Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 24, 2014)
  • 10-Q (Jul 31, 2014)
  • 10-Q (Apr 25, 2014)
  • 10-Q (Oct 24, 2013)
  • 10-Q (Jul 25, 2013)
  • 10-Q (Apr 25, 2013)

 
8-K

 
Other

Colgate-Palmolive Company 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.A
  4. Ex-31.B
  5. Ex-32
  6. Ex-32
form10q.htm


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

For the quarterly period ended June 30, 2011
OR

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

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

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

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

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

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

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

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

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

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

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


 
 

 

PART I.
FINANCIAL INFORMATION

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

 
2

 

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

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

See Notes to Condensed Consolidated Financial Statements.

 
3

 

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

See Notes to Condensed Consolidated Financial Statements.

 
4

 

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

1.
Basis of Presentation

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

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

2.
Use of Estimates

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

3.
Acquisitions

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

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

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

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

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

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

 
5

 

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

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

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

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

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

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

 
6

 

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

The following are components of comprehensive income:

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


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

 

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

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

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

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

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

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

 
8

 

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

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

9.
Contingencies

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

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

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

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

 
9

 

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

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

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

Brazilian Matters

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

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

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

 
10

 

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

European Competition Matters

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

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

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

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

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

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

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

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

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

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

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

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

 
11

 

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

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

ERISA Matters

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

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

 
12

 

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

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

11.
Fair Value Measurements and Financial Instruments

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

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

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

 
13

 

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

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

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

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

Fair value hedges

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

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

 

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

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

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

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

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

Cash flow hedges

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

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

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