Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-12
exhibit12_93018xq318.htm
EX-31.A
exhibit31a_93018xq318.htm
EX-31.B
exhibit31b_93018xq318.htm
EX-32
exhibit32_93018xq318.htm
Colgate Palmolive Earnings 2018-09-30
CL 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 cl-9302018x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
_________________________
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
Shares Outstanding
Date
Common stock, $1.00 par value
867,319,919
September 30, 2018
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,
2018
2017 (A)
2018
2017 (A)
Net sales
$
3,845
$
3,974
$
11,733
$
11,562
Cost of sales
1,576
1,591
4,755
4,610
Gross profit
2,269
2,383
6,978
6,952
Selling, general and administrative expenses
1,369
1,410
4,061
4,055
Other (income) expense, net
26
16
114
150
Operating profit
874
957
2,803
2,747
Non-service related postretirement costs
18
30
65
82
Interest (income) expense, net
36
27
106
74
Income before income taxes
820
900
2,632
2,591
Provision for income taxes
258
250
717
770
Net income including noncontrolling interests
562
650
1,915
1,821
Less: Net income attributable to noncontrolling interests
39
43
121
120
Net income attributable to Colgate-Palmolive Company
$
523
$
607
$
1,794
$
1,701
Earnings per common share, basic
$
0.60
$
0.69
$
2.06
$
1.93
Earnings per common share, diluted
$
0.60
$
0.68
$
2.05
$
1.91
Dividends declared per common share *
$
0.42
$
0.40
$
1.66
$
1.59
* Two dividends were declared in the first quarter of 2018 and 2017.
(A) Prior year amounts have been reclassified to conform to the current year presentation as a result of the adoption of Accounting Standards Update (“ASU”) No. 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” For further information regarding the impact of the reclassification, see Note 1, Basis of Presentation, Note 3, Recent Accounting Pronouncements and Updated Accounting Policies and Note 13, Segment Information to the Condensed Consolidated Financial Statements.
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,
2018
2017
2018
2017
Net income including noncontrolling interests
$
562
$
650
$
1,915
$
1,821
Other comprehensive income (loss), net of tax:
Cumulative translation adjustments
(49
)
64
(247
)
294
Retirement plans and other retiree benefit adjustments
31
54
59
79
Gains (losses) on cash flow hedges
(1
)
(3
)
9
(16
)
Total Other comprehensive income (loss), net of tax
(19
)
115
(179
)
357
Total Comprehensive income including noncontrolling interests
543
765
1,736
2,178
Less: Net income attributable to noncontrolling interests
39
43
121
120
Less: Cumulative translation adjustments attributable to noncontrolling interests
(11
)
2
(25
)
11
Total Comprehensive income attributable to noncontrolling interests
28
45
96
131
Total Comprehensive income attributable to Colgate-Palmolive Company
$
515
$
720
$
1,640
$
2,047
See Notes to Condensed Consolidated Financial Statements.
3
COLGATE-PALMOLIVE COMPANY
Condensed Consolidated Balance Sheets
(Dollars in Millions)
(Unaudited)
September 30, 2018
December 31, 2017
Assets
Current Assets
Cash and cash equivalents
$
841
$
1,535
Receivables (net of allowances of $82 and $77, respectively)
1,532
1,480
Inventories
1,245
1,221
Other current assets
523
403
Total current assets
4,141
4,639
Property, plant and equipment:
Cost
8,451
8,460
Less: Accumulated depreciation
(4,580
)
(4,388
)
3,871
4,072
Goodwill
2,539
2,218
Other intangible assets, net
1,660
1,341
Deferred income taxes
165
188
Other assets
195
218
Total assets
$
12,571
$
12,676
Liabilities and Shareholders’ Equity
Current Liabilities
Notes and loans payable
$
85
$
11
Current portion of long-term debt
—
—
Accounts payable
1,158
1,212
Accrued income taxes
360
354
Other accruals
2,144
1,831
Total current liabilities
3,747
3,408
Long-term debt
6,519
6,566
Deferred income taxes
325
204
Other liabilities
2,048
2,255
Total liabilities
12,639
12,433
Shareholders’ Equity
Common stock
1,466
1,466
Additional paid-in capital
2,183
1,984
Retained earnings
21,008
20,531
Accumulated other comprehensive income (loss)
(4,172
)
(3,855
)
Unearned compensation
1
(5
)
Treasury stock, at cost
(20,916
)
(20,181
)
Total Colgate-Palmolive Company shareholders’ equity
(430
)
(60
)
Noncontrolling interests
362
303
Total equity
(68
)
243
Total liabilities and equity
$
12,571
$
12,676
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,
2018
2017
Operating Activities
Net income including noncontrolling interests
$
1,915
$
1,821
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operations:
Depreciation and amortization
385
354
Restructuring and termination benefits, net of cash
(20
)
80
Stock-based compensation expense
97
106
Charge for U.S. tax reform
80
—
Deferred income taxes
78
(2
)
Voluntary benefit plan contributions
(67
)
(81
)
Cash effects of changes in:
Receivables
(196
)
(50
)
Inventories
(36
)
16
Accounts payable and other accruals
13
39
Other non-current assets and liabilities
(55
)
12
Net cash provided by operations
2,194
2,295
Investing Activities
Capital expenditures
(321
)
(382
)
Purchases of marketable securities and investments
(159
)
(301
)
Proceeds from sale of marketable securities and investments
28
149
Payment for acquisitions, net of cash acquired
(728
)
—
Other
6
2
Net cash used in investing activities
(1,174
)
(532
)
Financing Activities
Principal payments on debt
(5,478
)
(3,551
)
Proceeds from issuance of debt
5,536
3,478
Dividends paid
(1,122
)
(1,070
)
Purchases of treasury shares
(956
)
(1,055
)
Proceeds from exercise of stock options
319
431
Net cash used in financing activities
(1,701
)
(1,767
)
Effect of exchange rate changes on Cash and cash equivalents
(13
)
69
Net increase (decrease) in Cash and cash equivalents
(694
)
65
Cash and cash equivalents at beginning of the period
1,535
1,315
Cash and cash equivalents at end of the period
$
841
$
1,380
Supplemental Cash Flow Information
Income taxes paid
$
655
$
820
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. Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”) reclassifies certain prior year amounts, as applicable, to conform to the current year presentation.
