CL-9.30.2014-10Q


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, 2014
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
 
911,398,318
 
September 30, 2014





PART I.    FINANCIAL INFORMATION


COLGATE-PALMOLIVE COMPANY
 Condensed Consolidated Statements of Income
 (Dollars in Millions Except Per Share Amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
4,379

 
$
4,398

 
$
13,056

 
$
13,059

Cost of sales
1,821

 
1,813

 
5,422

 
5,425

Gross profit
2,558

 
2,585

 
7,634

 
7,634

Selling, general and administrative expenses
1,497

 
1,549

 
4,548

 
4,611

Other (income) expense, net
113

 
20

 
524

 
359

Operating profit
948

 
1,016

 
2,562

 
2,664

Interest (income) expense, net
4

 

 
20

 
(8
)
Income before income taxes
944

 
1,016

 
2,542

 
2,672

Provision for income taxes
364

 
317

 
869

 
863

Net income including noncontrolling interests
580

 
699

 
1,673

 
1,809

Less: Net income attributable to noncontrolling interests
38

 
43

 
121

 
132

Net income attributable to Colgate-Palmolive Company
$
542

 
$
656

 
$
1,552

 
$
1,677

 
 
 
 
 
 
 
 
Earnings per common share, basic
$
0.59

 
$
0.71

 
$
1.69

 
$
1.80

 
 
 
 
 
 
 
 
Earnings per common share, diluted
$
0.59

 
$
0.70

 
$
1.68

 
$
1.78

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.36

 
$
0.34

 
$
1.42

 
$
1.33


* Two dividends were declared in the first quarter of 2014 and 2013.


See Notes to Condensed Consolidated Financial Statements.

2



COLGATE-PALMOLIVE COMPANY
 Condensed Consolidated Statements of Comprehensive Income
 (Dollars in Millions)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net income including noncontrolling interests
$
580

 
$
699

 
$
1,673

 
$
1,809

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Cumulative translation adjustments
(367
)
 
90

 
(386
)
 
(165
)
Retirement plans and other retiree benefit adjustments
(17
)
 
18

 
4

 
56

Gains (losses) on available-for-sale securities
(4
)
 
3

 
(56
)
 
7

     Gains (losses) on cash flow hedges
3

 
(5
)
 
(1
)
 

Total Other comprehensive income (loss), net of tax
(385
)
 
106

 
(439
)
 
(102
)
Total Comprehensive income including noncontrolling interests
195

 
805

 
1,234

 
1,707

Less: Net income attributable to noncontrolling interests
38

 
43

 
121

 
132

Less: Cumulative translation adjustments attributable to noncontrolling interests
(2
)
 
(3
)
 
(3
)
 
(7
)
Total Comprehensive income attributable to noncontrolling interests
36

 
40

 
118

 
125

Total Comprehensive income attributable to Colgate-Palmolive Company
$
159

 
$
765

 
$
1,116

 
$
1,582



See Notes to Condensed Consolidated Financial Statements.

3


COLGATE-PALMOLIVE COMPANY
 Condensed Consolidated Balance Sheets
 (Dollars in Millions)
(Unaudited)
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,355

 
$
962

Receivables (net of allowances of $58 and $67, respectively)
1,747

 
1,636

Inventories
1,422

 
1,425

Other current assets
657

 
799

Total current assets
5,181

 
4,822

Property, plant and equipment:
 

 
 

Cost
8,413

 
8,330

Less: Accumulated depreciation
(4,375
)
 
(4,247
)
 
4,038

 
4,083

Goodwill, net
2,355

 
2,474

Other intangible assets, net
1,424

 
1,496

Deferred income taxes
31

 
77

Other assets
656

 
924

Total assets
$
13,685

 
$
13,876

Liabilities and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Notes and loans payable
$
14

 
$
13

Current portion of long-term debt
600

 
895

Accounts payable
1,215

 
1,343

Accrued income taxes
294

 
239

Other accruals
2,289

 
1,980

Total current liabilities
4,412

 
4,470

Long-term debt
5,441

 
4,749

Deferred income taxes
355

 
444

Other liabilities
1,731

 
1,677

Total liabilities
11,939

 
11,340

Shareholders’ Equity
 

 
 

Common stock
1,466

 
1,466

Additional paid-in capital
1,126

 
1,004

Retained earnings
18,210

 
17,952

Accumulated other comprehensive income (loss)
(2,887
)
 
(2,451
)
Unearned compensation
(18
)
 
(33
)
Treasury stock, at cost
(16,477
)
 
(15,633
)
Total Colgate-Palmolive Company shareholders’ equity
1,420

 
2,305

Noncontrolling interests
326

 
231

Total shareholders’ equity
1,746

 
2,536

Total liabilities and shareholders’ equity
$
13,685

 
$
13,876


See Notes to Condensed Consolidated Financial Statements.

4



COLGATE-PALMOLIVE COMPANY
Condensed Consolidated Statements of Cash Flows
(Dollars in Millions)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Operating Activities
 
 
 
Net income including noncontrolling interests
$
1,673

 
$
1,809

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

 
 

Depreciation and amortization
329

 
329

Restructuring and termination benefits, net of cash
69

 
82

Voluntary benefit plan contribution
(2
)
 
(101
)
Venezuela remeasurement charges
327

 
172

Charge for a foreign tax matter
66

 

Stock-based compensation expense
109

 
105

Deferred income taxes
(35
)
 
35

Cash effects of changes in:
 
 
 
Receivables
(222
)
 
(137
)
Inventories
(51
)
 
(107
)
Accounts payable and other accruals
100

 
121

Other non-current assets and liabilities
29

 
57

Net cash provided by operations
2,392

 
2,365

Investing Activities
 

 
 

Capital expenditures
(493
)
 
(419
)
Purchases of marketable securities and investments
(232
)
 
(408
)
Proceeds from sale of marketable securities and investments
277

 
195

Payment for acquisitions, net of cash acquired
(25
)
 

