form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2010
OR
|
¨
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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)
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(I.R.S. Employer Identification No.)
|
| |
|
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300 Park Avenue, New York, New York
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10022
|
|
(Address of principal executive offices)
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(Zip Code)
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(212) 310-2000
(Registrant’s telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
|
Large accelerated filer x
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Accelerated filer ¨
|
|
Non-accelerated filer ¨
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Smaller reporting company ¨
|
|
(Do not check if a smaller reporting company)
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
|
Class
|
|
Shares Outstanding
|
|
Date
|
|
Common stock, $1.00 par value
|
|
482,683,530 |
|
September 30, 2010
|
|
PART I.
|
FINANCIAL INFORMATION
|
COLGATE-PALMOLIVE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
| |
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
3,943 |
|
|
$ |
3,998 |
|
|
$ |
11,586 |
|
|
$ |
11,246 |
|
|
Cost of sales
|
|
|
1,599 |
|
|
|
1,631 |
|
|
|
4,732 |
|
|
|
4,665 |
|
|
Gross profit
|
|
|
2,344 |
|
|
|
2,367 |
|
|
|
6,854 |
|
|
|
6,581 |
|
|
Selling, general and administrative expenses
|
|
|
1,391 |
|
|
|
1,403 |
|
|
|
4,038 |
|
|
|
3,885 |
|
|
Other (income) expense, net
|
|
|
(5 |
) |
|
|
38 |
|
|
|
232 |
|
|
|
72 |
|
|
Operating profit
|
|
|
958 |
|
|
|
926 |
|
|
|
2,584 |
|
|
|
2,624 |
|
|
Interest expense, net
|
|
|
13 |
|
|
|
17 |
|
|
|
43 |
|
|
|
59 |
|
|
Income before income taxes
|
|
|
945 |
|
|
|
909 |
|
|
|
2,541 |
|
|
|
2,565 |
|
|
Provision for income taxes
|
|
|
300 |
|
|
|
292 |
|
|
|
879 |
|
|
|
824 |
|
|
Net income including noncontrolling interests
|
|
|
645 |
|
|
|
617 |
|
|
|
1,662 |
|
|
|
1,741 |
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
26 |
|
|
|
27 |
|
|
|
83 |
|
|
|
81 |
|
|
Net income attributable to Colgate-Palmolive Company
|
|
$ |
619 |
|
|
$ |
590 |
|
|
$ |
1,579 |
|
|
$ |
1,660 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share, basic
|
|
$ |
1.26 |
|
|
$ |
1.17 |
|
|
$ |
3.17 |
|
|
$ |
3.27 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share, diluted
|
|
$ |
1.21 |
|
|
$ |
1.12 |
|
|
$ |
3.07 |
|
|
$ |
3.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$ |
0.53 |
|
|
$ |
0.44 |
|
|
$ |
1.50 |
|
|
$ |
1.28 |
|
See Notes to Condensed Consolidated Financial Statements.
COLGATE-PALMOLIVE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
| |
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
654 |
|
|
$ |
600 |
|
|
Receivables (net of allowances of $53 and $50, respectively)
|
|
|
1,690 |
|
|
|
1,626 |
|
|
Inventories
|
|
|
1,278 |
|
|
|
1,209 |
|
|
Other current assets
|
|
|
469 |
|
|
|
375 |
|
|
Total current assets
|
|
|
4,091 |
|
|
|
3,810 |
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
6,998 |
|
|
|
6,700 |
|
|
Less: Accumulated depreciation
|
|
|
(3,426 |
) |
|
|
(3,184 |
) |
| |
|
|
3,572 |
|
|
|
3,516 |
|
|
Goodwill, net
|
|
|
2,336 |
|
|
|
2,302 |
|
|
Other intangible assets, net
|
|
|
818 |
|
|
|
821 |
|
|
Other assets
|
|
|
573 |
|
|
|
685 |
|
|
Total assets
|
|
$ |
11,390 |
|
|
$ |
11,134 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Notes and loans payable
|
|
$ |
51 |
|
|
$ |
35 |
|
|
Current portion of long-term debt
|
|
|
8 |
|
|
|
326 |
|
|
Accounts payable
|
|
|
1,096 |
|
|
|
1,172 |
|
|
Accrued income taxes
|
|
|
307 |
|
|
|
387 |
|
|
Other accruals
|
|
|
1,714 |
|
|
|
1,679 |
|
|
Total current liabilities
|
|
|
3,176 |
|
|
|
3,599 |
|
| |
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,329 |
|
|
|
2,821 |
|
|
Deferred income taxes
|
|
|
112 |
|
|
|
82 |
|
|
Other liabilities
|
|
|
1,927 |
|
|
|
1,375 |
|
| |
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Preference stock
|
|
|
159 |
|
|
|
169 |
|
|
Common stock
|
|
|
733 |
|
|
|
733 |
|
|
Additional paid-in capital
|
|
|
1,826 |
|
|
|
1,764 |
|
|
Retained earnings
|
|
|
13,980 |
|
|
|
13,157 |
|
|
Accumulated other comprehensive income (loss)
|
|
|
(2,308 |
) |
|
|
(2,096 |
) |
| |
|
|
14,390 |
|
|
|
13,727 |
|
|
Unearned compensation
|
|
|
(100 |
) |
|
|
(133 |
) |
|
Treasury stock, at cost
|
|
|
(11,618 |
) |
|
|
(10,478 |
) |
|
Total Colgate-Palmolive Company shareholders’ equity
|
|
|
2,672 |
|
|
|
3,116 |
|
|
Noncontrolling interests
|
|
|
174 |
|
|
|
141 |
|
|
Total shareholders’ equity
|
|
|
2,846 |
|
|
|
3,257 |
|
|
Total liabilities and shareholders’ equity
|
|
$ |
11,390 |
|
|
$ |
11,134 |
|
See Notes to Condensed Consolidated Financial Statements.
COLGATE-PALMOLIVE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
| |
|
Nine Months Ended
September 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
Net income including noncontrolling interests
|
|
$ |
1,662 |
|
|
$ |
1,741 |
|
|
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operations:
|
|
|
|
|
|
|
|
|
|
Venezuela hyperinflationary transition charge
|
|
|
271 |
|
|
|
— |
|
|
Restructuring, net of cash
|
|
|
— |
|
|
|
(14 |
) |
|
Depreciation and amortization
|
|
|
278 |
|
|
|
262 |
|
|
Stock-based compensation expense
|
|
|
101 |
|
|
|
97 |
|
|
Deferred income taxes
|
|
|
91 |
|
|
|
16 |
|
|
Cash effects of changes in:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(56 |
) |
|
|
(104 |
) |
|
Inventories
|
|
|
(63 |
) |
|
|
10 |
|
|
Accounts payable and other accruals
|
|
|
(95 |
) |
|
|
355 |
|
|
Other non-current assets and liabilities
|
|
|
54 |
|
|
|
12 |
|
|
Net cash provided by operations
|
|
|
2,243 |
|
|
|
2,375 |
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(318 |
) |
|
|
(347 |
) |
|
Purchases of marketable securities and investments
|
|
|
(211 |
) |
|
|
(147 |
) |
|
Proceeds from sales of marketable securities and investments
|
|
|
94 |
|
|
|
— |
|
|
Other
|
|
|
(3 |
) |
|
|
10 |
|
|
Net cash used in investing activities
|
|
|
(438 |
) |
|
|
(484 |
) |
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(3,469 |
) |
|
|
(3,011 |
) |
|
Proceeds from issuance of debt
|
|
|
3,709 |
|
|
|
2,561 |
|
|
Dividends paid
|
|
|
(804 |
) |
|
|
(702 |
) |
|
Purchases of treasury shares
|
|
|
(1,385 |
) |
|
|
(664 |
) |
|
Proceeds from exercise of stock options and excess tax benefits
|
|
|
204 |
|
|
|
196 |
|
|
Net cash used in financing activities
|
|
|
(1,745 |
) |
|
|
(1,620 |
) |
|
Effect of exchange rate changes on Cash and cash equivalents
|
|
|
(6 |
) |
|
|
21 |
|
|
Net increase (decrease) in Cash and cash equivalents
|
|
|
54 |
|
|
|
292 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
600 |
|
|
|
555 |
|
|
Cash and cash equivalents at end of period
|
|
$ |
654 |
|
|
$ |
847 |
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$ |
854 |
|
|
$ |
853 |
|
See Notes to Condensed Consolidated Financial Statements.
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
The Condensed Consolidated Financial Statements reflect all normal recurring adjustments which, in management’s opinion, are necessary for a fair statement of the results for interim periods. Results of operations for interim periods may not be representative of results to be expected for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.
For a complete set of financial notes, including the significant accounting policies of Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”), refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission.
Provision for certain expenses, including income taxes, media advertising and consumer promotion, are based on full year assumptions and are included in the accompanying Condensed Consolidated Financial Statements in proportion with estimated annual tax rates, the passage of time or estimated annual sales.
Inventories by major class are as follows:
| |
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
Raw materials and supplies
|
|
$ |
311 |
|
|
$ |
310 |
|
|
Work-in-process
|
|
|
53 |
|
|
|
50 |
|
|
Finished goods
|
|
|
914 |
|
|
|
849 |
|
|
Total Inventories
|
|
$ |
1,278 |
|
|
$ |
1,209 |
|
Major changes in the components of Shareholders’ Equity since the beginning of 2010 are as follows:
| |
|
Colgate-Palmolive Company Shareholders’ Equity
|
|
|
Noncontrolling Interests
|
|
| |
|
Preference Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Unearned Compensation
|
|
|
Treasury Stock
|
|
|
Retained Earnings
|
|
|
Accumulated Other
Comprehensive Income (Loss)
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$ |
169 |
|
|
$ |
733 |
|
|
$ |
1,764 |
|
|
$ |
(133 |
) |
|
$ |
(10,478 |
) |
|
$ |
13,157 |
|
|
$ |
(2,096 |
) |
|
$ |
141 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,579 |
|
|
|
|
|
|
|
83 |
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212 |
) |
|
|
3 |
|
|
Dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Convertible Preference stock, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(731 |
) |
|
|
|
|
|
|
|
|
|
Noncontrolling interests in Company’s subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48 |
) |
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for stock options
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preference stock conversion
|
|
|
(10 |
) |
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
33 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
Balance, September 30, 2010
|
|
$ |
159 |
|
|
$ |
733 |
|
|
$ |
1,826 |
|
|
$ |
(100 |
) |
|
$ |
(11,618 |
) |
|
$ |
13,980 |
|
|
$ |
(2,308 |
) |
|
$ |
174 |
|
Accumulated other comprehensive income (loss), as reflected in the Condensed Consolidated Balance Sheets, primarily consists of cumulative foreign currency translation adjustments and unrecognized pension and other retiree benefit costs. Refer to Note 5 for the components of Other comprehensive income (loss).
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
|
5.
|
Other Comprehensive Income
|
The following are components of comprehensive income:
| |
|
Three Months Ended
|
|
| |
|
September 30, 2010
|
|
|
September 30, 2009
|
|
| |
|
Colgate-Palmolive Company
|
|
|
|
|
|
|
|
|
Colgate-Palmolive Company
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
619 |
|
|
$ |
26 |
|
|
$ |
645 |
|
|
$ |
590 |
|
|
$ |
27 |
|
|
$ |
617 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
307 |
|
|
|
4 |
|
|
|
311 |
|
|
|
165 |
|
|
|
— |
|
|
|
165 |
|
|
Retirement plan and other retiree benefit adjustments
|
|
|
(332 |
) |
|
|
— |
|
|
|
(332 |
) |
|
|
(12 |
) |
|
|
— |
|
|
|
(12 |
) |
|
Gains (losses) on cash flow hedges
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
Other
|
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Total Other comprehensive income (loss), net of tax
|
|
$ |
(33 |
) |
|
$ |
4 |
|
|
$ |
(29 |
) |
|
$ |
152 |
|
|
$ |
— |
|
|
$ |
152 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
586 |
|
|
$ |
30 |
|
|
$ |
616 |
|
|
$ |
742 |
|
|
$ |
27 |
|
|
$ |
769 |
|
| |
|
|
|
| |
|
|
|
|
|
|
| |
|
Colgate-Palmolive Company
|
|
|
|
|
|
|
|
|
Colgate-Palmolive Company
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,579 |
|
|
$ |
83 |
|
|
$ |
1,662 |
|
|
$ |
1,660 |
|
|
$ |
81 |
|
|
$ |
1,741 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
126 |
|
|
|
3 |
|
|
|
129 |
|
|
|
332 |
|
|
|
— |
|
|
|
332 |
|
|
Retirement plan and other retiree benefit adjustments
|
|
|
(310 |
) |
|
|
— |
|
|
|
(310 |
) |
|
|
10 |
|
|
|
— |
|
|
|
10 |
|
|
Gains (losses) on cash flow hedges
|
|
|
(7 |
) |
|
|
— |
|
|
|
(7 |
) |
|
|
10 |
|
|
|
— |
|
|
|
10 |
|
|
Other
|
|
|
(21 |
) |
|
|
— |
|
|
|
(21 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total Other comprehensive income (loss), net of tax
|
|
$ |
(212 |
) |
|
$ |
3 |
|
|
$ |
(209 |
) |
|
$ |
352 |
|
|
$ |
— |
|
|
$ |
352 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
1,367 |
|
|
$ |
86 |
|
|
$ |
1,453 |
|
|
$ |
2,012 |
|
|
$ |
81 |
|
|
$ |
2,093 |
|
During the third quarter of 2010, the Company amended certain of its defined benefit, defined contribution and retiree medical plans in the U.S. As a result, the Company was required to remeasure the benefit obligations and assets of each affected plan as of the amendment date, September 1, 2010. The impact from the remeasurement was a charge of $550 ($344 aftertax) to Other comprehensive income (loss), net, as reflected in the table above, primarily due to the 100 basis point reduction in the discount rate since year-end. The incremental impact to the Company’s net income due to the plan amendments for the remainder of 2010 is not significant.
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Colgate-Palmolive Company
|
|
$ |
619 |
|
|
|
|
|
|
|
|
$ |
590 |
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
Basic EPS
|
|
|
610 |
|
|
|
486.0 |
|
|
$ |
1.26 |
|
|
|
583 |
|
|
|
499.1 |
|
|
$ |
1.17 |
|
|
Stock options and restricted stock
|
|
|
|
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
|
|
|
|
Convertible preference stock
|
|
|
9 |
|
|
|
19.7 |
|
|
|
|
|
|
|
7 |
|
|
|
21.1 |
|
|
|
|
|
|
Diluted EPS
|
|
$ |
619 |
|
|
|
509.5 |
|
|
$ |
1.21 |
|
|
$ |
590 |
|
|
|
524.6 |
|
|
$ |
1.12 |
|
For the three months ended September 30, 2010 and 2009, the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 4,248,553 and 4,320,294, respectively.
| |
|
|
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
(millions)
|
|
|
Per Share
|
|
|
Net income attributable to Colgate-Palmolive Company
|
|
$ |
1,579 |
|
|
|
|
|
|
|
|
$ |
1,660 |
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
Basic EPS
|
|
|
1,554 |
|
|
|
489.9 |
|
|
$ |
3.17 |
|
|
|
1,638 |
|
|
|
500.2 |
|
|
$ |
3.27 |
|
|
Stock options and restricted stock
|
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
Convertible preference stock
|
|
|
25 |
|
|
|
20.1 |
|
|
|
|
|
|
|
22 |
|
|
|
21.5 |
|
|
|
|
|
|
Diluted EPS
|
|
$ |
1,579 |
|
|
|
514.7 |
|
|
$ |
3.07 |
|
|
$ |
1,660 |
|
|
|
525.0 |
|
|
$ |
3.16 |
|
For the nine months ended September 30, 2010 and 2009, the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 49,904 and 8,913,941, respectively.
|
7.
|
Retirement Plans and Other Retiree Benefits
|
Components of net periodic benefit cost for three and nine months ended September 30, 2010 and 2009 were as follows:
| |
|
Pension Benefits
|
|
|
Other Retiree Benefits
|
|
| |
|
United States
|
|
|
International
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30,
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
11 |
|
|
$ |
10 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
1 |
|
|
Interest cost
|
|
|
23 |
|
|
|
23 |
|
|
|
9 |
|
|
|
10 |
|
|
|
9 |
|
|
|
9 |
|
|
Annual ESOP allocation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
Expected return on plan assets
|
|
|
(25 |
) |
|
|
(21 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
Amortization of transition and prior service costs (credits)
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of actuarial loss
|
|
|
13 |
|
|
|
14 |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
|
Net periodic benefit cost
|
|
$ |
23 |
|
|
$ |
27 |
|
|
$ |
9 |
|
|
$ |
10 |
|
|
$ |
14 |
|
|
$ |
12 |
|
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30,
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
36 |
|
|
$ |
32 |
|
|
$ |
13 |
|
|
$ |
12 |
|
|
$ |
10 |
|
|
$ |
8 |
|
|
Interest cost
|
|
|
71 |
|
|
|
71 |
|
|
|
26 |
|
|
|
27 |
|
|
|
30 |
|
|
|
27 |
|
|
Annual ESOP allocation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
(5 |
) |
|
Expected return on plan assets
|
|
|
(76 |
) |
|
|
(67 |
) |
|
|
(19 |
) |
|
|
(17 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
Amortization of transition and prior service costs (credits)
|
|
|
3 |
|
|
|
3 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
Amortization of actuarial loss
|
|
|
35 |
|
|
|
37 |
|
|
|
7 |
|
|
|
4 |
|
|
|
11 |
|
|
|
10 |
|
|
Net periodic benefit cost
|
|
$ |
69 |
|
|
$ |
76 |
|
|
$ |
28 |
|
|
$ |
27 |
|
|
$ |
44 |
|
|
$ |
38 |
|
The Company is contingently liable with respect to lawsuits, environmental matters, taxes and other matters arising in the normal course of business.
Management proactively reviews and monitors the Company’s exposure to, and the impact of, environmental matters. The Company is party to various environmental matters and, as such, may be responsible for all or a portion of the cleanup, restoration and post-closure monitoring of several sites.
As a matter of course, the Company is regularly audited by the IRS and other tax authorities around the world in countries where it conducts business. In this regard, the IRS has completed its examination of the Company’s federal income tax returns through 2005. The amount of additional tax involved as a result of assessments arising from the IRS examination did not have a material impact on the financial position, results of operations or cash flows of the Company. Estimated incremental tax payments related to potential disallowances for subsequent periods are not expected to be material.
Brazilian Matters
In 2001, the Central Bank of Brazil sought to impose a substantial fine on the Company’s Brazilian subsidiary (approximately $154 at the current exchange rate) based on alleged foreign exchange violations in connection with the financing of the Company’s 1995 acquisition of the Kolynos oral care business from Wyeth (formerly American Home Products) (the Seller), as described in the Company’s Form 8-K dated January 10, 1995. The Company appealed the imposition of the fine to the Brazilian Monetary System Appeals Council (the Council), and on January 30, 2007, the Council decided the appeal in the Company’s favor, dismissing the fine entirely. However, certain tax and civil proceedings that began as a result of this Central Bank matter are still outstanding as described below.
The Brazilian internal revenue authority has disallowed interest deductions and foreign exchange losses taken by the Company’s Brazilian subsidiary for certain years in connection with the financing of the Kolynos acquisition. The tax assessments with interest, at the current exchange rate, approximate $121. The Company has been disputing the disallowances by appealing the assessments within the internal revenue authority’s appellate process with the following results to date:
|
|
·
|
In June 2005, the First Board of Taxpayers ruled in the Company’s favor and allowed all of the previously claimed deductions for 1996 through 1998. In March 2007, the First Board of Taxpayers ruled in the Company’s favor and allowed all of the previously claimed deductions for 1999 through 2001. The tax authorities appealed these decisions to the next administrative level.
|
|
|
·
|
In August 2009, the First Taxpayers’ Council (the next and final administrative level of appeal) overruled the decisions of the First Board of Taxpayers, upholding the majority of the assessments, disallowing a portion of the assessments and remanding a portion of the assessments for further consideration by the First Board of Taxpayers.
|
The Company has filed a motion for reconsideration with the First Taxpayers’ Council and further appeals are available within the Brazilian federal courts. The Company intends to challenge these assessments vigorously. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel and other advisors, that the disallowances are without merit and that the Company should ultimately prevail on appeal, if necessary, in the Brazilian federal courts.
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
In 2002, the Brazilian Federal Public Attorney filed a civil action against the federal government of Brazil, Laboratorios Wyeth-Whitehall Ltda. (the Brazilian subsidiary of the Seller) and the Company, as represented by its Brazilian subsidiary, seeking to annul an April 2000 decision by the Brazilian Board of Tax Appeals that found in favor of the Seller’s Brazilian subsidiary on the issue of whether it had incurred taxable capital gains as a result of the divestiture of Kolynos. The action seeks to make the Company’s Brazilian subsidiary jointly and severally liable for any tax due from the Seller’s Brazilian subsidiary. Although there can be no assurances, management believes, based on the opinion of its Brazilian legal counsel, that the Company should ultimately prevail in this action. The Company intends to challenge this action vigorously.
In December 2005, the Brazilian internal revenue authority issued to the Company’s Brazilian subsidiary a tax assessment with interest and penalties of approximately $72, at the current exchange rate, based on a claim that certain purchases of U.S. Treasury bills by the subsidiary and their subsequent disposition during the period 2000 to 2001 were subject to a tax on foreign exchange transactions. The Company is disputing the assessment within the internal revenue authority’s administrative appeals process. In October 2007, the Second Board of Taxpayers, which has jurisdiction over these matters, ruled in favor of the internal revenue authority. In January 2008, the Company appealed this decision to the next administrative level. Although there can be no assurances, management believes, based on the advice of its Brazilian legal counsel, that the tax assessment is without merit and that the Company should prevail on appeal either at the administrative level or, if necessary, in the Brazilian federal courts. The Company intends to challenge this assessment vigorously.
European Competition Matters
Since February 2006, the Company has learned that investigations relating to potential competition law violations involving the Company’s subsidiaries had been commenced by governmental authorities in the European Union (EU), Belgium, France, Germany, Greece, Italy, The Netherlands, Romania, Spain, Switzerland and the United Kingdom (UK). The Company understands that many of these investigations also involve other consumer goods companies and/or retail customers. While several of the investigations are ongoing, there have been the following results to date:
|
|
·
|
In February 2008, the federal competition authority in Germany imposed fines on four of the Company’s competitors, but the Company was not fined due to its cooperation with the German authorities.
|
|
|
·
|
In November 2009, the UK Office of Fair Trading informed the Company that it was no longer pursuing its investigation of the Company.
|
|
|
·
|
In December 2009, the Swiss competition law authority imposed a fine of $5 on the Company’s GABA subsidiary for alleged violations of restrictions on parallel imports into Switzerland. The Company is appealing the fine in the Swiss courts.
|
|
|
·
|
In January 2010, the Spanish competition law authority found that four suppliers of shower gel had entered into an agreement regarding product down-sizing, for which Colgate’s Spanish subsidiary was fined $3. The Company is appealing the fine in the Spanish courts.
|
|
|
·
|
While the investigations of the Company’s Romanian subsidiary by the Romanian competition authority have been closed since May 2009, a complainant has petitioned the court to reopen one of the investigations.
|
Currently, formal claims of violations, or statements of objections, are pending against the Company as follows:
|
|
·
|
The French competition authority alleges agreements on pricing and promotion of heavy duty detergents among four consumer goods companies, including the Company’s French subsidiary.
|
|
|
·
|
The Italian competition authority alleges that 17 consumer goods companies, including the Company’s Italian subsidiary, exchanged competitively sensitive information in the cosmetics sector.
|
|
|
·
|
The French competition authority alleges violations of competition law by three pet food producers, including the Company’s Hill’s France subsidiary, focusing on exclusivity arrangements.
|
|
|
·
|
The Dutch competition authority alleges that six companies, including the Company’s Dutch subsidiary, engaged in concerted practices and exchanged sensitive information in the cosmetics sector.
|
|
|
·
|
The German competition authority alleges in an investigation related to the one resolved in February 2008 that 17 branded goods companies, including the Company’s German subsidiary, exchanged sensitive information related to the German market.
|
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
The Company has responded, or will have an opportunity to respond, to each of these statements of objections. Investigations are ongoing in the EU, Belgium, France and Greece, but no formal claims of violations have been filed in these jurisdictions except in France as noted above.
The Company’s policy is to comply with antitrust and competition laws and, if a violation of any such laws is found, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. The Company has undertaken a comprehensive review of its selling practices and related competition law compliance in Europe and elsewhere and, where the Company has identified a lack of compliance, it has undertaken remedial action. Competition and antitrust law investigations often continue for several years and can result in substantial fines for violations that are found. Such fines, depending on the gravity and duration of the infringement as well as the value of the sales involved, have amounted, in some cases, to hundreds of millions of dollars. While the Company cannot predict the final financial impact of these competition law issues as these matters may change, the Company has taken and will, as necessary, take additional reserves as and when appropriate.
ERISA Matters
In October 2007, a putative class action claiming that certain aspects of the cash balance portion of the Colgate-Palmolive Company Employees’ Retirement Income Plan (the Plan) do not comply with the Employee Retirement Income Security Act was filed against the Plan and the Company in the United States District Court for the Southern District of New York. Specifically, Proesel, et al. v. Colgate-Palmolive Company Employees’ Retirement Income Plan, et al. alleges improper calculation of lump sum distributions, age discrimination and failure to satisfy minimum accrual requirements, thereby resulting in the underpayment of benefits to Plan participants. Two other putative class actions filed earlier in 2007, Abelman, et al. v. Colgate-Palmolive Company Employees’ Retirement Income Plan, et al., in the United States District Court for the Southern District of Ohio, and Caufield v. Colgate-Palmolive Company Employees’ Retirement Income Plan, in the United States District Court for the Southern District of Indiana, both alleging improper calculation of lump sum distributions and, in the case of Abelman, claims for failure to satisfy minimum accrual requirements, were transferred to the Southern District of New York and consolidated with Proesel into one action, In re Colgate-Palmolive ERISA Litigation. The complaint in the consolidated action alleges improper calculation of lump sum distributions and failure to satisfy minimum accrual requirements, but does not include a claim for age discrimination. The relief sought includes recalculation of benefits in unspecified amounts, pre- and post-judgment interest, injunctive relief and attorneys’ fees. This action has not been certified as a class action as yet. The Company and the Plan intend to contest this action vigorously should the parties be unable to reach a settlement.
While it is possible that the Company’s cash flows and results of operations in a particular quarter or year could be materially affected by the impact of the above-noted contingencies, it is the opinion of management that these matters will not have a material impact on the Company’s financial position, ongoing results of operations or cash flows.
The Company evaluates segment performance based on several factors, including Operating profit. The Company uses Operating profit as a measure of the operating segment performance because it excludes the impact of corporate-driven decisions related to interest expense and income taxes. Corporate operations include stock-based compensation related to stock options and restricted stock awards, research and development costs, Corporate overhead costs, restructuring and related implementation costs, and gains and losses on sales of non-core product lines and assets. The Company reports these items within Corporate operations as they relate to Corporate-based responsibilities and decisions and are not included in the internal measures of segment operating performance used by the Company to measure the underlying performance of the business segments. In 2010, Corporate Operating profit also includes the one-time $271 charge of transitioning to hyperinflationary accounting in Venezuela as of January 1, 2010. For further information regarding Venezuela, refer to Note 11.
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
Net sales and Operating profit by segment were as follows:
| |
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oral, Personal and Home Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
753 |
|
|
$ |
740 |
|
|
$ |
2,274 |
|
|
$ |
2,204 |
|
|
Latin America
|
|
|
1,069 |
|
|
|
1,136 |
|
|
|
3,130 |
|
|
|
3,097 |
|
|
Europe/South Pacific
|
|
|
821 |
|
|
|
896 |
|
|
|
2,415 |
|
|
|
2,406 |
|
|
Greater Asia/Africa
|
|
|
779 |
|
|
|
695 |
|
|
|
2,239 |
|
|
|
1,972 |
|
|
Total Oral, Personal and Home Care
|
|
|
3,422 |
|
|
|
3,467 |
|
|
|
10,058 |
|
|
|
9,679 |
|
|
Pet Nutrition
|
|
|
521 |
|
|
|
531 |
|
|
|
1,528 |
|
|
|
1,567 |
|
|
Total Net sales
|
|
$ |
3,943 |
|
|
$ |
3,998 |
|
|
$ |
11,586 |
|
|
$ |
11,246 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oral, Personal and Home Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
224 |
|
|
$ |
217 |
|
|
$ |
668 |
|
|
$ |
608 |
|
|
Latin America
|
|
|
332 |
|
|
|
346 |
|
|
|
975 |
|
|
|
987 |
|
|
Europe/South Pacific
|
|
|
197 |
|
|
|
219 |
|
|
|
572 |
|
|
|
539 |
|
|
Greater Asia/Africa
|
|
|
195 |
|
|
|
161 |
|
|
|
573 |
|
|
|
457 |
|
|
Total Oral, Personal and Home Care
|
|
|
948 |
|
|
|
943 |
|
|
|
2,788 |
|
|
|
2,591 |
|
|
Pet Nutrition
|
|
|
138 |
|
|
|
136 |
|
|
|
413 |
|
|
|
407 |
|
|
Corporate
|
|
|
(128 |
) |
|
|
(153 |
) |
|
|
(617 |
) |
|
|
(374 |
) |
|
Total Operating profit
|
|
$ |
958 |
|
|
$ |
926 |
|
|
$ |
2,584 |
|
|
$ |
2,624 |
|
|
10.
|
Fair Value Measurements and Financial Instruments
|
The Company uses available market information and other valuation methodologies in assessing the fair value of financial instruments. Judgment is required in interpreting market data to develop the estimates of fair value and, accordingly, changes in assumptions or the estimation methodologies may affect the fair value estimates. The Company is exposed to credit losses in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely as it is the Company’s policy to contract only with diverse, highly rated counterparties.
Financial Instruments
At September 30, 2010 and December 31, 2009, marketable securities of $55 and $41, respectively, were included within Other current assets in the Condensed Consolidated Balance Sheets and consisted of bank deposits with original maturities greater than 90 days (Level 1 valuation). During the third quarter of 2010, the Company invested $136 in a portfolio of investment grade fixed income securities, including corporate bonds and sovereign debt securities, with maturities generally ranging from one to three years. This investment is considered an available-for-sale portfolio of securities and included within Other assets in the Condensed Consolidated Balance Sheet. The portfolio is considered a Level 1 investment as all of the securities have quoted prices on an active exchange with daily liquidity.
During the second half of 2009, the Company invested $210 in U.S. dollar-denominated bonds issued by a Venezuelan state-owned corporation with stated maturities ranging from two to seven years and $50 in U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government with stated maturities ranging from six to eight years. Prior to January 1, 2010, the U.S. dollar-denominated bonds had been remeasured at the parallel market rate and then translated for financial reporting purposes at the official rate of 2.15. As a result of transitioning to hyperinflationary accounting in Venezuela as of January 1, 2010, a charge of $152 was recorded to write down the value of the U.S. dollar-denominated bonds. This charge is included in the $271 one-time charge discussed in Note 11. During the third quarter of 2010, the Company invested an additional $23 in U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government with stated maturities ranging from three to seven years and sold $50 of the U.S. dollar-denominated bonds.
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
As of September 30, 2010, the fair value of the Venezuela bond investments was $89 and the $6 difference between their fair value and carrying value was recorded as an unrealized loss in Accumulated other comprehensive income (loss). The bonds are classified as available-for-sale and are included within Other current assets and Other assets in the Condensed Consolidated Balance Sheets. The U.S. dollar-denominated bonds are considered Level 1 as they have quoted prices on an active exchange with daily liquidity. The U.S. dollar-linked, devaluation-protected bonds are considered Level 2 as they are priced over-the-counter in a less liquid market with limited daily activity.
The carrying amount of cash and cash equivalents, accounts receivable and short-term debt approximated fair value as of September 30, 2010 and December 31, 2009. The estimated fair value of the Company’s long-term debt, including the current portion, as of September 30, 2010 and December 31, 2009, was $3,657 and $3,362, respectively, and the related carrying value was $3,337 and $3,147, 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).
Derivative Instruments
The Company’s derivative instruments include interest rate swap contracts, foreign currency contracts and commodity contracts. The Company utilizes interest rate swap contracts to manage its targeted mix of fixed and floating rate debt, and these swaps are valued using observable benchmark rates (Level 2 valuation). Foreign currency contracts consist of forward and swap contracts utilized to hedge a portion of the Company’s foreign currency purchases, assets and liabilities created in the normal course of business as well as the net investment in certain foreign subsidiaries. These contracts are valued using observable forward rates (Level 2 valuation). Commodity contracts are utilized to hedge the purchases of raw materials used in the Company’s operations. These contracts are measured using quoted commodity exchange prices (Level 1 valuation). The duration of foreign currency and commodity contracts generally does not exceed 12 months.
It is the Company’s policy to enter into derivative instrument contracts with terms that match the underlying exposure being hedged. As such, the Company’s derivative instruments are considered highly effective. Hedge ineffectiveness, if any, is not material for any period presented.
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
Financial Statement Classification
The Company holds derivative instruments that are designated as hedging instruments as well as certain instruments not so designated. The following table discloses the fair value as of September 30, 2010 and December 31, 2009 for both types of derivative instruments:
| |
Asset Derivatives
|
|
Liability Derivatives
|
|
| |
Account
|
|
Fair Value
|
|
Account
|
|
Fair Value
|
|
|
Designated derivative instruments
|
|
|
9/30/10
|
|
|
12/31/09
|
|
|
|
9/30/10
|
|
|
12/31/09
|
|
|
Interest rate swap contracts
|
Other assets
|
|
$ |
30 |
|
|
$ |
17 |
|
Other liabilities
|
|
$ |
—
|
|
|
$ |
—
|
|
|
Foreign currency contracts
|
Other current assets
|
|
|
26 |
|
|
|
11 |
|
Other accruals
|
|
|
24 |
|
|
|
8 |
|
|
Commodity contracts
|
Other current assets
|
|
|
3 |
|
|
|
1 |
|
Other accruals
|
|
|
—
|
|
|
|
1 |
|
|
Total designated
|
|
|
$ |
59 |
|
|
$ |
29 |
|
|
|
$ |
24 |
|
|
$ |
9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current assets
|
|
$ |
|
|
|
$ |
3 |
|
Other accruals
|
|
$ |
5 |
|
|
$ |
—
|
|
|
Total not designated
|
|
|
$ |
—
|
|
|
$ |
3 |
|
|
|
$ |
5 |
|
|
$ |
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
59 |
|
|
$ |
32 |
|
|
|
$ |
29 |
|
|
$ |
9 |
|
Derivatives not designated as hedging instruments for each period consist of a cross-currency swap which serves as an economic hedge of a foreign currency deposit. The cross-currency swap outstanding at December 31, 2009, which had a notional value of $99, was settled during the second quarter of 2010, resulting in a realized gain of $9. A new cross-currency swap with similar terms and an underlying foreign currency deposit was entered into during June 2010. For the three- and nine-month periods ended September 30, 2010, $5 of net losses and $1 of net gains, respectively, were recognized in Other (income) expense, net related to the swaps, offset by $5 of net gains and $1 of net losses recognized in Other (income) expense, net on the underlying deposit. The notional value of the new swap was $90 at September 30, 2010. For the three- and nine-month periods ended September 30, 2009, $3 of net gains and $7 of net losses, respectively, were recognized in Other (income) expense, net related to the swaps, offset by $3 of net losses and $7 of net gains recognized in Other (income) expense, net on the underlying deposit.
Cash flow hedges
As of September 30, 2010, all of the Company’s commodity contracts, with a notional value of $16, and certain foreign currency forward contracts, with a notional value of $292, have been designated as cash flow hedges. As of September 30, 2009, all of the Company’s commodity contracts, with a notional value of $14, and certain foreign currency forward contracts, with a notional value of $184, were designated as cash flow hedges. For cash flow hedges, 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.
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
Activity related to cash flow hedges recorded during the three-month periods ended September 30, 2010 and 2009 was as follows:
| |
|
Three Months Ended
September 30, 2010
|
|
|
Three Months Ended
September 30, 2009
|
|
|
Cash Flow Hedges
|
|
Gain (Loss)
Recognized
in OCI 1
|
|
|
Gain (Loss)
Reclassified into
Cost of sales
|
|
|
Gain (Loss)
Recognized
in OCI 1
|
|
|
Gain (Loss)
Reclassified into
Cost of sales
|
|
|
Foreign currency contracts
|
|
$ |
(11 |
) |
|
$ |
(3 |
) |
|
$ |
(10 |
) |
|
$ |
(10 |
) |
|
Commodity contracts
|
|
|
5 |
|
|
|
—
|
|
|
|
(1 |
) |
|
|
—
|
|
| |
|
$ |
(6 |
) |
|
$ |
(3 |
) |
|
$ |
(11 |
) |
|
$ |
(10 |
) |
Activity related to cash flow hedges recorded during the nine-month periods ended September 30, 2010 and 2009 was as follows:
| |
|
Nine Months Ended
September 30, 2010
|
|
|
Nine Months Ended
September 30, 2009
|
|
|
Cash Flow Hedges
|
|
Gain (Loss)
Recognized
in OCI 1
|
|
|
Gain (Loss)
Reclassified into
Cost of sales
|
|
|
Gain (Loss)
Recognized
in OCI 1
|
|
|
Gain (Loss)
Reclassified into
Cost of sales
|
|
|
Foreign currency contracts
|
|
$ |
(10 |
) |
|
$ |
—
|
|
|
$ |
(11 |
) |
|
$ |
(13 |
) |
|
Commodity contracts
|
|
|
2 |
|
|
|
(1 |
) |
|
|
—
|
|
|
|
(8 |
) |
| |
|
$ |
(8 |
) |
|
$ |
(1 |
) |
|
$ |
(11 |
) |
|
$ |
(21 |
) |
|
1
|
The net gain (loss) recognized in OCI for both foreign currency contracts and commodity contracts is expected to be recognized in Cost of sales within the next twelve months.
|
Fair value hedges
As of September 30, 2010, the Company has designated all interest rate swap contracts, with a notional value of $600, and certain foreign currency forward contracts, with a notional value of $1,080, as fair value hedges. As of September 30, 2009, the Company designated all interest rate swap contracts, with a notional value of $600, and certain foreign currency forward contracts, with a notional value of $955, as fair value hedges. For fair value hedges, the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings. The impact of foreign currency contracts is recognized in Selling, general and administrative expenses. The impact of interest rate swap contracts is recognized in Interest expense, net.
Activity related to fair value hedges recorded during the three-month periods ended September 30, 2010 and 2009 was as follows:
| |
|
Three Months Ended
September 30, 2010
|
|
|
Three months ended
September 30, 2009
|
|
|
Fair Value Hedges
|
|
Gain (Loss) on Derivatives
|
|
|
Gain (Loss) on Hedged Item
|
|
|
Gain (Loss) on Derivatives
|
|
|
Gain (Loss) on Hedged Item
|
|
|
Foreign currency contracts
|
|
$ |
26 |
|
|
$ |
(26 |
) |
|
$ |
(3 |
) |
|
$ |
3 |
|
|
Interest rate swap contracts
|
|
|
4 |
|
|
|
(4 |
) |
|
|
6 |
|
|
|
(6 |
) |
| |
|
$ |
30 |
|
|
$ |
(30 |
) |
|
$ |
3 |
|
|
$ |
(3 |
) |
COLGATE-PALMOLIVE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Share and Per Share Amounts)
(Unaudited)
Activity related to fair value hedges recorded during the nine-month periods ended September 30, 2010 and 2009 was as follows:
| |
|
Nine Months Ended
September 30, 2010
|
|
|
Nine Months Ended
September 30, 2009
|
|
|
Fair Value Hedges
|
|
Gain (Loss) on Derivatives
|
|
|
Gain (Loss) on Hedged Item
|
|
|
Gain (Loss) on Derivatives
|
|
|
Gain (Loss) on Hedged Item
|
|
|
Foreign currency contracts
|
|
$ |
22 |
|
|
$ |
(22 |
) |
|
$ |
7 |
|
|
$ |
(7 |
) |
|
Interest rate swap contracts
|
|
|
13 |
|
|
|
(13 |
) |
|
|
(4 |
) |
|
|
4 |
|
| |
|
$ |
35 |
|
|
$ |
(35 |
) |
|
$ |
3 |
|
|
$ |
(3 |
) |
Net investment hedges
As of September 30, 2010, the Company has designated certain foreign currency forward contracts with a notional value of $76, as well as certain foreign currency-denominated debt with a notional value of $279, as net investment hedges. As of September 30, 2009, the Company designated certain foreign currency forward contracts with a notional value of $37, as well as certain foreign currency-denominated debt with a notional value of $406, as net investment hedges. For the three- and nine-month periods ended September 30, 2010, net losses of $41 and $3, respectively, were recorded in OCI to offset the changes in the values of the net investments being hedged. For the three-and-nine month periods ended September 30, 2009, $20 and $25 of net gains, respectively, were recorded in OCI to offset the changes in the values of the net investments being hedged.
Effective January 1, 2010, Venezuela was designated as hyperinflationary and therefore the functional currency for the Company’s Venezuelan subsidiary (CP Venezuela) became the U.S. dollar. As a result, the impact of Venezuelan currency fluctuations is reported in income. The change in the reporting currency from the Venezuelan bolivar to the U.S. dollar resulted in a one-time charge of approximately $271 recorded within Other (income) expense, net in the first quarter of 2010. This charge primarily represents the premium paid to acquire U.S. dollar-denominated cash ($150) and bonds ($152) at the parallel market rate, offset by $31 for U.S. dollar-denominated payables. Previously these items had been remeasured at the parallel market rate and then translated for financial reporting purposes at the official rate of 2.15.
On January 8, 2010, the Venezuelan government announced its decision to devalue its currency and implement a two-tier exchange rate structure. As a result, the official exchange rate changed from 2.15 to 2.60 for essential goods and 4.30 for non-essential goods. The devaluation resulted in a one-time pre-tax gain of $46 recorded in Other (income) expense and an after-tax gain of $59 in the first quarter of 2010 related to the remeasurement of the local balance sheet and lower taxes on accrued but unpaid remittances from Venezuela.
While we expect many of our imported goods will continue to receive the 2.60 rate of exchange, as was the case in the first nine months of 2010, we remeasure the financial statements of our Venezuelan subsidiary at the rate at which we expect to remit future dividends, which currently is 4.30. As the local currency operations in Venezuela now translate into fewer U.S. dollars, this will have an ongoing adverse effect on our reported results.
For the nine months ended September 30, 2010, CP Venezuela represented 4% of the Company’s consolidated Net sales. At September 30, 2010, CP Venezuela’s bolivar-denominated monetary net asset position was $245.
COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)
Executive Overview
Colgate-Palmolive Company seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers on a global basis 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. This geographic diversity and balance help to reduce the Company’s exposure to business and other risks in any one country or part of the world.
The Oral, Personal and Home Care segment is operated through four reportable operating segments: North America, Latin America, Europe/South Pacific and Greater Asia/Africa, all of which sell to a variety of retail and wholesale customers and distributors. The Company, through Hill’s Pet Nutrition, also competes on a worldwide basis in the pet nutrition market, selling its products principally through the veterinary profession and specialty pet retailers.
On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, sales (including volume, pricing and foreign exchange components), organic sales growth, gross profit margin, operating profit, net income and earnings per share, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators, and the Company’s corporate governance practices (including the Company’s Code of Conduct), help to maintain business health and strong internal controls.
To achieve its business and financial objectives, the Company focuses the organization on initiatives to drive and fund growth. The Company seeks to capture significant opportunities for growth by identifying and meeting consumer needs within its core categories, through its focus on innovation and the deployment of valuable consumer and shopper insights in the development of successful new products regionally, which are then rolled out on a global basis. To enhance these efforts, the Company has developed key initiatives to build strong relationships with consumers, dental and veterinary professionals and retail customers. Growth opportunities are greater in those areas of the world in which economic development and rising consumer incomes expand the size and number of markets for the Company’s products.
The investments needed to fund this growth are developed through continuous, Company-wide initiatives to lower costs and increase effective asset utilization through which the Company seeks to become even more effective and efficient throughout its businesses. The Company also continues to prioritize its investments toward its higher margin businesses, specifically Oral Care, Personal Care and Pet Nutrition.
The Company operates in a highly competitive global marketplace and, looking forward, expects global macroeconomic and market conditions to remain highly challenging. With approximately 75% of its Net sales generated outside of the United States, the Company is exposed to changes in economic conditions and foreign currency exchange rates, as well as political uncertainty in some countries, all of which could impact future operating results. In particular, as a result of the decision by the Venezuelan government on January 8, 2010 to devalue the Venezuelan bolivar, described more fully in Note 11 to the Condensed Consolidated Financial Statements, the local currency operations of CP Venezuela now translate into fewer U.S. dollars, which will have an ongoing adverse effect on the Company’s reported results. The Company has taken, and continues to take, actions to mitigate the impact of the devaluation on its operations. While difficult to project, our current estimate is that the impact of the devaluation, taking into account these actions, will be a net reduction in 2010 diluted earnings per share of between $0.10 and $0.15 per share, including the $59 aftertax gain related to the remeasurement of the local balance sheet and lower taxes on accrued but unpaid remittances from CP Venezuela recorded in the first quarter of 2010. In addition to the $59 aftertax gain, the Company incurred a one-time charge of approximately $271 recorded within Other (income) expense, net in the first quarter 2010 related to the change in the reporting currency from the Venezuelan bolivar to the U.S. dollar as of January 1, 2010. As actual results may differ, please see “Cautionary Statement on Forward-Looking Statements” below.
COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)
The Venezuelan government continues to impose currency exchange controls and during the second quarter of 2010 a new currency market was established which replaced the free-floating parallel market. Although CP Venezuela continues to have limited access to U.S. dollars at official rates and currently only for imported goods, under the current restrictions, it is not permitted to access the new currency market. Our business in Venezuela and the repatriation of its earnings would be further negatively affected if these difficult conditions continue or additional currency exchange controls are imposed.
The Company believes it is well prepared to meet the challenges ahead due to its strong financial condition, experience operating in challenging environments and continued focus on the Company’s strategic initiatives: getting closer to the consumer, the profession and customers; effectiveness and efficiency in everything; innovation everywhere; and leadership. This focus, together with the strength of the Company’s global brand names and its broad international presence in both mature and emerging markets, should position the Company well to increase shareholder value over the long-term.
Results of Operations
Worldwide Net sales were $3,943 in the third quarter of 2010, a decrease of 1.5% from the third quarter of 2009, as volume growth of 3.0% and flat net selling prices were more than offset by a 4.5% negative impact of foreign exchange. Organic sales (Net sales excluding foreign exchange, acquisitions and divestments) grew 3.0% in the third quarter of 2010.
Net sales in the Oral, Personal and Home Care segment were $3,422 in the third quarter of 2010, a decrease of 1.5% from the third quarter of 2009, as volume growth of 3.5% and flat net selling prices were more than offset by a 5.0% negative impact of foreign exchange. Organic sales in the Oral, Personal and Home Care segment grew 3.5% in the third quarter of 2010.
Net sales in North America increased 2.0% in the third quarter of 2010 to $753, driven by volume growth of 3.0% and a 0.5% positive impact of foreign exchange, partially offset by net selling price decreases of 1.5%. Organic sales in North America grew 1.5% in the third quarter of 2010. Products contributing to growth in oral care included Colgate Triple Action, Colgate Sensitive MultiProtection and Colgate Max White with Mini Bright Strips toothpastes, Colgate 360° ActiFlex, Colgate Max White and Colgate Extra Clean manual toothbrushes and the Colgate Wisp mini-brush. Products contributing to growth in other categories included Softsoap Sea Minerals liquid hand soap, Speed Stick and Lady Speed Stick Stainguard antiperspirants and Ajax Lime with Bleach Alternative dish liquid. Operating profit in North America increased 3% in the third quarter of 2010 to $224 due to sales growth and cost-saving initiatives, partially offset by higher material costs and increased promotional investments.
Net sales in Latin America decreased 6.0% in the third quarter of 2010 to $1,069, as volume growth of 1.0% and net selling price increases of 5.0% were more than offset by a 12.0% negative impact of foreign exchange. Organic sales in Latin America grew 6.0% in the third quarter of 2010. Volume gains, led by Mexico, Brazil, Argentina and Central America, more than offset a volume decline in Venezuela. Products contributing to growth in oral care included Colgate Sensitive Pro-Alivio and Colgate Total toothpastes, Colgate 360° ActiFlex, Colgate Twister and Colgate 360° Sensitive Pro-Alivio manual toothbrushes and Colgate Plax Sensitive, Colgate Plax Whitening Tartar Control and Colgate Plax Magic mouthwashes. Products contributing to growth in other categories included Palmolive Naturals Yogurt and Almond Oil and Palmolive Naturals Perfect Tone bar soaps, Lady Speed Stick and Speed Stick Waterproof deodorants and Suavitel GoodBye Ironing fabric conditioner. Operating profit in Latin America decreased 4% in the third quarter of 2010 to $332, primarily due to increased advertising and promotional investments and the negative impact of foreign exchange, especially in Venezuela.
Net sales in Europe/South Pacific decreased 8.5% in the third quarter of 2010 to $821, as volume growth of 0.5% was more than offset by net selling price decreases of 3.5% and a 5.5% negative impact of foreign exchange. Organic sales in Europe/South Pacific decreased 3.0% in the third quarter of 2010. Volume gains, led by the GABA business, the United Kingdom and Australia, more than offset volume declines in France and Greece. Products contributing to growth in oral care included Colgate Sensitive Pro-Relief, Colgate Sensitive Pro-Relief Whitening and Colgate Max White One toothpastes, Colgate 360° ActiFlex and Colgate Total Professional toothbrushes and Colgate Plax Ice mouth rinse. Products contributing to growth in other categories included Palmolive Nutra-Fruit shower crème and the Natura Verde line of home care products made with ingredients of natural origin and biodegradable formulas. Operating profit in Europe/South Pacific decreased 10% in the third quarter of 2010 to $197 due to the negative impact of foreign exchange, increased promotional investments and higher material costs, partially offset by the impact of cost-saving initiatives.
COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)
Net sales in Greater Asia/Africa increased 12.0% in the third quarter of 2010 to $779, driven by volume growth of 12.0% and a 2.0% positive impact of foreign exchange, partially offset by net selling price decreases of 2.0%. Organic sales in Greater Asia/Africa grew 10.0% in the third quarter of 2010. Volume gains were led by India, the Greater China region, Philippines, Russia and South Africa. Products contributing to growth in oral care included Colgate Sensitive Pro-Relief, Colgate Sensitive Pro-Relief Whitening, Colgate Total Professional Sensitive and Colgate 360° Whole Mouth Clean toothpastes, Colgate 360° ActiFlex, Colgate Massager and Colgate Zig Zag manual toothbrushes and Colgate Plax Complete Care mouthwash. Products contributing to growth in other categories included Palmolive Naturals Papaya and Palmolive Nutra-Fruit shower gels. Operating profit in Greater Asia/Africa increased 21% in the third quarter of 2010 to $195 due to sales growth and cost-saving initiatives, which more than offset higher material costs and increased advertising.
Net sales for Hill’s Pet Nutrition decreased 2.0% in the third quarter of 2010 to $521, as a result of volume declines of 0.5%, net selling price decreases of 1.0% and a 0.5% negative impact of foreign exchange. Organic sales in Hill’s Pet Nutrition decreased 1.5% in the third quarter of 2010. Volume declined in the U.S. and Japan, while volume gains were achieved in Russia and Taiwan. Successful products within the U.S. included Science Diet Small and Toy Breed Canine, Science Diet Healthy Mobility Canine and Prescription Diet j/d Feline. Successful products contributing to international sales included Science Diet Small and Toy Breed Canine and Science Plan VetEssentials Canine and Feline. Operating profit in Hill’s Pet Nutrition increased 1% in the third quarter of 2010 to $138 as lower sales and higher material costs were more than offset by a continued focus on cost-saving initiatives and lower advertising.
Worldwide Net sales were $11,586 in the first nine months of 2010, up 3.0% from the first nine months of 2009, driven by volume growth of 4.0% and level net selling prices, partially offset by a 1.0% negative impact of foreign exchange.
Net sales in the Oral, Personal and Home Care segment were $10,058 in the first nine months of 2010, up 4.0% from 2009, driven by volume growth of 5.0% and net selling price increases of 0.5%, partially offset by a negative foreign exchange impact of 1.5%. Within this segment, North America sales increased 3.0% on volume growth of 4.5% and net selling price decreases of 2.5%, Latin America sales increased 1.0%, driven by volume growth of 3.0% and net selling price increases of 6.0%, Europe/South Pacific sales increased 0.5% on volume growth of 3.0% and net selling price decreases of 3.0%, Greater Asia/Africa sales increased 13.5% on volume growth of 11.0% and net selling price decreases of 1.5%, with the remainder of the change in each region due to foreign exchange.
Net sales for the Hill’s Pet Nutrition segment decreased 2.5% in the first nine months of 2010 to $1,528, as volume declines of 2.0% and net selling price decreases of 2.0% were partially offset by a positive foreign exchange impact of 1.5%.
Operating profit (loss) related to Corporate was ($128) in the third quarter of 2010 as compared to ($153) in the third quarter of 2009. In the first nine months of 2010, Operating profit (loss) related to Corporate increased to ($617) from ($374) in the comparable period of 2009. In the first nine months of 2010, Operating profit (loss) includes a one-time $271 charge related to the transition to hyperinflationary accounting in Venezuela as of January 1, 2010.
For a table summarizing segment Net sales and Operating profit, please refer to Note 9, “Segment Information” to the Condensed Consolidated Financial Statements.
Worldwide gross profit margin increased to 59.4% in the third quarter of 2010 compared to 59.2% in the third quarter of 2009 and increased to 59.2% in the first nine months of 2010 from 58.5% in the first nine months of 2009. In each case, cost-saving initiatives more than offset the impact of negative foreign exchange and increased promotional investments.
Selling, general and administrative expenses as a percentage of Net sales increased to 35.3% in the third quarter of 2010 from 35.1% in the third quarter of 2009, and increased to 34.9% in the first nine months of 2010 from 34.5% in the first nine months of 2009. In each case, the increase is primarily due to higher advertising. In the third quarter of 2010, advertising increased 1% to $432 as compared with $429 in the third quarter of 2009. In the first nine months of 2010, advertising increased 10% to $1,250 as compared with $1,138 in the first nine months of 2009.
COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)
Other (income) expense, net amounted to ($5) in the third quarter of 2010 as compared with $38 in the third quarter of 2009 and $232 in the first nine months of 2010 as compared to $72 in the first nine months of 2009. Other (income) expense, net for the third quarter of 2009 includes costs of $22 related to the remeasurement of certain U.S. dollar liabilities in Venezuela settled with dollars obtained through securities transactions in the parallel market at an exchange rate less favorable than the official rate. Other (income) expense, net for the first nine months of 2010 includes a one-time $271 charge in Corporate related to the transition to hyperinflationary accounting in Venezuela as of January 1, 2010, partially offset by a one-time pre-tax gain of $46 recorded in Latin America related to the remeasurement of the CP Venezuela balance sheet as a result of the devaluation on January 8, 2010.
Operating profit increased 3% to $958 in the third quarter of 2010 from $926 in 2009. Operating profit decreased 2% to $2,584 in the first nine months of 2010 from $2,624 in the first nine months of 2009. Excluding the one-time $271 charge related to the transition to hyperinflationary accounting in Venezuela, Operating profit increased 9% in the first nine months of 2010, driven primarily by higher gross profit margins and cost-saving initiatives.
Interest expense, net decreased to $13 and $43 for the three and nine months ended September 30, 2010, respectively, as compared with $17 and $59 in the comparable periods of 2009, primarily due to lower average interest rates.
The quarterly provision for income taxes is determined based on the Company’s estimated full year effective tax rate adjusted by the amount of tax attributable to infrequent and unusual items that are separately recognized on a discrete basis in the income tax provision in the quarter in which they occur. The Company’s current estimate of its full year effective income tax rate before discrete period items is 32.2%, which is consistent with the estimate in the third quarter 2009.
The effective tax rate for the first nine months of 2010 is 34.6%. The rate was increased as a result of the one-time charges recorded in the first quarter of 2010 of $271 related to the transition to hyperinflationary accounting in Venezuela and $9 related to the elimination, beginning in 2013, of the tax deduction on the Medicare Part D retiree drug subsidy under the Patient Protection and Affordable Care Act (HR 3590). Partially offsetting these increases was the one-time $59 gain from the remeasurement of the CP Venezuela balance sheet and lower taxes on accrued but unpaid remittances as a result of the devaluation also recorded in the first quarter of 2010.
Net income attributable to Colgate-Palmolive Company for the third quarter of 2010 increased to $619 from $590 in the comparable 2009 period, and earnings per common share on a diluted basis increased to $1.21 per share from $1.12 per share in the comparable 2009 period. Net income attributable to Colgate-Palmolive Company in the first nine months of 2010 decreased to $1,579 from $1,660 in the comparable 2009 period, and earnings per common share on a diluted basis decreased to $3.07 per share from $3.16 per share in the comparable 2009 period. Net income attributable to Colgate-Palmolive Company for the first nine months of 2010 included a one-time charge of $271 related to the transition to hyperinflationary accounting in Venezuela ($0.52 per share). Excluding this one-time charge, Net income attributable to Colgate-Palmolive Company for the first nine months of 2010 increased 11% to $1,850 and earnings per common share on a diluted basis increased 14% to $3.59.
Liquidity and Capital Resources
Net cash provided by operations decreased 6% to $2,243 in the nine months of 2010, compared with $2,375 in the comparable period of 2009, due to increased working capital. As a percentage of sales, working capital increased by 100 basis points to 1.7% of Net Sales in third quarter 2010 versus the year ago period, primarily due to lower accrued liabilities, partially offset by lower accounts receivable. The Company defines working capital as the difference between current assets (excluding cash and marketable securities, the latter of which is reported in Other current assets) and current liabilities (excluding short-term debt).
Investing activities used $438 in the first nine months of 2010, compared with $484 in the comparable period of 2009. Capital spending was consistent with the comparable period of 2009 and continues to focus primarily on projects that yield high aftertax returns. Overall capital expenditures for 2010 are expected to be at an annual rate of approximately 3.5% of Net sales.
Net cash outflows from activity related to marketable securities and other investments were lower than in the comparable period of 2009. During the nine months ended 2009, the Company purchased $72 of U.S. dollar-denominated bonds issued by a Venezuelan state-owned corporation and $50 of U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government. During the third quarter of 2010, the Company sold $50 of the U.S. dollar-denominated bonds to obtain U.S. dollars in order to support ongoing operations and purchased an additional $23 of the U.S. dollar-linked, devaluation-protected bonds to reduce the Company’s exposure to local currency. Separately, the Company also invested $136 in a portfolio of investment grade fixed income securities, including corporate bonds and sovereign debt securities.
COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)
Financing activities used $1,745 of cash during the first nine months of 2010 compared with $1,620 in the comparable period of 2009. This increase is primarily due to higher repurchases of common stock and higher dividends paid, partially offset by higher net proceeds from the issuance of debt.
Commercial paper outstanding was $575 and $36 as of September 30, 2010 and 2009, respectively. The average daily balances outstanding for commercial paper in the first nine months of 2010 and 2009 were $1,146 and $1,266, respectively. The maximum daily balance outstanding for commercial paper in the first nine months of 2010 and 2009 was $1,628 and $1,556, respectively. The Company regularly classifies commercial paper and certain current maturities of notes payable as long-term debt as it has the intent and ability to refinance such obligations on a long-term basis, including, if needed, by utilizing its lines of credit that expire in 2012.
During the third quarter of 2009, the Company issued $300 of U.S. dollar-denominated six-year notes at a fixed rate of 3.15% under the shelf registration statement for the Company’s medium-term note program. Proceeds from the debt issuance were primarily used to reduce commercial paper borrowings. In addition, during the third quarter of 2009, to effectively convert a portion of the Company’s fixed debt portfolio to a variable rate, the Company also entered into interest rate swaps, with a total notional value of $330.
Certain of the facilities with respect to the Company’s bank borrowings contain cross-default provisions. Non-compliance with these requirements could ultimately result in the acceleration of amounts owed. The Company is in full compliance with all such requirements and believes the likelihood of non-compliance is remote.
In the first nine months of 2010, the Company increased the quarterly common stock dividend by 20% to $0.53 per share and the semi-annual Series B Convertible Preference Stock dividend to $8.48 per share. On February 4, 2010, the Company’s Board of Directors authorized a new share repurchase program (the 2010 Program) that authorizes the repurchase of up to 40 million shares of the Company’s common stock.
For additional information regarding liquidity and capital resources, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Non-GAAP Financial Measures
This quarterly report on Form 10-Q discusses organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments) (non-GAAP). Management believes this measure provides investors with useful supplemental information regarding the Company’s underlying sales trends by presenting sales growth excluding the external factor of foreign exchange, as well as the impact of acquisitions and divestments.
Worldwide Operating profit, Net income attributable to Colgate-Palmolive Company and earnings per share on a diluted basis are discussed in this quarterly report on Form 10-Q both on a GAAP basis and excluding the impact of the one-time charge related to the transition to hyperinflationary accounting in Venezuela (non-GAAP). Management believes these measures provide investors with useful supplemental information regarding the Company’s underlying business trends and performance of the Company’s on-going operations and are useful for period-over-period comparisons of such operations.
The Company uses the above financial measures internally in its budgeting process and as a factor in determining compensation. While the Company believes that these non-GAAP financial measures are useful in evaluating the Company’s business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.
COLGATE-PALMOLIVE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Share and Per Share Amounts)
Cautionary Statement on Forward-Looking Statements
This quarterly report on Form 10-Q may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases. Such statements may relate, for example, to sales or volume growth, profit and profit margin growth, earnings growth, financial goals, the impact of the currency devaluation in Venezuela, cost-reduction plans, tax rates and new product introductions, among other matters. These statements are made on the basis of the Company’s views and assumptions as of this time and the Company undertakes no obligation to update these statements. Moreover, the Company does not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. The Company cautions investors that any such forward-looking statements are not guarantees of future performance and that actual events or results may differ materially from those statements. Actual events or results may differ materially because of global economic conditions and other factors that affect international businesses, as well as matters specific to us and the markets we serve, including currency rate fluctuations, changes in foreign or domestic laws or regulations or their interpretation, political and fiscal developments, the availability and cost of raw and packaging materials, our ability to maintain or increase selling prices, changes in the policies of retail trade customers and our ability to continue lowering costs and to mitigate the impact of the currency devaluation and exchange controls in Venezuela. For information about these and other factors that could impact our business and cause actual results to differ materially from forward-looking statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, including the information set forth under the captions “Item 1A. Risk Factors” and “Cautionary Statement on Forward-Looking Statements.”
Quantitative and Qualitative Disclosures about Market Risk
There is no material change in the information reported under Part II, Item 7, “Managing Foreign Currency, Interest Rate and Commodity Price Exposure” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
COLGATE-PALMOLIVE COMPANY
(Unaudited)
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of the Company’s Chairman of the Board, President and Chief Executive Officer and its Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2010 (the Evaluation). Based upon the Evaluation, the Company’s Chairman of the Board, President and Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) are effective.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
PART II.
|
OTHER INFORMATION
|
|
Item 1.
|
Legal Proceedings
|
For information regarding legal matters, refer to Item 3 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, Note 13 to the Consolidated Financial Statements included therein and Note 8 to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
For information regarding risk factors, please refer to Part 1, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
On February 4, 2010, the Board authorized a share repurchase program (the 2010 Program). The 2010 Program authorizes the repurchase of up to 40 million shares of the Company’s common stock. The Board’s authorization also provides for share repurchases on an on-going basis to fulfill certain requirements of the Company’s compensation and benefit programs. The shares will be repurchased from time to time in open market transactions or privately negotiated transactions at the Company’s discretion, subject to market conditions, customary blackout periods and other factors.
The following table shows the stock repurchase activity for each of the three months in the quarter ended September 30, 2010:
|
Month
|
|
Total Number of Shares
Purchased(1)
|
|
|
Average Price Paid per Share
|
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
|
|
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
|
|
|
July 1 through 31, 2010
|
|
|
662,755 |
|
|
$ |
78.72 |
|
|
|
550,000 |
|
|
|
29,064,520 |
|
|
August 1 through 31, 2010
|
|
|
2,345,332 |
|
|
$ |
76.33 |
|
|
|
2,320,000 |
|
|
|
26,744,520 |
|
|
September 1 through 30, 2010
|
|
|
2,267,543 |
|
|
$ |
76.57 |
|
|
|
2,165,000 |
|
|
|
24,579,520 |
|
|
Total
|
|
|
5,275,630 |
|
|
$ |
76.73 |
|
|
|
5,035,000 |
|
|
|
|
|
____________________
|
(1)
|
Includes share repurchases under the 2010 Program and those associated with certain employee elections under the Company’s compensation and benefit programs.
|
|
(2)
|
The difference between the total number of shares purchased and the total number of shares purchased as part of publicly announced plans or programs is 240,630 shares, all of which relate to shares deemed surrendered to the Company to satisfy certain employee elections under its compensation and benefit programs.
|
|
Item 3.
|
Defaults Upon Senior Securities
|
None.
|
Item 5.
|
Other Information
|
None.
COLGATE-PALMOLIVE COMPANY
(Unaudited)
|
Exhibit No.
|
|
Description
|
| |
|
|
|
|
|
Form of Distribution Agreement relating to Colgate’s Medium-Term Note Program, Series G.
|
| |
|
|
|
|
|
Form of Fixed Rate Medium-Term Note, Series G.
|
| |
|
|
|
|
|
Form of Floating Rate Medium-Term Note
|
| |
|
|
|
|
|
Opinion of Sidley Austin LLP relating to Colgate’s Medium-Term Note Program
|
| |
|
|
|
|
|
Colgate-Palmolive Company Supplemental Salaried Employees’ Retirement Plan, amended and restated as of September 1, 2010.
|
| |
|
|
|
|
|
Colgate-Palmolive Company Supplemental Savings & Investment Plan, amended and restated as of September 1, 2010.
|
| |
|
|
|
|
|
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
|
| |
|
|
|
23
|
|
Consent of Sidley Austin LLP (included in Exhibit 5).
|
| |
|
|
|
|
|
Certificate of the Chairman of the Board, President and Chief Executive Officer of Colgate-Palmolive Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
| |
|
|
|
|
|
Certificate of the Chief Financial Officer of Colgate-Palmolive Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
| |
|
|
|
|
|
Certificate of the Chairman of the Board, President and Chief Executive Officer and the Chief Financial Officer of Colgate-Palmolive Company pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350.
|
| |
|
|
|
101
|
|
The following materials from Colgate-Palmolive Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.
|
COLGATE-PALMOLIVE COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
COLGATE-PALMOLIVE COMPANY
|
|
|
(Registrant)
|
| |
|
|
|
Principal Executive Officer:
|
| |
|
|
October 28, 2010
|
/s/ Ian Cook
|
|
|
Ian Cook
|
|
|
Chairman of the Board, President and
Chief Executive Officer
|
| |
|
|
|
Principal Financial Officer:
|
| |
|
|
October 28, 2010
|
/s/ Stephen C. Patrick
|
|
|
Stephen C. Patrick
|
|
|
Chief Financial Officer
|
| |
|
|
|
Principal Accounting Officer:
|
| |
|
|
October 28, 2010
|
/s/ Dennis J. Hickey
|
|
|
Dennis J. Hickey
|
|
|
Vice President and Corporate Controller
|