The Company adopted Accounting Standards Update (“ASU”) No. 2017-07, “Compensation–Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” on January 1, 2018. For further information regarding the impact of the adoption of ASU No. 2017-07, refer to Note 3, Recent Accounting Pronouncements and Updated Accounting Policies and Note 13, Segment Information.
For a complete set of financial statement notes, including the Company’s significant accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the “SEC”).
2.
Use of Estimates
Provisions for certain expenses, including income taxes, 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 and Updated Accounting Policies
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-15, “Intangibles–Goodwill and Other–Internal–Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance is effective for the Company on a prospective or retrospective basis beginning on January 1, 2020, with early adoption permitted. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation–Retirement Benefits–Defined Benefit Plans–General (Topic 715): Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans.” This new guidance removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and requires certain additional disclosures. This new guidance is effective for the Company on a retrospective basis beginning in the year ending December 31, 2020, with early adoption permitted. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This new guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.
6
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement–Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which permits the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “TCJA” or “U.S. tax reform”) from Accumulated other comprehensive income (loss) to Retained earnings. This new guidance is effective for the Company beginning on January 1, 2019, with early adoption permitted, and must be applied either in the period of adoption or retrospectively to periods in which the effects of the TCJA are recognized. The Company elected to adopt this new guidance early, beginning on January 1, 2018, and reclassified $163 during the first quarter of 2018.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” amending the eligibility criteria for hedged items and transactions to expand an entity’s ability to hedge nonfinancial and financial risk components. The new guidance eliminates the requirement to separately measure and present hedge ineffectiveness and aligns the presentation of hedge gains and losses with the underlying hedge item. The new guidance also simplifies the hedge documentation and hedge effectiveness assessment requirements. The new guidance is effective for the Company beginning on January 1, 2019, with early adoption permitted. The amended presentation and disclosure requirements must be adopted on a prospective basis, while any amendments to cash flow and net investment hedge relationships that exist on the date of adoption must be applied on a “modified retrospective” basis, meaning a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the year of adoption. The new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a stock-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance was effective for the Company on a prospective basis beginning on January 1, 2018 and did not impact the Company’s Consolidated Financial Statements, as it is not the Company’s practice to change either the terms or the conditions of stock-based payment awards once they are granted.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation–Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” changing the presentation of the net periodic benefit cost on the Statement of Income and limiting the amount of net periodic benefit cost eligible for capitalization to assets. The new guidance permits only the service cost component of net periodic benefit cost to be eligible for capitalization. The new guidance also requires entities to present the service cost component of net periodic benefit cost together with compensation costs arising from services rendered by employees during the period. The non-service related components of net periodic benefit cost, which include interest, expected return on assets, amortization of prior service costs and actuarial gains and losses, are required to be presented outside of Operating profit. The line item or items used to present the other components of net periodic benefit cost must be disclosed in the Notes to the Consolidated Financial Statements, if not separately described on the Statement of Income. The new presentation requirement is required to be adopted on a “full retrospective” basis, meaning the standard is applied to all of the periods presented in the financial statements, while the limitation on capitalization can only be adopted on a prospective basis. Effective January 1, 2018, as required, the Company adopted this standard on a retrospective basis. As permitted by the new guidance, the Company used the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the basis for applying the retrospective presentation requirements. As a result, for all periods presented, only the service related component of pension and other postretirement benefit costs is included in Operating profit. The non-service related components are included in a new line item, “Non-service related postretirement costs,” which is below Operating profit. For the three months ended September 30, 2017, the Company reclassified $19 and $11 and, for the nine months ended September 30, 2017, the Company reclassified $69 and $13 of non-service related components of pension and other postretirement benefit costs from Selling, general and administrative expenses and Other (income) expense, net, respectively, to Non-service related postretirement costs. Adoption of this standard had no effect on Net income attributable to Colgate-Palmolive Company, Earnings per common share or Cash flow.
7
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard is effective for the Company on a prospective basis beginning on January 1, 2020, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which provides additional guidance on evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the new guidance would define this as an asset acquisition; otherwise, the entity then evaluates whether the asset meets the requirement that a business include, at a minimum, an input and substantive process that together significantly contribute to the ability to create outputs. The guidance was effective for the Company on a prospective basis beginning on January 1, 2018. This new guidance did not have an impact on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. The guidance was effective for the Company on January 1, 2018. This new guidance did not have an impact on the Company’s Consolidated Financial Statements.
In February 2016, the FASB issued its final standard on lease accounting, ASU No. 2016-02, “Leases (Topic 842),” which supersedes Topic 840, “Leases.” The new accounting standard requires the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. Under current accounting standards, substantially all of the Company’s leases are considered operating leases and, as such, are not recognized on the Company’s Consolidated Balance Sheet. The new standard also provides additional guidance on the measurement of the right-of-use assets and lease liabilities and will require enhanced disclosures about the Company’s leasing arrangements. This new standard is effective for the Company beginning on January 1, 2019, with early adoption permitted.
In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” to clarify the implementation guidance and ASU No. 2018-11, “Leases (Topic 842) Targeted Improvements.” This updated guidance provides an optional transition method, which allows for the initial application of the new accounting standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. The Company will adopt the new standard on January 1, 2019 and intends to elect certain practical expedients, including the optional transition method that allows for the application of the new standard at its adoption date with no restatement of prior period amounts. The Company has identified its significant lease contracts by geography and by asset type and is in the process of implementing a global lease management and accounting system. The Company is in the process of finalizing its assessment of the impact of the new standard on its Consolidated Financial Statements and is evaluating its processes and internal controls to identify any necessary changes.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The amendment to the standard was effective for the Company beginning on January 1, 2018 and did not have an impact on the Company’s Consolidated Financial Statements.
