Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
 FORM 10-Q
_________________________
 (Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes No 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Shares Outstanding
 
Date
Common stock, $1.00 par value
 
867,738,696
 
June 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017 (A)
 
2018
 
2017 (A)
Net sales
$
3,886

 
$
3,826

 
$
7,888

 
$
7,588

Cost of sales
1,585

 
1,526

 
3,179

 
3,019

Gross profit
2,301

 
2,300

 
4,709

 
4,569

Selling, general and administrative expenses
1,300

 
1,309

 
2,692

 
2,645

Other (income) expense, net
55

 
113

 
88

 
134

Operating profit
946

 
878

 
1,929

 
1,790

Non-service related postretirement costs
23

 
25

 
47

 
52

Interest (income) expense, net
35

 
24

 
70

 
47

Income before income taxes
888

 
829

 
1,812

 
1,691

Provision for income taxes
213

 
269

 
459

 
520

Net income including noncontrolling interests
675

 
560

 
1,353

 
1,171

Less: Net income attributable to noncontrolling interests
38

 
36

 
82

 
77

Net income attributable to Colgate-Palmolive Company
$
637

 
$
524

 
$
1,271

 
$
1,094

 
 
 
 
 
 
 
 
Earnings per common share, basic
$
0.73

 
$
0.59

 
$
1.46

 
$
1.24

 
 
 
 
 
 
 
 
Earnings per common share, diluted
$
0.73

 
$
0.59

 
$
1.45

 
$
1.23

 
 
 
 
 
 
 
 
Dividends declared per common share *
$
0.42

 
$
0.40

 
$
1.24

 
$
1.19


* 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net income including noncontrolling interests
$
675

 
$
560

 
$
1,353

 
$
1,171

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Cumulative translation adjustments
(305
)
 
98

 
(198
)
 
230

Retirement plans and other retiree benefit adjustments
14

 
12

 
28

 
25

     Gains (losses) on cash flow hedges
11

 
(3
)
 
10

 
(13
)
Total Other comprehensive income (loss), net of tax
(280
)
 
107

 
(160
)
 
242

Total Comprehensive income including noncontrolling interests
395

 
667

 
1,193

 
1,413

Less: Net income attributable to noncontrolling interests
38

 
36

 
82

 
77

Less: Cumulative translation adjustments attributable to noncontrolling interests
(16
)
 
2

 
(14
)
 
9

Total Comprehensive income attributable to noncontrolling interests
22

 
38

 
68

 
86

Total Comprehensive income attributable to Colgate-Palmolive Company
$
373

 
$
629

 
$
1,125

 
$
1,327



See Notes to Condensed Consolidated Financial Statements.

3


COLGATE-PALMOLIVE COMPANY
 Condensed Consolidated Balance Sheets
 (Dollars in Millions)
(Unaudited)
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
833

 
$
1,535

Receivables (net of allowances of $83 and $77, respectively)
1,545

 
1,480

Inventories
1,254

 
1,221

Other current assets
540

 
403

Total current assets
4,172

 
4,639

Property, plant and equipment:
 

 
 

Cost
8,408

 
8,460

Less: Accumulated depreciation
(4,500
)
 
(4,388
)
 
3,908

 
4,072

Goodwill
2,483

 
2,218

Other intangible assets, net
1,735

 
1,341

Deferred income taxes
156

 
188

Other assets
196

 
218

Total assets
$
12,650

 
$
12,676

Liabilities and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Notes and loans payable
$
346

 
$
11

Current portion of long-term debt

 

Accounts payable
1,121

 
1,212

Accrued income taxes
382

 
354

Other accruals
2,093

 
1,831

Total current liabilities
3,942

 
3,408

Long-term debt
6,519

 
6,566

Deferred income taxes
206

 
204

Other liabilities
2,172

 
2,255

Total liabilities
12,839

 
12,433

Shareholders’ Equity
 

 
 

Common stock
1,466

 
1,466

Additional paid-in capital
2,081

 
1,984

Retained earnings
20,851

 
20,531

Accumulated other comprehensive income (loss)
(4,164
)
 
(3,855
)
Unearned compensation

 
(5
)
Treasury stock, at cost
(20,757
)
 
(20,181
)
Total Colgate-Palmolive Company shareholders’ equity
(523
)
 
(60
)
Noncontrolling interests
334

 
303

Total equity
(189
)
 
243

Total liabilities and equity
$
12,650

 
$
12,676



See Notes to Condensed Consolidated Financial Statements.

