Colgate-Palmolive Company
COLGATE PALMOLIVE CO (Form: 10-Q, Received: 07/21/2017 08:58:51)


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, 2017
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) 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
 
880,841,977
 
June 30, 2017





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,
 
2017
 
2016
 
2017
 
2016
Net sales
$
3,826

 
$
3,845

 
$
7,588

 
$
7,607

Cost of sales
1,526

 
1,541

 
3,019

 
3,055

Gross profit
2,300

 
2,304

 
4,569

 
4,552

Selling, general and administrative expenses
1,333

 
1,320

 
2,695

 
2,674

Other (income) expense, net
114

 
40

 
136

 
67

Operating profit
853

 
944

 
1,738

 
1,811

Interest (income) expense, net
24

 
25

 
47

 
53

Income before income taxes
829

 
919

 
1,691

 
1,758

Provision for income taxes
269

 
281

 
520

 
546

Net income including noncontrolling interests
560

 
638

 
1,171

 
1,212

Less: Net income attributable to noncontrolling interests
36

 
38

 
77

 
79

Net income attributable to Colgate-Palmolive Company
$
524

 
$
600

 
$
1,094

 
$
1,133

 
 
 
 
 
 
 
 
Earnings per common share, basic
$
0.59

 
$
0.67

 
$
1.24

 
$
1.27

 
 
 
 
 
 
 
 
Earnings per common share, diluted
$
0.59

 
$
0.67

 
$
1.23

 
$
1.26

 
 
 
 
 
 
 
 
Dividends declared per common share *
$
0.40

 
$
0.39

 
$
1.19

 
$
1.16


* Two dividends were declared in the first quarter of 2017 and 2016.


















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,
 
2017
 
2016
 
2017
 
2016
Net income including noncontrolling interests
$
560

 
$
638

 
$
1,171

 
$
1,212

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

 
(43
)
 
230

 
83

Retirement plans and other retiree benefit adjustments
12

 
12

 
25

 
23

Gains (losses) on available-for-sale securities

 

 

 

     Gains (losses) on cash flow hedges
(3
)
 
7

 
(13
)
 
(4
)
Total Other comprehensive income (loss), net of tax
107

 
(24
)
 
242

 
102

Total Comprehensive income including noncontrolling interests
667

 
614

 
1,413

 
1,314

Less: Net income attributable to noncontrolling interests
36

 
38

 
77

 
79

Less: Cumulative translation adjustments attributable to noncontrolling interests
2

 
(6
)
 
9

 
(5
)
Total Comprehensive income attributable to noncontrolling interests
38

 
32

 
86

 
74

Total Comprehensive income attributable to Colgate-Palmolive Company
$
629

 
$
582

 
$
1,327

 
$
1,240



See Notes to Condensed Consolidated Financial Statements.

3


COLGATE-PALMOLIVE COMPANY
  Condensed Consolidated Balance Sheets
 (Dollars in Millions)
(Unaudited)
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,241

 
$
1,315

Receivables (net of allowances of $75 and $73, respectively)
1,526

 
1,411

Inventories
1,199

 
1,171

Other current assets
589

 
441

Total current assets
4,555

 
4,338

Property, plant and equipment:
 

 
 

Cost
8,261

 
7,942

Less: Accumulated depreciation
(4,331
)
 
(4,102
)
 
3,930

 
3,840

Goodwill
2,191

 
2,107

Other intangible assets, net
1,340

 
1,313

Deferred income taxes
360

 
301

Other assets
204

 
224

Total assets
$
12,580

 
$
12,123

Liabilities and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Notes and loans payable
$
13

 
$
13

Current portion of long-term debt

 

Accounts payable
1,131

 
1,124

Accrued income taxes
404

 
441

Other accruals
2,232

 
1,727

Total current liabilities
3,780

 
3,305

Long-term debt
6,506

 
6,520

Deferred income taxes
195

 
246

Other liabilities
2,011

 
2,035

Total liabilities
12,492

 
12,106

Shareholders’ Equity
 

 
 

Common stock
1,466

 
1,466

Additional paid-in capital
1,854

 
1,691

Retained earnings
19,952

 
19,922

Accumulated other comprehensive income (loss)
(3,947
)
 
(4,180
)
Unearned compensation
(2
)
 
(7
)
Treasury stock, at cost
(19,565
)
 
(19,135
)
Total Colgate-Palmolive Company shareholders’ equity
(242
)
 
(243
)
Noncontrolling interests
330

 
260

Total equity
88

 
17

Total liabilities and equity
$
12,580

 
$
12,123



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,
 
2017
 
2016
Operating Activities
 
 
 
Net income including noncontrolling interests
$
1,171

 
$
1,212

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

 
 

Depreciation and amortization
226

 
215

Restructuring and termination benefits, net of cash
78

 
8

Stock-based compensation expense
53

 
48

Deferred income taxes
(64
)
 
(41
)
Voluntary benefit plan contributions
(57
)
 
(50
)
Cash effects of changes in:
 
 
 
Receivables
(64
)
 
(132
)
Inventories
9

 
(35
)
Accounts payable and other accruals
(61
)
 
69

Other non-current assets and liabilities
14

 
26

Net cash provided by operations
1,305

 
1,320

Investing Activities
 

 
 

Capital expenditures
(229
)
 
(248
)
Purchases of marketable securities and investments
(201
)
 
(183
)
Proceeds from sale of marketable securities and investments
114

 
87

Other
4

 
4

Net cash used in investing activities
(312
)
 
(340
)
Financing Activities
 

 
 

Principal payments on debt
(1,841
)
 
(4,078
)
Proceeds from issuance of debt
1,761

 
4,123

Dividends paid
(716
)
 
(704
)
Purchases of treasury shares
(660
)
 
(482
)
Proceeds from exercise of stock options
337

 
274

Net cash used in financing activities
(1,119
)
 
(867
)
Effect of exchange rate changes on Cash and cash equivalents
52

 
2

Net increase (decrease) in Cash and cash equivalents
(74
)
 
115

Cash and cash equivalents at beginning of the period
1,315

 
970

Cash and cash equivalents at end of the period
$
1,241

 
$
1,085

Supplemental Cash Flow Information
 

 
 

Income taxes paid
$
639

 
$
507


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. The Company reclassifies certain prior year amounts, as applicable, to conform to the current year presentation.

For a complete set of financial statement notes, including the significant accounting policies of Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”), refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 , filed with the Securities and Exchange Commission.

2.
Use of Estimates

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

3.
Recent Accounting Pronouncements

On May 10, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a share-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 is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s Consolidated Financial Statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.

On March 10, 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. Other 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. The new guidance is effective for the Company beginning on January 1, 2018, with early adoption permitted. While the Company is currently assessing the impact of the new standard on its Consolidated Financial Statements, based on its historical results, it anticipates that, as a result of the reclassification, full year Operating profit will increase by approximately $100 annually with no impact on Net income attributable to Colgate-Palmolive Company.

On January 26, 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 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)

On January 5, 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 is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

On October 24, 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory,” which eliminates the requirement to defer recognition of income taxes on intra-entity asset transfers until the asset is sold to an outside party. The new guidance requires the recognition of current and deferred income taxes on intra-entity transfers of assets other than inventory, such as intellectual property and property, plant and equipment, when the transfer occurs. As permitted, the Company early-adopted the new standard on a “modified retrospective” basis, meaning the standard is applied only to the most recent period presented in the financial statements, as of January 1, 2017. This new guidance did not have a material impact on the Company’s Consolidated Financial Statements.

On August 26, 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 is effective for the Company beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amended accounting for income taxes related to share-based compensation, the related classification in the statement of cash flows and share award forfeiture accounting. The new guidance was effective for the Company beginning on January 1, 2017. As required subsequent to the adoption of this new guidance, the Company recognized excess tax benefits of $8 and $26 (resulting from an increase in the fair value of an award from grant date to the vesting or exercise date, as applicable) in the Provision for income taxes as a discrete item during the three and six months ended June 30, 2017 , respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. Prior to January 1, 2017, excess tax benefits were recognized in equity. As permitted, the Company elected to classify excess tax benefits as an operating activity in the Statement of Cash Flows instead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods. Also, as permitted by the new standard, the Company elected to account for forfeitures as they occur.

On March 15, 2016, the FASB issued ASU No. 2016-07, “Investments–Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,” which eliminated the requirement to retroactively adjust an investment that subsequently qualifies for equity method accounting (as a result of an increase in level of ownership interest or degree of influence) as if the equity method of accounting had been applied during all prior periods that the investment was held. The new standard requires that the investor add the cost of acquiring additional ownership interest in the investee to its current basis and prospectively apply the equity method of accounting. For an available-for-sale investment, any unrealized gains or losses should be recognized in earnings at the date the investment qualifies as an equity method investment. The new guidance was effective for the Company beginning on January 1, 2017. This new guidance did not have a material 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)

On February 25, 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 standard requires a “modified retrospective” adoption, meaning the standard is applied to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact of the new standard on its Consolidated Financial Statements.

On January 5, 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 is effective for the Company beginning on January 1, 2018. While the Company is currently assessing the impact of the new standard, it does not expect this new guidance to have a material impact on its Consolidated Financial Statements.

On July 22, 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out (“LIFO”) and the retail inventory method. The new guidance was effective for the Company beginning on January 1, 2017. This new guidance did not have a material impact on the Company’s Consolidated Financial Statements.

On May 28, 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 plans to adopt the new standard on January 1, 2018, on a “modified retrospective” basis. The Company continues to make progress in its assessment and implementation of the new standard and while the completion of this assessment is still ongoing, based on the progress to date, the Company does not expect the new standard will have a material impact on its revenue recognition accounting policy or its Consolidated Financial Statements.


8

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

            
4.
Restructuring and Related Implementation Charges
 
In the fourth quarter of 2012, the Company commenced a Global Growth and Efficiency Program (as expanded in 2014 and 2015 as described below, the “2012 Restructuring Program”) for sustained growth. The program’s initiatives are expected to help Colgate ensure sustained solid worldwide growth in unit volume, organic sales and earnings per share and enhance its global leadership positions in its core businesses.

On October 23, 2014, the Company’s Board of Directors (the “Board”) approved an expansion of the 2012 Restructuring Program to take advantage of additional savings opportunities.

On October 29, 2015, the Board approved the reinvestment of the funds from the sale of the Company’s laundry detergent business in the South Pacific to expand the 2012 Restructuring Program and extend it for one year through December 31, 2017. The Board approved the implementation plan for this expansion on March 10, 2016. Initiatives under the 2012 Restructuring 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.

The Company continually seeks new projects and ways to advance the implementation of existing projects in order to accelerate savings under the program and, given the challenging market conditions and slowing category growth experienced in the first six months of 2017, it has identified additional opportunities and now estimates charges to be at the upper end of its previously disclosed range. Cumulative pretax charges resulting from the 2012 Restructuring Program, once all phases are approved and implemented, are now estimated to be $1,500 to $1,585 ( $1,120 to $1,170 aftertax) as compared to the previous estimate of $1,405 to $1,585 ( $1,050 to $1,170 aftertax).

The pretax charges resulting from the 2012 Restructuring Program are currently estimated to be comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits ( 45% ); asset-related costs, primarily Incremental Depreciation and Asset Impairments ( 10% ); and Other charges, which include contract termination costs, consisting primarily of related implementation charges resulting directly from exit activities ( 20% ) and the implementation of new strategies ( 25% ). Over the course of the 2012 Restructuring Program, it is currently estimated that approximately 75% of the charges will result in cash expenditures. Anticipated pretax charges for 2017 are now expected to approximate $275 to $360 ( $210 to $260 aftertax) as compared to the previous estimate of $180 to $360 ( $140 to $260 aftertax). It is expected that substantially all charges resulting from the 2012 Restructuring Program will be incurred by December 31, 2017 .

It is currently expected that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America ( 15% ), Europe ( 25% ), Latin America ( 5% ), Asia Pacific ( 5% ), Africa/Eurasia ( 5% ), Hill’s Pet Nutrition ( 5% ) and Corporate ( 40% ), which includes substantially all of the costs related to the implementation of new strategies, noted above, on a global basis. It is expected that, when it has been fully implemented, the 2012 Restructuring Program will contribute a net reduction of approximately 3,300 to 3,800 positions from the Company’s global employee workforce.

For the three and six months ended June 30, 2017 and 2016 , 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,
 
2017
 
2016
 
2017
 
2016
Cost of sales
$
21

 
$
12

 
$
35

 
$
20

Selling, general and administrative expenses
17

 
14

 
38

 
40

Other (income) expense, net
104

 
33

 
115

 
54

Total 2012 Restructuring Program charges, pretax
$
142

 
$
59

 
$
188

 
$
114

 
 
 
 
 
 
 
 
Total 2012 Restructuring Program charges, aftertax
$
115

 
$
44

 
$
146

 
$
82



9

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

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 2012 Restructuring 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

2017

2016

2017

2016


North America
17
%

23
%

22
%

32
%

17
%
Latin America
3
%

6
%

3
%

7
%

4
%
Europe
55
%

6
%

42
%

7
%

24
%
Asia Pacific
3
%

9
%

3
%

6
%

3
%
Africa/Eurasia
2
%

22
%

2
%

15
%

6
%
Hill s Pet Nutrition
2
%

17
%

4
%

9
%

7
%
Corporate
18
%

17
%

24
%

24
%

39
%

Since the inception of the 2012 Restructuring Program in the fourth quarter of 2012, the Company has incurred cumulative pretax charges of $1,416 ( $1,053 aftertax) in connection with the implementation of various projects as follows:
 
Cumulative Charges
 
as of June 30, 2017
Employee-Related Costs
$
573

Incremental Depreciation
86

Asset Impairments
29

Other
728

Total
$
1,416


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; and 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.

10

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

The following tables summarize the activity for the restructuring and related implementation charges discussed above and the related accruals:
 
 
Three Months Ended June 30, 2017
 
 
Employee-Related
Costs
 
 
Incremental
Depreciation
 
 
Asset
Impairments
 
 
Other
 
 
Total
 
Balance at March 31, 2017
 
$
44

 
$

 
$

 
$
123

 
$
167

Charges
 
100

 
4

 

 
38

 
142

Cash payments
 
(8
)
 

 

 
(46
)
 
(54
)
Charges against assets
 
(1
)
 
(4
)
 

 

 
(5
)
Foreign exchange
 
3

 

 

 
1

 
4

Balance at June 30, 2017
 
$
138

 
$

 
$

 
$
116

 
$
254

 
 
Six Months Ended June 30, 2017
 
 
Employee-Related
Costs
 
 
Incremental
Depreciation
 
 
Asset
Impairments
 
 
Other
 
 
Total
 
Balance at December 31, 2016
 
$
56

 
$

 
$

 
$
125

 
$
181

Charges
 
108

 
6

 
2

 
72

 
188

Cash payments
 
(27
)
 

 

 
(82
)
 
(109
)
Charges against assets
 
(2
)
 
(6
)
 
(2
)
 

 
(10
)
Foreign exchange
 
3

 

 

 
1

 
4

Balance at June 30, 2017
 
$
138

 
$

 
$

 
$
116

 
$
254


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 $ 2 for the three and six months ended June 30, 2017 , 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 9 , Retirement Plans and Other Retiree Benefits ).

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 2012 Restructuring Program. These charges for the three and six months ended June 30, 2017 include third-party incremental costs related to the development and implementation of new business and strategic initiatives of $ 37 and $ 70 , respectively, and contract termination costs and charges resulting directly from exit activities of $ 1 and $2 , respectively. These charges were expensed as incurred.


11

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

5.    Inventories

Inventories by major class are as follows:
 
June 30,
2017
 
December 31,
2016
Raw materials and supplies
$
241

 
$
266

Work-in-process
47

 
42

Finished goods
911

 
863

Total Inventories
$
1,199

 
$
1,171


6.    Shareholders’ Equity

Changes in the components of Shareholders’ Equity for the six months ended June 30, 2017 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, 2016
$
1,466

 
$
1,691

 
$
(7
)
 
$
(19,135
)
 
$
19,922

 
$
(4,180
)
 
$
260

Net income
 

 
 

 
 

 
 

 
1,094

 
 
 
77

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 

 
 
 
233

 
9

Dividends
 

 
 

 
 

 
 

 
(1,053
)
 
 

 
(16
)
Stock-based compensation expense
 

 
53

 
 

 
 

 
 

 
 

 
 

Shares issued for stock options
 

 
126

 
 

 
208

 
 

 
 

 
 

Shares issued for restricted stock units
 
 
(17
)
 
 
 
17

 
 
 
 
 
 
Treasury stock acquired
 

 
 

 
 

 
(660
)
 
 

 
 

 
 

Other
 

 
1

 
5

 
5

 
(11
)
 
 

 


Balance, June 30, 2017
$
1,466

 
$
1,854

 
$
(2
)
 
$
(19,565
)
 
$
19,952

 
$
(3,947
)
 
$
330


Accumulated other comprehensive income (loss) includes cumulative translation losses of $ 2,991 and $ 3,212 at June 30, 2017 and December 31, 2016 , respectively, and unrecognized retirement plan and other retiree benefits costs of $ 952 and $ 977 at June 30, 2017 and December 31, 2016 , respectively.


12

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

7.    Earnings Per Share
 
Three Months Ended
 
June 30, 2017
 
June 30, 2016
 
Net income attributable to Colgate-Palmolive Company
 
Shares
(millions)
 
Per
Share
 
Net income attributable to Colgate-Palmolive Company
 
Shares
(millions)
 
Per
Share
Basic EPS
$
524

 
883.8

 
$
0.59

 
$
600

 
893.9

 
$
0.67

Stock options and
restricted stock units
 
 
7.0

 
 

 
 

 
7.2

 
 

Diluted EPS
$
524

 
890.8

 
$
0.59

 
$
600

 
901.1

 
$
0.67


For the three months ended June 30, 2017 and 2016 , the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 5,299,933 and 598,857 , respectively.

 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
Net income attributable to Colgate-Palmolive Company
 
Shares
(millions)
 
Per
Share
 
Net income attributable to Colgate-Palmolive Company
 
Shares
(millions)
 
Per
Share
Basic EPS
$
1,094

 
884.2

 
$
1.24

 
$
1,133

 
893.8

 
$
1.27

Stock options and
restricted stock units
 
 
6.7

 
 

 
 

 
6.9

 
 

Diluted EPS
$
1,094

 
890.9

 
$
1.23

 
$
1,133

 
900.7

 
$
1.26


For the six months ended June 30, 2017 and 2016 , the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 9,051,702 and 356,541 , 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 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.

13

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

8.
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, 2017 and 2016 were as follows:
 
 
2017
 
2016
 
 
Pretax
 
Net of Tax
 
Pretax
 
Net of Tax
 
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
$
57

 
$
96

 
$
(8
)
 
$
(37
)
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)
 
19

 
12

 
16

 
12

Retirement plans and other retiree benefits adjustments
 
19

 
12

 
16

 
12

Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities
 

 

 

 

Reclassification of (gains) losses into net earnings on available-for-sale securities
 

 

 

 

Gains (losses) on available-for-sale securities
 

 

 

 

Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges
 
(7
)
 
(4
)
 
7

 
6

Reclassification of (gains) losses into net earnings on cash flow hedges (2)
 
1

 
1

 
2

 
1

Gains (losses) on cash flow hedges
 
(6
)
 
(3
)
 
9

 
7

Total Other comprehensive income (loss)
 
$
70

 
$
105

 
$
17

 
$
(18
)

(1) These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 9 , Retirement Plans and Other Retiree Benefits for additional details.
(2) These (gains) losses are reclassified into Cost of sales. See Note 13 , Fair Value Measurements and Financial Instruments for additional details.

There were no tax impacts on Other comprehensive income (loss) attributable to Noncontrolling interests.


14

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, 2017 and 2016 were as follows:
 
 
2017
 
2016
 
 
Pretax
 
Net of Tax
 
Pretax
 
Net of Tax
 
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
$
160

 
$
221

 
$
86

 
$
88

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)
 
37

 
25

 
32

 
23

Retirement plans and other retiree benefits adjustments
 
37

 
25

 
32

 
23

Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities
 

 

 

 

Reclassification of (gains) losses into net earnings on available-for-sale securities
 

 

 

 

Gains (losses) on available-for-sale securities
 

 

 

 

Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges
 
(20
)
 
(12
)
 
(7
)
 
(4
)
Reclassification of (gains) losses into net earnings on cash flow hedges (2)
 
(2
)
 
(1
)
 

 

Gains (losses) on cash flow hedges
 
(22
)
 
(13
)
 
(7
)
 
(4
)
Total Other comprehensive income (loss)
 
$
175

 
$
233

 
$
111

 
$
107


(1) These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 9 , Retirement Plans and Other Retiree Benefits for additional details.
(2) These (gains) losses are reclassified into Cost of sales. See Note 13 , 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)

9.
Retirement Plans and Other Retiree Benefits

Components of Net periodic benefit cost for the three and six months ended June 30, 2017 and 2016 were as follows:
 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Three Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
1

 
$
1

 
$
3

 
$
4

 
$
4

 
$
3

Interest cost
23

 
26

 
5

 
6

 
10

 
11

ESOP offset

 

 

 

 

 
(1
)
Expected return on plan assets
(28
)
 
(28
)
 
(5
)
 
(6
)
 

 

Amortization of transition and prior service costs (credits)

 

 

 

 

 

Amortization of actuarial loss (gain)
12

 
10

 
3

 
2

 
4

 
4

Net periodic benefit cost
$
8

 
$
9

 
$
6

 
$
6

 
$
18

 
$
17


 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
1

 
$
1

 
$
7

 
$
8

 
$
8

 
$
6

Interest cost
47

 
53

 
10

 
12

 
21

 
22

ESOP offset

 

 

 

 

 
(1
)
Expected return on plan assets
(55
)
 
(55
)
 
(10
)
 
(11
)
 

 

Amortization of transition and prior service costs (credits)

 

 

 

 

 

Amortization of actuarial loss (gain)
24

 
20

 
5

 
4

 
8

 
8

Net periodic benefit cost
$
17

 
$
19

 
$
12

 
$
13

 
$
37

 
$
35

 

For the six months ended June 30, 2017 , the Company made voluntary contributions of $ 57 to its U.S. postretirement plans. For the six months ended June 30, 2016 , the Company made voluntary contributions of $50 to its U.S. postretirement plans.


16

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

10.    Income Taxes

On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amended accounting for income taxes related to share-based compensation. As a result of adopting the standard effective January 1, 2017, the Company recognized excess tax benefits of $8 and $26 (resulting from an increase in the fair value of an award from the grant date to the vesting or exercise date, as applicable) in the Provision for income taxes as a discrete item during the three and six months ended June 30, 2017 , respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. Prior to January 1, 2017, excess tax benefits were recognized in equity. See Note 3 , Recent Accounting Pronouncements for additional information.

Since 2002, the Company has taken a tax position in a foreign jurisdiction 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.

During the quarter ended June 30, 2016, the Supreme Court in this foreign jurisdiction decided the matter in the Company’s favor for the years 2002 through 2005 and, as a result, the Company recorded a net tax benefit of $13 , including interest. The Administrative Court in this jurisdiction has also 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 for future appeals. The tax benefit of deductions related to this tax position taken for the years 2006 through 2007 and 2012 through 2014 totals approximately $15  at current exchange rates. These deductions are currently being challenged by the tax authorities either in the lower courts or at the administrative level and, if resolved in the Company’s favor, will result in the Company recording additional tax benefits, including interest.

11.
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, 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 $0 to approximately $225 (based on current exchange rates). The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company. 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.

17

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

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 $162 . 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 similar action 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 $71 , 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 Brazilian federal court. In the event the Company is unsuccessful in this filing, 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.


18

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 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 have involved other consumer goods companies and/or retail customers. These investigations often continue for several years and can result in substantial fines for violations that are found as well as associated private actions for damages. While the Company cannot predict the final financial impact of pending competition law matters, as these matters may change, the Company evaluates developments in these matters quarterly and accrues liabilities as and when appropriate. 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 current status of pending competition law matters as of June 30, 2017 (except as noted below) 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 entitled to indemnification for this fine from Unilever as provided in 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 (based on current exchange rates), which approximates reserves previously taken by the Company for this matter. The Company is currently reviewing the decision, and will likely appeal 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, 2017 , there were 174 individual cases pending against the Company in state and federal courts throughout the United States, as compared to 146 cases as of March 31, 2017 and 115 cases as of December 31, 2016 . During the three months ended June 30, 2017 , 36 new cases were filed and eight cases were resolved by voluntary dismissal or settlement. During the six months ended June 30, 2017 , 77 new cases were filed and 18 cases were resolved by voluntary dismissal 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.

A number of the pending cases are expected to go to trial in 2017. 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 and excess 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.


19

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

N8

The Company was a defendant in a lawsuit that was brought in Utah federal court by N8 Medical, Inc. (“N8 Medical”), Brigham Young University (“BYU”) and N8 Pharmaceuticals, Inc. (“N8 Pharma”). The complaint, originally filed in November 2013, alleged breach of contract and other torts arising out of the Company’s evaluation of a technology owned by BYU and licensed, at various times, to Ceragenix Pharmaceuticals, Inc., now in bankruptcy, N8 Medical and N8 Pharma.

In 2016, the Company resolved the claims brought by BYU and N8 Medical. These claims were each resolved in an amount that is not material to the Company’s results of operations. In the first quarter of 2017, the court dismissed the claims of N8 Pharma, which has filed a Notice of Appeal.

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 (the Company Defendants ) in the United States District Court for the Southern District of New York. The Company Defendants filed a motion to dismiss this action, which was denied in February 2017. This action has not yet 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 possible losses in excess of accrued liabilities disclosed above does not include any amount relating to the case.



20

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

12.    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.

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, 2016. 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.


21

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

Net sales and Operating profit by segment were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Net sales
 
 
 
 
 
 
 
Oral, Personal and Home Care
 
 
 
 
 
 
 
North America
$
764

 
$
793

 
$
1,524

 
$
1,593

Latin America
1,002

 
938

 
1,926

 
1,786

Europe
584

 
606

 
1,142

 
1,194

Asia Pacific
663

 
697

 
1,383

 
1,440

Africa/Eurasia
241

 
239

 
487

 
470

Total Oral, Personal and Home Care
3,254

 
3,273

 
6,462

 
6,483

Pet Nutrition
572

 
572

 
1,126

 
1,124

Total Net sales
$
3,826

 
$
3,845

 
$
7,588

 
$
7,607

 
 
 
 
 
 
 
 
Operating profit
 

 
 

 
 
 
 
Oral, Personal and Home Care
 

 
 

 
 
 
 
North America
$
241

 
$
250

 
$
474

 
$
489

Latin America
308

 
284

 
577

 
531

Europe
145

 
138

 
285

 
279

Asia Pacific
205

 
219

 
424

 
438

Africa/Eurasia
45

 
45

 
90

 
88

Total Oral, Personal and Home Care
944

 
936

 
1,850

 
1,825

Pet Nutrition
163

 
162

 
320

 
317

Corporate
(254
)
 
(154
)
 
(432
)
 
(331
)
Total Operating profit
$
853

 
$
944

 
$
1,738

 
$
1,811


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).

For the three months ended June 30, 2017 , Corporate Operating profit (loss) included charges of $142 resulting from the 2012 Restructuring Program. For the six months ended June 30, 2017 , Corporate Operating profit (loss) included charges of $188 resulting from the 2012 Restructuring Program.

For the three months ended June 30, 2016 , Corporate Operating profit (loss) included charges of $59 resulting from the 2012 Restructuring Program. For the six months ended June 30, 2016 , Corporate Operating profit (loss) included charges of $114 resulting from the 2012 Restructuring Program.

For further information regarding the 2012 Restructuring Program, refer to Note 4 , Restructuring and Related Implementation Charges.

22

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

13.
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.


23

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

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, 2017 and December 31, 2016 :
 
Assets
 
Liabilities
 
 
Account
 
Fair Value
 
Account
 
Fair Value
Designated derivative instruments
 
6/30/17
 
12/31/16
 
 
 
6/30/17
 
12/31/16
Interest rate swap contracts
Other current assets
 
$

 
$
1

 
Other accruals
 
$

 
$

Interest rate swap contracts
Other assets
 

 
1

 
Other liabilities
 
1

 

Foreign currency contracts
Other current assets
 
13

 
29

 
Other accruals
 
28

 
4

Foreign currency contracts
Other assets
 

 
5

 
Other liabilities
 
26

 

Commodity contracts
Other current assets
 

 

 
Other accruals
 

 

Total designated
 
 
$
13

 
$
36

 
 
 
$
55

 
$
4

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated
 
 
 

 
 

 
 
 
 
 
 

Foreign currency contracts
Other current assets
 
$

 
$

 
Other accruals
 
$
1

 
$

Total not designated
 
 
$


$

 
 
 
$
1

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Total derivative instruments
 
$
13

 
$
36

 
 
 
$
56

 
$
4

 
 
 
 
 
 
 
 
 
 
 
 
Other financial instruments
 
 

 
 

 
 
 
 

 
 

Marketable securities
Other current assets
 
$
144

 
$
23

 
 
 
 

 
 

Total other financial instruments
 
$
144

 
$
23

 
 
 
 

 
 


The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of June 30, 2017 and December 31, 2016 . The estimated fair value of the Company’s long-term debt, including the current portion, as of June 30, 2017 and December 31, 2016 , was $6,710 and $6,717 , respectively, and the related carrying value was $6,506 and $6,520 , 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, 2017 and 2016 was as follows:
 
2017
 
2016
 
Foreign
Currency
Contracts
 
Interest
Rate
Swaps
 
 
Total
 
Foreign
Currency
Contracts
 
Interest
Rate
Swaps
 
 
Total
Notional Value at June 30,
$
930

 
$
600

 
$
1,530

 
$
347

 
$
1,250

 
$
1,597

Three months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivatives
(3
)
 

 
(3
)
 
(6
)
 
1

 
(5
)
Gain (loss) on hedged items
3

 

 
3

 
6

 
(1
)
 
5

Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivatives
(1
)
 
(2
)
 
(3
)
 
(5
)
 
9

 
4

Gain (loss) on hedged items
1

 
2

 
3

 
5

 
(9
)
 
(4
)

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, 2017 and 2016 was as follows:
 
2017
 
2016
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
Notional Value at June 30,
$
719

 
$
2

 
$
721

 
$
705

 
$
9

 
$
714

Three months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
(7
)
 

 
(7
)
 
5

 
2

 
7

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

 
(1
)
 
(3
)
 
1

 
(2
)
Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
(20
)
 

 
(20
)
 
(9
)
 
2

 
(7
)
Gain (loss) reclassified into Cost of sales
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, 2017 and 2016 was as follows:
 
2017
 
2016
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
Notional Value at June 30,
$
800

 
$
572

 
$
1,372

 
$
895

 
$
1,280

 
$
2,175

Three months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
(28
)
 
(78
)
 
(106
)
 
10

 
26

 
36

Gain (loss) on hedged items
27

 
78

 
105

 
(7
)
 
(26
)
 
(33
)
Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments