Colgate-Palmolive Company
COLGATE PALMOLIVE CO (Form: 10-Q, Received: 10/25/2012 13:54:06)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
  FORM 10-Q
_________________________
  (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
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   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Shares Outstanding
 
Date
Common stock, $1.00 par value
 
472,481,714
 
September 30, 2012





PART I.      FINANCIAL INFORMATION


COLGATE-PALMOLIVE COMPANY
  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
  (Dollars in Millions Except Per Share Amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net sales
$
4,332

 
$
4,383

 
$
12,799

 
$
12,562

Cost of sales
1,803

 
1,921

 
5,372

 
5,365

Gross profit
2,529

 
2,462

 
7,427

 
7,197

Selling, general and administrative expenses
1,501

 
1,489

 
4,443

 
4,314

Other (income) expense, net
1

 
(62
)
 
37

 
(35
)
Operating profit
1,027

 
1,035

 
2,947

 
2,918

Interest expense, net
4

 
10

 
20

 
37

Income before income taxes
1,023

 
1,025

 
2,927

 
2,881

Provision for income taxes
326

 
349

 
932

 
952

Net income including noncontrolling interests
697

 
676

 
1,995

 
1,929

Less: Net income attributable to noncontrolling interests
43

 
33

 
121

 
88

Net income attributable to Colgate-Palmolive Company
$
654

 
$
643

 
$
1,874

 
$
1,841

 
 
 
 
 
 
 
 
Earnings per common share, basic
$
1.38

 
$
1.32

 
$
3.93

 
$
3.76

 
 
 
 
 
 
 
 
Earnings per common share, diluted
$
1.36

 
$
1.31

 
$
3.89

 
$
3.73

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.62

 
$
0.58

 
$
1.82

 
$
1.69



See Notes to Condensed Consolidated Financial Statements.

2




COLGATE-PALMOLIVE COMPANY
  CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
  (Dollars in Millions)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income including noncontrolling interests
$
697

 
$
676

 
$
1,995

 
$
1,929

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Cumulative translation adjustments
89

 
(483
)
 
(23
)
 
(186
)
Retirement Plan and other retiree benefit adjustments
25

 
29

 
35

 
57

Gains (losses) on available-for-sale securities
(5
)
 
(2
)
 
9

 
46

     Unrealized gains (losses) on cash flow hedges
(2
)
 

 
3

 
(4
)
Total Other comprehensive income, net of tax
107

 
(456
)
 
24

 
(87
)
Total Comprehensive income including noncontrolling interests
804

 
220

 
2,019

 
1,842

Less: Net income attributable to noncontrolling interests
43

 
33

 
121

 
88

Less: Cumulative translation adjustments attributable to noncontrolling interests
8

 
(5
)
 
4

 
(3
)
Total Comprehensive income attributable to noncontrolling interests
51

 
28

 
125

 
85

Total Comprehensive income attributable to Colgate-Palmolive Company
$
753

 
$
192

 
$
1,894

 
$
1,757



See Notes to Condensed Consolidated Financial Statements.

3



COLGATE-PALMOLIVE COMPANY
  CONDENSED CONSOLIDATED BALANCE SHEETS
  (Dollars in Millions)
(Unaudited)
 
September 30,
2012
 
December 31,
2011
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
909

 
$
878

Receivables (net of allowances of $56 and $49, respectively)
1,857

 
1,675

Inventories
1,384

 
1,327

Other current assets
611

 
522

Total current assets
4,761

 
4,402

Property, plant and equipment:
 

 
 

Cost
7,587

 
7,324

Less: Accumulated depreciation
(3,902
)
 
(3,656
)
 
3,685

 
3,668

Goodwill, net
2,634

 
2,657

Other intangible assets, net
1,322

 
1,341

Deferred income taxes
82

 
115

Other assets
940

 
541

Total assets
$
13,424

 
$
12,724

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Notes and loans payable
$
53

 
$
34

Current portion of long-term debt
250

 
346

Accounts payable
1,181

 
1,244

Accrued income taxes
288

 
392

Other accruals
1,928

 
1,700

Total current liabilities
3,700

 
3,716

 
 
 
 
Long-term debt
4,943

 
4,430

Deferred income taxes
327

 
252

Other liabilities
1,757

 
1,785

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
733

 
733

Additional paid-in capital
1,444

 
1,336

Retained earnings
16,654

 
15,649

Accumulated other comprehensive income (loss)
(2,455
)
 
(2,475
)
Unearned compensation
(39
)
 
(60
)
Treasury stock, at cost
(13,830
)
 
(12,808
)
Total Colgate-Palmolive Company shareholders’ equity
2,507

 
2,375

Noncontrolling interests
190

 
166

Total shareholders’ equity
2,697

 
2,541

Total liabilities and shareholders’ equity
$
13,424

 
$
12,724


See Notes to Condensed Consolidated Financial Statements.

4



COLGATE-PALMOLIVE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2012
 
2011
Operating Activities
 
 
 
Net income including noncontrolling interests
$
1,995

 
$
1,929

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operations:
 

 
 

Depreciation and amortization
317

 
315

Business realignment and other cost-saving initiatives
(35
)
 
130

Gain before tax on sales of non-core product lines

 
(207
)
Voluntary benefit plan contributions
(101
)
 
(178
)
Stock-based compensation expense
98

 
102

Deferred income taxes
71

 
134

Cash effects of changes in:
 
 
 
Receivables
(166
)
 
(127
)
Inventories
(48
)
 
(147
)
Accounts payable and other accruals
(27
)
 
62

Other non-current assets and liabilities
29

 
44

Net cash provided by operations
2,133

 
2,057

Investing Activities
 

 
 

Capital expenditures
(317
)
 
(324
)
Sale of property and non-core product lines
38

 
241

Purchases of marketable securities and investments
(501
)
 
(108
)
Proceeds from sale of marketable securities and investments
120

 
173

Payment for acquisitions, net of cash acquired
(29
)
 
(972
)
Other
65

 
(8
)
Net cash used in investing activities
(624
)
 
(998
)
Financing Activities
 

 
 

Principal payments on debt
(3,684
)
 
(2,720
)
Proceeds from issuance of debt
4,131

 
4,074

Dividends paid
(951
)
 
(850
)
Purchases of treasury shares
(1,344
)
 
(1,386
)
Proceeds from exercise of stock options and excess tax benefits
390

 
316

Net cash provided by (used in) financing activities
(1,458
)
 
(566
)
Effect of exchange rate changes on Cash and cash equivalents
(20
)
 
(38
)
Net increase (decrease) in Cash and cash equivalents
31

 
455

Cash and cash equivalents at beginning of the period
878

 
490

Cash and cash equivalents at end of the period
$
909

 
$
945

Supplemental Cash Flow Information
 

 
 

Income taxes paid
$
949

 
$
769


See Notes to Condensed Consolidated Financial Statements.

5

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, 2011 , 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.
Recent Accounting Pronouncements

In June 2011 , the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, “Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to disclose other comprehensive income and its components in the statement of changes in equity. As permitted under ASU No. 2011-05, the Company elected to present items of net income and other comprehensive income in two separate consecutive statements beginning in the first quarter of 2012.

4.
Acquisitions and Divestitures

Sanex Acquisition

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 €676 ( $966 ). 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.

Total purchase price consideration of $966 has been allocated to the net assets acquired based on their respective fair values at June 20, 2011, as follows: 
Recognized amounts of assets acquired and liabilities assumed:
 
Inventories
$
26

Property, plant and equipment, net
3

Other intangible assets, net
596

Goodwill, net
411

Accrued income taxes
(48
)
Long-term deferred income taxes
(18
)
Long-term other liabilities
(4
)
Fair value of net assets acquired
$
966



6

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

Other intangible assets acquired include trademarks of $403 with an indefinite useful life and customer relationships of $193 with useful lives ranging from 15 to 18 years.

Goodwill of $411 was allocated between the Europe/South Pacific segment ( 90% ) and the Greater Asia/Africa segment ( 10% ). The Company expects that substantially all of the goodwill will be deductible for tax purposes. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial statements is not material. For the nine months ended September 30, 2011 , Other (income) expense, net included $12 in transaction costs related to the acquisition, of which $2 related to the third quarter.

Sale of Detergent Business in Colombia

In connection with the Sanex acquisition, Colgate sold its non-core laundry detergent business in Colombia to Unilever for $215 . The detergent sale closed on July 29, 2011 and, as a result of the sale, the Company recognized a pretax gain of $207 ( $135 aftertax gain) in the third quarter of 2011. These operations were not material to the Company’s Net sales, Net income or Earnings per share.

Sale of Land in Mexico

On September 13, 2011, the Company’s Mexican subsidiary entered into an agreement to sell to the United States of America the Mexico City site on which its commercial operations, technology center and soap production facility are located. The sale price is payable in three installments, with the final installment due upon the transfer of the property, which is expected to occur in 2014. During the third quarter of 2011, the Company received the first installment of $24 upon signing the agreement. During the third quarter of 2012, the Company received the second installment of $36 . The Company is re-investing these payments to relocate its soap production to a new state-of-the-art facility to be constructed at its Mission Hills, Mexico site, to relocate its commercial and technology operations within Mexico City and to prepare the existing site for transfer. As a result, the Company expects to make capital improvements and incur costs to exit the site through 2014. These exit costs will primarily be related to staff leaving indemnities, accelerated depreciation and demolition to make the site building-ready. In 2011 , the Company recorded $13 of pretax costs ( $9 of aftertax costs) related to the sale, of which $7 of pretax costs ( $5 of aftertax costs) related to the third quarter. During the nine months ended September 30, 2012 , the Company incurred an additional $20 of pretax costs ( $15 of aftertax costs) related to the sale, of which $7 of pretax costs ( $5 of aftertax costs) related to the third quarter.

5.
Inventories

Inventories by major class are as follows:
 
September 30,
2012
 
December 31,
2011
Raw materials and supplies
$
341

 
$
319

Work-in-process
63

 
54

Finished goods
980

 
954

Total Inventories
$
1,384

 
$
1,327




7

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

6.
Shareholders’ Equity

Changes in the components of Shareholders’ Equity for the nine months ended September 30, 2012 are as follows:
 
Colgate-Palmolive Company Shareholders’ Equity
 
Noncontrolling
Interests
 
Common
Stock
 
Additional
Paid-in
Capital
 
Unearned
Compensation
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
Balance, December 31, 2011
$
733

 
$
1,336

 
$
(60
)
 
$
(12,808
)
 
$
15,649

 
$
(2,475
)
 
$
166

Net income
 

 
 

 
 

 
 

 
1,874

 
 
 
121

Other comprehensive income, net of tax
 

 
 

 
 

 
 

 
 
 
20

 
4

Dividends
 

 
 

 
 

 
 

 
(869
)
 
 

 
(82
)
Stock-based compensation expense
 

 
98

 
 

 
 

 
 

 
 

 
 

Shares issued for stock options
 

 
73

 
 

 
257

 
 

 
 

 
 

Shares issued for restricted stock awards
 
 
(69
)
 
 
 
69

 
 
 
 
 
 
Treasury stock acquired
 

 
 

 
 

 
(1,344
)
 
 

 
 

 
 

Other
 

 
6

 
21

 
(4
)
 
 

 
 

 
(19
)
Balance, September 30, 2012
$
733

 
$
1,444

 
$
(39
)
 
$
(13,830
)
 
$
16,654

 
$
(2,455
)
 
$
190


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.

7.
Earnings Per Share

 
Three Months Ended
 
September 30, 2012
 
September 30, 2011
 
Income
 
Shares
(millions)
 
Per
Share
 
Income
 
Shares
(millions)
 
Per
Share
Net income attributable to Colgate-Palmolive Company
$
654

 
 
 
 
 
$
643

 
 
 
 
Basic EPS
654

 
474.9

 
$
1.38

 
643

 
486.7

 
$
1.32

Stock options and restricted stock
 
 
4.3

 
 

 
 

 
3.8

 
 

Diluted EPS
$
654

 
479.2

 
$
1.36

 
$
643

 
490.5

 
$
1.31


For the three months ended September 30, 2012 and 2011 , the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 607,263 and 1,202,090 , respectively.

8

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

 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
Income
 
Shares
(millions)
 
Per
Share
 
Income
 
Shares
(millions)
 
Per
Share
Net income attributable to Colgate-Palmolive Company
$
1,874

 
 
 
 
 
$
1,841

 
 
 
 
Basic EPS
1,874

 
477.4

 
$
3.93

 
1,841

 
489.9

 
$
3.76

Stock options and restricted stock
 
 
4.1

 
 

 
 

 
3.5

 
 

Diluted EPS
$
1,874

 
481.5

 
$
3.89

 
$
1,841

 
493.4

 
$
3.73


For the nine months ended September 30, 2012 and 2011 , the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 629,944 and 422,263 , respectively.

8.
Retirement Plans and Other Retiree Benefits

Components of net periodic benefit cost for the three and nine months ended September 30, 2012 and 2011 were as follows:
 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Three Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
4

 
$
5

 
$
6

 
$
6

 
$
2

 
$
2

Interest cost
24

 
24

 
9

 
9

 
9

 
8

Annual ESOP allocation

 

 

 

 

 

Expected return on plan assets
(28
)
 
(27
)
 
(7
)
 
(7
)
 
(1
)
 
(1
)
Amortization of transition and prior service costs (credits)
2

 
2

 
1

 

 

 

Amortization of actuarial loss
17

 
12

 
2

 
2

 
5

 
3

Net periodic benefit cost
$
19

 
$
16

 
$
11

 
$
10

 
$
15

 
$
12

 
 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
18

 
$
18

 
$
17

 
$
16

 
$
8

 
$
8

Interest cost
73

 
75

 
26

 
28

 
30

 
29

Annual ESOP allocation

 

 

 

 
(1
)
 
(1
)
Expected return on plan assets
(84
)
 
(83
)
 
(19
)
 
(21
)
 
(2
)
 
(2
)
Amortization of transition and prior service costs (credits)
7

 
7

 
1

 
2

 
2

 
3

Amortization of actuarial loss
46

 
35

 
7

 
7

 
13

 
12

Net periodic benefit cost
$
60

 
$
52

 
$
32

 
$
32

 
$
50

 
$
49


For the nine months ended September 30, 2012 and 2011 , the Company made voluntary contributions of $101 and $178 , respectively, to its U.S. postretirement plans.

9

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

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, all U.S. federal income tax returns through December 31, 2007 have been audited by the IRS and there are limited matters in administrative appeals for years 2002 through 2007, the settlement of which is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial condition. With a few exceptions, the Company is no longer subject to U.S., state and local income tax examinations for the years prior to 2007. In addition, the Company has subsidiaries in various foreign jurisdictions that have statutes of limitations for tax audits generally ranging from three to six years. 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.

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 $225 (based on current exchange rates). The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company 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 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.

10

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

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 $131 . The Company has been disputing the disallowances by appealing the assessments within the internal revenue authority’s appellate process with the following results to date:
In June 2005, the First Board of Taxpayers ruled in the Company’s favor and allowed all of the previously claimed deductions for 1996 through 1998. In March 2007, the First Board of Taxpayers ruled in the Company’s favor and allowed all of the previously claimed deductions for 1999 through 2001. The tax authorities appealed these decisions to the next administrative level.
In August 2009, the First Taxpayers’ Council (the next and final administrative level of appeal) overruled the decisions of the First Board of Taxpayers, upholding the majority of the assessments, disallowing a portion of the assessments and remanding a portion of the assessments for further consideration by the First Board of Taxpayers.

The Company has filed a motion for clarification with a special appeals chamber of the Taxpayers’ Council and further appeals are available within the Brazilian federal courts. The Company intends to challenge these assessments vigorously. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel and other advisors, that the disallowances are without merit and that the Company should ultimately prevail on appeal, if necessary, in the Brazilian federal courts.
 
In 2002, the Brazilian Federal Public Attorney filed a civil action against the federal government of Brazil, Laboratorios Wyeth-Whitehall Ltda. (the Brazilian subsidiary of the Seller) and the Company, as represented by its Brazilian subsidiary, seeking to annul an April 2000 decision by the Brazilian Board of Tax Appeals that found in favor of the Seller’s Brazilian subsidiary on the issue of whether it had incurred taxable capital gains as a result of the divestiture of Kolynos. The action seeks to make the Company’s Brazilian subsidiary jointly and severally liable for any tax due from the Seller’s Brazilian subsidiary. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the Company should ultimately prevail in this action. The Company intends to challenge this action vigorously.

In December 2005, the Brazilian internal revenue authority issued to the Company’s Brazilian subsidiary a tax assessment with interest and penalties of approximately $78 , at the current exchange rate, based on a claim that certain purchases of U.S. Treasury bills by the subsidiary and their subsequent disposition during the period 2000 to 2001 were subject to a tax on foreign exchange transactions. The Company is disputing the assessment within the internal revenue authority’s administrative appeals process. In October 2007, the Second Board of Taxpayers, which has jurisdiction over these matters, ruled in favor of the internal revenue authority. In January 2008, the Company appealed this decision, and in January 2012, a special appeals chamber of the Taxpayers’ Council denied the Company’s appeal. The Company plans to appeal this decision. Although there can be no assurances, management believes, based on the advice of its Brazilian legal counsel, that the tax assessment is without merit and that the Company should prevail on appeal, if not at the administrative level, in the Brazilian federal courts. The Company intends to challenge this assessment vigorously.

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 substantially all of these investigations also involve other consumer goods companies and/or retail customers. The status of the various pending matters is discussed below.


11

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

Fines have been imposed on the Company in the following matters, although, as noted below, the Company is appealing each of these fines:
In December 2009, the Swiss competition law authority imposed a fine of $6 on the Company’s GABA subsidiary for alleged violations of restrictions on parallel imports into Switzerland. 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.
In December 2011, the French competition law authority found that four consumer goods companies had entered into agreements on pricing and promotion of heavy duty detergents for which Colgate’s French subsidiary was fined $46 in connection with a divested business. The Company is appealing the fine in the French courts.
In March 2012, the French competition law authority found that three pet food producers, including the Company’s Hill’s France subsidiary, had violated the competition law, for which it imposed a fine of $6 on the Company’s Hill’s France subsidiary for alleged restrictions on exports from France. The Company is appealing the fine in the French courts.

Currently, formal claims of violations, or statements of objections, are pending against the Company as follows:
The German competition law authority has alleged that 17 branded goods companies, including the Company’s German subsidiary, exchanged sensitive information related to the German market. The Company has responded to this formal claim of violations. 
The Belgian competition law authority has alleged that 11 branded goods companies, including the Company’s Belgian subsidiary, assisted retailers to coordinate their retail prices on the Belgian market. The Company is in the process of responding to this statement of objections.

Investigations are ongoing in France and Greece, but no formal claims of violations have been filed in these jurisdictions except in the two French matters 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. 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.


12

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

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 costs 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.

Net sales and Operating profit by segment were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net sales
 
 
 
 
 
 
 
Oral, Personal and Home Care
 
 
 
 
 
 
 
North America
$
797

 
$
776

 
$
2,310

 
$
2,238

Latin America
1,245

 
1,243

 
3,684

 
3,571

Europe/South Pacific
865

 
972

 
2,569

 
2,661

Greater Asia/Africa
897

 
855

 
2,635

 
2,484

Total Oral, Personal and Home Care
3,804

 
3,846

 
11,198

 
10,954

Pet Nutrition
528

 
537

 
1,601

 
1,608

Total Net sales
$
4,332

 
$
4,383

 
$
12,799

 
$
12,562

 
 
 
 
 
 
 
 
Operating profit
 

 
 

 
 
 
 
Oral, Personal and Home Care
 

 
 

 
 
 
 
North America
$
219

 
$
213

 
$
598

 
$
599

Latin America
371

 
364

 
1,082

 
1,050

Europe/South Pacific
198

 
196

 
560

 
551

Greater Asia/Africa
231

 
202

 
671

 
604

Total Oral, Personal and Home Care
1,019

 
975

 
2,911

 
2,804

Pet Nutrition
147

 
127

 
440

 
408

Corporate
(139
)
 
(67
)
 
(404
)
 
(294
)
Total Operating profit
$
1,027

 
$
1,035

 
$
2,947

 
$
2,918


13

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

For the nine months ended September 30, 2012 , Corporate Operating profit (loss) includes costs of $21 associated with the business realignment and other cost-saving initiatives and costs of $20 related to the sale of land in Mexico. For the three months ended September 30, 2012 , Corporate Operating profit (loss) includes costs of $3 associated with the business realignment and other cost-saving initiatives and costs of $7 related to the sale of land in Mexico. For the three and nine months ended September 30, 2011, Corporate Operating profit (loss) included a gain on the sale of the non-core laundry detergent business in Colombia of $ 207 , costs of $ 168 associated with the business realignment and other cost-saving initiatives and costs of $ 7 related to the sale of land in Mexico. The business realignment and other cost-saving initiatives include the integration of Sanex, the right-sizing of the Colombia business and the closing of an oral care facility in Mississauga, Canada and a Hill’s facility in Los Angeles, California. For further information regarding the Sanex acquisition, the sale of the non-core laundry detergent business in Colombia and the sale of land in Mexico, refer to Note 4.

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, 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 arising 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 twelve months.

14

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 September 30, 2012 and December 31, 2011 :

 
Assets
 
Liabilities
 
 
Account
 
Fair Value
 
Account
 
Fair Value
Designated derivative instruments
 
 
9/30/12
 
12/31/11
 
 
 
9/30/12
 
12/31/11
Interest rate swap contracts
Other current assets
 
$
5

 
$
2

 
Other accruals
 
$

 
$

Interest rate swap contracts
Other assets
 
45

 
40

 
Other liabilities
 

 
2

Foreign currency contracts
Other current assets
 
4

 
8

 
Other accruals
 
9

 
6

Foreign currency contracts
Other assets
 
28

 
28

 
Other liabilities
 

 

Commodity contracts
Other current assets
 
5

 

 
Other accruals
 

 
1

Total designated
 
 
$
87

 
$
78

 
 
 
$
9

 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated
 
 
 

 
 

 
 
 
 
 
 

Foreign currency contracts
Other assets
 
$

 
$
3

 
Other liabilities
 
$
1

 
$

Total not designated
 
 
$

 
$
3

 
 
 
$
1

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Total derivative instruments
 
 
$
87

 
$
81

 
 
 
$
10

 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
Other financial instruments
 
 
 

 
 

 
 
 
 

 
 

Marketable securities
Other current assets
 
$
81

 
$
72

 
 
 
 

 
 

Available-for-sale securities
Other assets
 
623

 
236

 
 
 
 

 
 

Total other financial instruments
 
 
$
704

 
$
308

 
 
 
 

 
 


The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of September 30, 2012 and December 31, 2011 . The estimated fair value of the Company’s long-term debt, including the current portion, as of September 30, 2012 and December 31, 2011 , was $5,635 and $5,121 , respectively, and the related carrying value was $5,193 and $4,776 , 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).

15

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

Fair value hedges

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

Activity related to fair value hedges recorded during the three-month and nine -month periods ended September 30, 2012 and 2011 was as follows:
 
2012
 
2011
 
Foreign
Currency
Contracts
 
Interest
Rate
Swaps
 
 
Total
 
Foreign
Currency
Contracts
 
Interest
Rate
Swaps
 
 
Total
Notional Value at September 30,
$
944

 
$
1,338

 
$
2,282

 
$
619

 
$
1,288

 
$
1,907

Three-months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivative
(8
)
 
5

 
(3
)
 

 
22

 
22

Gain (loss) on hedged items
8

 
(5
)
 
3

 

 
(22
)
 
(22
)
Nine-months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivative
2

 
12

 
14

 
6

 
30

 
36

Gain (loss) on hedged items
(2
)
 
(12
)
 
(14
)
 
(6
)
 
(30
)
 
(36
)

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 and nine -month periods ended September 30, 2012 and 2011 was as follows:
 
2012
 
2011
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
Notional Value at September 30,
$
347

 
$
26

 
$
373

 
$
326

 
$
32

 
$
358

Three-months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
(7
)
 
6

 
(1
)
 
(2
)
 
(2
)
 
(4
)
Gain (loss) reclassified into Cost of sales
(1
)
 
4

 
3

 
(5
)
 
1

 
(4
)
Nine-months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
(4
)
 
11

 
7

 
(9
)
 
(2
)
 
(11
)
Gain (loss) reclassified into Cost of sales

 
4

 
4

 
(13
)
 
6

 
(7
)

16

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

The net gain (loss) recognized in OCI for both foreign currency contracts and commodity contracts is expected to be recognized in Cost of sales within the next twelve months.

Net investment hedges

The Company has designated certain foreign currency forward and option contracts and certain foreign currency-denominated debt as net investment hedges, for which the gain or loss on the instrument is reported as a component of Currency translation adjustments within OCI, along with the offsetting gain or loss on the hedged items.

Activity related to net investment hedges recorded during the three-month and nine -month periods ended September 30, 2012 and 2011 was as follows:
 
2012
 
2011
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
Notional Value at September 30,
$
527

 
$
296

 
$
823

 
$
32

 
$
348

 
$
380

Three-months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
(6
)
 
(2
)
 
(8
)
 
2

 
23

 
25

Gain (loss) on hedged items
8

 
2

 
10

 
(2
)
 
(23
)
 
(25
)
Nine-months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
2

 
2

 
4

 
(8
)
 
(10
)
 
(18
)
Gain (loss) on hedged items
(5
)
 
(2
)
 
(7
)
 
8

 
10

 
18


Derivatives Not Designated as Hedging Instruments

Derivatives not designated as hedging instruments for each period consist of a cross-currency swap that serves as an economic hedge of a foreign currency deposit, for which the gain or loss on the instrument and the offsetting gain or loss on the hedged item are recognized in Other (income) expense, net for each period. The cross-currency swap outstanding at December 31, 2010 was settled during the second quarter of 2011, resulting in a realized loss of $6 which was offset by a corresponding gain on an underlying deposit. A new cross-currency swap with similar terms and an underlying foreign currency deposit was entered into during June 2011.