8
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
In May 2014, the FASB and the International Accounting Standards Board issued their final converged standard on revenue recognition. The standard, issued as ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by the FASB, provides a comprehensive revenue recognition model for all contracts with customers and supersedes current revenue recognition guidance. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to its customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The new standard also includes enhanced disclosures. During 2016, the FASB issued several accounting updates (ASU No. 2016-08, 2016-10 and 2016-12) to clarify implementation guidance and correct unintended application of the guidance. The standard allows for either full retrospective adoption or modified retrospective adoption. The Company adopted the new standard on January 1, 2018, on a “modified retrospective” basis, which did not have a material impact on the Company’s Consolidated Financial Statements. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the 2018 opening balance of retained earnings. Results for periods beginning on or after January 1, 2018 are presented under Topic 606, “Revenue from Contracts with Customers,” while prior period amounts are not adjusted and continue to be reported in accordance with the prior accounting guidance under Topic 605, “Revenue Recognition.”
The new accounting standard changes only the timing of when certain of the Company’s sales are recorded and does not change the amount at which sales are recorded. The application of the new accounting standard did not have a material impact on the Company’s Consolidated Financial Statements for the three or nine months ended September 30, 2018 and is not expected to have a material impact on the Company’s Consolidated Financial Statements in future periods.
Updated Accounting Policies
Revenue Recognition Accounting Policy
The Company’s revenue contracts represent a single performance obligation to sell its products to trade customers. Sales are recorded at the time control of the products is transferred to trade customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the products. Control is the ability of trade customers to direct the “use of” and “obtain” the benefit from our products. In evaluating the timing of the transfer of control of products to trade customers, the Company considers several control indicators, including significant risks and rewards of products, the Company’s right to payment and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to trade customers.
Net sales reflect the transaction prices for contracts, which include units shipped at selling list prices reduced by variable consideration. Variable consideration includes expected sales returns and the cost of current and continuing promotional programs. Current promotional programs primarily include product listing allowances and co-operative advertising arrangements. Continuing promotional programs are predominantly consumer coupons and volume-based sales incentive arrangements. The cost of promotional programs is estimated using the expected value method considering all reasonably available information, including the Company’s historical experience and its current expectations, and is reflected in the transaction price when sales are recorded. Adjustments to the cost of promotional programs in subsequent periods are generally not material, as the Company’s promotional programs are typically of short duration, thereby reducing the uncertainty inherent in such estimates.
Sales returns are generally accepted at the Company’s discretion and are not material to the Company’s Consolidated Financial Statements. The Company’s contracts with trade customers do not have significant financing components or non-cash consideration and the Company does not have unbilled revenue or significant amounts of prepayments from customers. The Company records Net sales excluding taxes collected on its sales to its trade customers. Shipping and handling activities are accounted for as contract fulfillment costs and classified as Selling, general and administrative expenses.
9
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
4.
Acquisitions and Divestitures
Acquisitions
In January 2018, the Company acquired all of the outstanding equity interests of Physicians Care Alliance, LLC and Elta MD Holdings, Inc., professional skin care businesses, for aggregate cash consideration of approximately $730. With these acquisitions, the Company entered the professional skin care category, which complements its existing global personal care businesses and resulted in the recognition of additional goodwill.
During the third quarter of 2018, the Company updated its analysis of the preliminary valuation of the assets and liabilities acquired, which primarily resulted in an increase of $64 to goodwill, a decrease in other intangible assets of $69 and a decrease in deferred income taxes of $5, compared with the estimates recorded in the first quarter of 2018. The impact of the change to the preliminary estimates was not material to the Company’s results of operations. As a result, the total purchase price consideration of $730 has been allocated to the net assets acquired based on their respective estimated fair values as follows:
Recognized amounts of assets acquired and liabilities assumed:
Inventories
$
8
Other current assets
8
Other intangible assets
369
Goodwill
396
Other current liabilities
(6
)
Deferred income taxes
(45
)
Fair value of net assets acquired
$
730
Based on the Company’s purchase price allocation, other intangible assets acquired primarily include trademarks of $231 with useful lives of 25 years and customer relationships of $133 with useful lives ranging from 12 to 13 years.
Goodwill of $396 was allocated to the North America segment. The Company expects that approximately 45% 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 Condensed Consolidated Financial Statements is not material.
10
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
5.
Restructuring and Related Implementation Charges
In the fourth quarter of 2012, the Company commenced a restructuring program (the “Global Growth and Efficiency Program”) for sustained growth. The program was expanded in 2014 and expanded and extended in 2015. Building on the Company’s successful implementation of the program, on October 26, 2017, the Company’s Board of Directors (the “Board”) approved an expansion of the Global Growth and Efficiency Program and an extension of the program through December 31, 2019 to take advantage of additional opportunities to streamline the Company’s operations.
Initiatives under the Global Growth and Efficiency Program continue to fit within the program’s three focus areas of expanding commercial hubs, extending shared business services and streamlining global functions and optimizing the global supply chain and facilities.
Including the most recent expansion, cumulative pretax charges resulting from the Global Growth and Efficiency Program, once all phases are approved and implemented, are estimated to be in the range of $1,730 to $1,885 ($1,280 to $1,380 aftertax). The Company now anticipates that pretax charges for 2018 will approximate $125 to $165 ($95 to $125 aftertax). It is expected that substantially all charges resulting from the Global Growth and Efficiency Program will be incurred by December 31, 2019.
The pretax charges resulting from the Global Growth and Efficiency Program are currently estimated to be comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits (50%); asset-related costs, primarily Incremental Depreciation and Asset Impairments (5%); and Other charges, which include contract termination costs, consisting primarily of related implementation charges resulting directly from exit activities (25%) and the implementation of new strategies (20%). Over the course of the Global Growth and Efficiency Program, it is currently estimated that approximately 80% of the charges will result in cash expenditures.
The Company expects that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America (15%), Latin America (5%), Europe (20%), Asia Pacific (5%), Africa/Eurasia (5%), Hill’s Pet Nutrition (10%) and Corporate (40%), which includes substantially all of the costs related to the implementation of new strategies, noted above, on a global basis. The Company expects that, when it has been fully implemented, the Global Growth and Efficiency Program will have contributed a net reduction of approximately 3,800 to 4,400 positions from the Company’s global employee workforce.
For the three and nine months ended September 30, 2018 and 2017, restructuring and related implementation charges are reflected in the Condensed Consolidated Statements of Income as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Cost of sales
$
8
$
16
$
19
$
51
Selling, general and administrative expenses
9
22
24
60
Other (income) expense, net
8
9
64
122
Non-service related postretirement costs
1
11
8
13
Total Global Growth and Efficiency Program charges, pretax
$
26
$
58
$
115
$
246
Total Global Growth and Efficiency Program charges, aftertax
$
22
$
39
$
93
$
185
Restructuring and related implementation charges in the preceding table are recorded in the Corporate segment as these initiatives are predominantly centrally directed and controlled and are not included in internal measures of segment operating performance.
11
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
Total charges incurred for the Global Growth and Efficiency Program relate to initiatives undertaken by the following reportable operating segments:
Three Months Ended
Nine Months Ended
Program-to-date
September 30,
September 30,
Accumulated Charges
2018
2017
2018
2017
North America
16
%
27
%
17
%
23
%
18
%
Latin America
8
%
2
%
11
%
3
%
4
%
Europe
(24
)%
(11
)%
(4
)%
29
%
20
%
Asia Pacific
14
%
7
%
4
%
4
%
3
%
Africa/Eurasia
5
%
2
%
5
%
2
%
6
%
Hill’s Pet Nutrition
40
%
9
%
25
%
5
%
8
%
Corporate
41
%
64
%
42
%
34
%
41
%
Total
100
%
100
%
100
%
100
%
100
%
Since the inception of the Global Growth and Efficiency Program in the fourth quarter of 2012, the Company has incurred cumulative pretax charges of $1,676 ($1,246 aftertax) in connection with the implementation of various projects as follows:
Cumulative Charges
as of September 30, 2018
Employee-Related Costs
$
672
Incremental Depreciation
91
Asset Impairments
43
Other
870
Total
$
1,676
The majority of costs incurred since inception relate to the following projects: the implementation of the Company’s overall hubbing strategy; the extension of shared business services and streamlining of global functions; the consolidation of facilities; the closing of the Morristown, New Jersey personal care facility; the simplification and streamlining of the Company’s research and development capabilities and oral care supply chain, both in Europe; redesigning the European commercial organization; restructuring how the Company will provide future retirement benefits to substantially all of the U.S.-based employees participating in the Company’s defined benefit retirement plan by shifting them to the Company’s defined contribution plan; and the implementation of a Corporate efficiencies program.
The following tables summarize the activity for the restructuring and related implementation charges discussed above and the related accruals:
Three Months Ended September 30, 2018
Employee-Related
Costs
Incremental
Depreciation
Asset
Impairments
Other
Total
Balance at June 30, 2018
$
82
$
—
$
—
$
130
$
212
Charges
9
—
5
12
26
Cash payments
(17
)
—
—
(13
)
(30
)
Charges against assets
(1
)
—
(5
)
—
(6
)
Foreign exchange
(3
)
—
—
—
(3
)
Other
—
—
—
—
—
Balance at September 30, 2018
$
70
$
—
$
—
$
129
$
199
12
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
Nine Months Ended September 30, 2018
Employee-Related Costs
Incremental Depreciation
Asset Impairments
Other
Total
Balance at December 31, 2017
$
127
$
—
$
—
$
107
$
234
Charges
44
1
7
63
115
Cash payments
(89
)
—
—
(46
)
(135
)
Charges against assets
(8
)
(1
)
(7
)
—
(16
)
Foreign exchange
(4
)
—
—
—
(4
)
Other
—
—
—
5
5
Balance at September 30, 2018
$
70
$
—
$
—
$
129
$
199
Employee-Related Costs primarily include severance and other termination benefits and are calculated based on long-standing benefit practices, local statutory requirements and, in certain cases, voluntary termination arrangements. Employee-Related Costs also include pension and other retiree benefit enhancements amounting to $1 and $8 for the three and nine months ended September 30, 2018, respectively, which are reflected as Charges against assets within Employee-Related Costs in the preceding tables as the corresponding balance sheet amounts are reflected as a reduction of pension assets or an increase in pension and other retiree benefit liabilities. See Note 10, Retirement Plans and Other Retiree Benefits for additional information.
Incremental Depreciation is recorded to reflect changes in useful lives and estimated residual values for long-lived assets that will be taken out of service prior to the end of their normal service period. Asset Impairments are recorded to write down inventories and assets held for sale or disposal to their fair value based on amounts expected to be realized. Charges against assets within Asset Impairments are net of cash proceeds pertaining to the sale of certain assets.
Other charges consist primarily of charges resulting directly from exit activities and the implementation of new strategies as a result of the Global Growth and Efficiency Program. These charges for the three and nine months ended September 30, 2018 include third-party incremental costs related to the development and implementation of new business and strategic initiatives of $11 and $31, respectively, and contract termination costs and charges resulting directly from exit activities of $1 and $32, respectively. These charges were expensed as incurred.
6. Inventories
Inventories by major class are as follows:
September 30, 2018
December 31, 2017
Raw materials and supplies
$
248
$
267
Work-in-process
40
42
Finished goods
957
912
Total Inventories
$
1,245
$
1,221
13
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
7. Shareholders’ Equity
Changes in the components of Shareholders’ Equity for the nine months ended September 30, 2018 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, 2017
$
1,466
$
1,984
$
(5
)
$
(20,181
)
$
20,531
$
(3,855
)
$
303
Net income
1,794
121
Other comprehensive income (loss), net of tax
(154
)
(25
)
Dividends
(1,450
)
(37
)
Stock-based compensation expense
97
Shares issued for stock options
133
188
Shares issued for restricted stock units
(31
)
31
Treasury stock acquired
(956
)
Other
—
6
2
133
(163
)
(1)
Balance, September 30, 2018
$
1,466
$
2,183
$
1
$
(20,916
)
$
21,008
$
(4,172
)
$
362
(1) As a result of the early adoption of ASU 2018-02, the Company reclassified the stranded tax effects in Accumulated other comprehensive income (loss) resulting from the TCJA to Retained earnings. See Note 3, Recent Accounting Pronouncements and Updated Accounting Policies for additional information.
Accumulated other comprehensive income (loss) includes cumulative translation losses of $3,159 and $2,927 at September 30, 2018 and December 31, 2017, respectively, and unrecognized retirement plan and other retiree benefits costs of $1,017 and $923 at September 30, 2018 and December 31, 2017, respectively.