Other
18

 
4

Net cash used in investing activities
(455
)
 
(628
)
Financing Activities
 

 
 

Principal payments on debt
(6,220
)
 
(5,504
)
Proceeds from issuance of debt
6,597

 
5,563

Dividends paid
(990
)
 
(1,030
)
Purchases of treasury shares
(1,119
)
 
(1,115
)
Proceeds from exercise of stock options and excess tax benefits
295

 
276

Net cash used in financing activities
(1,437
)
 
(1,810
)
Effect of exchange rate changes on Cash and cash equivalents
(107
)
 
(90
)
Net increase (decrease) in Cash and cash equivalents
393

 
(163
)
Cash and cash equivalents at beginning of the period
962

 
884

Cash and cash equivalents at end of the period
$
1,355

 
$
721

Supplemental Cash Flow Information
 

 
 

Income taxes paid
$
781

 
$
781


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 statement notes, including the significant accounting policies of Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”), refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission.

2.
Use of Estimates

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

3.
Recent Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued their final converged standard on revenue recognition. The standard, issued as Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers” by the FASB, provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes current revenue recognition guidance. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The new standard also includes enhanced disclosures which are significantly more comprehensive than those in existing revenue standards. This new guidance is effective for the Company beginning January 1, 2017, with no early adoption permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently assessing the impact of the new standard on its Consolidated Financial Statements.

On April 10, 2014, the FASB issued ASU No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for the Company beginning with its Consolidated Financial Statements for the year ending December 31, 2015. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

6

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

4.
Acquisitions and Divestitures

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 were located. The sale price is payable in three installments, with the final installment due upon the transfer of the property, which, subject to the Company obtaining still outstanding regulatory approvals, is expected to occur in 2014. During the third quarter of 2011, the Company received the first installment of $24 upon signing the agreement. During the third quarter of 2012, the Company received the second installment of $36. The Company has reinvested these payments to relocate its soap production to a new state-of-the-art facility at its Mission Hills, Mexico site, to relocate its commercial and technology operations within Mexico City and to prepare the existing site for transfer. Exit costs incurred during the project primarily relate to staff leaving indemnities, accelerated depreciation and demolition to make the site building-ready. During the three months ended September 30, 2014 and 2013, the Company recorded $1 and $3 of pretax costs ($1 and $2 of aftertax costs), respectively, related to the sale. During the nine months ended September 30, 2014 and 2013, the Company recorded $4 and $14 of pretax costs ($3 and $9 of aftertax costs), respectively, related to the sale.

5.
Restructuring and Related Implementation Charges
 
In the fourth quarter of 2012, the Company commenced a four-year Global Growth and Efficiency Program (the “2012 Restructuring Program”) for sustained growth. The program’s initiatives are expected to help Colgate ensure continued solid worldwide growth in unit volume, organic sales and earnings per share and enhance its global leadership positions in its core businesses.

Implementation of the 2012 Restructuring Program is projected to result in cumulative pretax charges, once all phases are approved and implemented, totaling between $1,100 and $1,250 ($775 and $875 aftertax), which are currently estimated to be comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits (50%); asset-related costs, primarily Incremental Depreciation and Asset Impairments (15%); and Other charges, which include contract termination costs, consisting primarily of implementation-related charges resulting directly from exit activities (20%) and the implementation of new strategies (15%). Anticipated pretax charges for 2014 are expected to amount to approximately $275 to $325 ($200 to $230 aftertax). Over the course of the 2012 Restructuring Program, it is estimated that approximately 75% of the charges will result in cash expenditures.

It is expected that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America (15%), Europe/South Pacific (20%), Latin America (5%), Asia (5%), Africa/Eurasia (5%), Hill’s Pet Nutrition (10%) and Corporate (40%), which includes substantially all of the costs related to the implementation of new strategies, noted above, on a global basis. It is expected that, by the end of 2016, the 2012 Restructuring Program will reduce the Company’s global employee workforce by approximately 6% from the 2012 level of approximately 38,000.

7

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

For the three and nine months ended September 30, 2014 and 2013, restructuring and implementation-related charges are reflected in the income statement as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Cost of sales
$
7

 
$
8

 
$
23

 
$
26

Selling, general and administrative expenses
13

 
9

 
42

 
31

Other (income) expense, net
35

 
13

 
166

 
141

Total 2012 Restructuring Program charges, pretax
$
55

 
$
30

 
$
231

 
$
198

 
 
 
 
 
 
 
 
Total 2012 Restructuring Program charges, aftertax
$
41

 
$
22

 
$
167

 
$
153


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

Total charges incurred for the 2012 Restructuring Program relate to initiatives undertaken in the following reportable operating segments:

Three Months Ended

Nine Months Ended

Program-to-date

September 30,

September 30,

Accumulated Charges

2014

2013

2014

2013


North America
9
%

13
%

9
%

20
%

10
%
Latin America
3
%

6
%

4
%

6
%

3
%
Europe/South Pacific
17
%

22
%

18
%

35
%

28
%
Asia
15
%

%

4
%

%

1
%
Africa/Eurasia
4
%

%

3
%

4
%

5
%
Hills Pet Nutrition
6
%

29
%

9
%

8
%

8
%
Corporate
46
%

30
%

53
%

27
%

45
%

Since the inception of the 2012 Restructuring Program in the fourth quarter of 2012, the Company has incurred pretax cumulative charges of $691 ($515 aftertax) in connection with the implementation of various projects as follows:
 
Cumulative Charges
 
as of September 30, 2014
Employee-Related Costs
$
277

Incremental Depreciation
42

Asset Impairments
1

Other
371

Total
$
691


8

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

The majority of costs incurred since inception relate to the following projects: restructuring how the Company will provide future retirement benefits to substantially all of its U.S.-based employees by shifting them from the Companys defined benefit retirement plan to the Companys defined contribution plan; the closing of the Morristown, New Jersey personal care facility; the simplification and streamlining of the Companys research and development capabilities and oral care supply chain, both in Europe; the consolidation of facilities; the implementation of the Companys hubbing strategy in Europe; and the extension of shared business services and streamlining global functions.

The following table summarizes the activity for the restructuring and implementation-related charges discussed above and the related accruals:
 
 
Three Months Ended September 30, 2014
 
 
Employee-Related
Costs
 
 
Incremental
Depreciation
 
 
Asset
Impairments 
 
 
Other 
 
 
Total 
 
Balance at June 30, 2014
 
$
105

 
$

 
$

 
$
112

 
$
217

Charges
 
18

 
5

 

 
32

 
55

Cash payments
 
(20
)
 

 

 
(27
)
 
(47
)
Charges against assets
 

 
(5
)
 

 

 
(5
)
Foreign exchange
 
(4
)
 

 

 
(2
)
 
(6
)
Balance at September 30, 2014
 
$
99

 
$

 
$

 
$
115

 
$
214

 
 
Nine Months Ended September 30, 2014
 
 
Employee-Related
Costs
 
 
Incremental
Depreciation
 
 
Asset
Impairments 
 
 
Other 
 
 
Total 
 
Balance at December 31, 2013
 
$
116

 
$

 
$

 
$
42

 
$
158

Charges
 
55

 
16

 

 
160

 
231

Cash payments
 
(67
)
 

 

 
(83
)
 
(150
)
Charges against assets
 
(1
)
 
(16
)
 

 

 
(17
)
Foreign exchange
 
(4
)
 

 

 
(4
)
 
(8
)
Balance at September 30, 2014
 
$
99

 
$

 
$

 
$
115

 
$
214


Employee-Related Costs primarily include severance and other termination benefits and are calculated based on long-standing benefit practices, local statutory requirements and, in certain cases, voluntary termination arrangements. Employee-Related Costs also included pension enhancements amounting to $1 for the nine months ended September 30, 2014, which are reflected as Charges against assets within Employee-Related Costs in the preceding table as the corresponding balance sheet amounts are reflected as a reduction of pension assets or an increase in pension liabilities.

Incremental Depreciation is recorded to reflect changes in useful lives and estimated residual values for long-lived assets that will be taken out of service prior to the end of their normal service period. Asset Impairments are recorded to write down assets held for sale or disposal to their fair value based on amounts expected to be realized. Charges against assets within Asset Impairments are net of cash proceeds pertaining to the sale of certain assets.

Other charges consist primarily of charges resulting directly from exit activities and the implementation of new strategies as a result of the 2012 Restructuring Program. These charges for the three and nine months ended September 30, 2014 included third-party incremental costs related to the development and implementation of new business and strategic initiatives of $15 and $47, respectively, and contract termination costs and charges resulting directly from exit activities of $6 and $33, respectively, directly related to the 2012 Restructuring Program. These charges were expensed as incurred. Also included in Other charges for the three and nine months ended September 30, 2014 are other exit costs related to the consolidation of facilities of $11 and $80, respectively.

On October 23, 2014, the Company’s Board of Directors approved an expansion of the 2012 Restructuring Program. Refer to Note 16, Subsequent Events for additional details.


9

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

6.
Inventories

Inventories by major class are as follows:
 
September 30,
2014
 
December 31,
2013
Raw materials and supplies
$
339

 
$
340

Work-in-process
58

 
60

Finished goods
1,025

 
1,025

Total Inventories
$
1,422

 
$
1,425


7.
Shareholders’ Equity

Changes in the components of Shareholders’ Equity for the nine months ended September 30, 2014 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, 2013
$
1,466

 
$
1,004

 
$
(33
)
 
$
(15,633
)
 
$
17,952

 
$
(2,451
)
 
$
231

Net income
 

 
 

 
 

 
 

 
1,552

 
 
 
121

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 

 
 
 
(436
)
 
(3
)
Dividends
 

 
 

 
 

 
 

 
(1,294
)
 
 

 
(23
)
Stock-based compensation expense
 

 
109

 
 

 
 

 
 

 
 

 
 

Shares issued for stock options
 

 
77

 
 

 
200

 
 

 
 

 
 

Shares issued for restricted stock awards
 
 
(76
)
 
 
 
76

 
 
 
 
 
 
Treasury stock acquired
 

 
 

 
 

 
(1,119
)
 
 

 
 

 
 

Other
 

 
12

 
15

 
(1
)
 
 

 
 

 


Balance, September 30, 2014
$
1,466

 
$
1,126

 
$
(18
)
 
$
(16,477
)
 
$
18,210

 
$
(2,887
)
 
$
326


Accumulated other comprehensive income (loss) includes cumulative translation losses of $2,155 and $1,772 at September 30, 2014 and December 31, 2013, respectively, and unrecognized retirement plan and other retiree benefits costs of $731 and $735 at September 30, 2014 and December 31, 2013, respectively.


10

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

8.
Earnings Per Share
 
Three Months Ended
 
September 30, 2014
 
September 30, 2013
 
Net income attributable to Colgate-Palmolive Company
 
Shares
(millions)
 
Per
Share
 
Net income attributable to Colgate-Palmolive Company
 
Shares
(millions)
 
Per
Share
Basic EPS
$
542

 
913.8

 
$
0.59

 
$
656

 
928.1

 
$
0.71

Stock options and
restricted stock units
 
 
9.0

 
 

 
 

 
8.8

 
 

Diluted EPS
$
542

 
922.8

 
$
0.59

 
$
656

 
936.9

 
$
0.70


For the three months ended September 30, 2014 and 2013, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 1,369,775 and 1,956,750, respectively.

 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Net income attributable to Colgate-Palmolive Company
 
Shares
(millions)
 
Per
Share
 
Net income attributable to Colgate-Palmolive Company
 
Shares
(millions)
 
Per
Share
Basic EPS
$
1,552

 
916.4

 
$
1.69

 
$
1,677

 
932.5

 
$
1.80

Stock options and
restricted stock units
 
 
9.3

 
 

 
 

 
8.9

 
 

Diluted EPS
$
1,552

 
925.7

 
$
1.68

 
$
1,677

 
941.4

 
$
1.78


For the nine months ended September 30, 2014 and 2013, the average number of stock options and restricted stock units that were anti-dilutive and not included in diluted earnings per share calculations were 484,913 and 703,219, respectively.

Basic and diluted earnings per share are computed independently for each quarter and any year-to-date period presented. As a result of changes in shares outstanding during the year and rounding, the sum of the quarters earnings per share may not necessarily equal the earnings per share for any year-to-date period.

11

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

9.
Other Comprehensive Income (Loss)

Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the three months ended September 30, 2014 and 2013 were as follows:
 
 
2014
 
2013
 
 
Pretax
 
Net of Tax
 
Pretax
 
Net of Tax
 
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
$
(362
)
 
$
(365
)
 
$
82

 
$
93

Retirement plans and other retiree benefits:
 
 
 
 
 
 
 
 
Net actuarial gain (loss) and prior service costs arising during the period
 
(43
)
 
(26
)
 
1

 
1

Amortization of net actuarial loss, transition and prior service costs (1)
 
17

 
9

 
27

 
17

Retirement plans and other retiree benefits adjustments
 
(26
)
 
(17
)
 
28

 
18

Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities (2)
 
(62
)
 
(40
)
 
4

 
3

Reclassification of (gains) losses into net earnings on available-for-sale securities (3)
 
56

 
36

 

 

Gains (losses) on available-for-sale securities
 
(6
)
 
(4
)
 
4

 
3

Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges
 
5

 
2

 
2

 

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

 
1

 
(8
)
 
(5
)
Gains (losses) on cash flow hedges
 
7

 
3

 
(6
)
 
(5
)
Total Other comprehensive income (loss)
 
$
(387
)
 
$
(383
)
 
$
108

 
$
109


(1)These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 10, Retirement Plans and Other Retiree Benefits for additional details.
(2)For the three months ended September 30, 2014, these amounts included a pretax loss of $52 related to the remeasurement of the bolivar denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela.
(3)Represents reclassification of losses on the Venezuela bonds into Other (income) expense, net due to an impairment in the fair value of the bonds as a result of the effective devaluation in the third quarter of 2014. See Note 14, Fair Value Measurements and Financial Instruments for additional details.
(4)These (gains) losses are reclassified into Cost of sales. See Note 14, Fair Value Measurements and Financial Instruments for additional details.


12

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

Additions to and reclassifications out of Accumulated other comprehensive income (loss) attributable to the Company for the nine months ended September 30, 2014 and 2013 were as follows:
 
 
2014
 
2013
 
 
Pretax
 
Net of Tax
 
Pretax
 
Net of Tax
 
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
$
(372
)
 
$
(383
)
 
$
(170
)
 
$
(158
)
Retirement plans and other retiree benefits:
 
 
 
 
 
 
 
 
Net actuarial gain (loss) and prior service costs arising during the period
 
(40
)
 
(24
)
 
4

 
3

Amortization of net actuarial loss, transition and prior service costs (1)
 
45

 
28

 
82

 
53

Retirement plans and other retiree benefits adjustments
 
5

 
4

 
86

 
56

Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities (2)
 
(354
)
 
(230
)
 
(124
)
 
(79
)
Reclassification of (gains) losses into net earnings on available-for-sale securities (3)
 
267

 
174

 
133

 
86

Gains (losses) on available-for-sale securities
 
(87
)
 
(56
)
 
9

 
7

Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges
 
(1
)
 
(1
)
 
13

 
8

Reclassification of (gains) losses into net earnings on cash flow hedges (4)
 
(1
)
 

 
(13
)
 
(8
)
Gains (losses) on cash flow hedges
 
(2
)
 
(1
)
 

 

Total Other comprehensive income (loss)
 
$
(456
)
 
$
(436
)
 
$
(75
)
 
$
(95
)

(1)These components of Other comprehensive income (loss) are included in the computation of total pension cost. See Note 10, Retirement Plans and Other Retiree Benefits for additional details.
(2)For the nine months ended September 30, 2014, these amounts included pretax net losses of $324 related to the remeasurement of the bolivar denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela.
For the nine months ended September 30, 2013, these amounts included pretax losses of $133 related only to the remeasurement of the bolivar denominated fixed interest rate bonds in Venezuela as a result of the devaluation in the first quarter of 2013. No remeasurement charge was required on the devaluation-protected bonds in the first quarter of 2013 since the official exchange rate changed from 4.30 to 6.30 bolivares per dollar and the devaluation-protected bonds revalued to the official exchange rate. See Note 14, Fair Value Measurements and Financial Instruments for additional details.
(3)Represents reclassification of losses on the Venezuela bonds into Other (income) expense, net due to an impairment in the fair value of the bonds as a result of the effective devaluations in the first and third quarters of 2014 and the devaluation in the first quarter of 2013. See Note 14, Fair Value Measurements and Financial Instruments for additional details.
(4)These (gains) losses are reclassified into Cost of sales. See Note 14, Fair Value Measurements and Financial Instruments for additional details.


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


13

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

10.
Retirement Plans and Other Retiree Benefits

Components of Net periodic benefit cost for the three and nine months ended September 30, 2014 and 2013 were as follows:
 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Three Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$

 
$
6

 
$
5

 
$
6

 
$
2

 
$
3

Interest cost
25

 
22

 
8

 
8

 
11

 
8

ESOP offset

 

 

 

 

 

Expected return on plan assets
(28
)
 
(29
)
 
(7
)
 
(7
)
 
(1
)
 
(1
)
Amortization of transition and prior service costs (credits)

 
1

 

 
1

 

 

Amortization of actuarial loss (gain)
11

 
17

 
2

 
3

 
4

 
5

Net periodic benefit cost
$
8

 
$
17

 
$
8

 
$
11

 
$
16

 
$
15


 
Pension Benefits
 
Other Retiree Benefits
 
United States
 
International
 
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
1

 
$
20

 
$
15

 
$
16

 
$
8

 
$
10

Interest cost
76

 
68

 
26

 
22

 
32

 
28

ESOP offset

 

 

 

 
(1
)
 
(1
)
Expected return on plan assets
(84
)
 
(88
)
 
(22
)
 
(19
)
 
(2
)
 
(2
)
Amortization of transition and prior service costs (credits)

 
6

 
3

 
1

 

 

Amortization of actuarial loss (gain)
27

 
49

 
3

 
10

 
12

 
16

Net periodic benefit cost
$
20

 
$
55

 
$
25

 
$
30

 
$
49

 
$
51

 

For the nine months ended September 30, 2014, the Company made a voluntary contribution of $2 to a postretirement plan of one of its U.S. subsidiaries. For the nine months ended September 30, 2013, the Company made voluntary contributions of $101 to its U.S. postretirement plans.

11.
Income Taxes

At December 31, 2013, the Company had unrecognized tax benefits of $199. In July 2014, the Company received notice of an adverse decision in a foreign court regarding a tax position taken in prior years. Although it plans to appeal this decision, the Company, as required, reassessed its tax position in light of the decision and concluded it needed to increase its unrecognized tax benefits by $30 and write off a $36 deferred tax asset. The Company recorded this $66 income tax charge in the quarter ended September 30, 2014.

Although it is possible that the amount of unrecognized tax benefits with respect to the Companys uncertain tax positions will further increase or decrease during the remainder of 2014, the Company does not expect material changes.


14

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

12. Contingencies

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

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, 2009 have been audited by, and settled with, the IRS. With a few exceptions, the Company is no longer subject to U.S., state and local income tax examinations for the years prior to 2009. 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.

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 $250 (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.

15

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

Brazilian Matters

There are certain tax and civil proceedings outstanding, as described below, related to the Companys 1995 acquisition of the Kolynos oral care business from Wyeth (the Seller).

The Brazilian internal revenue authority has disallowed interest deductions and foreign exchange losses taken by the Company’s Brazilian subsidiary for certain years in connection with the financing of the Kolynos acquisition. The tax assessments with interest, at the current exchange rate, are approximately $115. 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 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 $70, 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 TaxpayersCouncil denied the Company’s appeal. The Company has filed a motion for clarification with a special appeals chamber of the TaxpayersCouncil and further appeals are available within the Brazilian federal courts. 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.

16

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

Competition Matters

European Competition Matters

Certain of the Company’s subsidiaries in Europe are subject to investigations, and in some cases, fines by governmental authorities in a number of European countries related to potential competition law violations. The Company understands that substantially all of these matters 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 has appealed each of these fines:
In December 2009, the Swiss competition law authority imposed a fine of $6 on the Company’s GABA subsidiary for alleged violations of restrictions on parallel imports into Switzerland, which the Company appealed. In January 2014, this appeal was denied. The Company is appealing before the Swiss Supreme Court.
In January 2010, the Companys Spanish subsidiary was fined $3 by the Spanish competition law authority on the basis that it had entered an agreement with other shower gel manufacturers regarding product downsizing, which the Company contested. The fine was annulled by the Court of Appeal in July 2013. The Spanish competition law authority is appealing this judgment before the Spanish Supreme Court.
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 March 2012, the French competition law authority found that three pet food producers, including the Company’s Hill’s French subsidiary, had violated the competition law, for which it imposed a fine of $7 on the Company’s Hill’s French subsidiary for alleged restrictions on exports from France, which the Company contested. In October 2013, the Company’s appeal was denied. The Company is appealing before the French Supreme Court.

Currently, formal claims of violations, or statements of objections, are pending against the Company as follows:
In October 2012, the Belgian competition law authority alleged that 11 branded goods companies, including the Company’s Belgian subsidiary, assisted retailers to coordinate their retail prices on the Belgian market. The defendants have raised a number of procedural issues which need to be resolved before the case can proceed further.
In June 2013, the French competition law authority issued a statement of objections alleging that the Companys French subsidiary and a number of its competitors exchanged sensitive information related to the French home care and personal care sectors. The Company has responded to this statement of objections.
In July 2014, the Greek competition law authority issued a statement of objections alleging the Company and its Greek subsidiary restricted parallel imports into Greece. The Company has responded to this statement of objections.



17

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

Since December 31, 2013, the following matter has been resolved:
In January 2014, the French Court of Appeal confirmed the French competition law authority’s December 2011 fine of the Company’s French subsidiary, in the amount of $46, in connection with a divested heavy duty detergent business.

Australian Competition Matter

In December 2013, the Australian competition law authority instituted civil proceedings in the Sydney registry of the Federal Court of Australia alleging that three consumer goods companies, including the Company’s Australian subsidiary, a retailer and a former employee of the Company’s Australian subsidiary violated the Australian competition law by coordinating the launching and pricing of ultra concentrated laundry detergents. The Company intends to challenge these proceedings vigorously. Since the amount of any potential losses from these proceedings currently cannot be estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to these proceedings.

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. 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.

Talcum Powder Matters

The Company is a defendant in a number of civil actions alleging that certain talc products it sold prior to 1996 were contaminated with asbestos. Since 2008, the Company has challenged, and will continue to challenge, these cases vigorously, and although there can be no assurances, it believes, based on the advice of its legal counsel, that they are without merit and the Company should ultimately prevail. Currently, there are 14 single plaintiff cases pending against the Company in state courts in California, Delaware, Maryland, New Jersey and New York and one case pending in federal court in North Carolina. 17 similar cases previously filed against the Company have been dismissed and final judgment entered in favor of the Company. To date, there have been no findings of liability against the Company in any of these cases. Since the amount of any potential losses from these cases at trial currently cannot be estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to these cases.

ERISA Matters

In July 2014, the Colgate-Palmolive Company Employees’ Retirement Income Plan (the “Plan”) settled a putative class action alleging improper calculation of lump sum distributions and failure to satisfy minimum accrual requirements under the Plan. Under the settlement agreement, the Plan agreed to pay approximately $40 after application of certain offsets to resolve the litigation.

18

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

13.
Segment Information

The Company operates in two product segments: Oral, Personal and Home Care; and Pet Nutrition. The operations of the Oral, Personal and Home Care product segment are managed geographically in five reportable operating segments: North America, Latin America, Europe/South Pacific, Asia and Africa/Eurasia.

The Company evaluates segment performance based on several factors, including Operating profit. The Company uses Operating profit as a measure of operating segment performance because it excludes the impact of corporate-driven decisions related to interest expense and income taxes. Corporate operations include costs related to stock options and restricted stock units, 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 operating segment performance used by the Company to measure the underlying performance of the operating segments.

Net sales and Operating profit by segment were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
 
 
 
 
 
 
 
Oral, Personal and Home Care
 
 
 
 
 
 
 
North America
$
789

 
$
774

 
$
2,344

 
$
2,300

Latin America
1,194

 
1,251

 
3,577

 
3,747

Europe/South Pacific
886

 
880

 
2,624

 
2,552

Asia
634

 
627

 
1,916

 
1,900

Africa/Eurasia
310

 
321

 
916

 
932

Total Oral, Personal and Home Care
3,813

 
3,853

 
11,377

 
11,431

Pet Nutrition
566

 
545

 
1,679

 
1,628

Total Net sales
$
4,379

 
$
4,398

 
$
13,056

 
$
13,059

 
 
 
 
 
 
 
 
Operating profit
 

 
 

 
 
 
 
Oral, Personal and Home Care
 

 
 

 
 
 
 
North America
$
240

 
$
244

 
$
687

 
$
686

Latin America
330

 
358

 
931

 
1,022

Europe/South Pacific
237

 
216

 
681

 
605

Asia
187

 
174

 
558

 
533

Africa/Eurasia
60

 
65

 
177

 
192

Total Oral, Personal and Home Care
1,054

 
1,057

 
3,034

 
3,038

Pet Nutrition
149

 
138

 
439

 
410

Corporate
(255
)
 
(179
)
 
(911
)
 
(784
)
Total Operating profit
$
948

 
$
1,016

 
$
2,562

 
$
2,664



19

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

Approximately 80% of the Company’s Net sales are generated from markets outside the U.S., with over 50% of the Company’s Net sales coming from emerging markets (which consist of Latin America, Asia (excluding Japan), Africa/Eurasia and Central Europe).

For the three months ended September 30, 2014, Corporate Operating profit (loss) includes charges of $55 related to the 2012 Restructuring Program, a charge of $61 related to the 2014 Venezuela remeasurements, costs of $1 related to the sale of land in Mexico and a charge of $11 for a European competition law matter. For the nine months ended September 30, 2014, Corporate Operating profit (loss) includes charges of $231 related to the 2012 Restructuring Program, a charge of $327 related to the 2014 Venezuela remeasurements, costs of $4 related to the sale of land in Mexico and a charge of $11 for a European competition law matter.

For the three months ended September 30, 2013, Corporate Operating profit (loss) included charges of $30 related to the 2012 Restructuring Program and costs of $3 related to the sale of land in Mexico. For the nine months ended September 30, 2013, Corporate Operating profit (loss) included charges of $198 related to the 2012 Restructuring Program, a charge of $172 related to the 2013 Venezuela remeasurement, costs of $14 related to the sale of land in Mexico and a charge of $18 for a European competition law matter. For further information regarding the 2012 Restructuring Program, refer to Note 5, Restructuring and Related Implementation Charges. For further information regarding Venezuela, refer to Note 15, Venezuela. For further information regarding the sale of land in Mexico, refer to Note 4, Acquisitions and Divestitures. For further information regarding the European competition law matters, refer to Note 12, Contingencies.

14.
Fair Value Measurements and Financial Instruments

The Company uses available market information and other valuation methodologies in assessing the fair value of financial instruments. Judgment is required in interpreting market data to develop the estimates of fair value and, accordingly, changes in assumptions or the estimation methodologies may affect the fair value estimates. The Company is exposed to the risk of credit loss in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely and any nonperformance is unlikely to be material, as it is the Company’s policy to contract only with diverse, credit-worthy counterparties based upon both strong credit ratings and other credit considerations.

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

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

20

COLGATE-PALMOLIVE COMPANY
 Notes to Condensed Consolidated Financial Statements (continued)
(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 September 30, 2014 and December 31, 2013:
 
Assets
 
Liabilities
 
 
Account
 
Fair Value
 
Account
 
Fair Value
Designated derivative instruments
 
9/30/14
 
12/31/13
 
 
 
9/30/14
 
12/31/13
Interest rate swap contracts
Other current assets
 
$

 
$
1

 
Other accruals
 
$

 
$

Interest rate swap contracts
Other assets
 
13

 
20

 
Other liabilities
 
6

 
1

Foreign currency contracts
Other current assets
 
17

 
14

 
Other accruals
 
7

 
8

Foreign currency contracts
Other assets
 
37

 

 
Other liabilities
 

 
10

Commodity contracts
Other current assets
 

 

 
Other accruals
 
3

 

Total designated
 
 
$
67

 
$
35

 
 
 
$
16

 
$
19

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated
 
 
 

 
 

 
 
 
 
 
 

Foreign currency contracts
Other current assets
 
$

 
$

 
Other accruals
 
$

 
$
3

Foreign currency contracts
Other assets
 
4

 

 
Other liabilities
 

 

Total not designated
 
 
$
4


$

 
 
 
$

 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
Total derivative instruments
 
$
71

 
$
35

 
 
 
$
16

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
Other financial instruments
 
 

 
 

 
 
 
 

 
 

Marketable securities
Other current assets
 
$
124

 
$
173

 
 
 
 

 
 

Available-for-sale securities
Other assets
 
337

 
685

 
 
 
 

 
 

Total other financial instruments
 
$
461

 
$
858

 
 
 
 

 
 


The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of September 30, 2014 and December 31, 2013. The estimated fair value of the Company’s long-term debt, including the current portion, as of September 30, 2014 and December 31, 2013, was $6,170 and $5,690, respectively, and the related carrying value was $6,041 and $5,644, 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).

21

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

Fair Value Hedges

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

Activity related to fair value hedges recorded during the three and nine months ended September 30, 2014 and 2013 was as follows:
 
2014
 
2013
 
Foreign
Currency
Contracts
 
Interest
Rate
Swaps
 
 
Total
 
Foreign
Currency
Contracts
 
Interest
Rate
Swaps
 
 
Total
Notional Value at September 30,
$
1,372

 
$
1,438

 
$
2,810

 
$
1,568

 
$
1,088

 
$
2,656

Three months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivative
7

 
(9
)
 
(2
)
 
(9
)
 
2

 
(7
)
Gain (loss) on hedged items
(7
)
 
9

 
2

 
9

 
(2
)
 
7

Nine months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivative
9

 
(12
)
 
(3
)
 
3

 
(18
)
 
(15
)
Gain (loss) on hedged items
(9
)
 
12

 
3

 
(3
)
 
18

 
15


Cash Flow Hedges

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

Activity related to cash flow hedges recorded during the three and nine months ended September 30, 2014 and 2013 was as follows:
 
2014
 
2013
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
 
Total
Notional Value at September 30,
$
509

 
$
11

 
$
520

 
$
441

 
$
15

 
$
456

Three months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
8

 
(3
)
 
5

 
2

 

 
2

Gain (loss) reclassified into Cost of sales
(1
)
 
(1
)
 
(2
)
 
8

 

 
8

Nine months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI
1

 
(2
)
 
(1
)
 
13

 

 
13

Gain (loss) reclassified into Cost of sales

 
1

 
1

 
12

 
1

 
13


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.


22

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

Net Investment Hedges

The Company has designated certain foreign currency forward and option contracts and certain foreign currency-denominated debt as net investment hedges, for which the gain or loss on the instrument is reported as a component of 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 and nine months ended September 30, 2014 and 2013 was as follows:
 
2014
 
2013
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
 
Foreign
Currency
Contracts
 
Foreign
Currency
Debt
 
 
Total
Notional Value at September 30,
$
669

 
$

 
$
669

 
$
557

 
$
238

 
$
795

Three months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
44

 
1

 
45

 
(18
)
 
(9
)
 
(27
)
Gain (loss) on hedged items
(44
)
 
(1
)
 
(45
)
 
18

 
9

 
27

Nine months ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on instruments
44

 
4

 
48

 
(8
)
 

 
(8
)
Gain (loss) on hedged items
(44
)
 
(4
)
 
(48
)
 
9

 

 
9


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. 

Activity related to these contracts during the three and nine months ended September 30, 2014 and 2013 was as follows:
 
2014
 
2013
 
Cross-currency
Swap
 
Cross-currency
Swap
Notional Value at September 30,
$
102

 
$
96

Three months ended September 30:
 
 
 
Gain (loss) on instrument
5

 
(6
)
Gain (loss) on hedged item
(5
)
 
6

Nine months ended September 30:
 
 
 
Gain (loss) on instrument
2

 

Gain (loss) on hedged item
(2
)
 



23

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

Other Financial Instruments

Other financial instruments are classified as Other current assets or Other assets.

Other financial instruments classified as Other current assets include marketable securities, which consist of bank deposits of $76 with original maturities greater than 90 days (Level 1 valuation) and the current portion of bonds issued by the Venezuelan government (Level 2 valuation) in the amount of $48. The long-term portion of these bonds in the amount of $337 is included in Other assets.

Through its subsidiary in Venezuela, the Company is invested in U.S. dollar-linked, devaluation-protected bonds and bolivar denominated 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 September 30, 2014, the fair market value of U.S. dollar-linked devaluation-protected bonds and bolivar denominated fixed interest rate bonds was $114 and $271, respectively. These bonds are considered available-for-sale securities and, as noted above, the long-term portion in the amount of $337 is included in Other assets.

The following table presents a reconciliation of the Venezuelan bonds at fair value for the nine months ended September 30, 2014 and 2013:
 
2014
 
2013
Beginning balance as of January 1,
$
685

 
$
642

Unrealized gain (loss) on investment
(354
)
 
(124
)
Purchases and sales during the period
54

 
182

Ending balance as of September 30,
$
385

 
$
700


Unrealized loss on investment for the nine months ended September 30, 2014 included a net loss of $324 primarily related to the remeasurement of the bolivar denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela as a result of the effective devaluations in the first and third quarters of 2014.

Unrealized loss on investment for the nine months ended September 30, 2013 consisted primarily of a charge of $133 related only to the remeasurement of the bolivar denominated fixed interest rate bonds in Venezuela as a result of the devaluation in the first quarter of 2013. No remeasurement charge was required on the devaluation-protected bonds in the first quarter of 2013 since the official exchange rate changed from 4.30 to 6.30 bolivares per dollar and the devaluation-protected bonds revalued to the official exchange rate.

For further information regarding Venezuela, refer to Note 15, Venezuela.



24

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

15.
Venezuela

Venezuela has been designated hyper-inflationary and, therefore, the functional currency for the Company’s Venezuelan subsidiary (“CP Venezuela”) is the U.S. dollar and Venezuelan currency fluctuations are reported in income.

During the first quarter of 2014, the Venezuelan government enacted several changes to Venezuela’s foreign exchange regime, introducing a multi-tier foreign exchange system whereby there are now three exchange rate mechanisms available to convert Venezuelan bolivares to U.S. dollars. The Venezuelan government replaced CADIVI with a new foreign currency administration, the National Center for Foreign Commerce (“CENCOEX”). Although the official exchange rate remains at 6.30 bolivares per dollar, the exchange rate for foreign investments moved to the rate available on the SICAD I (Supplementary System for the Administration of Foreign Currency) currency market. The Venezuelan government also introduced an alternative currency market known as SICAD II. The Company remeasures the financial statements of CP Venezuela at the end of each month at the rate at which it expects to remit future dividends which, based on the advice of legal counsel, is the SICAD I rate.

Effective with the quarter ended March 31, 2014, the Company remeasured the majority of CP Venezuela’s local currency-denominated net monetary assets at the quarter-end SICAD I rate of 10.70 bolivares per dollar and incurred a pretax loss of $266 ($174 aftertax loss or $0.19 per diluted common share).

During the second quarter of 2014, the SICAD I rate revalued slightly and the Company remeasured CP Venezuela’s local currency-denominated net monetary assets at the quarter-end SICAD I rate of 10.60 bolivares per dollar. The impact of the remeasurement during the quarter was insignificant in relation to the Company’s consolidated Net income.

During the third quarter of 2014, the SICAD I rate devalued and the Company remeasured CP Venezuela’s local currency-denominated net monetary assets at the quarter-end SICAD I rate of 12.00 bolivares per dollar and incurred a pretax loss of $61 ($40 aftertax loss or $0.04 per diluted common share).

Included in the losses incurred in the first and third quarters of 2014 were charges related to the devaluation-protected bonds issued by the Venezuelan government and held by CP Venezuela. Because the official exchange rate remains at 6.30 bolivares per dollar, the devaluation-protected bonds did not revalue at the rate available on the SICAD I currency market but remained at the official exchange rate, which resulted in an impairment in the fair value of the bonds.

CP Venezuela continues to be able to settle certain of its U.S. dollar obligations for imported materials at the official rate of 6.30 bolivares per dollar and records the gains related to such transactions when the funds are authorized by CENCOEX and the liabilities are paid.

In the first quarter of 2013, the Company incurred a pretax loss of $172 ($111 aftertax loss) related to the remeasurement of CP Venezuela’s local currency-denominated net monetary assets at the date of the devaluation that changed the official exchange rate from 4.30 to 6.30 bolivares per dollar.

For the nine months ended September 30, 2014, CP Venezuela represented approximately 3% of the Company’s consolidated Net sales. At September 30, 2014, CP Venezuelas local currency-denominated net monetary asset position, which would be subject to remeasurement in the event of further changes in the SICAD I rate, was approximately $444. This amount includes the devaluation-protected bonds issued by the Venezuelan government. CP Venezuelas local currency-denominated non-monetary assets were approximately $328 at September 30, 2014 and included approximately $233 of fixed assets that could be subject to impairment if CP Venezuela is not able to implement price increases to offset the impacts of continued high inflation or further devaluations, or if it does not have sufficient access to U.S. dollars to fund imports.

25

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

16.
Subsequent events

Acquisition

On October 3, 2014, the Company acquired an oral care business in Myanmar for $62 in cash plus additional consideration contingent upon achievement of performance targets under a distribution services agreement. As a result of the acquisition, the Company expects to be the market leader in the toothpaste category in Myanmar. The Company will record the acquisition in the quarter ending December 31, 2014.

Credit Facility

On October 17, 2014, the Company entered into an amendment of its five-year revolving credit facility whereby the facility was extended by one year to November 2019 and the capacity of the facility was increased by $520 to $2,370.

Restructuring and Related Implementation Charges

On October 23, 2014, the Company’s Board of Directors approved an expansion of the 2012 Restructuring Program. The initiatives under the 2012 Restructuring Program continue to be focused on the following areas:
Expanding Commercial Hubs - Building on the success of this structure already implemented in several divisions, continuing to cluster single-country subsidiaries into more efficient regional hubs, in order to drive smarter and faster decision making, strengthen capabilities available on the ground and improve cost structure.
Extending Shared Business Services and Streamlining Global Functions - Implementing the Companys shared service organizational model, already successful in Europe, in all regions of the world. Initially focused on finance and accounting, these shared services will be expanded to additional functional areas to streamline global functions.
Optimizing Global Supply Chain and Facilities - Continuing to optimize manufacturing efficiencies, global warehouse networks and office locations for greater efficiency, lower cost and speed to bring innovation to market.

The Board authorized the expansion of the 2012 Restructuring Program to take advantage of additional savings opportunities identified in all three areas.

As a result of the expansion, cumulative pretax charges related to the 2012 Restructuring Program, once all phases are approved and implemented, are now estimated to be $1,285 to $1,435 ($950 to $1,050 aftertax), increased from $1,100 to $1,250 ($775 to $875 aftertax). Implementation of the 2012 Restructuring Program is still expected to be substantially completed by December 31, 2016. Also as a result of the expansion, the anticipated pretax charges for 2014 increased to approximately $300 to $350 ($225 to $255 aftertax).

These pretax charges are currently estimated to be comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits (50%); asset-related costs, primarily Incremental Depreciation and Asset Impairments (10%); and Other charges, which include contract termination costs, consisting primarily of implementation-related charges resulting directly from exit activities (20%) and the implementation of new strategies (20%). Over the course of the 2012 Restructuring Program, it is currently estimated that approximately 75% of the charges will result in cash expenditures.

Charges related to the 2012 Restructuring Program will continue to be recorded in the Corporate segment as these decisions are predominantly centrally directed and controlled and are not included in internal measures of segment operating performance. It is expected that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America (15%), Europe/South Pacific (20%), Latin America (5%), Asia (5%), Africa/Eurasia (5%), Hill’s Pet Nutrition (10%) and Corporate (40%), which includes substantially al