Activity related to these contracts during the three-month and nine -month periods ended September 30, 2012 and 2011 was as follows:
 
2012
 
2011
 
Cross-currency
Swap
 
Cross-currency
Swap
Notional Value at September 30,
$
96

 
$
96

Three-months ended September 30:
 
 
 
Gain (loss) on instrument
(3
)
 
2

Gain (loss) on hedged item
3

 
(2
)
Nine-months ended September 30:
 
 
 
Gain (loss) on instrument
(4
)
 
(2
)
Gain (loss) on hedged item
4

 
2


17

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

Other Financial Instruments

Other financial instruments include marketable securities and Venezuelan bonds. The marketable securities primarily consist of bank deposits with original maturities greater than 90 days (Level 1 valuation) and are included in Other current assets.

Through its subsidiary in Venezuela, the Company is invested in U.S. dollar-linked, devaluation-protected bonds and fixed interest rate bonds, both of which are issued by the Venezuelan government. These bonds are actively traded and, therefore, are considered Level 2 investments as their values are determined based upon observable market-based inputs or unobservable inputs that are corroborated by market data. As of September 30, 2012 , the U.S. dollar-linked, devaluation protected bonds and the fixed interest rate bonds had fair market values of $250 and $373 , respectively. These investments are considered available-for-sale securities and are included in Other assets.

The following table presents a reconciliation of the Venezuelan bonds at fair value for the nine months ended September 30 :
 
2012
 
2011
Beginning balance as of January 1,
$
236

 
$
96

Unrealized gain (loss) on investment
14

 
60

Purchases and sales during the period
373

 
77

Ending balance as of September 30,
$
623

 
$
233


As a result of the Venezuelan government’s elimination of the two-tier exchange rate structure effective January 1, 2011, the U.S. dollar-linked, devaluation-protected bonds revalued and the Company recorded an unrealized gain of $ 62 in the first quarter of 2011. For further information regarding Venezuela, refer to Note 12 below.

12.
Venezuela

Effective January 1, 2010, Venezuela was designated as hyperinflationary and, therefore, the functional currency for the Company’s Venezuelan subsidiary (CP Venezuela) became the U.S. dollar. As a result, the impact of Venezuelan currency fluctuations is reported in income. The change in the reporting currency from the Venezuelan bolivar fuerte to the U.S. dollar resulted in a one-time charge of $ 271 recorded within Other (income) expense, net in the first quarter of 2010.

On January 8, 2010, the Venezuelan government announced its decision to devalue its currency and implement a two-tier exchange rate structure. As a result, the official exchange rate changed from 2.15 to 2.60 for essential goods and 4.30 for non-essential goods. The devaluation resulted in a one-time pretax gain of $ 46 recorded in Other (income) expense and an aftertax gain of $ 59 in the first quarter of 2010. In December 2010, the Venezuelan government announced that, effective January 1, 2011, the 2.60 exchange rate for essential goods would be abolished. As a result, CP Venezuela incurred an aftertax loss of $ 36 in the fourth quarter of 2010.

The Company remeasures the financial statements of CP Venezuela at the rate at which it expects to remit future dividends, which currently is 4.30 . For the nine months ended September 30, 2012 , CP Venezuela represented approximately 5% of the Company’s consolidated Net sales. At September 30, 2012 , CP Venezuela’s bolivar fuerte-denominated net monetary asset position, which would be subject to translation adjustment in the event of a devaluation, was approximately $500 . This amount does not include $ 250 of devaluation-protected bonds issued by the Venezuelan government, as these bonds provide protection against devaluations by adjusting the amount of bolivares fuerte received at maturity for any devaluation subsequent to issuance.


18

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

13.
Subsequent Event

On October 24, 2012, the Company’s Board of Directors approved a four -year Global Growth and Efficiency Program (the “2012 Restructuring Program”) for sustained growth. The program’s initiatives are expected to help Colgate ensure continued solid worldwide growth in unit volume, organic sales and earnings per share and enhance its global leadership positions in its core businesses.

Implementation of the 2012 Restructuring Program, which is expected to be substantially completed by December 31, 2016, is projected to result in cumulative pretax charges, once all phases are approved and implemented, totaling between $ 1,100 and $ 1,250 ($ 775 and $ 875 aftertax), which are currently estimated to be comprised of the following: employee-related costs, including severance, pension and other termination benefits ( 50% ); asset-related costs, primarily accelerated depreciation and asset write-downs ( 15% ); and other charges, which include contract termination costs, consisting primarily of implementation-related charges resulting directly from exit activities ( 20% ) and the implementation of new strategies ( 15% ). Over the course of the four-year 2012 Restructuring Program, it is estimated that approximately 75% of the charges will result in cash expenditures.

Charges related to the 2012 Restructuring Program will be recorded in the Corporate segment as these decisions are predominantly centrally directed and controlled and are not included in internal measures of segment operating performance. It is expected that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America ( 15% ), Europe/South Pacific ( 20% ), Latin America ( 5% ), Greater Asia/Africa ( 10% ), Hill’s Pet Nutrition ( 15% ) and Corporate ( 35% ), which includes substantially all of the costs related to the implementation of new strategies, noted above, on a global basis. It is expected that by the end of 2016, the 2012 Restructuring Program will reduce the Company’s global employee workforce by approximately 6% from the current level of 38,600 .



19

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


Executive Overview and Outlook

Colgate-Palmolive Company seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers globally with products that make their lives healthier and more enjoyable.

To this end, the Company is tightly focused on two product segments: Oral, Personal and Home Care; and Pet Nutrition. Within these segments, the Company follows a closely defined business strategy to develop and increase market leadership positions in key product categories. These product categories are prioritized based on their capacity to maximize the use of the organization’s core competencies and strong global equities and to deliver sustainable long-term growth.

Operationally, the Company is organized along geographic lines with management teams having responsibility for the business and financial results in each region. The Company competes in more than 200 countries and territories worldwide with established businesses in all regions contributing to the Company’s sales and profitability. Approximately 80% of the Company’s net sales are generated from markets outside the U.S., with approximately 50% of the Company’s net sales coming from emerging markets (which consist of Latin America, Greater Asia/Africa (excluding Japan) and Central Europe). This geographic diversity and balance help to reduce the Company’s exposure to business and other risks in any one country or part of the world.

The Oral, Personal and Home Care segment is operated through 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, net sales (including volume, pricing and foreign exchange components), organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments), gross profit margin, operating profit, net income and earnings per share, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators and the Company’s Code of Conduct and corporate governance practices help to maintain business health and strong internal controls.

To achieve its business and financial objectives, the Company focuses the organization on initiatives to drive and fund growth. The Company seeks to capture significant opportunities for growth by identifying and meeting consumer needs within its core categories, through its focus on innovation and the deployment of valuable consumer and shopper insights in the development of successful new products regionally, which are then rolled out on a global basis. To enhance these efforts, the Company has developed key initiatives to build strong relationships with consumers, dental and veterinary professionals and retail customers. Growth opportunities are greater in those areas of the world in which economic development and rising consumer incomes expand the size and number of markets for the Company’s products.

The investments needed to support growth are developed through continuous, Company-wide initiatives to lower costs and increase effective asset utilization. Through these initiatives, which are referred to as the Company’s funding-the-growth initiatives, the Company seeks to become even more effective and efficient throughout its businesses. These initiatives are designed to reduce costs associated with direct materials, indirect expenses and distribution and logistics and encompass a wide range of projects, examples of which include raw material substitution, reduction of packaging materials, consolidating suppliers to leverage volumes and increasing manufacturing efficiency through SKU reductions and formulation simplification. The Company also continues to prioritize its investments toward its higher margin businesses, specifically Oral Care, Personal Care and Pet Nutrition.


20

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


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 for an aggregate purchase price of €676 ( $966 ). 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.

On July 29, 2011, in connection with the Sanex acquisition, Colgate sold its non-core laundry detergent business in Colombia to Unilever for $215 resulting in a pretax gain of $207 ( $135 aftertax gain). In 2011, this gain was more than offset by pretax costs of $224 ( $177 aftertax costs) associated with the implementation of business realignment and other cost-saving initiatives, the sale of land in Mexico discussed below and a competition law matter in France related to a divested detergent business as discussed in Note 9 “Contingencies” to the Condensed Consolidated Financial Statements. The business realignment and other cost-saving initiatives include the integration of Sanex, the right-sizing of the Colombia business and the closing of an oral care facility in Mississauga, Canada and a Hill’s facility in Los Angeles, California. In the nine months ended September 30, 2012, the Company incurred aftertax costs of $14 associated with the business realignment and other cost-saving initiatives and aftertax costs of $15 related to the sale of land in Mexico.

On September 13, 2011, the Company’s Mexican subsidiary entered into an agreement to sell to the United States of America the Mexico City site on which its commercial operations, technology center and soap production facility are located. The sale price is payable in three installments, with the final installment due upon the transfer of the property, which is expected to occur in 2014. The Company is re-investing these payments to relocate its soap production to a new state-of-the-art facility to be constructed at its Mission Hills, Mexico site, to relocate its commercial and technology operations within Mexico City and to prepare the existing site for transfer. As a result, the Company expects to make capital improvements and incur costs to exit the site through 2014. These exit costs will primarily be related to staff leaving indemnities, accelerated depreciation and demolition to make the site building-ready.

With over 80% 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. For example, as discussed in detail below, the operating environment in Venezuela is challenging, with economic uncertainty fueled by currency devaluations and high inflation and governmental restrictions in the form of import authorization controls, currency exchange controls, price controls and the possibility of expropriation of property or other resources.

In particular, the Company has been impacted as a result of the significant devaluations of the Venezuelan bolivar fuerte, described more fully in Note 12 “Venezuela” to the Condensed Consolidated Financial Statements. In addition, the Venezuelan government continues to impose import authorization controls, currency exchange and payment controls and price controls. CP Venezuela continues to have limited access to U.S. dollars at the official rate, and currently only for imported goods. Under existing regulations, CP Venezuela is not permitted to access the currency market established in 2010, and as a result, CP Venezuela funds its requirements for imported goods through a combination of U.S. dollars obtained from the government at the official rate, intercompany borrowings, the use of financial and other intermediaries and existing U.S. dollar cash balances, which were obtained previously through parallel market transactions and through the prior liquidation of its U.S. dollar-denominated bond portfolio. On April 1, 2012, price controls became effective, affecting most products in CP Venezuela’s portfolio, thereby further restricting the Company’s ability to implement price increases, which has been one of the key mechanisms to offset the effects of continuing high inflation.


21

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


The Company’s business in Venezuela, and the Company’s 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 or more stringent controls on foreign currency exchange, pricing or imports or other governmental actions. For the nine months ended September 30, 2012 , CP Venezuela represented approximately 5% of the Company’s consolidated Net sales. At September 30, 2012 , CP Venezuela’s local currency net monetary asset position was approximately $ 500 . The Company actively manages its investment in and exposure to Venezuela.

On October 24, 2012, the Company’s Board of Directors approved a four-year Global Growth and Efficiency Program (the “2012 Restructuring Program”) for sustained growth. The program’s initiatives are expected to help Colgate ensure continued solid worldwide growth in unit volume, organic sales and earnings per share and enhance its global leadership positions in its core businesses.

This four-year Global Growth and Efficiency Program is expected to produce significant benefits in the Company’s long-term business performance. The major objectives of the program include:
Becoming even stronger on the ground through the continued evolution and expansion of proven global and regional commercial capabilities, which have already been successfully implemented in a number of the Company’s operations around the world.
Simplifying and standardizing how work gets done by increasing technology enabled collaboration and taking advantage of global data and analytic capabilities, leading to smarter and faster decisions.
Reducing structural costs to continue to increase the Company’s gross and operating profit.
Building on Colgate’s current position of strength to enhance its leading market share positions worldwide and ensure sustained sales and earnings growth.

Implementation of the 2012 Restructuring Program is projected to result in cumulative pretax charges, once all phases are approved and implemented, totaling between $1,100 and $1,250 ($775 and $875 aftertax), beginning with approximately $110 to $120 ($90 to $100 aftertax) in the fourth quarter of 2012. The anticipated charges for 2013 are expected to amount to approximately $260 to $310 ($185 to $220 aftertax). Over the course of the four-year 2012 Restructuring Program, it is estimated that approximately 75% of the charges will result in cash expenditures. It is expected that by the end of 2016, the 2012 Restructuring Program will reduce the Company’s global employee workforce by approximately 6% from the current level of 38,600.

Savings are projected to be in the range of $365 to $435 ($275 to $325 aftertax) annually by the fourth year of the program, substantially all of which are expected to increase future cash flows. Savings in 2013 should approximate $40 to $50 ($30 to $40 aftertax) effective in the latter part of the year.
Initiatives under the program will focus on the following three areas:
Expanding Commercial Hubs - Building on the success of this structure already implemented in several divisions, continue to cluster single-country subsidiaries into more efficient regional hubs, in order to drive smarter and faster decision making, strengthen capabilities available on the ground and improve cost structure.
Extending Shared Business Services and Streamlining Global Functions - Implementing the Company’s shared service organizational model, already successful in Europe, in all regions of the world. Initially focused on finance and accounting, these shared services will be expanded to additional functional areas to streamline global functions.
Optimizing Global Supply Chain and Facilities - Continuing to optimize manufacturing efficiencies, global warehouse networks and office locations for greater efficiency, lower cost and speed to bring innovation to market.

22

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


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 continues to experience heightened competitive activity in certain markets from other large multinational companies, some of which have greater resources than we do. Such activities have included more aggressive product claims and marketing challenges, as well as increased promotional spending and geographic expansion. Additionally, we continue to experience volatile foreign currency fluctuations and high commodity costs. While the Company has taken, and will continue to take, measures to mitigate the effect of these conditions, should they persist, they could adversely affect the Company’s future results.

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



23

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


Results of Operations

Three Months

Worldwide Net sales were $4,332 in the third quarter of 2012 , down 1.0% from the third quarter of 2011 , as volume growth of 2.0% and net selling price increases of 3.0% were more than offset by negative foreign exchange of 6.0% . Organic sales (Net sales excluding foreign exchange, acquisitions and divestments), a non-GAAP financial measure as discussed below, increased 5.0% in the third quarter of 2012 .

Net sales in the Oral, Personal and Home Care segment were $3,804 in the third quarter of 2012 , down 1.0% from the third quarter of 2011 , as volume growth of 2.5% and net selling price increases of 2.5% were more than offset by negative foreign exchange of 6.0% . Excluding the impact of the divestment of the non-core laundry detergent business in Colombia, volume increased 3.0% . Organic sales in the Oral, Personal and Home Care segment increased 5.5% .

Gross Profit/Margin

Worldwide Gross profit increased 3% to $ 2,529 in the third quarter of 2012 from $ 2,462 in the third quarter of 2011

Gross profit in both periods included costs associated with the business realignment and other cost-saving initiatives. Gross profit in the third quarter of 2012 also included the impact of costs related to the sale of land in Mexico. Excluding the items described above in both periods, Gross profit increased to $2,537 in the third quarter of 2012 from $2,490 in the third quarter of 2011 , primarily due to higher gross profit margin.

Worldwide Gross profit margin increased to 58.4% in the third quarter of 2012 from 56.2% in the third quarter of 2011 .  Excluding the items described above, Gross profit margin increased by 180 bps to 58.6% in the third quarter of 2012 . This increase in the third quarter of 2012 was primarily due to cost savings from the Company’s funding-the-growth initiatives ( 210 bps) and higher pricing ( 115 bps), which were partially offset by higher raw and packaging material costs driven by higher global commodity costs and negative foreign exchange transaction costs ( 185 bps).
 
 
Three Months Ended September 30,
 
 
2012
 
2011
Gross profit, GAAP
 
$
2,529

 
$
2,462

Costs related to the sale of land in Mexico
 
7

 

Business realignment and other cost-saving initiatives
 
1

 
28

Gross profit, non-GAAP
 
$
2,537

 
$
2,490


 
 
Three Months Ended September 30,
 
 
2012
 
2011
 
Basis Point Change
Gross profit margin, GAAP
 
58.4
%
 
56.2
%
 
220
Costs related to the sale of land in Mexico
 
0.2
%
 

 

Business realignment and other cost-saving initiatives
 

 
0.6
%
 

Gross profit margin, non-GAAP
 
58.6
%
 
56.8
%
 
180

24

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


Selling, General and Administrative expenses

Selling, general and administrative expenses increased 1% to $1,501 in the third quarter of 2012 from $1,489 in the third quarter of 2011

Selling, general and administrative expenses in both periods included the impact of costs associated with the business realignment and other cost-saving initiatives. Excluding the impact of costs associated with the business realignment and other cost-saving initiatives in both periods, Selling, general and administrative expenses increased to $1,499 in the third quarter of 2012 from $1,484 in the third quarter of 2011 .

Selling, general and administrative expenses as a percentage of Net sales increased to 34.6% in the third quarter of 2012 from 34.0% in the third quarter of 2011 . Excluding the impact of costs associated with the business realignment and other cost-saving initiatives in both periods, Selling, general and administrative expenses as a percentage of Net sales were 34.6% , an increase of 70 bps as compared to the year ago quarter. The increase was a result of higher overhead expenses and higher advertising expenses, both as a percentage of Net sales. This increase in overhead expenses is mainly due to negative foreign exchange transaction costs, higher costs due to inflation, higher postretirement benefit expenses and the timing of expenses incurred during the year. In the third quarter of 2012 , advertising increased 0.7% to $453 , as compared with $450 in the third quarter of 2011 , and increased as a percentage of Net sales to 10.5% in the third quarter of 2012 from 10.3% in the third quarter of 2011 .

 
 
Three Months Ended September 30,
 
 
2012
 
2011
Selling, general and administrative expenses, GAAP
 
$
1,501

 
$
1,489

Business realignment and other cost-saving initiatives
 
(2
)
 
(5
)
Selling, general and administrative expenses, non-GAAP
 
$
1,499

 
$
1,484


 
 
Three Months Ended September 30,
 
 
2012
 
2011
 
Basis Point Change
Selling, general and administrative expenses as a percentage of Net sales, GAAP
 
34.6
%
 
34.0
 %
 
60
Business realignment and other cost-saving initiatives
 

 
(0.1
)%
 

Selling, general and administrative expenses as a percentage of Net sales, non-GAAP
 
34.6
%
 
33.9
 %
 
70

25

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


Other (income) expense, net

Other (income) expense, net was $1 in the third quarter of 2012 , as compared to ( $62 ) in the third quarter of 2011 . In the third quarter of 2011, Other (income) expense, net included costs related to the sale of land in Mexico, costs associated with the business realignment and other cost-saving initiatives and the gain on the sale of the non-core laundry detergent business in Colombia. Excluding these items, Other (income) expense, net decreased to $1 in the third quarter of 2012 from $3 in the third quarter of 2011 . In the third quarter of 2011 , Other (income) expense, net also included transaction costs of $2 related to the Sanex acquisition.
 