4



COLGATE-PALMOLIVE COMPANY
Condensed Consolidated Statements of Cash Flows
(Dollars in Millions)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2018
 
2017
Operating Activities
 
 
 
Net income including noncontrolling interests
$
1,353

 
$
1,171

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

 
 

Depreciation and amortization
258

 
226

Restructuring and termination benefits, net of cash
(14
)
 
78

Stock-based compensation expense
47

 
53

Deferred income taxes
2

 
(64
)
Voluntary benefit plan contributions

 
(57
)
Cash effects of changes in:
 
 
 
Receivables
(200
)
 
(64
)
Inventories
(30
)
 
9

Accounts payable and other accruals
(96
)
 
(61
)
Other non-current assets and liabilities
(23
)
 
14

Net cash provided by operations
1,297


1,305

Investing Activities
 

 
 

Capital expenditures
(216
)
 
(229
)
Purchases of marketable securities and investments
(96
)
 
(201
)
Proceeds from sale of marketable securities and investments
19

 
114

Payment for acquisitions, net of cash acquired
(727
)
 

Other
7

 
4

Net cash used in investing activities
(1,013
)
 
(312
)
Financing Activities
 

 
 

Principal payments on debt
(3,953
)
 
(1,841
)
Proceeds from issuance of debt
4,266

 
1,761

Dividends paid
(756
)
 
(716
)
Purchases of treasury shares
(696
)
 
(660
)
Proceeds from exercise of stock options
160

 
337

Net cash used in financing activities
(979
)
 
(1,119
)
Effect of exchange rate changes on Cash and cash equivalents
(7
)
 
52

Net increase (decrease) in Cash and cash equivalents
(702
)
 
(74
)
Cash and cash equivalents at beginning of the period
1,535

 
1,315

Cash and cash equivalents at end of the period
$
833

 
$
1,241

Supplemental Cash Flow Information
 

 
 

Income taxes paid
$
468

 
$
639


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 February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 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. 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 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 conditions of stock-based payment awards once they are granted.

6

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


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 June 30, 2017, the Company reclassified $24 and $1 and, for the six months ended June 30, 2017, the Company reclassified $50 and $2 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.

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. The new standard also provides additional guidance on the measurement of the right-of-use assets and lease liabilities and will require enhanced disclosures about the Company’s leasing arrangements. Under current accounting standards, substantially all of the Company’s leases are considered operating leases and, as such, are not recognized on the Consolidated Balance Sheet. This new standard is effective for the Company beginning on January 1, 2019, with early adoption permitted. The Company is currently in the process of implementing the new standard and is continuing to assess its impact on the Company’s Consolidated Financial Statements.


7

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


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.

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, 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 six months ended June 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.

8

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.

Total purchase price consideration of $730 has been allocated on a preliminary basis to the net assets acquired based on their respective estimated fair values at January 2018, as follows:
Recognized amounts of assets acquired and liabilities assumed:
 
Inventories
$
7

Other current assets
9

Other intangible assets
438

Goodwill
332

Other current liabilities
(6
)
Deferred income taxes
(50
)
Fair value of net assets acquired
$
730


Based on the Company’s preliminary purchase price allocation, other intangible assets acquired include trademarks of $292 with useful lives of 25 years and customer relationships of $146 with useful lives ranging from 12 to 13 years.

Goodwill of $332 was allocated to the North America segment. The Company expects that approximately 40% of the goodwill will be deductible for tax purposes.

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

Pro forma results of operations have not been presented as the impact on the Company’s Condensed Consolidated Financial Statements is not material. The Company expects to finalize the purchase price allocation prior to the end of 2018.


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 anticipates that pretax charges for 2018 will approximate $100 to $175 ($75 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.


9

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


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 six months ended June 30, 2018 and 2017, restructuring and related implementation charges are reflected in the Condensed Consolidated Statements of Income as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Cost of sales
$
5

 
$
21

 
$
11

 
$
35

Selling, general and administrative expenses
10

 
17

 
15

 
38

Other (income) expense, net
43

 
103

 
56

 
113

Non-service related postretirement costs
3

 
1

 
7

 
2

Total Global Growth and Efficiency Program charges, pretax
$
61

 
$
142

 
$
89

 
$
188

 
 
 
 
 
 
 
 
Total Global Growth and Efficiency Program charges, aftertax
$
51

 
$
115

 
$
71

 
$
146


Restructuring and related implementation charges in the preceding table are recorded in the Corporate segment as these initiatives are predominantly centrally directed and controlled and are not included in internal measures of segment operating performance.

Total charges incurred for the Global Growth and Efficiency Program relate to initiatives undertaken by the following reportable operating segments:

Three Months Ended

Six Months Ended

Program-to-date

June 30,

June 30,

Accumulated Charges

2018

2017

2018

2017


North America
8
 %

17
%

17
%

22
%

18
%
Latin America
11
 %

3
%

11
%

3
%

4
%
Europe
2
 %

55
%

2
%

42
%

20
%
Asia Pacific
(6
)%

3
%

1
%

3
%

3
%
Africa/Eurasia
7
 %

2
%

6
%

2
%

6
%
Hills Pet Nutrition
22
 %

2
%

21
%

4
%

8
%
Corporate
56
 %

18
%

42
%

24
%

41
%
Total
100
 %
 
100
%
 
100
%
 
100
%
 
100
%


10

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


Since the inception of the Global Growth and Efficiency Program in the fourth quarter of 2012, the Company has incurred cumulative pretax charges of $1,650 ($1,224 aftertax) in connection with the implementation of various projects as follows:
 
Cumulative Charges
 
as of June 30, 2018
Employee-Related Costs
$
663

Incremental Depreciation
91

Asset Impairments
38

Other
858

Total
$
1,650


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 June 30, 2018
 
 
Employee-Related
Costs
 
Incremental
Depreciation
 
Asset
Impairments
 
Other
 
Total
Balance at March 31, 2018
 
$
104

 
$

 
$

 
$
100

 
$
204

Charges
 
17

 

 
2

 
42

 
61

Cash payments
 
(33
)
 

 

 
(17
)
 
(50
)
Charges against assets
 
(3
)
 

 
(2
)
 

 
(5
)
Foreign exchange
 
(3
)
 

 

 

 
(3
)
Other
 

 

 

 
5

 
5

Balance at June 30, 2018
 
$
82

 
$

 
$

 
$
130

 
$
212


 
 
Six Months Ended June 30, 2018
 
 
Employee-Related
Costs 
 
Incremental
Depreciation 
 
Asset
Impairments
 
Other
 
Total
Balance at December 31, 2017
 
$
127

 
$

 
$

 
$
107

 
$
234

Charges
 
35

 
1

 
2

 
51

 
89

Cash payments
 
(72
)
 

 

 
(33
)
 
(105
)
Charges against assets
 
(7
)
 
(1
)
 
(2
)
 

 
(10
)
Foreign exchange
 
(1
)
 

 

 

 
(1
)
Other
 

 

 

 
5

 
5

Balance at June 30, 2018
 
$
82

 
$

 
$

 
$
130

 
$
212






11

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


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 $3 and $7 for the three and six months ended June 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 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 six months ended June 30, 2018 include third-party incremental costs related to the development and implementation of new business and strategic initiatives of $12 and $20, respectively, and contract termination costs and charges resulting directly from exit activities of $30 and $31, respectively. These charges were expensed as incurred.

6.    Inventories

Inventories by major class are as follows:
 
June 30,
2018
 
December 31,
2017
Raw materials and supplies
$
251

 
$
267

Work-in-process
45

 
42

Finished goods
958

 
912

Total Inventories
$
1,254

 
$
1,221



12

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 six months ended June 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
 

 
 

 
 

 
 

 
1,271

 
 
 
82

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 

 
 
 
(146
)
 
(14
)
Dividends
 

 
 

 
 

 
 

 
(1,085
)
 
 

 
(37
)
Stock-based compensation expense
 

 
47

 
 

 
 

 
 

 
 

 
 

Shares issued for stock options
 

 
64

 
 

 
104

 
 

 
 

 
 

Shares issued for restricted stock units
 
 
(14
)
 
 
 
14

 
 
 
 
 
 
Treasury stock acquired
 

 
 

 
 

 
(696
)
 
 

 
 

 
 

Other
 

 

 
5

 
2

 
134

 
(163
)
(1)


Balance, June 30, 2018
$
1,466

 
$
2,081

 
$

 
$
(20,757
)
 
$
20,851

 
$
(4,164
)
 
$
334


(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 $3,121 and $2,927 at June 30, 2018 and December 31, 2017, respectively, and unrecognized retirement plan and other retiree benefits costs of $1,048 and $923 at June 30, 2018 and December 31, 2017, respectively.



13

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 June 30, 2018 and 2017, earnings per share were as follows:

 
Three Months Ended
 
June 30, 2018
 
June 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
$
637

 
871.7

 
$
0.73

 
$
524

 
883.8

 
$
0.59

Stock options and
restricted stock units
 
 
2.3

 
 

 
 

 
7.0

 
 

Diluted EPS
$
637

 
874.0

 
$
0.73

 
$
524

 
890.8

 
$
0.59


For the three months ended June 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 16,303,599 and 5,299,933, respectively.


For the six months ended June 30, 2018 and 2017, earnings per share were as follows:

 
Six Months Ended
 
June 30, 2018
 
June 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
$
1,271

 
873.5

 
$
1.46

 
$
1,094

 
884.2

 
$
1.24

Stock options and
restricted stock units
 
 
3.5

 
 

 
 

 
6.7

 
 

Diluted EPS
$
1,271

 
877.0

 
$
1.45

 
$
1,094

 
890.9

 
$
1.23


For the six months ended June 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 16,284,602 and 9,051,702, 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.

14

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 June 30, 2018 and 2017 were as follows:
 
 
2018
 
2017
 
 
Pretax
 
Net of Tax
 
Pretax
 
Net of Tax
 
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
$
(274
)
 
$
(289
)
 
$
57

 
$
96

Retirement plans and other retiree benefits:
 
 
 
 
 
 
 
 
Net actuarial gain (loss) and prior service costs arising during the period
 

 

 

 

Amortization of net actuarial loss, transition and prior service costs (1)
 
18

 
14

 
19

 
12

Retirement plans and other retiree benefits adjustments
 
18

 
14

 
19

 
12

Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges
 
14

 
10

 
(7
)
 
(4
)
Reclassification of (gains) losses into net earnings on cash flow hedges (2)
 
2

 
1

 
1

 
1

Gains (losses) on cash flow hedges
 
16

 
11

 
(6
)
 
(3
)
Total Other comprehensive income (loss)
 
$
(240
)
 
$
(264
)
 
$
70

 
$
105


(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.


15

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the six months ended June 30, 2018 and 2017 were as follows:
 
 
2018
 
2017
 
 
Pretax
 
Net of Tax
 
Pretax
 
Net of Tax
 
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
$
(178
)
 
$
(184
)
 
$
160

 
$
221

Retirement plans and other retiree benefits:
 
 
 
 
 
 
 
 
Net actuarial gain (loss) and prior service costs arising during the period
 

 

 

 

Amortization of net actuarial loss, transition and prior service costs (1)
 
36

 
28

 
37

 
25

Retirement plans and other retiree benefits adjustments
 
36

 
28

 
37

 
25

Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges
 
6

 
4

 
(20
)
 
(12
)
Reclassification of (gains) losses into net earnings on cash flow hedges (2)
 
8

 
6

 
(2
)
 
(1
)
Gains (losses) on cash flow hedges
 
14

 
10

 
(22
)
 
(13
)
Total Other comprehensive income (loss)
 
$
(128
)
 
$
(146
)
 
$
175

 
$
233


(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)


10.
Retirement Plans and Other Retiree Benefits

Components of Net periodic benefit cost for the three and six months ended June 30, 2018 and 2017 were as follows:
 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Three Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
$
1

 
$
1

 
$
3

 
$
3

 
$
4

 
$
4

Interest cost
22

 
23

 
5

 
5

 
9

 
10

Expected return on plan assets
(29
)
 
(28
)
 
(5
)
 
(5
)
 

 

Amortization of transition and prior service costs (credits)

 

 

 

 

 

Amortization of actuarial loss (gain)
11

 
12

 
2

 
3

 
5

 
4

Net periodic benefit cost
$
5

 
$
8

 
$
5

 
$
6

 
$
18

 
$
18


 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
$
1

 
$
1

 
$
7

 
$
7

 
$
8

 
$
8

Interest cost
43

 
47

 
11

 
10

 
19

 
21

Expected return on plan assets
(58
)
 
(55
)
 
(11
)
 
(10
)
 

 

Amortization of transition and prior service costs (credits)

 

 

 

 

 

Amortization of actuarial loss (gain)
23

 
24

 
4

 
5

 
9

 
8

Net periodic benefit cost
$
9

 
$
17

 
$
11

 
$
12

 
$
36

 
$
37


For the six months ended June 30, 2018 and 2017, the Company made voluntary contributions to its U.S. postretirement plans of $0 and $57, respectively.


17

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. 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 during 2018 and is expected to be finalized no later than the fourth quarter of 2018. 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.

As a result of the early adoption of ASU 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.

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.
 

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.

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

18

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


$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 Companys 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 $144. 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.

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 $64, 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.


19

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


Competition Matters

Certain of the Company’s subsidiaries have 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 June 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.

Talcum Powder Matters

The Company has been named as a defendant in civil actions alleging that certain talcum powder products that were sold prior to 1996 were contaminated with asbestos. Most of these actions involve a number of co-defendants from a variety of different industries, including suppliers of asbestos and manufacturers of products that, unlike the Company’s products, were designed to contain asbestos. As of June 30, 2018, there were 222 individual cases pending against the Company in state and federal courts throughout the United States, as compared to 199 cases as of March 31, 2018 and 193 cases as of December 31, 2017. During the three months ended June 30, 2018, 42 new cases were filed and 19 cases were resolved by voluntary dismissal or settlement. During the six months ended June 30, 2018, 67 new cases were filed and 38 cases were resolved by voluntary dismissal, appeal 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.


20

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


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.


21

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 six months ended June 30, 2017, the Company reclassified $25 and $52, 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 June 30, 2017 is as follows: North America $14, Latin America $1, Europe $1, Asia Pacific $1, Africa/Eurasia $0, Pet Nutrition $6 and Corporate $2. The impact of the reclassification from Operating profit by segment for the six months ended June 30, 2017 is as follows: North America $28, Latin America $3, Europe $3, Asia Pacific $1, Africa/Eurasia $1, Pet Nutrition $12 and Corporate $4. 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net sales
 
 
 
 
 
 
 
Oral, Personal and Home Care
 
 
 
 
 
 
 
North America
$
824

 
$
764

 
$
1,651

 
$
1,524

Latin America
933

 
1,002

 
1,862

 
1,926

Europe
620

 
584

 
1,268

 
1,142

Asia Pacific
674

 
663

 
1,433

 
1,383

Africa/Eurasia
243

 
241

 
498

 
487

Total Oral, Personal and Home Care
3,294

 
3,254

 
6,712

 
6,462

Pet Nutrition
592

 
572

 
1,176

 
1,126

Total Net sales
$
3,886

 
$
3,826

 
$
7,888

 
$
7,588


Approximately 75% of the Company’s Net sales are generated from markets outside the U.S., with approximately 50% of the Company’s Net sales coming from emerging markets (which consist of Latin America, Asia (excluding Japan), Africa/Eurasia and Central Europe).

22

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net sales
 
 
 
 
 
 
 
Oral Care
47
%
 
47
%
 
48
%
 
48
%
Personal Care
20
%
 
20
%
 
19
%
 
19
%
Home Care
18
%
 
18
%
 
18
%
 
18
%
Pet Nutrition
15
%
 
15
%
 
15
%
 
15
%
Total Net sales
100
%
 
100
%
 
100
%
 
100
%

Operating profit by segment was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Operating profit
 
 
 
 
 
 
 
Oral, Personal and Home Care
 
 
 
 
 
 
 
North America
$
264

 
$
255

 
$
521

 
$
502

Latin America
262

 
309

 
535

 
580

Europe
156

 
146

 
318

 
288

Asia Pacific
203

 
206

 
429

 
425

Africa/Eurasia
42

 
45

 
92

 
91

Total Oral, Personal and Home Care
927

 
961

 
1,895

 
1,886

Pet Nutrition
165

 
169

 
329

 
332

Corporate
(146
)
 
(252
)
 
(295
)
 
(428
)
Total Operating profit
$
946

 
$
878

 
$
1,929

 
$
1,790


For the three and six months ended June 30, 2018, Corporate Operating profit (loss) included charges of $58 and $82, respectively, resulting from the Global Growth and Efficiency Program.

For the three and six months ended June 30, 2017, Corporate Operating profit (loss) included charges of $141 and $186, 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.

23

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 June 30, 2018 and December 31, 2017:
 
Assets
 
Liabilities
 
 
Account
 
Fair Value
 
Account
 
Fair Value
Designated derivative instruments
 
 
6/30/18
 
12/31/17
 
 
 
6/30/18
 
12/31/17
Interest rate swap contracts
Other current assets
 
$

 
$

 
Other accruals
 
$
4

 
$

Interest rate swap contracts
Other assets
 

 

 
Other liabilities
 
14

 
7

Foreign currency contracts
Other current assets
 
34

 
25

 
Other accruals
 
10

 
20

Foreign currency contracts
Other assets
 

 

 
Other liabilities
 
30

 
46

Commodity contracts
Other current assets
 

 

 
Other accruals
 

 

Total designated
 
$
34

 
$
25

 
 
 
$
58

 
$
73

 
 
 
 
 
 
 
 
 
 
 
 
Other financial instruments
 
 
 

 
 

 
 
 
 

 
 

Marketable securities
Other current assets
 
$
83

 
$
14

 
 
 
 

 
 

Total other financial instruments
 
 
$
83

 
$
14

 
 
 
 

 
 


The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of June 30, 2018 and December 31, 2017. The estimated fair value of the Company’s long-term debt, including the current portion, as of June 30, 2018 and December 31, 2017, was $6,597 and $6,799, respectively, and the related carrying value was $6,519 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).

24

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


Fair Value Hedges

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

Activity related to fair value hedges recorded during the three and six months ended June 30, 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 June 30,
$
420


$
1,000


$
1,420


$
930


$
600


$
1,530

Three months ended June 30,

















Gain (loss) on derivatives
6


(1
)

5


(3
)



(3
)
Gain (loss) on hedged items
(6
)

1


(5
)

3




3

Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivatives
(7
)
 
(11
)
 
(18
)
 
(1
)
 
(2
)
 
(3
)
Gain (loss) on hedged items
7

 
11

 
18

 
1

 
2

 
3


Cash Flow Hedges

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

Activity related to cash flow hedges recorded during the three and six months ended June 30, 2018 and 2017 was as follows:
 
2018
 
2017
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
Notional Value at June 30,
$
833

 
$
6

 
$
839

 
$
719

 
$
2

 
$
721

Three months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
14

 

 
14

 
(7
)
 

 
(7
)
Gain (loss) reclassified into Cost of sales
(2
)
 

 
(2
)
 
(1
)
 

 
(1
)
Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
6

 

 
6

 
(20
)
 

 
(20
)
Gain (loss) reclassified into Cost of sales
(8
)
 

 
(8
)
 
2

 

 
2


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


25

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)


Net Investment Hedges

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

Activity related to net investment hedges recorded during the three and six months ended June 30, 2018 and 2017 was as follows:
 
2018
 
2017
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
Notional Value at June 30,
$
594

 
$
1,572

 
$
2,166

 
$
800

 
$
572

 
$
1,372

Three months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
43

 
78

 
121

 
(28
)
 
(78
)
 
(106
)
Gain (loss) on hedged items
(41
)
 
(78
)
 
(119
)
 
27

 
78

 
105

Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
25

 
59

 
84

 
(46
)
 
(93
)
 
(139
)
Gain (loss) on hedged items
(23
)
 
(59
)
 
(82
)
 
47

 
93

 
140




26

COLGATE-PALMOLIVE COMPANY
Managements Discussion and Analysis of Financial
Condition and Results of Operations
(Dollars in Millions Except Per Share Amounts)


Executive Overview

Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”) seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers globally with products that make their lives healthier and more enjoyable.

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

Operationally, the Company is organized along geographic lines with management teams having responsibility for the business and financial results in each region. The Company competes in more than 200 countries and territories worldwide with established businesses in all regions contributing to the Company’s sales and profitability. Approximately 75% of the Company’s Net sales are generated from markets outside the U.S., with approximately 50% of the Company’s Net sales coming from emerging markets (which consist of Latin America, Asia (excluding Japan), Africa/Eurasia and Central Europe). This geographic diversity and balance help to reduce the Company’s exposure to business and other risks in any one country or part of the world.

The Oral, Personal and Home Care product segment is managed geographically in five reportable operating segments: North America, Latin America, Europe, Asia Pacific and Africa/Eurasia, all of which sell to a variety of retail and wholesale customers and distributors. The Company, through Hill’s Pet Nutrition, also competes on a worldwide basis in the pet nutrition market, selling its products principally through authorized pet supply retailers and veterinarians. Many of the Company’s products are also sold online through various e-commerce platforms and retailers.

On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, net sales (including volume, pricing and foreign exchange components), organic sales growth (net sales growth excluding, as applicable, the impact of foreign exchange, acquisitions and divestments), a non-GAAP financial measure, and gross profit margin, operating profit, net income and earnings per share, in each case, on a GAAP and non-GAAP basis, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators and the Company’s Code of Conduct and corporate governance practices help to maintain business health and strong internal controls. For additional information regarding non-GAAP financial measures, see “Non-GAAP Financial Measures” below.

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


27

COLGATE-PALMOLIVE COMPANY
Managements Discussion and Analysis of Financial
Condition and Results of Operations
(Dollars in Millions Except Per Share Amounts)


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

Significant Items Impacting Comparability
In January 2018, the Company acquired all of the outstanding equity interests of Physicians Care Alliance, LLC (“PCA”) and Elta MD Holdings, Inc. (“Elta”), professional skin care businesses, for aggregate cash consideration of approximately $730. With these acquisitions, the Company has entered the professional skin care category, which complements its existing global personal care businesses. See Note 4, Acquisitions and Divestitures to the Condensed Consolidated Financial Statements for additional information.

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA” or “U.S. tax reform”) 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 future earnings generated by foreign subsidiaries while providing for future tax-free repatriation of such earnings through a 100% dividends-received deduction.
As a result of the enactment of the TCJA, in the fourth quarter of 2017, the Company recorded a provisional charge of $275 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. 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 Securities and Exchange Commission (the “SEC”) or the FASB related to the TCJA or additional information becoming available, the Company’s provisional charge may be adjusted during 2018 and is expected to be finalized no later than the fourth quarter of 2018. 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. Refer to “Results of Operations–Income Taxes” below for additional details.
The Company is in the midst of a restructuring program known as the “Global Growth and Efficiency Program,” which, following the most recent expansion and extension approved by the Company’s Board of Directors (the “Board”) on October 26, 2017, runs through December 31, 2019. The program’s initiatives are expected to help the Company ensure sustained solid worldwide growth in unit volume, organic sales, operating profit and earnings per share and to enhance its global leadership positions in its core businesses. Implementation of the Global Growth and Efficiency Program remains on track.
The initiatives under the Global Growth and Efficiency Program are focused on the following areas:
Expanding Commercial Hubs
Extending Shared Business Services and Streamlining Global Functions
Optimizing Global Supply Chain and Facilities

Savings, substantially all of which are expected to increase future cash flows, are projected to be in the range of $560 to $635 pretax ($500 to $575 aftertax) annually, once all projects are approved and implemented. 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).

In the three and six months ended June 30, 2018, the Company incurred aftertax costs of $51 and $71, respectively, resulting from the Global Growth and Efficiency Program.

For more information regarding the Global Growth and Efficiency Program, see “Restructuring and Related Implementation Charges” below and Note 5, Restructuring and Related Implementation Charges to the Condensed Consolidated Financial Statements.

28

COLGATE-PALMOLIVE COMPANY
Managements Discussion and Analysis of Financial
Condition and Results of Operations
(Dollars in Millions Except Per Share Amounts)



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. 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 (interest cost, expected return on assets and amortization of actuarial gains and losses) are included in a new line item, “Non-service related postretirement costs,” which is below Operating profit. Adoption of this standard had no effect on Net income attributable to Colgate-Palmolive Company, Earnings per common share or Cash flow. See Note 3, Recent Accounting Pronouncements and Updated Accounting Policies to the Condensed Consolidated Financial Statements for additional information.

In addition, effective July 1, 2018, Argentina was designated as a hyper-inflationary economy under GAAP. Consequently, the functional currency for the Company’s Argentinian subsidiary will be the U.S. dollar and the impact of all future Argentinian currency fluctuations will be recorded in income. However, this designation is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Outlook

Looking forward, the Company expects global macroeconomic and market conditions to remain highly challenging with continued low category growth rates around the world. While the global marketplace in which the Company operates has always been highly competitive, the Company continues to experience heightened competitive activity in certain markets from strong local competitors and from other large multinational companies, some of which have greater resources than the Company does. Such activities have included more aggressive product claims and marketing challenges, as well as increased promotional spending and geographic expansion. The Company has also been negatively affected by changes in the policies or practices of its retail trade customers in key markets, such as inventory de-stocking. In addition, the growth of e-commerce has affected and continues to affect consumer preferences and market dynamics. Given that approximately 75% of the Company’s Net sales originate in markets outside the U.S., the Company has experienced and may continue to experience volatile foreign currency fluctuations and high raw and packaging material 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 key priorities: growing sales through engaging with consumers, developing world-class innovation and working with retail partners; driving efficiency on every line of the income statement to increase margins; generating strong cash flow performance and utilizing that cash effectively to enhance total shareholder returns; and leading to win by staying true to the Company’s culture and focusing on its stakeholders. The Company’s commitment to these priorities, together with the strength of the Company’s global brands, its broad international presence in both developed and emerging markets and cost-saving initiatives, such as the Company’s funding-the-growth initiatives and the Global Growth and Efficiency Program, should position the Company well to increase shareholder value over the long term.




29

COLGATE-PALMOLIVE COMPANY
Managements Discussion and Analysis of Financial
Condition and Results of Operations
(Dollars in Millions Except Per Share Amounts)


Results of Operations

Three Months

Worldwide Net sales were $3,886 in the second quarter of 2018, up 1.5% from the second quarter of 2017, driven by volume growth of 1.5%, while net selling prices and foreign exchange were flat. The Company’s previously disclosed professional skin care acquisitions increased volume by 1.0%. Organic sales (Net sales excluding the impact of foreign exchange, acquisitions and divestments), a non-GAAP financial measure, increased 0.5% in the second quarter of 2018. A reconciliation of net sales growth to organic sales growth is provided under “Non-GAAP Financial Measures” below.

Net sales in the Oral, Personal and Home Care product segment were $3,294 in the second quarter of 2018, up 1.0% from the second quarter of 2017 as volume growth of 1.5% was partially offset by net selling price decreases of 0.5%, while foreign exchange was flat. The Company’s previously disclosed professional skin care acquisitions increased volume by 1.0%. Organic sales in the Oral, Personal and Home Care product segment in the second quarter of 2018 were even with the second quarter of 2017.

The Company’s share of the global toothpaste market was 42.1% on a year-to-date basis, down 1.1 share points from the year ago period, and its share of the global manual toothbrush market was 32.3% on a year-to-date basis, down 0.7 share points from the year ago period. Year-to-date market shares in toothpaste were up in Europe, flat in Latin America and down in North America, Asia Pacific and Africa/Eurasia versus the comparable 2017 period. In the manual toothbrush category, year-to-date market shares were up in North America, Latin America and Africa/Eurasia and down in Europe and Asia Pacific versus the comparable 2017 period. For additional information regarding market shares, see “Market Share Information” below.

Net sales in the Hill’s Pet Nutrition segment were $592 in the second quarter of 2018, up 3.5% from the second quarter of 2017, driven by volume growth of 1.0%, net selling price increases 1.0% and positive foreign exchange of 1.5%. Organic sales in the Hill’s Pet Nutrition segment increased 2.0% in the second quarter of 2018.

Gross Profit/Margin

Worldwide Gross profit increased to $2,301 in the second quarter of 2018 from $2,300