14
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
8. Earnings Per Share
For the three months ended September 30, 2018 and 2017, earnings per share were as follows:
Three Months Ended
September 30, 2018
September 30, 2017
Net income attributable to Colgate-Palmolive Company
Shares
(millions)
Per
Share
Net income attributable to Colgate-Palmolive Company
Shares
(millions)
Per
Share
Basic EPS
$
523
868.8
$
0.60
$
607
880.7
$
0.69
Stock options and
restricted stock units
2.3
5.6
Diluted EPS
$
523
871.1
$
0.60
$
607
886.3
$
0.68
For the three months ended September 30, 2018 and 2017, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 17,373,432 and 9,502,329, respectively.
For the nine months ended September 30, 2018 and 2017, earnings per share were as follows:
Nine Months Ended
September 30, 2018
September 30, 2017
Net income attributable to Colgate-Palmolive Company
Shares
(millions)
Per
Share
Net income attributable to Colgate-Palmolive Company
Shares
(millions)
Per
Share
Basic EPS
$
1,794
871.9
$
2.06
$
1,701
883.0
$
1.93
Stock options and
restricted stock units
3.1
6.3
Diluted EPS
$
1,794
875.0
$
2.05
$
1,701
889.3
$
1.91
For the nine months ended September 30, 2018 and 2017, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 16,602,521 and 9,209,060, respectively.
Basic and diluted earnings per share are computed independently for each quarter and any year-to-date period presented. As a result of changes in the number of shares outstanding during the year and rounding, the sum of the quarters’ earnings per share may not necessarily equal the earnings per share for any year-to-date period.
15
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
9.
Other Comprehensive Income (Loss)
Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the three months ended September 30, 2018 and 2017 were as follows:
2018
2017
Pretax
Net of Tax
Pretax
Net of Tax
Cumulative translation adjustments
$
(38
)
$
(38
)
$
48
$
62
Retirement plans and other retiree benefits:
Net actuarial gain (loss) and prior service costs arising during the period
24
18
72
45
Amortization of net actuarial loss, transition and prior service costs (1)
16
13
15
9
Retirement plans and other retiree benefits adjustments
40
31
87
54
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges
(2
)
(1
)
(8
)
(5
)
Reclassification of (gains) losses into net earnings on cash flow hedges (2)
—
—
4
2
Gains (losses) on cash flow hedges
(2
)
(1
)
(4
)
(3
)
Total Other comprehensive income (loss)
$
—
$
(8
)
$
131
$
113
(1) These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 10, Retirement Plans and Other Retiree Benefits for additional details.
(2) These (gains) losses are reclassified into Cost of sales. See Note 14, Fair Value Measurements and Financial Instruments for additional details.
There were no tax impacts on Other comprehensive income (loss) attributable to Noncontrolling interests.
16
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the nine months ended September 30, 2018 and 2017 were as follows:
2018
2017
Pretax
Net of Tax
Pretax
Net of Tax
Cumulative translation adjustments
$
(216
)
$
(222
)
$
208
$
283
Retirement plans and other retiree benefits:
Net actuarial gain (loss) and prior service costs arising during the period
24
18
72
45
Amortization of net actuarial loss, transition and prior service costs (1)
52
41
52
34
Retirement plans and other retiree benefits adjustments
76
59
124
79
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges
4
3
(28
)
(17
)
Reclassification of (gains) losses into net earnings on cash flow hedges (2)
8
6
2
1
Gains (losses) on cash flow hedges
12
9
(26
)
(16
)
Total Other comprehensive income (loss)
$
(128
)
$
(154
)
$
306
$
346
(1) These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 10, Retirement Plans and Other Retiree Benefits for additional details.
(2) These (gains) losses are reclassified into Cost of sales. See Note 14, Fair Value Measurements and Financial Instruments for additional details.
There were no tax impacts on Other comprehensive income (loss) attributable to Noncontrolling interests.
17
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
10.
Retirement Plans and Other Retiree Benefits
Components of Net periodic benefit cost for the three and nine months ended September 30, 2018 and 2017 were as follows:
Pension Benefits
Other Retiree Benefits
United States
International
Three Months Ended September 30,
2018
2017
2018
2017
2018
2017
Service cost
$
—
$
—
$
3
$
4
$
3
$
3
Interest cost
21
23
5
6
9
9
ESOP offset
—
—
—
—
—
(1
)
Expected return on plan assets
(28
)
(28
)
(5
)
(5
)
(1
)
—
Amortization of transition and prior service costs (credits)
—
—
—
—
—
—
Amortization of actuarial loss (gain)
12
12
2
2
2
1
Net periodic benefit cost
$
5
$
7
$
5
$
7
$
13
$
12
Pension Benefits
Other Retiree Benefits
United States
International
Nine Months Ended September 30,
2018
2017
2018
2017
2018
2017
Service cost
$
1
$
1
$
10
$
11
$
11
$
11
Interest cost
64
70
16
16
28
30
ESOP offset
—
—
—
—
—
(1
)
Expected return on plan assets
(86
)
(83
)
(16
)
(15
)
(1
)
—
Amortization of transition and prior service costs (credits)
—
—
—
—
—
—
Amortization of actuarial loss (gain)
35
36
6
7
11
9
Net periodic benefit cost
$
14
$
24
$
16
$
19
$
49
$
49
For the nine months ended September 30, 2018 and 2017, the Company made voluntary contributions to its U.S. postretirement plans of $67 and $81, respectively.
18
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
11.
Income Taxes
On December 22, 2017, the TCJA was enacted, which, among other things, lowered the U.S. corporate income tax rate to 21% from 35% and established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries. Beginning in 2018, the TCJA also requires a minimum tax on certain earnings generated by foreign subsidiaries while providing for tax-free repatriation of such earnings through a 100% dividends-received deduction. The Company’s effective income tax rate in 2017 included a provisional charge of $275, recorded in the fourth quarter of 2017, based on its initial analysis of the TCJA using information and estimates available as of February 15, 2018, the date on which the Company filed its Annual Report on Form 10-K for the year ended December 31, 2017. During the third quarter of 2018, the Company recognized an additional provisional transition tax expense of $80 reflecting the impact of transition tax guidance issued by the U.S. Treasury through the third quarter of 2018 and the update of certain estimates and calculations based on information available through the third quarter of 2018.
Given the significant complexity of the TCJA, recent and anticipated further guidance from the U.S. Treasury about implementing the TCJA and the potential for additional guidance from the SEC or the FASB related to the TCJA or additional information becoming available, the Company’s provisional charge may be adjusted further. The aforementioned guidance and additional information regarding the TCJA may also impact the Company’s 2018 effective income tax rate, exclusive of any adjustment to the provisional charge.
The Company has taken a tax position in a foreign jurisdiction since 2002 that has been challenged by the local tax authorities. In May 2015, the Company became aware of several rulings by the Supreme Court in this foreign jurisdiction disallowing certain tax deductions, which had the effect of reversing prior decisions. The Company had taken deductions in prior years similar to those disallowed by such court and, as a result, as required, reassessed its tax position and increased its unrecognized tax benefits in 2015.
In 2016, the Supreme Court in the foreign jurisdiction decided the matter in the Company’s favor for the years 2002 through 2005. Also in 2016, the Administrative Court in the foreign jurisdiction decided the matter in the Company’s favor for the years 2008 through 2011 by acknowledging the Supreme Court’s ruling for the years 2002 through 2005, which eliminated the possibility of future appeals. As a result, the Company recorded a tax benefit of $30, including interest, in 2016.
In March 2018, the lower courts ruled in the Company’s favor for the years 2006, 2007 and 2012 through 2014. The deadline for the local tax authorities to appeal has now passed, and the Company considers all outstanding disputes on this matter resolved. As a result, the Company recorded an additional tax benefit of $15, including interest, during the second quarter of 2018.
As a result of the early adoption of ASU No. 2018-02, the Company reclassified $163 of stranded tax effects in Accumulated other comprehensive income (loss) resulting from the TCJA to Retained earnings during the first quarter of 2018. See Note 3, Recent Accounting Pronouncements and Updated Accounting Policies for additional information.
12.
Contingencies
As a global company serving consumers in more than 200 countries and territories, the Company is routinely subject to a wide variety of legal proceedings. These include disputes relating to intellectual property, contracts, product liability, marketing, advertising, foreign exchange controls, antitrust and trade regulation, as well as labor and employment, pension, privacy, environmental and tax matters and consumer class actions. Management proactively reviews and monitors the Company’s exposure to, and the impact of, environmental matters. The Company is party to various environmental matters and, as such, may be responsible for all or a portion of the cleanup, restoration and post-closure monitoring of several sites.
The Company establishes accruals for loss contingencies when it has determined that a loss is probable and that the amount of loss, or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances.
19
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(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 for which the amount of any potential losses can be reasonably estimated, the Company currently estimates that the aggregate range of reasonably possible losses in excess of any accrued liabilities is $0 to approximately $200 (based on current exchange rates). The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company. Thus, the Company’s exposure and ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued or the range disclosed above.
Based on current knowledge, management does not believe that the ultimate resolution of loss contingencies arising from the matters discussed herein will have a material effect on the Company’s consolidated financial position or its ongoing results of operations or cash flows. However, in light of the inherent uncertainties noted above, an adverse outcome in one or more matters could be material to the Company’s results of operations or cash flows for any particular quarter or year.
Brazilian Matters
There are certain tax and civil proceedings outstanding, as described below, related to the Company’s 1995 acquisition of the Kolynos oral care business from Wyeth (the “Seller”).
The Brazilian internal revenue authority has disallowed interest deductions and foreign exchange losses taken by the Company’s Brazilian subsidiary for certain years in connection with the financing of the Kolynos acquisition. The tax assessments with interest, penalties and any court-mandated fees, at the current exchange rate, are approximately $139. This amount includes additional assessments received from the Brazilian internal revenue authority in April 2016 relating to net operating loss carryforwards used by the Company’s Brazilian subsidiary to offset taxable income that had also been deducted from the authority’s original assessments. The Company has been disputing the disallowances by appealing the assessments since October 2001. Appeals are currently pending at the administrative level. In the event the Company is ultimately unsuccessful in its administrative appeals, further appeals are available within the Brazilian federal courts.
In September 2015, the Company lost one of its appeals at the administrative level and filed a lawsuit in Brazilian federal court. In February 2017, the Company lost an additional administrative appeal and filed a lawsuit in Brazilian federal court. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the disallowances are without merit and that the Company should ultimately prevail. The Company is challenging these disallowances vigorously.
In July 2002, the Brazilian Federal Public Attorney filed a civil action against the federal government of Brazil, Laboratorios Wyeth-Whitehall Ltda. (the Brazilian subsidiary of the Seller) and the Company, as represented by its Brazilian subsidiary, in the 6th. Lower Federal Court in the City of São Paulo, seeking to annul an April 2000 decision by the Brazilian Board of Tax Appeals that found in favor of the Seller’s Brazilian subsidiary on the issue of whether it had incurred taxable capital gains as a result of the divestiture of Kolynos. The action seeks to make the Company’s Brazilian subsidiary jointly and severally liable for any tax due from the Seller’s Brazilian subsidiary. The case has been pending since 2002, and the Lower Federal Court has not issued a decision. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the Company should ultimately prevail in this action. The Company is challenging this action vigorously.
20
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
In December 2005, the Brazilian internal revenue authority issued to the Company’s Brazilian subsidiary a tax assessment with interest, penalties and any court-mandated fees of approximately $62, at the current exchange rate, based on a claim that certain purchases of U.S. Treasury bills by the subsidiary and their subsequent disposition during the period 2000 to 2001 were subject to a tax on foreign exchange transactions. The Company had been disputing the assessment within the internal revenue authority’s administrative appeals process. However, in November 2015, the Superior Chamber of Administrative Tax Appeals denied the Company’s final administrative appeal, and the Company has filed a lawsuit in the Brazilian federal court. In the event the Company is unsuccessful in this lawsuit, further appeals are available within the Brazilian federal courts. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the tax assessment is without merit and that the Company should ultimately prevail. The Company is challenging this assessment vigorously.
Competition Matters
Certain of the Company’s subsidiaries have historically been subject to investigations, and, in some cases, fines, by governmental authorities in a number of countries related to alleged competition law violations. Substantially all of these matters also involved other consumer goods companies and/or retail customers. 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 status of pending competition law matters as of September 30, 2018 is set forth below.