 
Three Months Ended September 30,
 
 
2012
 
2011
Other (income) expense, net, GAAP
 
$
1

 
$
(62
)
Costs related to the sale of land in Mexico
 

 
(7
)
Business realignment and other cost-saving initiatives
 

 
(135
)
Gain on sale of non-core detergent business in Colombia
 

 
207

Other (income) expense, net, non-GAAP
 
$
1

 
$
3


Operating Profit

Operating profit decreased 1% to $1,027 in the third quarter of 2012 from $1,035 in the third quarter of 2011 .

Operating profit in both periods included the impact of costs related to the sale of land in Mexico and costs associated with the business realignment and other cost-saving initiatives. Operating profit for the three months ended September 30, 2011 also included the gain on the sale of the non-core laundry detergent business in Colombia. Excluding the items described above in both periods, Operating profit increased 3% to $1,037 in the third quarter of 2012 as compared to the third quarter of 2011 , primarily due to higher Gross profit as a percentage of Net sales.

Operating profit margin was 23.7% in the third quarter of 2012 , an increase of 10 bps compared to the third quarter of 2011. Excluding the items described above in both periods, Operating profit margin increased 100 bps to 23.9% in the third quarter of 2012 as compared to 22.9% in the third quarter of 2011 . This increase is mainly due to an increase in Gross profit as a percentage of Net sales.
 
 
Three Months Ended September 30,
 
 
2012
 
2011
 
% Change
Operating profit, GAAP
 
$
1,027

 
$
1,035

 
(1
)%
Costs related to the sale of land in Mexico
 
7

 
7

 
 
Business realignment and other cost-saving initiatives
 
3

 
168

 
 
Gain on sale of non-core detergent business in Colombia
 

 
(207
)
 
 
Operating profit, non-GAAP
 
$
1,037

 
$
1,003

 
3
 %
 
 
Three Months Ended September 30,
 
 
2012
 
2011
 
Basis Point Change
Operating profit margin, GAAP
 
23.7
%
 
23.6
 %
 
10
Costs related to the sale of land in Mexico
 
0.1
%
 
0.2
 %
 

Business realignment and other cost-saving initiatives
 
0.1
%
 
3.8
 %
 

Gain on sale of non-core detergent business in Colombia
 

 
(4.7
)%
 
 
Operating profit margin, non-GAAP
 
23.9
%
 
22.9
 %
 
100

26

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


Net Sales and Operating Profit by Segment

Oral, Personal and Home Care

North America
 
Three Months Ended September 30,
 
2012
 
2011
 
Change
Net sales
$
797

 
$
776

 
2.5

%
Operating profit
$
219

 
$
213

 
3

%
% of Net sales
27.5
%
 
27.4
%
 
10

bps

Net sales in North America increased 2.5% in the third quarter of 2012 to $797 , driven by volume growth of 2.0% and net selling price increases of 0.5% . Organic sales in North America increased 2.5% in the third quarter of 2012 .

Operating profit in North America increased 3% in the third quarter of 2012 to $219 , or 27.5% of Net sales. This increase in Operating profit was due to an increase in Gross profit, which was partially offset by an increase in Selling, general and administrative expenses, both as a percentage of Net sales. This increase in Gross profit was driven by higher pricing and cost savings from the Company’s funding-the-growth initiatives, which were partially offset by higher raw and packaging material costs. This increase in Selling, general and administrative expenses was primarily due to higher advertising expenses.

Latin America
 
Three Months Ended September 30,
 
2012
 
2011
 
Change
Net sales
$
1,245

 
$
1,243

 

%
Operating profit
$
371

 
$
364

 
2

%
% of Net sales
29.8
%
 
29.3
%
 
50

bps

Net sales in Latin America increased to $1,245 in the third quarter of 2012 . Volume growth of 2.5% and net selling price increases of 5.5% were offset by a significant negative foreign exchange of 8.0% . The divestment of the non-core laundry detergent business in Colombia in 2011 had an impact of 1.0% on Net sales and volume growth in Latin America. Organic sales in Latin America increased 9.0% in the third quarter of 2012. Volume gains were led by Brazil, Ecuador, Mexico and Central America and were partially offset by a volume decline in Venezuela.

Operating profit in Latin America increased 2% in the third quarter of 2012 to $371 , or 29.8% of Net sales. This increase in Operating profit was due to an increase in Gross profit, which was partially offset by an increase in Selling, general and administrative expenses, both as a percentage of Net sales. This increase in Gross profit was driven by higher pricing and cost savings from the Company’s funding-the-growth initiatives, which were partially offset by higher raw and packaging material costs. This increase in Selling, general and administrative expenses was primarily due to higher overhead expenses, which were partially offset by lower advertising expenses. This increase in overhead expenses was mainly due to negative foreign exchange transaction costs and higher costs due to inflation in Venezuela.

27

COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)


Europe/South Pacific
 
Three Months Ended September 30,
 
2012
 
2011
 
Change
Net sales
$
865

 
$
972

 
(11.0
)
%
Operating profit
$
198

 
$
196

 
1

%
% of Net sales
22.9
%
 
20.2
%
 
270

bps

Net sales in Europe/South Pacific decreased 11.0% in the third quarter of 2012 to $865 , as a result of volume decline of 1.5% , net selling price decreases of 1.0% and a significant negative impact of foreign exchange of 8.5% . Organic sales in Europe/South Pacific decreased 2.5% in the third quarter of 2012 . Volume gains in Australia were more than offset by volume declines in Western Europe.

Operating profit in Europe/South Pacific increased 1% in the third quarter of 2012 to $198 , or 22.9% of Net sales. The increase in Operating profit was due to an increase in Gross profit and a decrease in Selling, general and administrative expenses, both as a percentage of Net sales. This increase in Gross profit was driven by savings from the Company’s funding-the-growth initiatives, which were partially offset by lower pricing. This decrease in Selling, general and administrative expenses was driven by lower overhead expenses, which were partially offset by higher advertising expenses.

Greater Asia/Africa
 
Three Months Ended September 30,
 
2012
 
2011
 
Change
Net sales
$
897

 
$
855

 
5.0

%
Operating profit
$
231

 
$
202

 
14

%
% of Net sales
25.8
%
 
23.6
%
 
220