XNYS:CL Colgate-Palmolive Co Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from________ to________ .
Commission File Number: 1-644
COLGATE-PALMOLIVE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
13-1815595
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
300 Park Avenue, New York, New York
10022
(Address of principal executive offices)
(Zip Code)
(212) 310-2000
(Registrant’s telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Shares Outstanding
 
Date
Common stock, $1.00 par value
 
474,169,670
 
June 30, 2012





PART I.    FINANCIAL INFORMATION


COLGATE-PALMOLIVE COMPANY
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Dollars in Millions Except Per Share Amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Net sales
$
4,267

 
$
4,185

 
$
8,467

 
$
8,179

Cost of sales
1,806

 
1,781

 
3,569

 
3,444

Gross profit
2,461

 
2,404

 
4,898

 
4,735

Selling, general and administrative expenses
1,464

 
1,421

 
2,942

 
2,825

Other (income) expense, net
15

 
15

 
36

 
27

Operating profit
982

 
968

 
1,920

 
1,883

Interest expense, net
6

 
11

 
16

 
27

Income before income taxes
976

 
957

 
1,904

 
1,856

Provision for income taxes
311

 
311

 
606

 
603

Net income including noncontrolling interests
665

 
646

 
1,298

 
1,253

Less: Net income attributable to noncontrolling interests
38

 
24

 
78

 
55

Net income attributable to Colgate-Palmolive Company
$
627

 
$
622

 
$
1,220

 
$
1,198

 
 
 
 
 
 
 
 
Earnings per common share, basic
$
1.31

 
$
1.27

 
$
2.55

 
$
2.44

 
 
 
 
 
 
 
 
Earnings per common share, diluted
$
1.30

 
$
1.26

 
$
2.53

 
$
2.42

 
 
 
 
 
 
 
 
Dividends declared per common share*
$

 
$

 
$
1.20

 
$
1.11


* Two dividends were declared in the first quarters of 2012 and 2011.



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,
 
2012
 
2011
 
2012
 
2011
Net income including noncontrolling interests
$
665

 
$
646

 
$
1,298

 
$
1,253

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Cumulative translation adjustments
(291
)
 
176

 
(112
)
 
297

Retirement Plan and other retiree benefit adjustments
(4
)
 
14

 
10

 
28

Gains (losses) on available-for-sale securities
4

 
8

 
14

 
48

     Unrealized gains (losses) on cash flow hedges

 
(4
)
 
5

 
(4
)
Total Other comprehensive income, net of tax
(291
)
 
194

 
(83
)
 
369

Total Comprehensive income including noncontrolling interests
374

 
840

 
1,215

 
1,622

Less: Net income attributable to noncontrolling interests
38

 
24

 
78

 
55

Less: Cumulative translation adjustments attributable to noncontrolling interests
(6
)
 
1

 
(4
)
 
2

Total Comprehensive income attributable to noncontrolling interests
32

 
25

 
74

 
57

Total Comprehensive income attributable to Colgate-Palmolive Company
$
342

 
$
815

 
$
1,141

 
$
1,565



See Notes to Condensed Consolidated Financial Statements.

3



COLGATE-PALMOLIVE COMPANY
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in Millions)
(Unaudited)
 
June 30,
2012
 
December 31,
2011
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
995

 
$
878

Receivables (net of allowances of $54 and $49, respectively)
1,785

 
1,675

Inventories
1,368

 
1,327

Other current assets
687

 
522

Total current assets
4,835

 
4,402

Property, plant and equipment:
 

 
 

Cost
7,427

 
7,324

Less: Accumulated depreciation
(3,802
)
 
(3,656
)
 
3,625

 
3,668

Goodwill, net
2,611

 
2,657

Other intangible assets, net
1,316

 
1,341

Deferred income taxes
84

 
115

Other assets
682

 
541

Total assets
$
13,153

 
$
12,724

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Notes and loans payable
$
43

 
$
34

Current portion of long-term debt
252

 
346

Accounts payable
1,226

 
1,244

Accrued income taxes
288

 
392

Other accruals
1,757

 
1,700

Total current liabilities
3,566

 
3,716

 
 
 
 
Long-term debt
5,068

 
4,430

Deferred income taxes
272

 
252

Other liabilities
1,737

 
1,785

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
733

 
733

Additional paid-in capital
1,387

 
1,336

Retained earnings
16,294

 
15,649

Accumulated other comprehensive income (loss)
(2,554
)
 
(2,475
)
Unearned compensation
(39
)
 
(60
)
Treasury stock, at cost
(13,515
)
 
(12,808
)
Total Colgate-Palmolive Company shareholders’ equity
2,306

 
2,375

Noncontrolling interests
204

 
166

Total shareholders’ equity
2,510

 
2,541

Total liabilities and shareholders’ equity
$
13,153

 
$
12,724


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,
 
2012
 
2011
Operating Activities
 
 
 
Net income including noncontrolling interests
$
1,298

 
$
1,253

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

 
 

Depreciation and amortization
211

 
202

Restructuring and termination benefits, net of cash
(27
)
 
(31
)
Voluntary benefit plan contributions
(100
)
 
(100
)
Stock-based compensation expense
48

 
56

Deferred income taxes
14

 
46

Cash effects of changes in:
 

 
 
Receivables
(119
)
 
(153
)
Inventories
(46
)
 
(148
)
Accounts payable and other accruals
(148
)
 
(19
)
Other non-current assets and liabilities
62

 
48

Net cash provided by operations
1,193

 
1,154

Investing Activities
 

 
 

Capital expenditures
(189
)
 
(225
)
Purchases of marketable securities and investments
(219
)
 
(80
)
Proceeds from sale of marketable securities and investments
71

 
171

Payment for acquisitions, net of cash acquired
(29
)
 
(960
)
Other
45

 
(17
)
Net cash used in investing activities
(321
)
 
(1,111
)
Financing Activities
 

 
 

Principal payments on debt
(2,307
)
 
(1,869
)
Proceeds from issuance of debt
2,873

 
3,433

Dividends paid
(593
)
 
(568
)
Purchases of treasury shares
(894
)
 
(1,017
)
Proceeds from exercise of stock options and excess tax benefits
191

 
220

Net cash provided by (used in) financing activities
(730
)
 
199

Effect of exchange rate changes on Cash and cash equivalents
(25
)
 
7

Net increase (decrease) in Cash and cash equivalents
117

 
249

Cash and cash equivalents at beginning of the period
878

 
490

Cash and cash equivalents at end of the period
$
995

 
$
739

Supplemental Cash Flow Information
 

 
 

Income taxes paid
$
682

 
$
513


See Notes to Condensed Consolidated Financial Statements.

5

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

1.
Basis of Presentation

The Condensed Consolidated Financial Statements reflect all normal recurring adjustments which, in management’s opinion, are necessary for a fair statement of the results for interim periods. Results of operations for interim periods may not be representative of results to be expected for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

For a complete set of financial notes, including the significant accounting policies of Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”), refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission.

2.
Use of Estimates

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

3.
Recent Accounting Pronouncements

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

4.
Acquisitions and Divestitures

Sanex Acquisition

On June 20, 2011, the Company, Colgate-Palmolive Europe Sàrl, Unilever N.V. and Unilever PLC (together with Unilever N.V., “Unilever”) finalized the Company’s acquisition from Unilever of the Sanex personal care business in accordance with a Business and Share Sale and Purchase Agreement (the “Purchase Agreement”) for an aggregate purchase price of €676 ($966), subject to certain post-closing purchase price adjustments. The acquisition was financed with available cash, proceeds from the sale of the Company’s Euro-denominated investment portfolio and the issuance of commercial paper.

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

Property, plant and equipment, net
3

Other intangible assets, net
596

Goodwill, net
411

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


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


6

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

Goodwill of $411 was allocated between the Europe/South Pacific segment (90%) and the Greater Asia/Africa segment (10%). The Company expects that substantially all of the goodwill will be deductible for tax purposes. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial statements is not material. For the six months ended June 30, 2011, Other (income) expense, net included $10 in transaction costs related to the acquisition, of which $7 related to the second quarter.

Sale of Detergent Business in Colombia

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

Sale of Land in Mexico

On September 13, 2011, the Company’s Mexican subsidiary entered into an agreement to sell to the United States of America the Mexico City site on which its commercial operations, technology center and soap production facility are located. The sale price is payable in three installments, with the final installment due upon the transfer of the property, which is expected to occur in 2014. During the third quarter of 2011, the Company received the first installment of $24 upon signing the agreement. The Company is re-investing these payments to relocate its soap production to a new state-of-the-art facility to be constructed at its Mission Hills, Mexico site, to relocate its commercial and technology operations within Mexico City and to prepare the existing site for transfer. As a result, the Company expects to make capital improvements and incur costs to exit the site through 2014. These exit costs will primarily be related to staff leaving indemnities, accelerated depreciation and demolition to make the site building-ready. In 2011, the Company recorded $13 of pretax costs ($9 of aftertax costs) related to the sale. During the six months ended June 30, 2012, the Company incurred an additional $13 of pretax costs ($10 of aftertax costs) related to the sale, of which $6 of pretax costs ($5 of aftertax costs) relate to the second quarter.

5.
Inventories

Inventories by major class are as follows:
 
 
June 30,
2012
 
December 31,
2011

Raw materials and supplies
$
323

 
$
319

Work-in-process
68

 
54

Finished goods
977

 
954

Total Inventories
$
1,368

 
$
1,327




7

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


6.
Shareholders’ Equity

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

 
$
1,336

 
$
(60
)
 
$
(12,808
)
 
$
15,649

 
$
(2,475
)
 
$
166

Net income
 

 
 

 
 

 
 

 
1,220

 
 
 
78

Other comprehensive income, net of tax
 

 
 

 
 

 
 

 
 
 
(79
)
 
(4
)
Dividends
 

 
 

 
 

 
 

 
(575
)
 
 

 
(18
)
Stock-based compensation expense
 

 
48

 
 

 
 

 
 

 
 

 
 

Shares issued for stock options
 

 
42

 
 

 
143

 
 

 
 

 
 

Shares issued for restricted stock awards
 
 
(44
)
 
 
 
44

 
 
 
 
 
 
Treasury stock acquired
 

 
 

 
 

 
(894
)
 
 

 
 

 
 

Other
 

 
5

 
21

 
 
 
 

 
 

 
(18
)
Balance, June 30, 2012
$
733

 
$
1,387

 
$
(39
)
 
$
(13,515
)
 
$
16,294

 
$
(2,554
)
 
$
204


Accumulated Other comprehensive income (loss), as reflected in the Condensed Consolidated Balance Sheets, primarily consists of cumulative foreign currency translation adjustments and unrecognized pension and other retiree benefit costs.

7.
Earnings Per Share

 
Three Months Ended
 
June 30, 2012
 
June 30, 2011
 
Income
 
Shares
(millions)
 
Per
Share
 
Income
 
Shares
(millions)
 
Per
Share
Net income attributable to Colgate-Palmolive Company
$
627

 
 
 
 
 
$
622

 
 
 
 
Basic EPS
627

 
477.3

 
$
1.31

 
622

 
489.5

 
$
1.27

Stock options and restricted stock
 
 
4.0

 
 

 
 

 
3.8

 
 

Diluted EPS
$
627

 
481.3

 
$
1.30

 
$
622

 
493.3

 
$
1.26


For the three months ended June 30, 2012 and 2011, the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 405,780 and 18,734, respectively.

8

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

 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
Income
 
Shares
(millions)
 
Per
Share
 
Income
 
Shares
(millions)
 
Per
Share
Net income attributable to Colgate-Palmolive Company
$
1,220

 
 
 
 
 
$
1,198

 
 
 
 
Basic EPS
1,220

 
478.7

 
$
2.55

 
1,198

 
491.5

 
$
2.44

Stock options and restricted stock
 
 
3.9

 
 

 
 

 
3.4

 
 

Diluted EPS
$
1,220

 
482.6

 
$
2.53

 
$
1,198

 
494.9

 
$
2.42


For the six months ended June 30, 2012 and 2011, the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 2,070,202 and 34,719, respectively.

8.
Retirement Plans and Other Retiree Benefits

Components of net periodic benefit cost for the three and six months ended June 30, 2012 and 2011 were as follows:
 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Three Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
7

 
$
6

 
$
6

 
$
5

 
$
3

 
$
3

Interest cost
24

 
25

 
8

 
10

 
10

 
10

Annual ESOP allocation

 

 

 

 
(1
)
 

Expected return on plan assets
(28
)
 
(28
)
 
(6
)
 
(7
)
 

 

Amortization of transition and prior service costs (credits)
3

 
3

 

 
1

 
1

 
1

Amortization of actuarial loss
14

 
12

 
3

 
3

 
4

 
4

Net periodic benefit cost
$
20

 
$
18

 
$
11

 
$
12

 
$
17

 
$
18

 
 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
14

 
$
13

 
$
11

 
$
10

 
$
6

 
$
6

Interest cost
49

 
51

 
17

 
19

 
21

 
21

Annual ESOP allocation

 

 

 

 
(1
)
 
(1
)
Expected return on plan assets
(56
)
 
(56
)
 
(12
)
 
(14
)
 
(1
)
 
(1
)
Amortization of transition and prior service costs (credits)
5

 
5

 

 
2

 
2

 
3

Amortization of actuarial loss
29

 
23

 
5

 
5

 
8

 
9

Net periodic benefit cost
$
41

 
$
36

 
$
21

 
$
22

 
$
35

 
$
37


For each of the six months ended June 30, 2012 and 2011, the Company made voluntary contributions of $100 to its U.S. postretirement plans.

9

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


9.
Contingencies

As a global company serving consumers in more than 200 countries and territories, the Company is routinely subject to a wide variety of legal proceedings. These include disputes relating to intellectual property, contracts, product liability, marketing, advertising, foreign exchange controls, antitrust and trade regulation, as well as labor and employment, environmental and tax matters. Management proactively reviews and monitors the Company’s exposure to, and the impact of, environmental matters. The Company is party to various environmental matters and, as such, may be responsible for all or a portion of the cleanup, restoration and post-closure monitoring of several sites.

As a matter of course, the Company is regularly audited by the IRS and other tax authorities around the world in countries where it conducts business. In this regard, all U.S. federal income tax returns through December 31, 2007 have been audited by the IRS and there are limited matters in administrative appeals for years 2002 through 2007, the settlement of which is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial condition. With a few exceptions, the Company is no longer subject to U.S., state and local income tax examinations for the years prior to 2007. In addition, the Company has subsidiaries in various foreign jurisdictions that have statutes of limitations for tax audits generally ranging from three to six years. Estimated incremental tax payments related to potential disallowances for subsequent periods are not expected to be material.

The Company establishes accruals for loss contingencies when it has determined that a loss is probable and that the amount of loss, or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances.

The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. For those matters disclosed below, the Company currently estimates that the aggregate range of reasonably possible losses in excess of any accrued liabilities is $0 to approximately $225 (based on current exchange rates). The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the matters in question. Thus, the Company’s exposure and ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued or the range disclosed above.

Based on current knowledge, management does not believe that the ultimate resolution of loss contingencies arising from the matters discussed herein will have a material effect on the Company’s consolidated financial position or its ongoing results of operations or cash flows. However, in light of the inherent uncertainties noted above, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular quarter or year.

Brazilian Matters

In 2001, the Central Bank of Brazil sought to impose a substantial fine on the Company’s Brazilian subsidiary based on alleged foreign exchange violations in connection with the financing of the Company’s 1995 acquisition of the Kolynos oral care business from Wyeth (formerly American Home Products) (the Seller), as described in the Company’s Form 8-K dated January 10, 1995. The Company appealed the imposition of the fine to the Brazilian Monetary System Appeals Council (the Council) and, on January 30, 2007, the Council decided the appeal in the Company’s favor, dismissing the fine entirely. However, certain tax and civil proceedings that began as a result of this Central Bank matter are still outstanding as described below.

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 $129. 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:

10

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

In June 2005, the First Board of Taxpayers ruled in the Company’s favor and allowed all of the previously claimed deductions for 1996 through 1998. In March 2007, the First Board of Taxpayers ruled in the Company’s favor and allowed all of the previously claimed deductions for 1999 through 2001. The tax authorities appealed these decisions to the next administrative level.
In August 2009, the First Taxpayers’ Council (the next and final administrative level of appeal) overruled the decisions of the First Board of Taxpayers, upholding the majority of the assessments, disallowing a portion of the assessments and remanding a portion of the assessments for further consideration by the First Board of Taxpayers.

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

In December 2005, the Brazilian internal revenue authority issued to the Company’s Brazilian subsidiary a tax assessment with interest and penalties of approximately $77, at the current exchange rate, based on a claim that certain purchases of U.S. Treasury bills by the subsidiary and their subsequent disposition during the period 2000 to 2001 were subject to a tax on foreign exchange transactions. The Company is disputing the assessment within the internal revenue authority’s administrative appeals process. In October 2007, the Second Board of Taxpayers, which has jurisdiction over these matters, ruled in favor of the internal revenue authority. In January 2008, the Company appealed this decision, and in January 2012, a special appeals chamber of the Taxpayers’ Council denied the Company’s appeal. The Company plans to appeal this decision. Although there can be no assurances, management believes, based on the advice of its Brazilian legal counsel, that the tax assessment is without merit and that the Company should prevail on appeal, if not at the administrative level, in the Brazilian federal courts. The Company intends to challenge this assessment vigorously.

European Competition Matters

Since February 2006, the Company has learned that investigations relating to potential competition law violations involving the Company’s subsidiaries had been commenced by governmental authorities in a number of European countries and by the European Commission. The Company understands that substantially all of these investigations also involve other consumer goods companies and/or retail customers. The status of the various pending matters is discussed below.

Fines have been imposed on the Company in the following matters, although, as noted below, the Company is appealing each of these fines:
In December 2009, the Swiss competition law authority imposed a fine of $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.

11

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


In December 2010, the Italian competition law authority found that 16 consumer goods companies, including the Company’s Italian subsidiary, exchanged competitively sensitive information in the cosmetics sector, for which the Company’s Italian subsidiary was fined $3. The Company is appealing the fine in the Italian courts.
In December 2011, the French competition law authority found that four consumer goods companies had entered into agreements on pricing and promotion of heavy duty detergents for which Colgates French subsidiary was fined $46 in connection with a divested business. The Company is appealing the fine in the French courts.
In March 2012, the French competition law authority found that three pet food producers, including the Company’s Hill’s France subsidiary, had violated the competition law, for which it imposed a fine of $6 on the Company’s Hill’s France subsidiary for alleged restrictions on exports from France. The Company is appealing the fine in the French courts.

In addition, the German competition law authority has issued a formal claim of violations alleging that 17 branded goods companies, including the Company’s German subsidiary, exchanged sensitive information related to the German market. The Company has responded to this formal claim of violations. 

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

The Company’s policy is to comply with antitrust and competition laws and, if a violation of any such laws is found, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. The Company has undertaken a comprehensive review of its selling practices and related competition law compliance in Europe and elsewhere and, where the Company has identified a lack of compliance, it has undertaken remedial action. Competition and antitrust law investigations often continue for several years and can result in substantial fines for violations that are found. While the Company cannot predict the final financial impact of these competition law issues as these matters may change, the Company evaluates developments in these matters quarterly and accrues liabilities as and when appropriate.

ERISA Matters

In October 2007, a putative class action claiming that certain aspects of the cash balance portion of the Colgate-Palmolive Company Employees’ Retirement Income Plan (the Plan) do not comply with the Employee Retirement Income Security Act was filed against the Plan and the Company in the United States District Court for the Southern District of New York. Specifically, Proesel, et al. v. Colgate-Palmolive Company Employees’ Retirement Income Plan, et al. alleges improper calculation of lump sum distributions, age discrimination and failure to satisfy minimum accrual requirements, thereby resulting in the underpayment of benefits to Plan participants. Two other putative class actions filed earlier in 2007, Abelman, et al. v. Colgate-Palmolive Company Employees’ Retirement Income Plan, et al., in the United States District Court for the Southern District of Ohio, and Caufield v. Colgate-Palmolive Company Employees’ Retirement Income Plan, in the United States District Court for the Southern District of Indiana, both alleging improper calculation of lump sum distributions and, in the case of Abelman, claims for failure to satisfy minimum accrual requirements, were transferred to the Southern District of New York and consolidated with Proesel into one action, In re Colgate-Palmolive ERISA Litigation. The complaint in the consolidated action alleges improper calculation of lump sum distributions and failure to satisfy minimum accrual requirements, but does not include a claim for age discrimination. The relief sought includes recalculation of benefits in unspecified amounts, pre- and post-judgment interest, injunctive relief and attorneys’ fees. This action has not been certified as a class action as yet. The parties are in discussions via non-binding mediation to determine whether the action can be settled. The Company and the Plan intend to contest this action vigorously should the parties be unable to reach a settlement.

12

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


10.
Segment Information

The Company evaluates segment performance based on several factors, including Operating profit. The Company uses Operating profit as a measure of the operating segment performance because it excludes the impact of corporate-driven decisions related to interest expense and income taxes. Corporate operations include costs related to stock options and restricted stock awards, research and development costs, Corporate overhead costs, restructuring and related implementation costs and gains and losses on sales of non-core product lines and assets. The Company reports these items within Corporate operations as they relate to Corporate-based responsibilities and decisions and are not included in the internal measures of segment operating performance used by the Company in order to measure the underlying performance of the business segments.  

Net sales and Operating profit by segment were as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Net sales
 
 
 
 
 
 
 
Oral, Personal and Home Care
 
 
 
 
 
 
 
North America
$
758

 
$
744

 
$
1,513

 
$
1,462

Latin America
1,269

 
1,231

 
2,439

 
2,328

Europe/South Pacific
850

 
857

 
1,704

 
1,689

Greater Asia/Africa
859

 
816

 
1,738

 
1,629

Total Oral, Personal and Home Care
3,736

 
3,648

 
7,394

 
7,108

Pet Nutrition
531

 
537

 
1,073

 
1,071

Total Net sales
$
4,267

 
$
4,185

 
$
8,467

 
$
8,179

 
 
 
 
 
 
 
 
Operating profit
 

 
 

 
 
 
 
Oral, Personal and Home Care
 

 
 

 
 
 
 
North America
$
196

 
$
194

 
$
379

 
$
386

Latin America
367

 
360

 
711

 
686

Europe/South Pacific
179

 
170

 
362

 
355

Greater Asia/Africa
220

 
199

 
440

 
402

Total Oral, Personal and Home Care
962

 
923

 
1,892

 
1,829

Pet Nutrition
145

 
140

 
293

 
281

Corporate
(125
)
 
(95
)
 
(265
)
 
(227
)
Total Operating profit
$
982

 
$
968

 
$
1,920

 
$
1,883


For the six months ended June 30, 2012, Corporate Operating profit includes costs of $18 associated with the business realignment and other cost-saving initiatives and costs of $13 related to the sale of land in Mexico. For the three months ended June 30, 2012, Corporate Operating profit includes costs of $13 associated with the business realignment and other cost-saving initiatives and costs of $6 related to the sale of land in Mexico. The business realignment and other cost-saving initiatives include the integration of Sanex, the right-sizing of the Colombia business and the closing of an oral care facility in Mississauga, Canada and a Hill’s facility in Los Angeles, California. For further information regarding the sale of land in Mexico, refer to Note 4.

13

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


11.
Fair Value Measurements and Financial Instruments

The Company uses available market information and other valuation methodologies in assessing the fair value of financial instruments. Judgment is required in interpreting market data to develop the estimates of fair value and, accordingly, changes in assumptions or the estimation methodologies may affect the fair value estimates. The Company is exposed to credit losses in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely as it is the Company’s policy to contract only with diverse, highly rated counterparties.

The Company is exposed to market risk from foreign currency exchange rates, interest rates and commodity price fluctuations. Volatility relating to these exposures is managed on a global basis by utilizing a number of techniques, including working capital management, supplier agreements, selling price increases, selective borrowings in local currencies and entering into selective derivative instrument transactions, issued with standard features, in accordance with the Company’s treasury and risk management policies, which prohibit the use of derivatives for speculative purposes and leveraged derivatives for any purpose. It is the Company’s policy to enter into derivative instrument contracts with terms that match the underlying exposure being hedged. Hedge ineffectiveness, if any, is not material for any period presented.

The Company’s derivative instruments include interest rate swap contracts, foreign currency contracts and commodity contracts. The Company utilizes interest rate swap contracts to manage its targeted mix of fixed and floating rate debt, and these swaps are valued using observable benchmark rates (Level 2 valuation). Foreign currency contracts consist of forward, option and swap contracts utilized to hedge a portion of the Company’s foreign currency purchases, assets and liabilities arising in the normal course of business as well as the net investment in certain foreign subsidiaries. These contracts are valued using observable market rates (Level 2 valuation). Commodity futures contracts are utilized to hedge the purchases of raw materials used in the Company’s operations. These contracts are measured using quoted commodity exchange prices (Level 1 valuation). The duration of foreign currency and commodity contracts generally does not exceed 12 months.


14

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

The following summarizes the fair value of the Company’s derivative instruments and other financial instruments at June 30, 2012 and December 31, 2011:

 
Assets
 
Liabilities
 
 
Account
 
Fair Value
 
Account
 
Fair Value
Designated derivative instruments
 
 
6/30/12
 
12/31/11
 
 
 
6/30/12
 
12/31/11
Interest rate swap contracts
Other current assets
 
$
7

 
$
2

 
Other accruals
 
$

 
$

Interest rate swap contracts
Other assets
 
38

 
40

 
Other liabilities
 

 
2

Foreign currency contracts
Other current assets
 
15

 
8

 
Other accruals
 
5

 
6

Foreign currency contracts
Other assets
 
33

 
28

 
Other liabilities
 

 

Commodity contracts
Other current assets
 
4

 

 
Other accruals
 

 
1

Total designated
 
 
$
97

 
$
78

 
 
 
$
5

 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated
 
 
 

 
 

 
 
 
 
 
 

Foreign currency contracts
Other assets
 
$
2

 
$
3

 
Other accruals
 
$

 
$

Total not designated
 
 
$
2

 
$
3

 
 
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Total derivative instruments
 
 
$
99

 
$
81

 
 
 
$
5

 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
Other financial instruments
 
 
 

 
 

 
 
 
 

 
 

Marketable securities
Other current assets
 
$
86

 
$
72

 
 
 
 

 
 

Available-for-sale securities
Other assets
 
392

 
236

 
 
 
 

 
 

Total other financial instruments
 
 
$
478

 
$
308

 
 
 
 

 
 


The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of June 30, 2012 and December 31, 2011. The estimated fair value of the Company’s long-term debt, including the current portion, as of June 30, 2012 and December 31, 2011, was $5,726 and $5,121, respectively, and the related carrying value was $5,320 and $4,776, respectively. The estimated fair value of long-term debt was derived principally from quoted prices on the Company’s outstanding fixed-term notes (Level 2 valuation).


15

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

Fair value hedges

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

Activity related to fair value hedges recorded during the three-month and six-month periods ended June 30, 2012 and 2011 was as follows:
 
2012
 
2011
 
Foreign
Currency
Contracts
 
Interest
Rate
Swaps
 
 
Total
 
Foreign
Currency
Contracts
 
Interest
Rate
Swaps
 
 
Total
Notional Value at June 30,
$
740

 
$
1,338

 
$
2,078

 
$
538

 
$
1,288

 
$
1,826

Three-months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivative
9

 
9

 
18

 

 
11

 
11

Gain (loss) on hedged items
(9
)
 
(9
)
 
(18
)
 

 
(11
)
 
(11
)
Six-months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivative
10

 
7

 
17

 
6

 
8

 
14

Gain (loss) on hedged items
(10
)
 
(7
)
 
(17
)
 
(6
)
 
(8
)
 
(14
)

Cash flow hedges

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

Activity related to cash flow hedges recorded during the three-month and six-month periods ended June 30, 2012 and 2011 was as follows:
 
2012
 
2011
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
Notional Value at June 30,
$
349

 
$
29

 
$
378

 
$
350

 
$
30

 
$
380

Three-months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
(3
)
 
3

 

 
(4
)
 
(2
)
 
(6
)
Gain (loss) reclassified into Cost of sales

 
1

 
1

 
(4
)
 
2

 
(2
)
Six-months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
3

 
5

 
8

 
(7
)
 

 
(7
)
Gain (loss) reclassified into Cost of sales
1

 

 
1

 
(8
)
 
5

 
(3
)

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.


16

COLGATE-PALMOLIVE COMPANY
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 Currency translation adjustments within OCI, along with the offsetting gain or loss on the hedged items.

Activity related to net investment hedges recorded during the three-month and six-month periods ended June 30, 2012 and 2011 was as follows:
 
2012
 
2011
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
Notional Value at June 30,
$
563

 
$
409

 
$
972

 
$
88

 
$
333

 
$
421

Three-months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
27

 
10

 
37

 
(3
)
 
(19
)
 
(22
)
Gain (loss) on hedged items
(27
)
 
(10
)
 
(37
)
 
3

 
19

 
22

Six-months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
8

 
4

 
12

 
(10
)
 
(33
)
 
(43
)
Gain (loss) on hedged items
(13
)
 
(4
)
 
(17
)
 
10

 
33

 
43


Derivatives Not Designated as Hedging Instruments

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

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

 
$
96

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

 

Gain (loss) on hedged item
(2
)
 

Six-months ended June 30:
 
 
 
Gain (loss) on instrument
(1
)
 
(4
)
Gain (loss) on hedged item
1

 
4



17

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

Other Financial Instruments

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

Through its subsidiary in Venezuela, the Company is invested in U.S. dollar-linked, devaluation-protected bonds and fixed interest rate bonds, both of which are issued by the Venezuelan government. These bonds are actively traded and, therefore, are considered Level 2 investments as their values are determined based upon observable market-based inputs or unobservable inputs that are corroborated by market data. As of June 30, 2012, the U.S. dollar-linked, devaluation protected bonds and the fixed interest rate bonds had fair market values of $251 and $141, respectively. These investments are considered available-for-sale securities and are included in Other assets.

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

 
$
96

Unrealized gain (loss) on investment
22

 
62

Purchases and sales during the period
134

 
71

Ending balance as of June 30,
$
392

 
$
229


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

12.
Venezuela

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

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

The Company remeasures the financial statements of CP Venezuela at the rate at which it expects to remit future dividends, which currently is 4.30. For the six months ended June 30, 2012, CP Venezuela represented approximately 5% of the Company’s consolidated Net sales. At June 30, 2012, CP Venezuela’s bolivar fuerte-denominated net monetary asset position, which would be subject to translation adjustment in the event of a devaluation, was approximately $426. This amount does not include $251 of devaluation-protected bonds issued by the Venezuelan government, as these bonds provide protection against devaluations by adjusting the amount of bolivares fuerte received at maturity for any devaluation subsequent to issuance.


18

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


Executive Overview and Outlook

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

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

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

The Oral, Personal and Home Care segment is operated through four reportable operating segments: North America, Latin America, Europe/South Pacific and Greater Asia/Africa, all of which sell to a variety of retail and wholesale customers and distributors. The Company, through Hill’s Pet Nutrition, also competes on a worldwide basis in the pet nutrition market, selling its products principally through specialty pet retailers and the veterinary profession.

On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, net sales (including volume, pricing and foreign exchange components), organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments), gross profit margin, operating profit, net income and earnings per share, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators and the Company’s Code of Conduct and corporate governance practices help to maintain business health and strong internal controls.

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

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


19

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


On June 20, 2011, the Company, Colgate-Palmolive Europe Sàrl, Unilever N.V. and Unilever PLC (together with Unilever N.V., “Unilever”) finalized the Company’s acquisition from Unilever of the Sanex personal care business in accordance with a Business and Share Sale and Purchase Agreement for an aggregate purchase price of €676 ($966), subject to certain post-closing purchase price adjustments. The acquisition was financed with available cash, proceeds from the sale of the Company’s Euro-denominated investment portfolio and the issuance of commercial paper.

On July 29, 2011, in connection with the Sanex acquisition, Colgate sold its laundry detergent business in Colombia to Unilever for $215 resulting in a pretax gain of $207 ($135 aftertax gain). In 2011, this gain was more than offset by pretax costs of $224 ($177 aftertax costs) associated with the implementation of business realignment and other cost-saving initiatives, the sale of land in Mexico discussed below and a competition law matter in France related to a divested detergent business as discussed in Note 9 “Contingencies” to the Condensed Consolidated Financial Statements. The business realignment and other cost-saving initiatives include the integration of Sanex, the right-sizing of the Colombia business and the closing of an oral care facility in Mississauga, Canada and a Hill’s facility in Los Angeles, California. In 2012, the Company incurred aftertax costs of $12 associated with the business realignment and other cost-saving initiatives and aftertax costs of $10 related to the sale of land in Mexico.

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

With over 80% of its Net sales generated outside of the United States, the Company is exposed to changes in economic conditions and foreign currency exchange rates, as well as political uncertainty in some countries, all of which could impact future operating results. For example, as discussed in detail below, the operating environment in Venezuela is challenging, with economic uncertainty fueled by currency devaluations and high inflation and governmental restrictions in the form of import authorization controls, currency exchange controls, price controls and the possibility of expropriation of property or other resources.

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


20

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


The Company’s business in Venezuela and the Company’s ability to repatriate its earnings, continue to be negatively affected by these difficult conditions and would be further negatively affected by additional devaluations or the imposition of additional or more stringent controls on foreign currency exchange, pricing or imports or other governmental actions. For the six months ended June 30, 2012, CP Venezuela represented approximately 5% of the Company’s consolidated Net sales. At June 30, 2012, CP Venezuela’s local currency net monetary asset position was approximately $426.

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

The Company believes it is well prepared to meet the challenges ahead due to its strong financial condition, experience operating in challenging environments and continued focus on the Company’s strategic initiatives: engaging to build our brands; innovation for growth; effectiveness and efficiency; and leading to win. This focus, together with the strength of the Company’s global brand names 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

Three Months

Worldwide Net sales were $4,267 in the second quarter of 2012, up 2.0% from the second quarter of 2011, as volume growth of 5.0% and net selling price increases of 3.5% were significantly impacted by negative foreign exchange of 6.5%. Excluding the impact of the divestment of the non-core laundry detergent business in Colombia, volume increased 5.5%. The Sanex business contributed 1.0% to worldwide Net sales and volume growth in the second quarter of 2012. Organic sales (Net sales excluding foreign exchange, acquisitions and divestments), a non-GAAP financial measure as discussed below, increased 8.0% in the second quarter of 2012 on organic volume growth of 4.5%. Organic volume growth excludes the impact of acquisitions and divestments.

Net sales in the Oral, Personal and Home Care segment were $3,736 in the second quarter of 2012, up 2.5% from the second quarter of 2011, as volume growth of 6.0% and net selling price increases of 3.5% were significantly impacted by negative foreign exchange of 7.0%. Excluding the impact of the divestment of the non-core laundry detergent business in Colombia, volume increased 7.0%. The Sanex business contributed 2.0% to Net sales and volume growth in the segment in the second quarter of 2012. Organic sales in the Oral, Personal and Home Care segment increased 8.5% on organic volume growth of 5.0% in the second quarter of 2012.

Gross Profit/Margin

Worldwide Gross profit increased 2% to $2,461 in the second quarter of 2012 from $2,404 in the second quarter of 2011. Excluding the impact of costs related to the sale of land in Mexico ($6) and costs associated with business realignment and other cost-saving initiatives ($2), Gross profit increased to $2,469 in the second quarter of 2012.

Worldwide Gross profit margin increased to 57.7% in the second quarter of 2012 from 57.4% in the second quarter of 2011. Excluding the impact of costs related to the sale of land in Mexico of 10 basis points (bps) and costs associated with business realignment and other cost-saving initiatives of 10 bps, gross profit margin was 57.9% in the second quarter of 2012. This increase in the second quarter of 2012 was primarily due to cost savings from the Company’s funding-the-growth initiatives (180 bps) and higher pricing (140 bps), which were partially offset by higher raw and packaging material costs driven by global commodity costs and negative foreign exchange transaction costs (265 bps).

21

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


 
 
Three Months Ended
 June 30,
 
 
2012
 
2011
Gross profit, GAAP
 
$
2,461

 
$
2,404

Costs related to the sale of land in Mexico
 
6

 

Business realignment and other cost-saving initiatives
 
2

 

Gross profit, non-GAAP
 
$
2,469

 
$
2,404


 
 
Three Months Ended June 30,
 
 
2012
 
2011
 
Basis Point Change
Gross profit margin, GAAP
 
57.7
%
 
57.4
%
 
30
Costs related to the sale of land in Mexico
 
0.1
%
 

 

Business realignment and other cost-saving initiatives
 
0.1
%
 

 

Gross profit margin, non-GAAP
 
57.9
%
 
57.4
%
 
50

Selling, General and Administrative expenses

Selling, general and administrative expenses increased 3.0% to $1,464 in the second quarter of 2012 from $1,421 in the second quarter of 2011. Excluding the impact of costs associated with the business realignment and other cost-saving initiatives ($5), Selling, general and administrative expenses increased to $1,459 in the second quarter of 2012.

Selling, general and administrative expenses as a percentage of Net sales increased to 34.3% in the second quarter of 2012 from 34.0% in the second quarter of 2011. Excluding the impact of costs related to the business realignment and other cost-saving initiatives (10 bps), Selling, general and administrative expenses were 34.2%, an increase of 20 bps as compared to the year ago quarter. This increase was a result of higher advertising expenses as a percentage of Net sales. In the second quarter of 2012, advertising increased 4.3% to $457, as compared with $438 in the second quarter of 2011, and increased as a percentage of Net sales to 10.7% in the second quarter of 2012 from 10.5% in the second quarter of 2011.
 
 
Three Months Ended
June 30,
 
 
2012
 
2011
Selling, general and administrative expenses, GAAP
 
$
1,464

 
$
1,421

Business realignment and other cost-saving initiatives
 
(5
)
 

Selling, general and administrative expenses, non-GAAP
 
$
1,459

 
$
1,421


 
 
Three Months Ended June 30,
 
 
2012
 
2011
 
Basis Point Change
Selling, general and administrative expenses as a percentage of Net sales, GAAP
 
34.3%
 
34.0
%
 
30
Business realignment and other cost-saving initiatives
 
(0.1)%
 

 

Selling, general and administrative expenses as a percentage of Net sales, non-GAAP
 
34.2%
 
34.0
%
 
20

22

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


Other (income) expense, net

Other (income) expense, net was $15 in the second quarter of 2012, even with the year ago quarter. In the second quarter of 2012, Other (income) expense, net includes costs of $6 related to the business realignment and other cost-saving initiatives. In the second quarter of 2011, Other income (expense), net included transaction costs of $7 related to the Sanex acquisition.

 
 
Three Months Ended
June 30,
 
 
2012
 
2011
Other (income) expense, net, GAAP
 
$
15

 
$
15

Business realignment and other cost-saving initiatives
 
(6
)
 

Other (income) expense, net, non-GAAP
 
$
9

 
$
15


Operating Profit

Operating profit increased 1% to $982 in the second quarter of 2012 from $968 in the second quarter of 2011. Excluding the impact of costs associated with the sale of land in Mexico ($6) and the business realignment and other cost-saving initiatives ($13), Operating profit increased 3% to $1,001 in the second quarter of 2012 as compared to the second quarter of 2011, primarily due to strong sales growth and higher gross profit margin.

Operating profit margin was 23.0%, a decrease of 10 bps compared to the year ago quarter. Excluding the impact of costs associated with the sale of land in Mexico (20 bps) and the business realignment and other cost-saving initiatives (30 bps), Operating profit margin increased 40 bps to 23.5% in the second quarter of 2012 as compared to 23.1% in the second quarter of 2011. This increase of 40 bps is mainly due to an increase in Gross profit as a percentage of Net sales, a portion of which was reinvested in higher advertising, which also increased as a percentage of Net sales.
 
 
Three Months Ended June 30,
 
 
2012
 
2011
 
% Change
Operating profit, GAAP
 
$
982

 
$
968

 
1
%
Costs related to the sale of land in Mexico
 
6

 

 
 
Business realignment and other cost-saving initiatives
 
13

 

 
 
Operating profit, non-GAAP
 
$
1,001

 
$
968

 
3
%

 
 
Three Months Ended June 30,
 
 
2012
 
2011
 
Basis Point Change
Operating profit margin, GAAP
 
23.0
%
 
23.1
%
 
(10
)
Costs related to the sale of land in Mexico
 
0.2
%
 

 


Business realignment and other cost-saving initiatives
 
0.3
%
 

 


Operating profit margin, non-GAAP
 
23.5
%
 
23.1
%
 
40


23

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


Net Sales and Operating Profit by Segment

North America
 
Three Months Ended June 30,
 
2012
 
2011
 
Change
Net sales
$
758

 
$
744

 
2.0

%
Operating profit
$
196

 
$
194

 
1

%
% of Net sales
25.9
%
 
26.1
%
 
(20
)
bps

Net sales in North America increased 2.0% in the second quarter of 2012 to $758, as a volume decline of 0.5% and negative foreign exchange of 0.5% were more than offset by net selling price increases of 3.0%. Organic sales in North America increased 2.5% in the second quarter of 2012.

Operating profit in North America increased 1% in the second quarter of 2012 to $196, while as a percentage of Net sales it decreased to 25.9%. The decrease in Operating profit as a percentage of Net sales was a result of an increase in Selling, general and administrative expenses, which was partially offset by an increase in Gross profit, both as a percentage of Net sales. This increase in Selling, general and administrative expenses was driven by higher advertising expenses as a percentage of Net sales. This increase in Gross profit was driven by cost savings from the Company’s funding-the-growth initiatives and higher pricing, partially offset by higher raw and packaging material costs.

Latin America

 
Three Months Ended June 30,
 
2012
 
2011
 
Change
Net sales
$
1,269

 
$
1,231

 
3.0

%
Operating profit
$
367

 
$
360

 
2

%
% of Net sales
28.9
%
 
29.2
%
 
(30
)
bps

Net sales in Latin America increased 3.0% in the second quarter of 2012 to $1,269, as volume growth of 6.5% and net selling price increases of 6.0% were significantly impacted by negative foreign exchange of 9.5%. The divestment of the non-core laundry detergent business in Colombia had an impact of 3.0% on sales and volume growth in Latin America. Organic sales in Latin America increased 15.5% in the second quarter of 2012. Volume gains were led by Brazil, Venezuela, Mexico and Colombia.

Operating profit in Latin America increased 2% in the second quarter of 2012 to $367, while as a percentage of Net sales it decreased to 28.9%. The decrease in Operating profit as a percentage of Net sales was due to a decrease in Gross profit and higher advertising, both as a percentage of Net sales. This decrease in Gross profit was due to higher raw and packaging material costs, negative foreign exchange transaction costs and higher costs due to inflation in Venezuela, which were partially offset by higher pricing and cost savings from the Company’s funding-the-growth initiatives.


24

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


Europe/South Pacific
 
Three Months Ended June 30,
 
2012
 
2011
 
Change
Net sales
$
850

 
$
857

 
(1.0
)
%
Operating profit
$
179

 
$
170

 
5

%
% of Net sales
21.1
%
 
19.8
%
 
130

bps

Net sales in Europe/South Pacific decreased 1.0% in the second quarter of 2012 to $850, as volume growth of 9.5% was more than offset by net selling price decreases of 1.5% and a significant negative impact of foreign exchange of 9.0%. The Sanex business contributed 6.5% to Europe/South Pacific sales and volume growth in the second quarter of 2012. Organic sales in Europe/South Pacific increased 1.5% in the second quarter of 2012 on organic volume growth of 3.0%. Volume gains were led by France, Iberia, Australia, the United Kingdom and the GABA business.

Operating profit in Europe/South Pacific increased 5% in the second quarter of 2012 to $179, or 21.1% of Net sales. The increase in Operating profit was due to an increase in Gross profit and a decrease in Selling, general and administrative expenses, both as a percentage of Net sales. This increase in Gross profit was driven by savings from the Company’s funding-the-growth initiatives, which were partially offset by lower pricing and higher raw and packaging material costs. This decrease in Selling, general and administrative expenses was driven by lower overhead expenses.

Greater Asia/Africa
 
Three Months Ended June 30,
 
2012
 
2011
 
Change
Net sales
$
859

 
$
816

 
5.0

%
Operating profit
$
220

 
$
199

 
11

%
% of Net sales
25.6
%
 
24.4
%
 
120

bps

Net sales in Greater Asia/Africa increased 5.0% in the second quarter of 2012 to $859, as volume growth of 7.5% and net selling price increases of 5.0% were significantly impacted by negative foreign exchange of 7.5%. The Sanex business contributed 0.5% to Greater Asia/Africa sales and volume growth in the second quarter of 2012. Organic sales in Greater Asia/Africa grew 12.0% on organic volume growth of 7.0% in the second quarter of 2012. Volume gains were led by India, Russia, South Africa, the Philippines and Thailand.

Operating profit in Greater Asia/Africa increased 11% in the second quarter of 2012 to $220, or 25.6% of Net sales. This increase was a result of an increase in Gross profit as a percentage of Net sales. This increase in Gross profit was due to higher pricing and cost savings from the Company’s funding-the-growth initiatives, partially offset by higher raw and packaging material costs. 

Pet Nutrition
 
Three Months Ended June 30,
 
2012
 
2011
 
Change
Net sales
$
531

 
$
537

 
(1.0
)
%
Operating profit
$
145

 
$
140

 
4

%
% of Net sales
27.3
%
 
26.1
%
 
120

bps


25

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


Net sales for Hill’s Pet Nutrition decreased 1.0% in the second quarter of 2012 to $531, as a volume decline of 3.0% and negative foreign exchange of 3.0% were partially offset by net selling price increases of 5.0%. Organic sales in Hill’s Pet Nutrition increased 2.0% in the second quarter of 2012. Volume declines in the United States were partially offset by volume gains in France.

Operating profit in Hill’s Pet Nutrition increased 4% in the second quarter of 2012 to $145, or 27.3% of Net sales. This increase in Operating profit as a percentage of Net sales was due to an increase in Gross profit, which was partially offset by an increase in Selling, general and administrative expenses, both as a percentage of Net sales. This increase in Gross profit was driven by higher pricing and cost savings from the Company’s funding-the-growth initiatives, which were partially offset by higher raw and packaging material costs. This increase in Selling, general and administrative expenses was primarily due to higher advertising expenses.

Corporate
 
Three Months Ended June 30,
 
2012
 
2011
 
Change
Operating profit
$
(125
)
 
$
(95
)
 
32
%

Operating profit (loss) related to Corporate was ($125) in the second quarter of 2012 as compared to ($95) in the second quarter of 2011. In the second quarter of 2012, Corporate Operating profit (loss) includes costs of $13 associated with the business realignment and other cost-saving initiatives and costs of $6 related to the sale of land in Mexico.

Interest expense, net

Interest expense, net decreased to $6 for the three months ended June 30, 2012 as compared with $11 in the comparable period of 2011, due to an increase in interest income.

Net income attributable to Colgate-Palmolive Company and Earnings per share

Net income attributable to Colgate-Palmolive Company for the second quarter of 2012 increased to $627 from $622 in the comparable 2011 period, and earnings per common share on a diluted basis increased to $1.30 per share from $1.26 per share in the comparable 2011 period. Net income attributable to Colgate-Palmolive Company for the second quarter of 2012 included aftertax costs of $5 related to the sale of land in Mexico and aftertax costs of $9 associated with the business realignment and other cost-saving initiatives. Excluding the items described above, Net income attributable to Colgate-Palmolive Company in the second quarter of 2012 increased 3% to $641 and earnings per share on a diluted basis increased 6% to $1.33.
 
 
Three Months Ended June 30,
 
 
2012
 
2011
 
% Change
Net income attributable to Colgate-Palmolive Company, GAAP
 
$
627

 
$
622

 
1
%
Costs related to the sale of land in Mexico
 
5

 

 
 
Business realignment and other cost-saving initiatives
 
9

 

 
 
Net income attributable to Colgate-Palmolive Company, non-GAAP
 
$
641

 
$
622

 
3
%
 
 
Three Months Ended June 30,
 
 
2012
 
2011
 
% Change
Diluted earnings per common share, GAAP
 
$
1.30

 
$
1.26

 
3
%
Costs related to the sale of land in Mexico
 
0.01

 

 
 
Business realignment and other cost-saving initiatives
 
0.02

 

 
 
Diluted earnings per common share, non-GAAP
 
$
1.33

 
$
1.26

 
6
%

26

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



Six Months

Worldwide Net sales were $8,467 in the first half of 2012, up 3.5% from the first half of 2011, as volume growth of 4.5% and net selling price increases of 3.5% were partially offset by a negative foreign exchange impact of 4.5%. Organic sales increased 7.0% in the first half of 2012 on organic volume growth of 3.5%. The Sanex business contributed 1.5% to worldwide Net sales and volume growth in the first half of 2012.

Net sales in the Oral, Personal and Home Care segment were $7,394 in the first half of 2012, up 4.0% from the first half of 2011, as volume growth of 5.5% and net selling price increases of 3.5% were partially offset by negative foreign exchange of 5.0%. Organic sales increased 8.0% in the first half of 2012 on organic volume growth of 4.5%. Excluding the impact of the divestment of the non-core detergent business in Colombia of 0.5%, volume increased 6.0%. The Sanex business contributed 1.5% to Oral, Personal and Home Care segment sales and volume growth in the first half of 2012.

Net sales and Operating profit by segment

Net sales and Operating profit by segment were as follows:
 
Six Months Ended
June 30,
 
2012
 
2011
Net sales
 
 
 
Oral, Personal and Home Care
 
 
 
North America
$
1,513

 
$
1,462