▪
In December 2014, the French competition law authority found that 13 consumer goods companies, including the Company’s French subsidiary, exchanged competitively sensitive information related to the French home care and personal care sectors, for which the Company’s French subsidiary was fined $57. In addition, as a result of the Company’s acquisition of the Sanex personal care business in 2011 from Unilever N.V. and Unilever PLC (together with Unilever N.V., “Unilever”), pursuant to a Business and Share Sale and Purchase Agreement (the “Sale and Purchase Agreement”), the French competition law authority found that the Company’s French subsidiary, along with Hillshire Brands Company (formerly Sara Lee Corporation (“Sara Lee”)), were jointly and severally liable for fines of $25 assessed against Sara Lee’s French subsidiary. The Company is indemnified for these fines by Unilever pursuant to the Sale and Purchase Agreement. The fines were confirmed by the Court of Appeal in October 2016. The Company is appealing the decision of the Court of Appeal on behalf of the Company and Sara Lee in the French Supreme Court.
▪
In July 2014, the Greek competition law authority issued a statement of objections alleging a restriction of parallel imports into Greece. The Company responded to this statement of objections. In July 2017, the Company received the decision from the Greek competition law authority in which the Company was fined $11. The Company is appealing the decision to the Greek courts.
21
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
Talcum Powder Matters
The Company has been named as a defendant in civil actions alleging that certain talcum powder products that were sold prior to 1996 were contaminated with asbestos. Most of these actions involve a number of co-defendants from a variety of different industries, including suppliers of asbestos and manufacturers of products that, unlike the Company’s products, were designed to contain asbestos. As of September 30, 2018, there were 215 individual cases pending against the Company in state and federal courts throughout the United States, as compared to 222 cases as of June 30, 2018 and 193 cases as of December 31, 2017. During the three months ended September 30, 2018, 23 new cases were filed and 30 cases were resolved by voluntary dismissal or settlement. During the nine months ended September 30, 2018, 90 new cases were filed and 68 cases were resolved by voluntary dismissal, judgment in the Company’s favor or settlement. The value of settlements in the quarter and the year-to-date period presented was not material, either individually or in the aggregate, to each such period’s results of operations.
The Company believes that a significant portion of its costs incurred in defending and resolving these claims will be covered by insurance policies issued by several primary, excess and umbrella insurance carriers, subject to deductibles, exclusions, retentions and policy limits.
While the Company and its legal counsel believe that these cases are without merit and intend to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters. Since the amount of any potential losses from these cases currently cannot be reasonably estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to these cases.
ERISA Matter
In June 2016, a putative class action claiming that residual annuity payments made to certain participants in the Colgate-Palmolive Company Employees’ Retirement Income Plan (the “Plan”) did not comply with the Employee Retirement Income Security Act was filed against the Plan, the Company and certain individuals in the United States District Court for the Southern District of New York. This action has been certified as a class action. The relief sought includes recalculation of benefits, pre- and post-judgment interest and attorneys’ fees. The Company is contesting this action vigorously. Since the amount of any potential loss from this case currently cannot be reasonably estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to the case.
22
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
13.
Segment Information
The Company operates in two product segments: Oral, Personal and Home Care; and Pet Nutrition.
The operations of the Oral, Personal and Home Care product segment are managed geographically in five reportable operating segments: North America, Latin America, Europe, Asia Pacific and Africa/Eurasia.
The Company evaluates segment performance based on several factors, including Operating profit. The Company uses Operating profit as a measure of operating segment performance because it excludes the impact of Corporate-driven decisions related to interest expense and income taxes.
Effective January 1, 2018, as required, the Company adopted ASU No. 2017-07, “Compensation–Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” on a retrospective basis. To conform to the current year’s presentation, for the three and nine months ended September 30, 2017, the Company reclassified $30 and $82, respectively, of non-service related components of pension and other postretirement costs, which was previously deducted from Operating profit, to a new line item, “Non-service related postretirement costs,” which is below Operating profit. The impact of the reclassification from Operating profit by segment for the three months ended September 30, 2017 is as follows: North America $15, Latin America $2, Europe $1, Asia Pacific $0, Africa/Eurasia $0, Pet Nutrition $6 and Corporate $6. The impact of the reclassification from Operating profit by segment for the nine months ended September 30, 2017 is as follows: North America $43, Latin America $5, Europe $4, Asia Pacific $1, Africa/Eurasia $1, Pet Nutrition $18 and Corporate $10. The reclassification had no effect on Net income attributable to Colgate-Palmolive Company, Earnings per common share or Cash flow.
The accounting policies of the operating segments are generally the same as those described in Note 2, Summary of Significant Accounting Policies to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Intercompany sales have been eliminated. Corporate operations include costs related to stock options and restricted stock units, research and development costs, Corporate overhead costs, restructuring and related implementation charges and gains and losses on sales of non-core product lines and assets. The Company reports these items within Corporate operations as they relate to Corporate-based responsibilities and decisions and are not included in the internal measures of segment operating performance used by the Company to measure the underlying performance of the operating segments.
Net sales by segment were as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Net sales
Oral, Personal and Home Care
North America
$
858
$
795
$
2,509
$
2,319
Latin America
856
985
2,718
2,911
Europe
640
642
1,908
1,784
Asia Pacific
673
728
2,106
2,111
Africa/Eurasia
236
251
734
738
Total Oral, Personal and Home Care
3,263
3,401
9,975
9,863
Pet Nutrition
582
573
1,758
1,699
Total Net sales
$
3,845
$
3,974
$
11,733
$
11,562
Approximately 70% of the Company’s Net sales are generated from markets outside the U.S., with approximately 50% of the Company’s Net sales coming from emerging markets (which consist of Latin America, Asia (excluding Japan), Africa/Eurasia and Central Europe).
23
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
The Company’s Net sales of Oral, Personal and Home Care and Pet Nutrition products accounted for the following percentages of the Company’s Net sales:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Net sales
Oral Care
47
%
48
%
47
%
48
%
Personal Care
20
%
20
%
20
%
19
%
Home Care
18
%
18
%
18
%
18
%
Pet Nutrition
15
%
14
%
15
%
15
%
Total Net sales
100
%
100
%
100
%
100
%
Operating profit by segment was as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Operating profit
Oral, Personal and Home Care
North America
$
259
$
264
$
780
$
766
Latin America
222
303
757
883
Europe
162
163
480
451
Asia Pacific
191
220
620
645
Africa/Eurasia
41
44
133
135
Total Oral, Personal and Home Care
875
994
2,770
2,880
Pet Nutrition
163
167
492
499
Corporate
(164
)
(204
)
(459
)
(632
)
Total Operating profit
$
874
$
957
$
2,803
$
2,747
For the three and nine months ended September 30, 2018, Corporate Operating profit (loss) included charges of $25 and $107, respectively, resulting from the Global Growth and Efficiency Program.
For the three and nine months ended September 30, 2017, Corporate Operating profit (loss) included charges of $47 and $233, respectively, resulting from the Global Growth and Efficiency Program.
For further information regarding the Global Growth and Efficiency Program, refer to Note 5, Restructuring and Related Implementation Charges.
24
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
14.
Fair Value Measurements and Financial Instruments
The Company uses available market information and other valuation methodologies in assessing the fair value of financial instruments. Judgment is required in interpreting market data to develop the estimates of fair value and, accordingly, changes in assumptions or the estimation methodologies may affect the fair value estimates. The Company is exposed to the risk of credit loss in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely and any nonperformance is unlikely to be material, as it is the Company’s policy to contract only with diverse, credit-worthy counterparties based upon both strong credit ratings and other credit considerations.
The Company is exposed to market risk from foreign currency exchange rates, interest rates and commodity price fluctuations. Volatility relating to these exposures is managed on a global basis by utilizing a number of techniques, including working capital management, sourcing strategies, selling price increases, selective borrowings in local currencies and entering into selective derivative instrument transactions, issued with standard features, in accordance with the Company’s treasury and risk management policies, which prohibit the use of derivatives for speculative purposes and leveraged derivatives for any purpose. It is the Company’s policy to enter into derivative instrument contracts with terms that match the underlying exposure being hedged. Hedge ineffectiveness, if any, is not material for any period presented.
The Company’s derivative instruments include interest rate swap contracts, foreign currency contracts and commodity contracts. The Company utilizes interest rate swap contracts to manage its targeted mix of fixed and floating rate debt, and these swaps are valued using observable benchmark rates (Level 2 valuation). The Company utilizes foreign currency contracts, including forward and swap contracts, option contracts, local currency deposits and local currency borrowings to hedge portions of its foreign currency purchases, assets and liabilities arising in the normal course of business and the net investment in certain foreign subsidiaries. These contracts are valued using observable market rates (Level 2 valuation). Commodity futures contracts are utilized to hedge the purchases of raw materials used in production. These contracts are measured using quoted commodity exchange prices (Level 1 valuation). The duration of foreign currency and commodity contracts generally does not exceed 12 months.
The following table summarizes the fair value of the Company’s derivative instruments and other financial instruments which are carried at fair value in the Company’s Consolidated Balance Sheets at September 30, 2018 and December 31, 2017:
Assets
Liabilities
Account
Fair Value
Account
Fair Value
Designated derivative instruments
9/30/18
12/31/17
9/30/18
12/31/17
Interest rate swap contracts
Other current assets
$
—
$
—
Other accruals
$
2
$
—
Interest rate swap contracts
Other assets
—
—
Other liabilities
16
7
Foreign currency contracts
Other current assets
27
25
Other accruals
12
20
Foreign currency contracts
Other assets
—
—
Other liabilities
28
46
Commodity contracts
Other current assets
—
—
Other accruals
1
—
Total designated
$
27
$
25
$
59
$
73
Other financial instruments
Marketable securities
Other current assets
$
120
$
14
Total other financial instruments
$
120
$
14
25
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of September 30, 2018 and December 31, 2017. The estimated fair value of the Company’s long-term debt, including the current portion, as of September 30, 2018 and December 31, 2017, was $6,660 and $6,799, respectively, and the related carrying value was $6,604 and $6,566, 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 gain or loss on the hedged item are recognized in current earnings. The impact of foreign currency contracts is primarily recognized in Selling, general and administrative expenses and the impact of interest rate swap contracts is recognized in Interest (income) expense, net.
Activity related to fair value hedges recorded during the three and nine months ended September 30, 2018 and 2017 was as follows:
2018
2017
Foreign Currency Contracts
Interest Rate Swaps
Total
Foreign Currency Contracts
Interest Rate Swaps
Total
Notional Value at September 30,
$
400
$
1,000
$
1,400
$
1,095
$
600
$
1,695
Three months ended September 30,
Gain (loss) on derivatives
—
—
—
(14
)
(1
)
(15
)
Gain (loss) on hedged items
—
—
—
14
1
15
Nine months ended September 30,
Gain (loss) on derivatives
(7
)
(11
)
(18
)
(15
)
(3
)
(18
)
Gain (loss) on hedged items
7
11
18
15
3
18
Cash Flow Hedges
All of the Company’s commodity contracts and certain foreign currency forward contracts have been designated as cash flow hedges, for which the effective portion of the gain or loss is reported as a component of Other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
Activity related to cash flow hedges recorded during the three and nine months ended September 30, 2018 and 2017 was as follows:
2018
2017
Foreign
Currency
Contracts
Commodity
Contracts
Total
Foreign
Currency
Contracts
Commodity
Contracts
Total
Notional Value at September 30,
$
821
$
14
$
835
$
724
$
1
$
725
Three months ended September 30,
Gain (loss) recognized in OCI
(2
)
—
(2
)
(8
)
—
(8
)
Gain (loss) reclassified into Cost of sales
—
—
—
(4
)
—
(4
)
Nine months ended September 30,
Gain (loss) recognized in OCI
4
—
4
(28
)
—
(28
)
Gain (loss) reclassified into Cost of sales
(8
)
—
(8
)
(2
)
—
(2
)
26
COLGATE-PALMOLIVE COMPANY
Notes to Condensed Consolidated Financial Statements (continued)
(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 generally 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 Cumulative translation adjustments within OCI, along with the offsetting gain or loss on the hedged items.
Activity related to net investment hedges recorded during the three and nine months ended September 30, 2018 and 2017 was as follows: