to directors, executive officers and corporate governance of the registrant and information regarding compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the Company’s Proxy Statement for its 2011 Annual Meeting of Stockholders (the 2011 Proxy Statement).
Code of Ethics
The Company’s Code of Conduct promotes the highest ethical standards in all of the Company’s business dealings. The Code of Conduct satisfies the SEC’s requirements for a Code of Ethics for senior financial officers and applies to all Company employees, including the Chairman, President and Chief Executive Officer, the Chief Financial Officer and the Chief Accounting Officer, and the Company’s directors. The Code of Conduct is available on the Company’s web site at www.colgate.com. Any amendment to the Code of Conduct will promptly be posted on the Company’s web site. It is the Company’s policy not to grant waivers of the Code of Conduct. In the extremely unlikely event that the Company grants an executive officer a waiver from a provision of the Code of Conduct, the Company will promptly disclose such information by posting it on its web site or by using other appropriate means in accordance with SEC rules.
The information regarding executive compensation set forth in the 2011 Proxy Statement is incorporated herein by reference.
The information regarding certain relationships and related transactions and director independence set forth in the 2011 Proxy Statement is incorporated herein by reference.
The information regarding auditor fees and services set forth in the 2011 Proxy Statement is incorporated herein by reference.
See “Index to Financial Statements.”
See “Exhibits to Form 10-K.”
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 24, 2011, by the following persons on behalf of the registrant and in the capacities indicated.
Index to Financial Statements
All other financial statements and schedules not listed have been omitted since the required information is included in the financial statements or the notes thereto or is not applicable or required.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Colgate-Palmolive Company and its subsidiaries (the Company) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
New York, New York
February 24, 2011
Consolidated Statements of Income
For the years ended December 31,
(Dollars in Millions Except Per Share Amounts)
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
As of December 31,
(Dollars in Millions Except Per Share Amounts)
See Notes to Consolidated Financial Statements.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in Millions)