filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
Colgate-Palmolive Company (together with its subsidiaries, the “Company” or “Colgate”) seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers globally with products that make their lives healthier and more enjoyable.
To this end, the Company is tightly focused on two product segments: Oral, Personal and Home Care; and Pet Nutrition. Within these segments, the Company follows a closely defined business strategy to grow our key product categories and increase our overall market share. Within the categories in which the Company competes, the Company prioritizes its efforts 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 70% of the Company’s Net sales are generated from markets outside the U.S., with approximately 50% of the Company’s Net sales coming from emerging markets (which consist of Latin America, Asia (excluding Japan), Africa/Eurasia and Central Europe). This geographic diversity and balance help to reduce the Company’s exposure to business and other risks in any one country or part of the world.
The Oral, Personal and Home Care product segment is managed geographically in five reportable operating segments: North America, Latin America, Europe, Asia Pacific and Africa/Eurasia, all of which sell to a variety of traditional and e-commerce retailers, wholesalers and distributors. The Company, through Hill’s Pet Nutrition, also competes on a worldwide basis in the pet nutrition market, selling its products principally through authorized pet supply retailers, veterinarians and e-commerce retailers.
On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, net sales (including volume, pricing and foreign exchange components), organic sales growth (net sales growth excluding, as applicable, the impact of foreign exchange, acquisitions, and divestments), a non-GAAP financial measure, and gross profit margin, operating profit, net income and earnings per share, in each case, on a GAAP and non-GAAP basis, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators and the Company’s Code of Conduct and corporate governance practices help to maintain business health and strong internal controls. For additional information regarding non-GAAP financial measures, see “Non-GAAP Financial Measures” below.
To achieve its business and financial objectives, the Company focuses the organization on initiatives to drive and fund growth. The Company seeks to capture significant opportunities for growth by identifying and meeting consumer needs within its core categories, through its focus on innovation and the deployment of valuable consumer and shopper insights in the development of successful new products regionally, which can then be rolled out on a global basis. To enhance these efforts, the Company has developed key initiatives to build strong relationships with consumers, dental, veterinary and skin care professionals and traditional and e-commerce retailers. In addition, the Company has enhanced its digital marketing capabilities and intends to broaden its e-commerce offerings, including direct-to-consumer and subscription services. 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, distribution and logistics, and advertising and promotional materials, among other things, and encompass a wide range of projects, examples of which include raw material substitution, reduction of packaging materials, consolidating suppliers to leverage volumes and increasing manufacturing efficiency through SKU reductions and formulation simplification. The Company also continues to prioritize its investments toward its higher margin businesses, specifically Oral Care, Personal Care and Pet Nutrition.
(Dollars in Millions Except Per Share Amounts)
Significant Items Impacting Comparability
In January 2018, the Company acquired all of the outstanding equity interests of Physicians Care Alliance, LLC (“PCA Skin”) and Elta MD Holdings, Inc. (“Elta MD”), professional skin care businesses, for aggregate cash consideration of approximately $730. With these acquisitions, the Company entered the professional skin care category, which complements its existing global personal care businesses. See Note 3, Acquisitions and Divestitures to the Consolidated Financial Statements for additional information.
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA” or “U.S. tax reform”) was enacted, which, among other things, lowered the U.S. corporate income tax rate to 21% from 35% and established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries. Beginning in 2018, the TCJA also requires a minimum tax on certain future earnings generated by foreign subsidiaries while providing for future tax-free repatriation of such earnings through a 100% dividends-received deduction.
As a result of the enactment of the TCJA, in the fourth quarter of 2017, the Company recorded a provisional charge of $275 based on its initial analysis of the TCJA using information and estimates available as of February 15, 2018, the date on which the Company filed its Annual Report on Form 10-K for the year ended December 31, 2017. During 2018, the Company finalized its assessment of the impact of the TCJA and recognized an additional tax expense of $80 reflecting the impact of transition tax guidance issued by the U.S. Treasury and the update of certain estimates and calculations based on information available through the end of 2018. Any further guidance issued after December 31, 2018 may have an impact to the Company’s Provision for income tax in the period such guidance is effective. Refer to “Results of Operations–Income Taxes” below for additional details.
In September 2016, the Company’s Mexican subsidiary completed the sale to the United States of America of the Mexico City site on which its commercial operations, technology center and soap production facility were previously located and received $60 as the third and final installment of the sale price. The total sale price (including the third installment and the previously received first and second installments) was $120. The Company recognized a pretax gain of $97 ($63 aftertax) in the third quarter of 2016, net of costs primarily related to site preparation.
Effective December 31, 2015, the Company concluded it no longer met the accounting criteria for consolidation of its Venezuelan subsidiary (“CP Venezuela”) and began accounting for CP Venezuela using the cost method of accounting.
Since January 1, 2016, under the cost method of accounting, the Company no longer includes the local operating results of CP Venezuela in its Consolidated Financial Statements and includes income relating to CP Venezuela only to the extent it receives cash for sales of inventory to CP Venezuela or for dividends or royalties remitted by CP Venezuela, all of which have been immaterial. Although CP Venezuela’s local operating results are no longer included in the Company’s Consolidated Financial Statements for accounting purposes, under current tax rules, the Company is required to continue including CP Venezuela in its consolidated U.S. federal income tax return. In the first quarter of 2016, Provision for income taxes included a $210 U.S. income tax benefit principally related to changes in Venezuela’s foreign exchange regime implemented in March 2016. See Note 11, Income Taxes to the Consolidated Financial Statements for additional details.
The Company’s restructuring program known as the “Global Growth and Efficiency Program” runs through December 31, 2019. The program’s initiatives are expected to help the Company ensure sustained solid worldwide growth in unit volume, organic sales, operating profit and earnings per share and to enhance its global leadership positions in its core businesses. Implementation of the Global Growth and Efficiency Program remains on track and is in its final year.
The initiatives under the Global Growth and Efficiency Program are focused on the following areas:
| ▪ | Expanding Commercial Hubs |
| ▪ | Extending Shared Business Services and Streamlining Global Functions |
| ▪ | Optimizing Global Supply Chain and Facilities |
Savings, substantially all of which are expected to increase future cash flows, are projected to be in the range of $590 to $635 pretax ($550 to $575 aftertax) annually, once all projects are approved and implemented. Cumulative pretax charges resulting from the Global Growth and Efficiency Program, once all phases are approved and implemented, are estimated to be in the range of $1,820 to $1,870 ($1,350 to $1,380 aftertax).
(Dollars in Millions Except Per Share Amounts)
In 2018, 2017 and 2016, the Company incurred aftertax costs of $125, $246 and $168, respectively, resulting from the Global Growth and Efficiency Program. For more information regarding the Global Growth and Efficiency Program, see “Restructuring and Related Implementation Charges” below and Note 4, Restructuring and Related Implementation Charges to the Consolidated Financial Statements.
Effective January 1, 2018, as required by the Financial Accounting Standards Board (“FASB”), the Company adopted Accounting Standard Update (“ASU”) No. 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” on a retrospective basis. As a result, for all periods presented, only the service related component of pension and other postretirement benefit costs is included in Operating profit. The non-service related components (interest cost, expected return on assets and amortization of actuarial gains and losses) are included in a new line item, “Non-service related postretirement costs,” which is below Operating profit. Adoption of this standard had no effect on Net income attributable to Colgate-Palmolive Company, Earnings per common share or Cash flow. See Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements for additional information.
As a result of adopting ASU No. 2016-09 “Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017, the Company recognizes excess tax benefits from stock-based compensation (resulting from an increase in the fair value of an award from the grant date to the vesting or exercise date, as applicable) in the Provision for income taxes as a discrete item. Prior to January 1, 2017, excess tax benefits from stock-based compensation were recognized in equity.
Outlook
Looking forward, the Company expects global macroeconomic and market conditions to remain challenging. While the Company has recently seen improvement in category growth rates, the Company expects category growth rates to remain below prior historical levels. While the global marketplace in which the Company operates has always been highly competitive, the Company continues to experience heightened competitive activity in certain markets from strong local competitors and from other large multinational companies, some of which have greater resources than the Company does. Such activities have included more aggressive product claims and marketing challenges, as well as increased promotional spending and geographic expansion. The Company has also been negatively affected by changes in the policies or practices of its retail trade customers in key markets, such as inventory de-stocking, limitations on access to shelf space or delisting of the Company’s products. In addition, the retail landscape in many of the Company’s markets continues to be impacted by the rapid growth of e-commerce retailers, changing consumer preferences (as consumers increasingly shop online) and the emergence of alternative retail channels, such as subscription services and direct-to-consumer businesses. This rapid growth in e-commerce and emergence of alternative retail channels may create pricing pressures and/or adversely affect the Company’s relationships with its key retailers. In addition, given that approximately 70% of the Company’s Net sales originate in markets outside the U.S., the Company has experienced and may continue to experience volatile foreign currency fluctuations and high raw and packaging material costs. While the Company has taken, and will continue to take, measures to mitigate the effect of these conditions, should they persist, they could adversely affect the Company’s future results.
In summary, the Company believes it is well prepared to meet the challenges ahead due to its strong financial condition, experience operating in challenging environments and continued focus on the Company’s key priorities: growing sales through engaging with consumers, developing world-class innovation and working with retail partners; driving efficiency on every line of the income statement to increase margins; generating strong cash flow performance and utilizing that cash effectively to enhance total shareholder return; and leading to win by staying true to the Company’s culture and focusing on its stakeholders. The Company’s commitment to these priorities, together with the strength of the Company’s global brands, its broad international presence in both developed and emerging markets and cost-saving initiatives, such as the Company’s funding-the-growth initiatives and the Global Growth and Efficiency Program, should position the Company well to increase shareholder value over the long term.
(Dollars in Millions Except Per Share Amounts)
Results of Operations
Net Sales
Worldwide Net sales were $15,544 in 2018, up 0.5% from 2017, as volume growth of 1.0% and net selling price increases of 0.5% were partially offset by negative foreign exchange of 1.0%. The Company’s professional skin care acquisitions increased volume by 1.0%. Organic sales (Net sales excluding, as applicable, the impact of foreign exchange, acquisitions and divestments), a non-GAAP financial measure as discussed below, increased 0.5% in 2018.
Net sales in the Oral, Personal and Home Care product segment were $13,156 in 2018, even with 2017, as volume growth of 1.0% and net selling price increases of 0.5% were offset by negative foreign exchange of 1.5%. The Company’s professional skin care acquisitions increased volume by 1.5%. Organic sales in the Oral, Personal and Home Care product segment in 2018 were even with 2017.
Organic sales in 2018 were even with 2017 as increases in Oral Care and Home Care organic sales were offset by a decline in Personal Care organic sales. The increase in Oral Care organic sales was primarily due to organic sales growth in the toothpaste category. The increase in the Home Care organic sales was primarily due to organic sales growth in the liquid cleaners and fabric softener categories. The decrease in Personal Care organic sales was due to declines in organic sales in the bar soap and underarm protection categories, which were partially offset by organic sales growth in the shower gel category.
The Company’s share of the global toothpaste market was 42.0% for full year 2018, down 1.3 share points from full year 2017, and its share of the global manual toothbrush market was 32.3% for full year 2018, down 0.7 share points from full year 2017. Full year 2018 market shares in toothpaste were down in North America, Latin America, Europe, Asia Pacific and Africa/Eurasia versus full year 2017. In the manual toothbrush category, full year 2018 market shares were up in North America and Africa/Eurasia and down in Latin America, Europe and Asia Pacific versus full year 2017. For additional information regarding the Company’s use of market share data and limitations on such data, see “Market Share Information” below.
Net sales for Hill’s Pet Nutrition were $2,388 in 2018, an increase of 4.0% from 2017, driven by volume growth of 1.5%, net selling price increases of 2.0% and positive foreign exchange of 0.5%. Organic sales for Hill’s Pet Nutrition increased 3.5% in 2018.
The increase in organic sales in 2018 versus 2017 was due to increases in organic sales in the Prescription Diet and Advanced Nutrition categories, partially offset by a decline in organic sales in the Naturals category.
Worldwide Net sales were $15,454 in 2017, up 1.5% from 2016, driven by volume growth of 0.5%, net selling price increases of 0.5% and positive foreign exchange of 0.5%. Organic sales increased 1.0% in 2017.
(Dollars in Millions Except Per Share Amounts)
Gross Profit/Margin
Worldwide Gross profit decreased 1% to $9,231 in 2018 from $9,280 in 2017. Gross profit in both periods included charges related to the Global Growth and Efficiency Program. Excluding these charges in both periods, Gross profit decreased to $9,262 in 2018 from $9,355 in 2017, reflecting a decrease of $147 resulting from lower Gross profit margin, partially offset by an increase of $54 resulting from higher Net sales.
Worldwide Gross profit margin decreased to 59.4% in 2018 from 60.0% in 2017. Excluding charges related to the Global Growth and Efficiency Program in both periods, Gross profit margin decreased by 90 basis points (bps) to 59.6% in 2018, from 60.5% in 2017. This decrease in Gross profit margin was primarily due to higher raw and packaging material costs (340 bps), partially offset by cost savings from the Company’s funding-the-growth initiatives (200 bps) and higher pricing (40 bps).
Worldwide Gross profit increased 2% to $9,280 in 2017 from $9,123 in 2016. Gross profit in both periods included charges related to the Global Growth and Efficiency Program. Excluding these charges in both periods, Gross profit increased to $9,355 in 2017 from $9,169 in 2016, reflecting an increase of $156 resulting from higher Net sales and an increase of $30 resulting from higher Gross profit margin.
Worldwide Gross profit margin was 60.0% in 2017, even with 2016. Excluding charges related to the Global Growth and Efficiency Program in both periods, Gross profit margin increased by 20 bps to 60.5% in 2017, from 60.3% in 2016. This increase in Gross profit margin was primarily driven by cost savings from the Company’s funding-the-growth initiatives and the Global Growth and Efficiency Program (200 bps) and higher pricing (20 bps), partially offset by higher raw and packaging material costs (190 bps).
| 2018 | 2017 | 2016 | ||||||||||
| Gross profit, GAAP | $ | 9,231 | $ | 9,280 | $ | 9,123 | ||||||
| Global Growth and Efficiency Program | 31 | 75 | 46 | |||||||||
| Gross profit, non-GAAP | $ | 9,262 | $ | 9,355 | $ | 9,169 |
| 2018 | 2017 | Basis Point Change | 2016 | Basis Point Change | ||||||||||
| Gross profit margin, GAAP | 59.4 | % | 60.0 | % | (60 | ) | 60.0 | % | — | |||||
| Global Growth and Efficiency Program | 0.2 | 0.5 | 0.3 | |||||||||||
| Gross profit margin, non-GAAP | 59.6 | % | 60.5 | % | (90 | ) | 60.3 | % | 20 |
(Dollars in Millions Except Per Share Amounts)
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $5,389 in 2018 from $5,400 in 2017. Selling, general and administrative expenses in both periods included charges related to the Global Growth and Efficiency Program. Excluding these charges in both periods, Selling, general and administrative expenses increased to $5,356 in 2018 from $5,314 in 2017, reflecting higher overhead expenses of $25 and increased advertising investment of $17.
Selling, general and administrative expenses as a percentage of Net sales decreased to 34.7% in 2018 from 34.9% in 2017. Excluding charges related to the Global Growth and Efficiency Program in both periods, Selling, general and administrative expenses as a percentage of Net sales were 34.5% in 2018, an increase of 10 bps as compared to 2017. This increase as a percentage of Net sales in 2018 was due to higher overhead expenses (10 bps), primarily driven by increased logistics costs. In 2018, advertising investment increased 1% to $1,590 as compared with $1,573 in 2017, while as a percentage of Net sales it was 10.2%, even with 2017.
Selling, general and administrative expenses increased 5% to $5,400 in 2017 from $5,143 in 2016. Selling, general and administrative expenses in both periods included charges related to the Global Growth and Efficiency Program. Excluding these charges in both periods, Selling, general and administrative expenses increased to $5,314 in 2017 from $5,066 in 2016, reflecting increased advertising investment of $145 and higher overhead expenses of $103.
Selling, general and administrative expenses as a percentage of Net sales increased to 34.9% in 2017 from 33.8% in 2016. Excluding charges related to the Global Growth and Efficiency Program in both periods, Selling, general and administrative expenses as a percentage of Net sales were 34.4%, an increase of 110 bps as compared to 2016. This increase in 2017 was driven by increased advertising investment (80 bps) and higher overhead expenses (30 bps), both as a percentage of Net sales. In 2017, advertising investment increased 10.2% to $1,573 as compared with $1,428 in 2016, and increased as a percentage of Net sales to 10.2% from 9.4% in 2016.
| 2018 | 2017 | 2016 | ||||||||||
| Selling, general and administrative expenses, GAAP | $ | 5,389 | $ | 5,400 | $ | 5,143 | ||||||
| Global Growth and Efficiency Program | (33 | ) | (86 | ) | (77 | ) | ||||||
| Selling, general and administrative expenses, non-GAAP | $ | 5,356 | $ | 5,314 | $ | 5,066 |
| 2018 | 2017 | Basis Point Change | 2016 | Basis Point Change | ||||||||||
| Selling, general and administrative expenses as a percentage of Net sales, GAAP | 34.7 | % | 34.9 | % | (20 | ) | 33.8 | % | 110 | |||||
| Global Growth and Efficiency Program | (0.2 | ) | (0.5 | ) | (0.5 | ) | ||||||||
| Selling, general and administrative expenses as a percentage of Net sales, non-GAAP | 34.5 | % | 34.4 | % | 10 | 33.3 | % | 110 |
(Dollars in Millions Except Per Share Amounts)
Other (Income) Expense, Net
Other (income) expense, net was $148, $173 and $25 in 2018, 2017 and 2016, respectively. The components of Other (income) expense, net are presented below:
| Other (income) expense, net | 2018 | 2017 | 2016 | |||||||||
| Global Growth and Efficiency Program | $ | 88 | $ | 152 | $ | 93 | ||||||
| Amortization of intangible assets | 59 | 35 | 33 | |||||||||
| Gain on sale of land in Mexico | — | — | (97 | ) | ||||||||
| Charges for a litigation matter | — | — | 17 | |||||||||
| Equity income | (10 | ) | (11 | ) | (10 | ) | ||||||
| Other, net | 11 | (3 | ) | (11 | ) | |||||||
| Total Other (income) expense, net | $ | 148 | $ | 173 | $ | 25 |
Other (income) expense, net was $148 in 2018 as compared to $173 in 2017. Other (income) expense, net in both periods included charges related to the Global Growth and Efficiency Program.
Other (income) expense, net was $173 in 2017 as compared to $25 in 2016. Other (income) expense, net in both periods included charges related to the Global Growth and Efficiency Program. Other (income) expense, net in 2016 also included a gain on the sale of land in Mexico and charges for a litigation matter.
Excluding the items described above in all periods, as applicable, Other (income) expense, net was $60 in 2018, $21 in 2017 and $12 in 2016.
| 2018 | 2017 | 2016 | ||||||||||
| Other (income) expense, net, GAAP | $ | 148 | $ | 173 | $ | 25 | ||||||
| Global Growth and Efficiency Program | (88 | ) | (152 | ) | (93 | ) | ||||||
| Gain on sale of land in Mexico | — | — | 97 | |||||||||
| Charges for a litigation matter | — | — | (17 | ) | ||||||||
| Other (income) expense, net, non-GAAP | $ | 60 | $ | 21 | $ | 12 |
(Dollars in Millions Except Per Share Amounts)
Operating Profit
Operating profit decreased to $3,694 in 2018 from $3,707 in 2017. Operating profit decreased 6% to $3,707 in 2017 from $3,955 in 2016.
In 2018, 2017 and 2016, Operating profit included charges related to the Global Growth and Efficiency Program. In 2016, Operating profit also included charges for a litigation matter and a gain on sale of land in Mexico. Excluding these items in all periods, as applicable, Operating profit in 2018 decreased 4% compared to 2017, primarily due to a decrease in Gross profit and an increase in Selling, general and administrative expenses, and Operating profit in 2017 decreased 2% compared to 2016, primarily due to an increase in Selling, general and administrative expenses which was partially offset by higher Gross profit.
Operating profit margin was 23.8% in 2018, compared with 24.0% in 2017 and 26.0% in 2016. Excluding charges related to the Global Growth and Efficiency Program in 2018 and 2017, Operating profit margin decreased 130 bps to 24.7% in 2018 compared to 26.0% in 2017. This decrease in Operating profit in 2018 is primarily due to a decrease in Gross profit (90 bps) and an increase in Selling, general and administrative expenses (10 bps), both as a percentage of Net sales. Excluding the items described above in 2017 and 2016, as applicable, Operating profit margin decreased 90 bps in 2017 compared to 2016, due to an increase in Selling, general and administrative expenses (110 bps), partially offset by an increase in Gross profit (20 bps), both as a percentage of Net sales.
| 2018 | 2017 | % Change | 2016 | % Change | ||||||||||||||
| Operating profit, GAAP | $ | 3,694 | $ | 3,707 | — | % | $ | 3,955 | (6 | )% | ||||||||
| Global Growth and Efficiency Program | 152 | 313 | 216 | |||||||||||||||
| Gain on sale of land in Mexico | — | — | (97 | ) | ||||||||||||||
| Charges for a litigation matter | — | — | 17 | |||||||||||||||
| Operating profit, non-GAAP | $ | 3,846 | $ | 4,020 | (4 | )% | $ | 4,091 | (2 | )% |
| 2018 | 2017 | Basis Point Change | 2016 | Basis Point Change | |||||||||||
| Operating profit margin, GAAP | 23.8 | % | 24.0 | % | (20 | ) | 26.0 | % | (200 | ) | |||||
| Global Growth and Efficiency Program | 0.9 | 2.0 | 1.4 | ||||||||||||
| Gain on sale of land in Mexico | — | — | (0.6 | ) | |||||||||||
| Charges for a litigation matter | — | — | 0.1 | ||||||||||||
| Operating profit margin, non-GAAP | 24.7 | % | 26.0 | % | (130 | ) | 26.9 | % | (90 | ) |
Non-Service Related Postretirement Costs
Non-service related postretirement costs were $87 in 2018 compared with $118 in 2017 and $118 in 2016. Non-service related postretirement costs included charges resulting from the Global Growth and Efficiency Program. Excluding these charges, Non-service related postretirement costs were $78 in 2018 compared to $98 in 2017 and $106 in 2016. The decreases in Non-service related postretirement costs in 2018 as compared to 2017 and 2017 as compared to 2016 were primarily due to decreases in interest costs.
| 2018 | 2017 | 2016 | ||||||||||
| Non-service related postretirement costs, GAAP | $ | 87 | $ | 118 | $ | 118 | ||||||
| Global Growth and Efficiency Program | (9 | ) | (20 | ) | (12 | ) | ||||||
| Non-service related postretirement costs, non-GAAP | $ | 78 | $ | 98 | $ | 106 |
Interest (Income) Expense, Net
Interest (income) expense, net was $143 in 2018 compared with $102 in 2017 and $99 in 2016. The increase in Interest (income) expense, net in 2018 as compared to 2017 and 2017 as compared to 2016 was primarily due to higher average interest rates on debt.
(Dollars in Millions Except Per Share Amounts)
Income Taxes
The effective income tax rate in 2018, 2017 and 2016 was 26.2%, 37.7% and 30.8%, respectively. As reflected in the table below, the non-GAAP effective income tax rate was 24.2% in 2018, 29.5% in 2017 and 31.3% in 2016. The decrease in the non-GAAP effective income tax rate in 2018 as compared to 2017 is primarily due to the enactment of the TCJA, as discussed in more detail below. The decrease in the non-GAAP effective income tax rate in 2017 as compared to 2016 is primarily due to the inclusion of excess tax benefits from stock-based compensation in the Provision for income taxes, as discussed in more detail below.
| 2018 | |||||||||||
| Income Before Income Taxes | Provision For Income Taxes(1) | Effective Income Tax Rate(2) | |||||||||
| As Reported GAAP | $ | 3,464 | $ | 906 | 26.2 | % | |||||
| Global Growth and Efficiency Program | 161 | 37 | (0.1 | ) | |||||||
| Benefit from a foreign tax matter | — | 15 | 0.4 | ||||||||
| U.S. tax reform | — | (80 | ) | (2.3 | ) | ||||||
| Non-GAAP | $ | 3,625 | $ | 878 | 24.2 | % |
| 2017 | |||||||||||
| Income Before Income Taxes | Provision For Income Taxes(1) | Effective Income Tax Rate(2) | |||||||||
| As Reported GAAP | $ | 3,487 | $ | 1,313 | 37.7 | % | |||||
| Global Growth and Efficiency Program | 333 | 87 | (1.0 | ) | |||||||
| U.S. tax reform | — | (275 | ) | (7.2 | ) | ||||||
| Non-GAAP | $ | 3,820 | $ | 1,125 | 29.5 | % |
| 2016 | |||||||||||
| Income Before Income Taxes | Provision For Income Taxes(1) | Effective Income Tax Rate(2) | |||||||||
| As Reported GAAP | $ | 3,738 | $ | 1,152 | 30.8 | % | |||||
| Global Growth and Efficiency Program | 228 | 59 | (0.3 | ) | |||||||
| Gain on sale of land in Mexico | (97 | ) | (34 | ) | (0.1 | ) | |||||
| Benefits from tax matters | — | 35 | 0.9 | ||||||||
| Charges for a litigation matter | 17 | 6 | — | ||||||||
| Non-GAAP | $ | 3,886 | $ | 1,218 | 31.3 | % |
| (1) | The income tax effect on non-GAAP items is calculated based upon the tax laws and statutory income tax rates applicable in the tax jurisdiction(s) of the underlying non-GAAP adjustment. |
| (2) | The impact of non-GAAP items on the Company’s effective tax rate represents the difference in the effective tax rate calculated with and without the non-GAAP adjustment on Income before income taxes and Provision for income taxes. |
(Dollars in Millions Except Per Share Amounts)
On December 22, 2017, the TCJA was enacted, which, among other things, lowered the U.S. corporate income tax rate to 21% from 35% and established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries. Beginning in 2018, the TCJA also requires a minimum tax on certain earnings generated by foreign subsidiaries while providing for tax-free repatriation of such earnings through a 100% dividends-received deduction. The Company’s effective income tax rate in 2017 included a provisional charge of $275, recorded in the fourth quarter of 2017, based on its initial analysis of the TCJA using information and estimates available as of February 15, 2018, the date on which the Company filed its Annual Report on Form 10-K for the year ended December 31, 2017. During 2018, the Company finalized its assessment of the impact of the TCJA and recognized an additional tax expense of $80 reflecting the impact of transition tax guidance issued by the U.S. Treasury and the update of certain estimates and calculations based on information available through the end of 2018. Any further guidance issued after December 31, 2018 may have an impact to the Company’s Provision for income tax in the period such guidance is effective.
The effective income tax rate in 2018 and 2017 also included $12 and $47, respectively, of stock compensation excess tax benefits in the Provision for income taxes as a result of the adoption of ASU No. 2016-09, “Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” effective January 1, 2017. See Note 11, Income Taxes to the Consolidated Financial Statements, for additional details.
The effective income tax rate in 2016 included a $210 U.S. income tax benefit principally related to changes in Venezuela’s foreign exchange regime implemented in March 2016. In order to fully utilize the $210 tax benefit in 2016, the Company repatriated an incremental $1,500 of earnings of foreign subsidiaries it previously considered indefinitely reinvested outside of the U.S., and accordingly, recorded a tax charge of $210.
The Company had taken a tax position in a foreign jurisdiction since 2002 that was challenged by the local tax authorities. In 2016, the Supreme Court in the foreign jurisdiction decided the matter in the Company’s favor for the years 2002 through 2005. Also in 2016, the Administrative Court in the foreign jurisdiction decided the matter in the Company’s favor for the years 2008 through 2011 by acknowledging the Supreme Court’s ruling for the years 2002 through 2005, which eliminated the possibility of future appeals. As a result, the Company recorded a tax benefit of $30, including interest, in 2016.
In March 2018, the lower courts ruled in the Company’s favor for the years 2006, 2007 and 2012 through 2014. The deadline for the local tax authorities to appeal has now passed, and the Company considers all outstanding disputes on this matter resolved. As a result, the Company recorded an additional tax benefit of $15, including interest.
The effective income tax rate in all years benefited from tax planning associated with the Company’s global business initiatives.
The Company expects its effective income tax rate in 2019 to be in the range of 25.5% to 26.5% both on a GAAP basis and excluding charges related to the Global Growth and Efficiency Program.
Net Income attributable to Colgate-Palmolive Company and Earnings per share, diluted
Net income attributable to Colgate-Palmolive Company was $2,400, or $2.75 per share on a diluted basis, in 2018 compared to $2,024, or $2.28 per share on a diluted basis, in 2017 and $2,441, or $2.72 per share on a diluted basis, in 2016. In 2018, 2017 and 2016, Net income attributable to Colgate-Palmolive Company included aftertax charges related to the Global Growth and Efficiency Program. In 2018 and 2017, Net income attributable to Colgate-Palmolive Company also included charges related to U.S. tax reform. In 2018, Net income attributable to Colgate-Palmolive Company also included a benefit from a foreign tax matter. In 2016, Net income attributable to Colgate-Palmolive Company also included charges for a litigation matter, a gain on sale of land in Mexico and benefits from tax matters.
(Dollars in Millions Except Per Share Amounts)
Excluding the items described above in all years, as applicable, Net income attributable to Colgate-Palmolive Company increased 2% to $2,590 in 2018 and Earnings per share, diluted increased 3% to $2.97, and Net income attributable to Colgate-Palmolive Company increased 1% to $2,545 in 2017, as compared to $2,522 in 2016, and Earnings per share, diluted increased 2% to $2.87 in 2017 from $2.81 in 2016.
| 2018 | |||||||||||||||||||||||
| Income Before Income Taxes | Provision For Income Taxes(1) | Net Income Including Noncontrolling Interests | Less: Income Attributable To Noncontrolling Interests | Net Income Attributable to Colgate-Palmolive Company | Diluted Earnings Per Share(2) | ||||||||||||||||||
| As Reported GAAP | $ | 3,464 | $ | 906 | $ | 2,558 | $ | 158 | $ | 2,400 | $ | 2.75 | |||||||||||
| Global Growth and Efficiency Program | 161 | 37 | 124 | (1 | ) | 125 | 0.15 | ||||||||||||||||
| Benefit from a foreign tax matter | — | 15 | (15 | ) | — | (15 | ) | (0.02 | ) | ||||||||||||||
| U.S. tax reform | — | (80 | ) | 80 | — | 80 | 0.09 | ||||||||||||||||
| Non-GAAP | $ | 3,625 | $ | 878 | $ | 2,747 | $ | 157 | $ | 2,590 | $ | 2.97 |
| 2017 | |||||||||||||||||||||
| Income Before Income Taxes | Provision For Income Taxes(1) | Net Income Including Noncontrolling Interests | Net Income Attributable to Colgate-Palmolive Company | Diluted Earnings Per Share(2) | |||||||||||||||||
| As Reported GAAP | $ | 3,487 | $ | 1,313 | $ | 2,174 | $ | 2,024 | $ | 2.28 | |||||||||||
| Global Growth and Efficiency Program | 333 | 87 | 246 | 246 | 0.28 | ||||||||||||||||
| U.S. tax reform | — | (275 | ) | 275 | 275 | 0.31 | |||||||||||||||
| Non-GAAP | $ | 3,820 | $ | 1,125 | $ | 2,695 | $ | 2,545 | $ | 2.87 |
| 2016 | |||||||||||||||||||||||
| Income Before Income Taxes | Provision For Income Taxes(1) | Net Income Including Noncontrolling Interests | Less: Income Attributable To Noncontrolling Interests | Net Income Attributable to Colgate-Palmolive Company | Diluted Earnings Per Share(2) | ||||||||||||||||||
| As Reported GAAP | $ | 3,738 | $ | 1,152 | $ | 2,586 | $ | 145 | $ | 2,441 | $ | 2.72 | |||||||||||
| Global Growth and Efficiency Program | 228 | 59 | 169 | 1 | 168 | 0.19 | |||||||||||||||||
| Gain on sale of land in Mexico | (97 | ) | (34 | ) | (63 | ) | — | (63 | ) | (0.07 | ) | ||||||||||||
| Benefits from tax matters | — | 35 | (35 | ) | — | (35 | ) | (0.04 | ) | ||||||||||||||
| Charges for a litigation matter | 17 | 6 | 11 | — | 11 | 0.01 | |||||||||||||||||
| Non-GAAP | $ | 3,886 | $ | 1,218 | $ | 2,668 | $ | 146 | $ | 2,522 | $ | 2.81 |
| (1) | The income tax effect on non-GAAP items is calculated based upon the tax laws and statutory income tax rates applicable in the tax jurisdiction(s) of the underlying non-GAAP adjustment. |
| (2) | The impact of non-GAAP adjustments on Diluted earnings per share may not necessarily equal the difference between “GAAP” and “non-GAAP” as a result of rounding. |
(Dollars in Millions Except Per Share Amounts)
Segment Results
The Company markets its products in over 200 countries and territories throughout the world in two product segments: Oral, Personal and Home Care; and Pet Nutrition. 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.
Oral, Personal and Home Care
North America
| 2018 | 2017 | % Change | 2016 | % Change | |||||||||||||||
| Net sales | $ | 3,348 | $ | 3,117 | 7.5 | % | $ | 3,183 | (2.0 | ) | % | ||||||||
| Operating profit | $ | 1,037 | $ | 1,043 | (1 | ) | % | $ | 1,087 | (4 | ) | % | |||||||
| % of Net sales | 31.0 | % | 33.5 | % | (250 | ) | bps | 34.2 | % | (70 | ) | bps |
Net sales in North America increased 7.5% in 2018 to $3,348, driven by volume growth of 6.5% and net selling price increases of 1.0%, while foreign exchange was flat. The Company’s professional skin care acquisitions increased volume by 5.0%. Organic sales in North America increased 2.5% in 2018.
The increase in organic sales in North America in 2018 versus 2017 was due to increases in Oral Care, Personal Care and Home Care organic sales. The increase in Oral Care was due to organic sales growth in the toothpaste and toothbrush categories. The increase in Personal Care was primarily due to organic sales growth in the liquid hand soap category. The increase in Home Care was due to organic sales growth in the liquid cleaner and fabric softener categories.
Net sales in North America decreased 2.0% in 2017 to $3,117, driven by net selling price decreases of 2.0%, while volume and foreign exchange were flat. Organic sales in North America decreased 2.0% in 2017.
Operating profit in North America decreased 1% in 2018 to $1,037, or 250 bps to 31.0% of Net sales. This decrease in Operating profit as a percentage of Net sales was due to a decrease in Gross profit (40 bps), an increase in Selling, general and administrative expenses (120 bps) and an increase in Other (income) expense, net (90 bps), all as a percentage of Net sales. This decrease in Gross profit was primarily due to higher raw and packaging material costs (220 bps), which were partially offset by cost savings from the Company’s funding-the-growth initiatives (160 bps). This increase in Selling, general and administrative expenses was due to higher overhead expenses (140 bps), primarily driven by increased logistics costs, which were partially offset by decreased advertising investment (20 bps). This increase in Other (income) expense, net was primarily due to the amortization of intangible assets resulting from the professional skin care acquisitions.
Operating profit in North America decreased 4% in 2017 to $1,043, or 70 bps to 33.5% of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to a decrease in Gross profit (40 bps) and an increase in Selling, general and administrative expenses (60 bps), both as a percentage of Net sales. This decrease in Gross profit was primarily driven by higher raw and packaging material costs (160 bps) and lower pricing due to increased in-store promotional activities, which were partially offset by cost savings from the Company’s funding-the-growth initiatives and the Global Growth and Efficiency Program (220 bps). This increase in Selling, general and administrative expenses was due to increased advertising investment (60 bps).
(Dollars in Millions Except Per Share Amounts)
Latin America
| 2018 | 2017 | % Change | 2016 | % Change | |||||||||||||||
| Net sales | $ | 3,605 | $ | 3,887 | (7.5 | ) | % | $ | 3,650 | 6.5 | % | ||||||||
| Operating profit | $ | 995 | $ | 1,171 | (15 | ) | % | $ | 1,139 | 3 | % | ||||||||
| % of Net sales | 27.6 | % | 30.1 | % | (250 | ) | bps | 31.2 | % | (110 | ) | bps |
Net sales in Latin America decreased 7.5% in 2018 to $3,605. Volume declines of 2.5% and negative foreign exchange of 6.5% were partially offset by net selling price increases of 1.5%. Volume declines in Brazil, Central America and Argentina were partially offset by volume gains in Greater Caribbean. Organic sales in Latin America decreased 1.0% in 2018.
The decrease in organic sales in Latin America in 2018 versus 2017 was driven by declines in Oral Care and Personal Care organic sales, partially offset by an increase in Home Care organic sales. The decline in Oral Care was due to a decline in organic sales in the toothpaste category, partially offset by organic sales growth in the manual toothbrush category. The decline in Personal Care was primarily due to a decline in organic sales in the bar soap category. The increase in Home Care was due to organic sales growth in the liquid cleaner, hand dish and fabric softener categories.
Net sales in Latin America increased 6.5% in 2017 to $3,887, driven by volume growth of 2.5%, net selling price increases of 3.0% and positive foreign exchange of 1.0%. Volume gains were led by Brazil, the Southern Cone and the Andean Region. Organic sales in Latin America increased 5.5% in 2017.
Operating profit in Latin America decreased 15% in 2018 to $995, or 250 bps to 27.6% of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to a decrease in Gross profit (220 bps) and an increase in Selling, general and administrative expenses (20 bps), both as a percentage of Net sales. This decrease in Gross profit was due to higher raw and packaging material costs (470 bps), which included foreign exchange transaction costs, which were partially offset by cost savings from the Company’s funding-the-growth initiatives (250 bps). This increase in Selling, general and administrative expenses was due to higher overhead expenses (40 bps), primarily driven by increased logistics costs, which were partially offset by decreased advertising investment (20 bps).
Operating profit in Latin America increased 3% in 2017 to $1,171, while as a percentage of Net sales it decreased 110 bps to 30.1% of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to an increase in Selling, general and administrative expenses (180 bps), partially offset by an increase in Gross profit (40 bps), both as a percentage of Net sales. This increase in Gross profit was mainly driven by cost savings from the Company’s funding-the-growth initiatives (170 bps) and higher pricing, which were partially offset by higher raw and packaging material costs (260 bps). This increase in Selling, general and administrative expenses was due to increased advertising investment (120 bps) and higher overhead expenses (60 bps).
Effective July 1, 2018, Argentina was designated as a hyper-inflationary economy under GAAP. Consequently, the functional currency for the Company’s Argentinian subsidiary is the U.S. dollar and the impact of Argentinian currency fluctuations has been and will be recorded in income. However, this designation has not had and is not expected to have a material impact on the Company’s Consolidated Financial Statements.
(Dollars in Millions Except Per Share Amounts)
Europe
| 2018 | 2017 | % Change | 2016 | % Change | |||||||||||||||
| Net sales | $ | 2,502 | $ | 2,394 | 4.5 | % | $ | 2,342 | 2.0 | % | |||||||||
| Operating profit | $ | 634 | $ | 605 | 5 | % | $ | 586 | 3 | % | |||||||||
| % of Net sales | 25.3 | % | 25.3 | % | — | bps | 25.0 | % | 30 | bps |
Net sales in Europe increased 4.5% in 2018 to $2,502, as volume growth of 2.5% and positive foreign exchange of 4.0% were partially offset by net selling price decreases of 2.0%. Volume gains were led by France, the United Kingdom and Italy. Organic sales in Europe increased 0.5% in 2018.
The increase in organic sales in Europe in 2018 versus 2017 was primarily due to an increase in Oral Care organic sales. The increase in Oral Care was driven by organic sales growth in the toothpaste category, partially offset by a decline in organic sales in the manual toothbrush category.
Net sales in Europe increased 2.0% in 2017 to $2,394, as volume growth of 2.0% and positive foreign exchange of 1.0% were partially offset by net selling price decreases of 1.0%. Volume gains were led by France, the Netherlands, Spain and Poland. Organic sales in Europe increased 1.0% in 2017.
Operating profit in Europe increased 5% in 2018 to $634, while as a percentage of Net sales it was 25.3%, even with 2017. Operating profit was even with 2017 as a decrease in Gross profit (20 bps) and an increase in Selling, general and administrative expenses (10 bps) were offset by a decrease in Other (income) expense, net (30 bps), all as a percentage of Net sales. This decrease in Gross profit was primarily due to higher raw and packaging material costs (180 bps) and lower pricing, which were partially offset by cost savings from the Company’s funding-the-growth initiatives (200 bps). This increase in Selling, general and administrative expenses was due to increased advertising investment (60 bps), which was partially offset by lower overhead expenses (50 bps).
Operating profit in Europe increased 3% in 2017 to $605, or 30 bps to 25.3% of Net sales. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross profit (30 bps) and a decrease in Selling, general and administrative expenses (20 bps), both as a percentage of Net sales. This increase in Gross profit was primarily due to cost savings from the Company’s funding-the-growth initiatives and the Global Growth and Efficiency Program (230 bps) and category sales mix, which were partially offset by higher raw and packaging material costs (230 bps), which included foreign exchange transaction costs, and lower pricing due to increased in-store promotional activities. This decrease in Selling, general and administrative expenses was due to lower overhead expenses (70 bps), which were partially offset by increased advertising investment (50 bps).
(Dollars in Millions Except Per Share Amounts)
Asia Pacific
| 2018 | 2017 | % Change | 2016 | % Change | |||||||||||||||
| Net sales | $ | 2,734 | $ | 2,781 | (1.5 | ) | % | $ | 2,796 | (0.5 | ) | % | |||||||
| Operating profit | $ | 777 | $ | 842 | (8 | ) | % | $ | 888 | (5 | ) | % | |||||||
| % of Net sales | 28.4 | % | 30.3 | % | (190 | ) | bps | 31.8 | % | (150 | ) | bps |
Net sales in Asia Pacific decreased 1.5% in 2018 to $2,734, as a result of volume declines of 1.5%, while net selling prices and foreign exchange were flat. Volume declines in the Greater China region and Thailand were partially offset by volume gains in India and the Philippines. Organic sales in Asia Pacific declined 1.5% in 2018.
The decrease in organic sales in 2018 versus 2017 was due to a decrease in Oral Care and Personal Care organic sales. The decrease in Oral Care was due to declines in organic sales in the toothpaste and manual toothbrush categories. The decrease in Personal Care was primarily due to declines in organic sales in the shampoo and bar soap categories.
Net sales in Asia Pacific decreased 0.5% in 2017 to $2,781, as a result of volume declines of 0.5%, while net selling prices and foreign exchange were flat. Volume declines in Australia, Thailand and India were partially offset by volume gains in the Philippines. Organic sales in Asia Pacific declined 0.5% in 2017.
Operating profit in Asia Pacific decreased 8% in 2018 to $777, or 190 bps to 28.4% of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to a decrease in Gross profit (80 bps) and an increase in Selling, general and administrative expenses (80 bps), both as a percentage of Net sales. This decrease in Gross profit was primarily due to higher raw and packaging material costs (320 bps), which were partially offset by cost savings from the Company’s funding-the-growth initiatives (270 bps). This increase in Selling, general and administrative expenses was due to higher overhead expenses (50 bps) and increased advertising investment (30 bps).
Operating profit in Asia Pacific decreased 5% in 2017 to $842, or 150 bps to 30.3% of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to a decrease in Gross profit (20 bps) and an increase in Selling, general and administrative expenses (120 bps), both as a percentage of Net sales. This decrease in Gross profit was primarily due to higher costs (290 bps), primarily driven by raw and packaging material costs, which were partially offset by cost savings from the Company’s funding-the-growth initiatives (250 bps). This increase in Selling, general and administrative expenses was due to higher overhead expenses (90 bps) and increased advertising investment (30 bps).
(Dollars in Millions Except Per Share Amounts)
Africa/Eurasia
| 2018 | 2017 | % Change | 2016 | % Change | |||||||||||||||
| Net sales | $ | 967 | $ | 983 | (1.5 | ) | % | $ | 960 | 2.5 | % | ||||||||
| Operating profit | $ | 173 | $ | 180 | (4 | ) | % | $ | 187 | (4 | ) | % | |||||||
| % of Net sales | 17.9 | % | 18.3 | % | (40 | ) | bps | 19.5 | % | (120 | ) | bps |
Net sales in Africa/Eurasia decreased 1.5% in 2018 to $967, as volume declines of 1.0% and negative foreign exchange of 4.0% were partially offset by net selling price increases of 3.5%. Volume declines in Russia, Turkey and South Africa were partially offset by volume gains in the Gulf States. Organic sales in Africa/Eurasia increased 2.5% in 2018.
The increase in organic sales in 2018 versus 2017 was primarily due to an increase in Oral Care organic sales, partially offset by a decline in Personal Care organic sales. The increase in Oral Care was due to organic sales growth in the toothpaste and manual toothbrush categories. The decrease in Personal Care was primarily due to declines in organic sales in the bar soap and underarm protection categories, partially offset by organic sales growth in the shower gel category.
Net sales in Africa/Eurasia increased 2.5% in 2017 to $983, as net selling price increases of 3.5% and positive foreign exchange of 3.5% were partially offset by volume declines of 4.5%. Volume declines in the Sub-Saharan Africa region, Turkey and South Africa were partially offset by volume gains in Russia. Organic sales in Africa/Eurasia declined 1.0% in 2017.
Operating profit in Africa/Eurasia decreased 4% in 2018 to $173, or 40 bps to 17.9% of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to a decrease in Gross Profit (130 bps), partially offset by a decrease in Selling, general and administrative expenses (70 bps), both as a percentage of Net sales. This decrease in Gross profit was mainly driven by higher raw and packaging material costs (430 bps), which included foreign exchange transaction costs, which were partially offset by cost savings from the Company’s funding-the-growth initiatives (110 bps) and higher pricing. The decrease in Selling, general and administrative expenses was due to lower overhead expenses (50 bps) and decreased advertising investment (20 bps).
Operating profit in Africa/Eurasia decreased 4% in 2017 to $180, or 120 bps to 18.3% of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to an increase in Selling, general and administrative expenses (260 bps), partially offset by an increase in Gross profit (160 bps), both as a percentage of Net sales. This increase in Gross profit was mainly driven by cost savings from the Company’s funding-the-growth initiatives (120 bps) and higher pricing, which were partially offset by higher raw and packaging material costs (100 bps). The increase in Selling, general and administrative expenses was due to increased advertising investment (310 bps), which was partially offset by lower overhead expenses (50 bps).
(Dollars in Millions Except Per Share Amounts)
Hill’s Pet Nutrition
| 2018 | 2017 | % Change | 2016 | % Change | |||||||||||||||
| Net sales | $ | 2,388 | $ | 2,292 | 4.0 | % | $ | 2,264 | 1.0 | % | |||||||||
| Operating profit | $ | 680 | $ | 677 | — | % | $ | 677 | — | % | |||||||||
| % of Net sales | 28.5 | % | 29.5 | % | (100 | ) | bps | 29.9 | % | (40 | ) | bps |
Net sales for Hill’s Pet Nutrition increased 4.0% in 2018 to $2,388, driven by volume growth of 1.5%, net selling price increases of 2.0% and positive foreign exchange of 0.5%. Volume gains were led by the United States and Australia. Organic sales in Hill’s Pet Nutrition increased 3.5% in 2018.
The increase in organic sales in 2018 versus 2017 was due to organic sales growth in the Prescription Diet and Advanced Nutrition categories, partially offset by a decline in organic sales in the Naturals category.
Net sales for Hill’s Pet Nutrition increased 1.0% in 2017 to $2,292, driven by net selling price increases of 1.5% and positive foreign exchange of 0.5%, partially offset by volume declines of 1.0%. Volume declines in the United States, Japan and Western and Eastern Europe were partially offset by volume gains in Australia and Latin America. The volume declines in the United States were attributable to trade disruption, while the volume declines in Japan were attributable to a continued contraction in the market. Organic sales in Hill’s Pet Nutrition increased 0.5% in 2017.
Operating profit in Hill’s Pet Nutrition increased to $680 in 2018 from $677 in 2017, while as a percentage of Net sales it decreased 100 bps to 28.5%. This decrease in Operating profit as a percentage of Net sales was due to a decrease in Gross profit (70 bps) and an increase in Other (income) expense, net (70 bps), partially offset by a decrease in Selling, general and administrative expenses (40 bps), all as a percentage of Net sales. This decrease in Gross profit was primarily due to higher raw and packaging material costs (300 bps), partially offset by cost savings from the Company’s funding-the-growth initiatives (150 bps) and higher pricing. This decrease in Selling, general and administrative expenses was due to lower overhead expenses (30 bps) and decreased advertising investment (10 bps). This increase in Other (income) expense, net was primarily due to the expiration of a foreign sales tax benefit.
Operating profit in Hill’s Pet Nutrition was $677 in 2017, even with 2016, while as a percentage of Net sales it decreased 40 bps to 29.5%. This decrease in Operating profit as a percentage of Net sales was primarily due to an increase in Selling, general and administrative expenses (90 bps), partially offset by an increase in Gross profit (60 bps), both as a percentage of Net sales. This increase in Gross profit was primarily due to cost savings from the Company’s funding-the-growth initiatives (170 bps) and higher pricing, partially offset by higher raw and packaging material costs (110 bps), net of foreign exchange transaction costs. This increase in Selling, general and administrative expenses was due to increased advertising investment (60 bps) and higher overhead expenses (30 bps).
(Dollars in Millions Except Per Share Amounts)
Corporate
| 2018 | 2017 | % Change | 2016 | % Change | ||||||||||||||
| Operating profit (loss) | $ | (602 | ) | $ | (811 | ) | (26 | ) | % | $ | (609 | ) | 33 | % |
Corporate operations include Corporate overhead costs, research and development costs, stock-based compensation expense related to stock options and restricted stock unit awards, restructuring and related implementation costs and gains and losses on sales of non-core product lines. The components of Operating profit (loss) for the Corporate segment are presented as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Global Growth and Efficiency Program | $ | (152 | ) | $ | (313 | ) | $ | (216 | ) | |||
| Gain on sale of land in Mexico | — | — | 97 | |||||||||
| Charges for a litigation matter | — | — | (17 | ) | ||||||||
| Corporate overhead costs and other, net | (450 | ) | (498 | ) | (473 | ) | ||||||
| Total Corporate Operating profit (loss) | $ | (602 | ) | $ | (811 | ) | $ | (609 | ) |
Excluding charges related to the Global Growth and Efficiency Program in 2018, 2017 and 2016, charges for a litigation matter in 2016 and the gain on sale of land in Mexico in 2016, Corporate Operating profit (loss) decreased in 2018 as compared to 2017, driven by lower Corporate overhead costs and other, net, primarily as a result of lower compensation expense.
Restructuring and Related Implementation Charges
Global Growth and Efficiency Program
In the fourth quarter of 2012, the Company commenced the Global Growth and Efficiency Program. The program was expanded in 2014 and expanded and extended in each of 2015 and 2017. The program runs through December 31, 2019.
Initiatives under the Global Growth and Efficiency Program are expected to help the Company ensure sustained solid worldwide growth in unit volume, organic sales, operating profit and earnings per share and to enhance its global leadership positions in its core businesses, producing significant benefits in the Company’s long-term business performance. The major objectives of the program include:
| ▪ | Becoming even stronger on the ground through the continued evolution and expansion of proven global and regional commercial capabilities, which have already been successfully implemented in a number of the Company’s operations around the world. |
| ▪ | Simplifying and standardizing how work gets done by increasing technology-enabled collaboration and taking advantage of global data and analytic capabilities, leading to smarter and faster decisions. |
| ▪ | Reducing structural costs to continue to increase the Company’s gross and operating profit. |
| ▪ | Building on Colgate’s current position of strength to enhance its leading market share positions worldwide and ensure sustained sales and earnings growth. |
(Dollars in Millions Except Per Share Amounts)
The initiatives under the Global Growth and Efficiency Program continue to be focused on the following areas:
| ▪ | Expanding Commercial Hubs – Building on the success of the hub structure implemented around the world, streamlining operations 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 – Optimizing the Company’s shared service organizational model in all regions of the world and continuing to streamline global functions to improve cost structure. |
| ▪ | 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. |
Implementation of the Global Growth and Efficiency Program remains on track and is in its final year. Savings, substantially all of which are expected to increase future cash flows, are projected to be in the range of $590 to $635 pretax ($550 to $575 aftertax) annually, once all projects are approved and implemented. Savings achieved in 2018 were in line with the Company’s previously disclosed estimate of $90 to $120 pretax ($100 to $125 aftertax). The Company expects savings in 2019 to be approximately $25 to $55 pretax ($40 to $60 aftertax). Cumulative pretax charges resulting from the Global Growth and Efficiency Program, once all phases are approved and implemented, are estimated to be in the range of $1,820 to $1,870 ($1,350 to $1,380 aftertax). The Company anticipates that pretax charges for 2019 will approximate $100 to $150 ($70 to $100 aftertax). It is expected that substantially all charges resulting from the Global Growth and Efficiency Program will be incurred by December 31, 2019.
The pretax charges resulting from the Global Growth and Efficiency Program are currently estimated to be comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits (45%); asset-related costs, primarily Incremental Depreciation and Asset Impairments (5%); and Other charges, which include contract termination costs, consisting primarily of related implementation charges resulting directly from exit activities (30%) and the implementation of new strategies (20%). Over the course of the Global Growth and Efficiency Program, it is currently estimated that approximately 80% of the charges will result in cash expenditures.
The Company expects that the cumulative pretax charges, once all projects are approved and implemented, will relate to initiatives undertaken in North America (15%), Europe (20%), Latin America (5%), Asia Pacific (5%), Africa/Eurasia (5%), Hill’s Pet Nutrition (10%) and Corporate (40%), which includes substantially all of the costs related to the implementation of new strategies, noted above, on a global basis. The Company expects that, when it has been fully implemented, the Global Growth and Efficiency Program will have contributed a net reduction of approximately 4,000 to 4,400 positions from the Company’s global employee workforce.
For the years ended December 31, 2018, 2017 and 2016, restructuring and related implementation charges are reflected in the Consolidated Statements of Income as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Cost of sales | $ | 31 | $ | 75 | $ | 46 | ||||||
| Selling, general and administrative expenses | 33 | 86 | 77 | |||||||||
| Other (income) expense, net | 88 | 152 | 93 | |||||||||
| Non-service related postretirement costs | 9 | 20 | 12 | |||||||||
| Total Global Growth and Efficiency Program charges, pretax | $ | 161 | $ | 333 | $ | 228 | ||||||
| Total Global Growth and Efficiency Program charges, aftertax | $ | 125 | $ | 246 | $ | 168 |
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.
(Dollars in Millions Except Per Share Amounts)
Total charges incurred for the Global Growth and Efficiency Program relate to initiatives undertaken by the following reportable operating segments:
| Program-to-date | |||||||||||
| 2018 | 2017 | 2016 | Accumulated Charges | ||||||||
| North America | 18 | % | 23 | % | 35 | % | 18 | % | |||
| Latin America | 10 | % | 2 | % | 5 | % | 4 | % | |||
| Europe | (2 | )% | 21 | % | 12 | % | 20 | % | |||
| Asia Pacific | 13 | % | 5 | % | 4 | % | 4 | % | |||
| Africa/Eurasia | 5 | % | 3 | % | 14 | % | 6 | % | |||
| Hill’s Pet Nutrition | 19 | % | 6 | % | 7 | % | 8 | % | |||
| Corporate | 37 | % | 40 | % | 23 | % | 40 | % | |||
| Total | 100 | % | 100 | % | 100 | % | 100 | % |
Since the inception of the Global Growth and Efficiency Program in the fourth quarter of 2012, the Company has incurred cumulative pretax charges of $1,722 ($1,278 aftertax) in connection with the implementation of various projects as follows:
| Cumulative Charges | |||
| as of December 31, 2018 | |||
| Employee-Related Costs | $ | 681 | |
| Incremental Depreciation | 92 | ||
| Asset Impairments | 52 | ||
| Other | 897 | ||
| Total | $ | 1,722 |
The majority of costs incurred since inception relate to the following projects: the implementation of the Company’s overall hubbing strategy; the extension of shared business services and streamlining of global functions; the consolidation of facilities; the closing of the Morristown, New Jersey personal care facility; the simplification and streamlining of the Company’s research and development capabilities and oral care supply chain, both in Europe; redesigning the European commercial organization; restructuring how the Company will provide future retirement benefits to substantially all of the U.S.-based employees participating in the Company’s defined benefit retirement plan by shifting them to the Company’s defined contribution plan; and the implementation of a Corporate efficiencies program.
(Dollars in Millions Except Per Share Amounts)
The following table summarizes the activity for the restructuring and related implementation charges, in the respective periods, discussed above and the related accruals:
| Employee-Related Costs | Incremental Depreciation | Asset Impairments | Other | Total | ||||||||||||||||
| Balance at January 1, 2016 | $ | 84 | $ | — | $ | — | $ | 131 | $ | 215 | ||||||||||
| Charges | 61 | 9 | 20 | 138 | 228 | |||||||||||||||
| Cash payments | (84 | ) | — | — | (153 | ) | (237 | ) | ||||||||||||
| Charges against assets | (4 | ) | (9 | ) | (20 | ) | — | (33 | ) | |||||||||||
| Foreign exchange | (1 | ) | — | — | — | (1 | ) | |||||||||||||
| Other | — | — | — | 9 | 9 | |||||||||||||||
| Balance at December 31, 2016 | $ | 56 | $ | — | $ | — | $ | 125 | $ | 181 | ||||||||||
| Charges | 163 | 10 | 9 | 151 | 333 | |||||||||||||||
| Cash payments | (74 | ) | — | — | (170 | ) | (244 | ) | ||||||||||||
| Charges against assets | (21 | ) | (10 | ) | (9 | ) | — | (40 | ) | |||||||||||
| Foreign exchange | 3 | — | — | 1 | 4 | |||||||||||||||
| Other | — | — | — | — | — | |||||||||||||||
| Balance at December 31, 2017 | $ | 127 | $ | — | $ | — | $ | 107 | $ | 234 | ||||||||||
| Charges | 53 | 2 | 16 | 90 | 161 | |||||||||||||||
| Cash payments | (107 | ) | — | — | (60 | ) | (167 | ) | ||||||||||||
| Charges against assets | (9 | ) | (2 | ) | (16 | ) | — | (27 | ) | |||||||||||
| Foreign exchange | (4 | ) | — | — | — | (4 | ) | |||||||||||||
| Other | — | — | — | 5 | 5 | |||||||||||||||
| Balance at December 31, 2018 | $ | 60 | $ | — | $ | — | $ | 142 | $ | 202 |
Employee-Related Costs primarily include severance and other termination benefits and are calculated based on long-standing benefit practices, local statutory requirements and, in certain cases, voluntary termination arrangements. Employee-Related Costs also include pension and other retiree benefit enhancements amounting to $9, $21 and $4 for the years ended December 31, 2018, 2017 and 2016, respectively, 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 and other retiree benefit liabilities (see Note 10, Retirement Plans and Other Retiree Benefits to the Consolidated Financial Statements).
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 inventories and assets held for sale or disposal to their fair value based on amounts expected to be realized. Charges against assets within Asset Impairments are net of cash proceeds pertaining to the sale of certain assets.
Other charges consist primarily of charges resulting directly from exit activities and the implementation of new strategies as a result of the Global Growth and Efficiency Program. These charges for the years ended December 31, 2018, 2017 and 2016 include third-party incremental costs related to the development and implementation of new business and strategic initiatives of $42, $145 and $116, respectively, and contract termination costs and charges resulting directly from exit activities of $48, $6 and $21, respectively. These charges were expensed as incurred. Also included in Other charges for the years ended December 31, 2018, 2017 and 2016 are other exit costs of $0, $0 and $1, respectively, related to the consolidation of facilities.
(Dollars in Millions Except Per Share Amounts)
Non-GAAP Financial Measures
This Annual Report on Form 10-K discusses certain financial measures on both a GAAP and a non-GAAP basis. The Company uses the non-GAAP financial measures described below internally in its budgeting process, to evaluate segment and overall operating performance and as a factor in determining compensation. The Company believes that these non-GAAP financial measures are useful in evaluating the Company’s underlying business performance and trends; however, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.
Net sales growth (GAAP) and organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments) (non-GAAP) are discussed in this Annual Report on Form 10-K. Management believes the organic sales growth measure provides investors and analysts with useful supplemental information regarding the Company’s underlying sales trends by presenting sales growth excluding, as applicable, the external factor of foreign exchange, as well as the impact of acquisitions and divestments. A reconciliation of organic sales growth to Net sales growth for the years ended December 31, 2018 and 2017 is provided below.
Worldwide Gross profit, Gross profit margin, Selling, general and administrative expenses, Selling, general and administrative expenses as a percentage of Net sales, Other (income) expense, net, Operating profit, Operating profit margin, Non-service related postretirement costs, effective income tax rate, Net income attributable to Colgate-Palmolive Company and Earnings per share on a diluted basis are discussed in this Annual Report on Form 10-K both on a GAAP basis and excluding, as applicable, charges resulting from the Global Growth and Efficiency Program, a benefit from a foreign tax matter, charges related to U.S. tax reform, a gain on the sale of land in Mexico, benefits from tax matters and charges for a litigation matter (non-GAAP). These non-GAAP financial measures exclude items that, either by their nature or amount, management would not expect to occur as part of the Company’s normal business on a regular basis, such as restructuring charges, charges for certain litigation and tax matters, gains and losses from certain divestitures and certain unusual, non-recurring items. Investors and analysts use these financial measures in assessing the Company’s business performance and management believes that presenting these financial measures on a non-GAAP basis provides them with useful supplemental information to enhance their understanding of the Company’s underlying business performance and trends. These non-GAAP financial measures also enhance the ability to compare period-to-period financial results. A reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP financial measures for the years ended December 31, 2018, 2017 and 2016 is presented within the applicable section of Results of Operations.
(Dollars in Millions Except Per Share Amounts)
The following tables provide a quantitative reconciliation of Net sales growth to organic sales growth for each of the years ended December 31, 2018 and 2017 versus the prior year:
| Year ended December 31, 2018 | Net Sales Growth (GAAP) | Foreign Exchange Impact | Acquisitions and Divestments Impact | Organic Sales Growth (Non-GAAP) |
| Oral, Personal and Home Care | ||||
| North America | 7.5% | —% | 5.0% | 2.5% |
| Latin America | (7.5)% | (6.5)% | —% | (1.0)% |
| Europe | 4.5% | 4.0% | —% | 0.5% |
| Asia Pacific | (1.5)% | —% | —% | (1.5)% |
| Africa/Eurasia | (1.5)% | (4.0)% | —% | 2.5% |
| Total Oral, Personal and Home Care | —% | (1.5)% | 1.5% | —% |
| Pet Nutrition | 4.0% | 0.5% | —% | 3.5% |
| Total Company | 0.5% | (1.0)% | 1.0% | 0.5% |
| Year ended December 31, 2017 | Net Sales Growth (GAAP) | Foreign Exchange Impact | Acquisitions and Divestments Impact | Organic Sales Growth (Non-GAAP) |
| Oral, Personal and Home Care | ||||
| North America | (2.0)% | —% | —% | (2.0)% |
| Latin America | 6.5% | 1.0% | —% | 5.5% |
| Europe | 2.0% | 1.0% | —% | 1.0% |
| Asia Pacific | (0.5)% | —% | —% | (0.5)% |
| Africa/Eurasia | 2.5% | 3.5% | —% | (1.0)% |
| Total Oral, Personal and Home Care | 2.0% | 1.0% | —% | 1.0% |
| Pet Nutrition | 1.0% | 0.5% | —% | 0.5% |
| Total Company | 1.5% | 0.5% | —% | 1.0% |
Market Share Information
Management uses market share information as a key indicator to monitor business health and performance. References to market share in this Annual Report on Form 10-K are based on a combination of consumption and market share data provided by third-party vendors, primarily Nielsen, and internal estimates. All market share references represent the percentage of the dollar value of sales of our products, relative to all product sales in the category in the countries in which the Company competes and purchases data (excluding Venezuela from all periods).
Market share data is subject to limitations on the availability of up-to-date information. The Company measures year-to-date market shares from January 1 of the relevant year through the most recent period for which market share data is available, which typically reflects a lag time of one or two months. We believe that the third-party vendors we use to provide data are reliable, but we have not verified the accuracy or completeness of the data or any assumptions underlying the data. In addition, market share information calculated by the Company may be different from market share information calculated by other companies due to differences in category definitions, the use of data from different countries, internal estimates and other factors.
(Dollars in Millions Except Per Share Amounts)
Liquidity and Capital Resources
The Company expects cash flow from operations and debt issuances will be sufficient to meet foreseeable business operating and recurring cash needs (including for debt service, dividends, capital expenditures, charges resulting from the Global Growth and Efficiency Program and stock repurchases). The Company believes its strong cash generation and financial position should continue to allow it broad access to global credit and capital markets.
Cash Flow
Net cash provided by operations was $3,056 in 2018, compared to $3,054 in 2017 and $3,141 in 2016. Net cash provided by operations for 2018 increased as compared to 2017 primarily due to lower income tax payments, partially offset by an increase in working capital. The decrease in 2017 as compared to 2016 was primarily due to the timing of income tax payments.
The Company defines working capital as the difference between current assets (excluding Cash and cash equivalents and marketable securities, the latter of which is reported in Other current assets) and current liabilities (excluding short-term debt). The Company continues to be tightly focused on working capital. The Company’s working capital as a percentage of Net sales was (1.7)% in 2018 as compared to (2.0)% in 2017.
In the fourth quarter of 2012, the Company commenced the Global Growth and Efficiency Program. The program was expanded in 2014 and expanded and extended in each of 2015 and 2017. The program runs through December 31, 2019.
Implementation of the Global Growth and Efficiency Program remains on track and is in its final year. Including the most recent expansion, total program charges resulting from the Global Growth and Efficiency Program are estimated to be in the range of $1,820 to $1,870 ($1,350 to $1,380 aftertax). Approximately 80% of total program charges resulting from the Global Growth and Efficiency Program are expected to result in cash expenditures. Savings from the Global Growth and Efficiency Program, substantially all of which are expected to increase future cash flows, are projected to be in the range of $590 to $635 pretax ($550 to $575 aftertax) annually, once all projects are approved and implemented. Savings achieved in 2018 were in line with the Company’s previously disclosed estimate of $90 to $120 pretax ($100 to $125 aftertax).
The Company anticipates that pretax charges for 2019 will approximate $100 to $150 ($70 to $100 aftertax). The Company expects savings in 2019 to amount to approximately $25 to $55 pretax ($40 to $60 aftertax). It is anticipated that cash requirements for the Global Growth and Efficiency Program will be funded from operating cash flows. Approximately 70% of the restructuring accrual at December 31, 2018 is expected to be paid before year-end 2019.
Investing activities used $1,170 of cash in 2018, compared to $471 and $499 during 2017 and 2016, respectively. Investing activities in 2018 include the Company’s acquisition of the outstanding equity interests of PCA Skin and Elta MD, professional skin care businesses, for aggregate cash consideration of approximately $730. Purchases of marketable securities and investments decreased in 2018 to $169 from $347 in 2017. Proceeds from the sale of marketable securities and investments decreased in 2018 to $156 from $391 in 2017.
In September 2016, the Company’s Mexican subsidiary completed the sale to the United States of America of the Mexico City site on which its commercial operations, technology center and soap production facility were previously located and received $60 as the third and final installment of the sale price. The total sale price (including the third installment and the previously received first and second installments) was $120. The Company recognized a pretax gain of $97 ($63 aftertax) in the third quarter of 2016, net of costs primarily related to site preparation.
Capital expenditures in 2018 were $436, a decrease from $553 in 2017 and $593 in 2016. Capital expenditures decreased in 2018 primarily due to lower spending on manufacturing facilities and capital projects related to the Global Growth and Efficiency Program. Capital expenditures for 2019 are expected to be approximately 2.5% to 3.0% of Net sales. The Company continues to focus its capital spending on projects that are expected to yield high aftertax returns.
(Dollars in Millions Except Per Share Amounts)
Financing activities used $2,679 of cash during 2018 compared to $2,450 and $2,233 during 2017 and 2016, respectively. The increase in cash used in 2018 as compared to 2017 was primarily due to higher net payments on debt and lower proceeds from the exercise of stock options. The increase in cash used in 2017 as compared to 2016 was primarily due to lower net proceeds from the issuance of debt and higher purchases of treasury shares.
Long-term debt, including the current portion, decreased to $6,354 as of December 31, 2018, as compared to $6,566 as of December 31, 2017 and total debt decreased to $6,366 as of December 31, 2018 as compared to $6,577 as of December 31, 2017. The Company’s debt issuances support its capital structure strategy objectives of funding its business and growth initiatives while minimizing its risk-adjusted cost of capital. During the fourth quarter of 2017, the Company issued $400 of five-year notes at a fixed rate of 2.25%. During the third quarter of 2017, the Company issued $500 of thirty-year notes at a fixed rate of 3.70%. The debt issuances in 2017 were under the Company’s shelf registration statement. Proceeds from the debt issuances in 2017 were used for general corporate purposes, which included the retirement of commercial paper borrowings.
At December 31, 2018, the Company had access to unused domestic and foreign lines of credit of $3,023 (including under the facility discussed below) and could also issue medium-term notes pursuant to an effective shelf registration statement. In November 2018, the Company amended and restated its five-year revolving credit facility, on substantially similar terms, for a five-year term expiring November 2023 and increasing the facility’s capacity to $2,650. Commitment fees related to the credit facility are not material.
Domestic and foreign commercial paper outstanding was $534 and $24 as of December 31, 2018 and December 31, 2017, respectively. The average daily balances outstanding of commercial paper in 2018 and 2017 were $1,773 and $1,606, respectively. The Company classifies commercial paper and certain current maturities of notes payable as long-term debt when it has the intent and ability to refinance such obligations on a long-term basis, including, if necessary, by utilizing its line of credit that expires in November 2023.
The following is a summary of the Company’s commercial paper and global short-term borrowings as of December 31, 2018 and 2017:
| 2018 | 2017 | |||||||||||||||||
| Weighted Average Interest Rate | Maturities | Outstanding | Weighted Average Interest Rate | Maturities | Outstanding | |||||||||||||
| Payable to banks | 5.3 | % | 2019 | $ | 12 | 2.8 | % | 2018 | $ | 11 | ||||||||
| Commercial paper | 2.5 | % | 2019 | 534 | 1.5 | % | 2018 | 24 | ||||||||||
| Total | $ | 546 | $ | 35 |
Certain of the agreements with respect to the Company’s bank borrowings contain financial and other covenants as well as cross-default provisions. Noncompliance with these requirements could ultimately result in the acceleration of amounts owed. The Company is in full compliance with all such requirements and believes the likelihood of noncompliance is remote. See Note 6, Long-Term Debt and Credit Facilities to the Consolidated Financial Statements for further information about the Company’s long-term debt and credit facilities.
Dividend payments in 2018 were $1,591, an increase from $1,529 in 2017 and $1,508 in 2016. Dividend payments increased to $1.66 per share in 2018 from $1.59 per share in 2017 and $1.55 per share in 2016. In the first quarter of 2018, the Company’s Board increased the quarterly common stock cash dividend to $0.42 per share from $0.40 per share, effective in the second quarter of 2018.
The Company repurchases shares of its common stock in the open market and in private transactions to maintain its targeted capital structure and to fulfill certain requirements of its compensation and benefit plans. On June 18, 2018, the Board authorized the repurchase of shares of the Company’s common stock having an aggregate purchase price of up to $5,000 under the 2018 Program, which replaced a previously authorized share repurchase program. The Board also has authorized share repurchases on an ongoing basis to fulfill certain requirements of the Company’s compensation and benefit programs. The shares are repurchased from time to time in open market or privately negotiated transactions at the Company’s discretion, subject to market conditions, customary blackout periods and other factors.
(Dollars in Millions Except Per Share Amounts)
Aggregate share repurchases in 2018 consisted of 8.9 million common shares under the 2018 Program, 8.7 million common shares under the 2015 Program and 1.1 million common shares to fulfill the requirements of compensation and benefit plans, for a total purchase price of $1,238. Aggregate repurchases in 2017 consisted of 18.3 million common shares under the 2015 Program and 0.9 million common shares to fulfill the requirements of compensation and benefit plans, for a total purchase price of $1,399. Aggregate repurchases in 2016 consisted of 18.3 million common shares under the 2015 Program and 1.0 million common shares to fulfill the requirements of compensation and benefit plans, for a total purchase price of $1,335.
Cash and cash equivalents decreased $809 during 2018 to $726 at December 31, 2018, compared to $1,535 at December 31, 2017, primarily due to the acquisitions of PCA Skin and Elta MD and reduced levels of debt. Cash and cash equivalents held by the Company’s foreign subsidiaries was $651 and $1,467, respectively, at December 31, 2018 and 2017.
In 2016, in order to fully utilize a $210 U.S. income tax benefit principally related to changes in Venezuela’s foreign exchange regime, the Company decided to repatriate $1,500 of earnings of foreign subsidiaries it previously considered indefinitely reinvested outside of the U.S., and accordingly, recorded a tax charge of $210.
The following represents the scheduled maturities of the Company’s contractual obligations as of December 31, 2018:
| Total | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | ||||||||||||||||||||||
| Long-term debt including current portion(1) | $ | 4,748 | $ | — | $ | 249 | $ | 298 | $ | 886 | $ | 893 | $ | 2,422 | ||||||||||||||
| Net cash interest payments on long-term debt(2) | 1,993 | 148 | 143 | 136 | 121 | 92 | 1,353 | |||||||||||||||||||||
| Leases | 666 | 193 | 165 | 123 | 102 | 51 | 32 | |||||||||||||||||||||
| Purchase obligations(3) | 440 | 179 | 151 | 96 | 4 | 2 | 8 | |||||||||||||||||||||
| U.S. tax reform payments | 219 | — | — | 9 | 25 | 46 | 139 | |||||||||||||||||||||
| Total | $ | 8,066 | $ | 520 | $ | 708 | $ | 662 | $ | 1,138 | $ | 1,084 | $ | 3,954 |
| (1) | The Company classifies commercial paper and notes maturing within the next 12 months as long-term debt when it has the intent and ability to refinance such obligations on a long-term basis. The amounts in this table exclude such obligations. |
| (2) | Includes the net interest payments on fixed and variable rate debt and associated interest rate swaps. Interest payments associated with floating rate instruments are based on management’s best estimate of projected interest rates for the remaining term of variable rate debt. |
| (3) | The Company had outstanding contractual obligations with suppliers at the end of 2018 for the purchase of raw, packaging and other materials and services in the normal course of business. These purchase obligation amounts represent only those items which are based on agreements that are legally binding and that specify all significant terms including minimum quantity, price and term and do not represent total anticipated purchases. |
Long-term liabilities associated with the Company’s postretirement plans are excluded from the table above due to the uncertainty of the timing of these cash disbursements. The amount and timing of cash funding related to these benefit plans will generally depend on local regulatory requirements, various economic assumptions (the most significant of which are detailed in “Critical Accounting Policies and Use of Estimates” below) and voluntary Company contributions. Based on current information, the Company is not required to make a mandatory contribution to its qualified U.S. pension plan in 2019. Management’s best estimate of voluntary contributions the Company will make to its U.S. postretirement plans for the year ending December 31, 2019 is approximately $100. In addition, total benefit payments to be paid to participants for the year ending December 31, 2019 from the Company’s assets are estimated to be approximately $61.
Additionally, liabilities for unrecognized income tax benefits are excluded from the table above as the Company is unable to reasonably predict the ultimate amount or timing of a settlement of such liabilities. See Note 11, Income Taxes to the Consolidated Financial Statements for more information.
As more fully described in Part I, Item 3 “Legal Proceedings” and Note 13, Commitments and Contingencies to the Consolidated Financial Statements, the Company has commitments and contingencies with respect to lawsuits, environmental matters, taxes and other matters arising in the ordinary course of business.
(Dollars in Millions Except Per Share Amounts)
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated special purpose entities.
Managing Foreign Currency, Interest Rate, Commodity Price and Credit Risk Exposure
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, 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. The Company’s treasury and risk management policies prohibit the use of derivatives for speculative purposes and leveraged derivatives for any purpose.
The sensitivity of our financial instruments to market fluctuations is discussed below. See Note 2, Summary of Significant Accounting Policies and Note 7, Fair Value Measurements and Financial Instruments to the Consolidated Financial Statements for further discussion of derivatives and hedging policies and fair value measurements.
Foreign Exchange Risk
As the Company markets its products in over 200 countries and territories, it is exposed to currency fluctuations related to manufacturing and selling its products in currencies other than the U.S. dollar. The Company manages its foreign currency exposures through a combination of cost-containment measures, sourcing strategies, selling price increases and the hedging of certain costs in an effort to minimize the impact on earnings of foreign currency rate movements. See the “Results of Operations” section above for discussion of the foreign exchange impact on Net sales in each operating segment.
The assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates with resulting translation gains and losses accumulated in a separate component of shareholders’ equity. Income and expense items are translated into U.S. dollars at average rates of exchange prevailing during the year.
The Company primarily utilizes foreign currency contracts, including forward and swap contracts, option contracts, foreign and local currency deposits and local currency borrowings to hedge portions of its exposures relating to foreign currency purchases, assets and liabilities created in the normal course of business and the net investment in certain foreign subsidiaries. The duration of foreign currency contracts generally does not exceed 12 months and the contracts are valued using observable market rates.
The Company’s foreign currency forward contracts that qualify for cash flow hedge accounting resulted in a net unrealized gain of $9 and a net unrealized loss of $9 at December 31, 2018 and 2017, respectively. Changes in the fair value of cash flow hedges are recorded in Other comprehensive income (loss) and are reclassified into earnings in the same period or periods during which the underlying hedged transaction is recognized in earnings. At the end of 2018, an unfavorable 10% change in exchange rates would have resulted in a net unrealized loss of $69.
(Dollars in Millions Except Per Share Amounts)
Interest Rate Risk
The Company manages its mix of fixed and floating rate debt against its target with debt issuances and by entering into interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. The notional amount, interest payment and maturity date of the swaps generally match the principal, interest payment and maturity date of the related debt, and the swaps are valued using observable benchmark rates.
Based on year-end 2018 variable rate debt levels, a 1% increase in interest rates would have increased Interest (income) expense, net by $19 in 2018.
Commodity Price Risk
The Company is exposed to price volatility related to raw materials used in production, such as resins, pulp, essential oils, tropical oils, tallow, poultry, corn and soybeans. The Company manages its raw material exposures through a combination of cost containment measures, ongoing productivity initiatives and the limited use of commodity hedging contracts. Futures contracts are used on a limited basis, primarily in the Hill’s Pet Nutrition segment, to manage volatility related to anticipated raw material inventory purchases of certain traded commodities.
At December 31, 2018 and 2017 the Company’s open commodity derivative contracts, which qualify for cash flow hedge accounting, were not material. At the end of 2018, an unfavorable 10% change in commodity futures prices would have resulted in a net unrealized loss of $2.
Credit Risk
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 with diverse, credit-worthy counterparties based upon both strong credit ratings and other credit considerations.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles–Goodwill and Other–Internal–Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance is effective for the Company on a prospective or retrospective basis beginning on January 1, 2020, with early adoption permitted. The Company elected to adopt this guidance early, beginning on January 1, 2019 on a prospective basis and does not expect the guidance to have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation–Retirement Benefits–Defined Benefit Plans–General (Topic 715): Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans.” This new guidance removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and requires certain additional disclosures. This new guidance is effective for the Company on a retrospective basis beginning in the year ending December 31, 2020, with early adoption permitted. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.
(Dollars in Millions Except Per Share Amounts)
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This new guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in
unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosure requirements in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement–Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which permits the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “TCJA” or “U.S. tax reform”) from Accumulated other comprehensive income (loss) to Retained earnings. This new guidance is effective for the Company beginning on January 1, 2019, with early adoption permitted, and must be applied either in the period of adoption or retrospectively to periods in which the effects of the TCJA are recognized. The Company elected to adopt this new guidance early, beginning on January 1, 2018, and reclassified $163 during the first quarter of 2018.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” amending the eligibility criteria for hedged items and transactions to expand an entity’s ability to hedge nonfinancial and financial risk components. The new guidance eliminates the requirement to separately measure and present hedge ineffectiveness and aligns the presentation of hedge gains and losses with the underlying hedge item. The new guidance also simplifies the hedge documentation and hedge effectiveness assessment requirements. The new guidance is effective for the Company beginning on January 1, 2019, with early adoption permitted. The amended presentation and disclosure requirements must be adopted on a prospective basis, while any amendments to cash flow and net investment hedge relationships that exist on the date of adoption must be applied on a “modified retrospective” basis, meaning a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the year of adoption. The new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In October 2018, the FASB issued ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as Benchmark Interest Rate for Hedge Accounting Purposes.” The new guidance permits use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The new guidance is effective for the Company beginning on January 1, 2019, concurrently with the adoption of ASU 2017-12, with early adoption permitted. The new guidance is required to be applied on a prospective basis. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a stock-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance was effective for the Company on a prospective basis beginning on January 1, 2018 and did not impact the Company’s Consolidated Financial Statements, as it is not the Company’s practice to change either the terms or the conditions of stock-based payment awards once they are granted.
(Dollars in Millions Except Per Share Amounts)
In March 2017, the FASB issued ASU No. 2017-07, “Compensation–Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” changing the presentation of the net periodic benefit cost on the Statement of Income and limiting the amount of net periodic benefit cost eligible for capitalization to assets. The new guidance permits only the service cost component of net periodic benefit cost to be eligible for capitalization. The new guidance also requires entities to present the service cost component of net periodic benefit cost together with compensation costs arising from services rendered by employees during the period. The non-service related components of net periodic benefit cost, which include interest, expected return on assets, amortization of prior service costs and actuarial gains and losses, are required to be presented outside of Operating profit. The line item or items used to present the other components of net periodic benefit cost must be disclosed in the Notes to the Consolidated Financial Statements, if not separately described on the Statement of Income. The new presentation requirement was adopted on a “full retrospective” basis, meaning the standard is applied to all of the periods presented in the financial statements, while the limitation on capitalization was adopted on a prospective basis. Effective January 1, 2018, as required, the Company adopted this standard on a retrospective basis. As permitted by the new guidance, the Company used the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the basis for applying the retrospective presentation requirements. As a result, for all periods presented, only the service related component of pension and other postretirement benefit costs is included in Operating profit. For the years ended December 31, 2017 and 2016, the Company reclassified $118 and $118, respectively, of non-service related components of pension and other postretirement costs, which was previously deducted from Operating profit, to a new line item, “Non-service related postretirement costs,” which is below Operating profit. Adoption of this standard had no effect on Net income attributable to Colgate-Palmolive Company, Earnings per common share or Cash flow.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard is effective for the Company on a prospective basis beginning on January 1, 2020, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which provides additional guidance on evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the new guidance would define this as an asset acquisition; otherwise, the entity then evaluates whether the asset meets the
requirement that a business include, at a minimum, an input and substantive process that together significantly contribute to the ability to create outputs. The guidance was effective for the Company on a prospective basis beginning on January 1, 2018. This new guidance did not have an impact on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. The guidance was effective for the Company on January 1, 2018. This new guidance did not have an impact on the Company’s Consolidated Financial Statements.
(Dollars in Millions Except Per Share Amounts)
In February 2016, the FASB issued its final standard on lease accounting, ASU No. 2016-02, “Leases (Topic 842),” which superseded Topic 840, “Leases.” The new accounting standard was effective for the Company beginning on January 1, 2019 and required the recognition on the balance sheet of right-of-use assets and lease liabilities for all long-term leases, including operating leases, and enhanced disclosures about the Company’s leasing arrangements. Substantially all of the Company’s leases are considered operating leases and, as such, under accounting standards in effect at December 31, 2018, were not recognized on the Company’s Consolidated Balance Sheets as of December 31, 2018 and 2017. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” to clarify the implementation guidance and ASU No. 2018-11, “Leases (Topic 842) Targeted Improvements.” This updated guidance provided an optional transition method, which allows for the initial application of the new accounting standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. The Company adopted the new standard beginning on January 1, 2019 and elected the optional transition method with no restatement of prior period amounts. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components and to exclude short-term leases from its Consolidated Balance Sheet. The Company’s adoption of the new standard is expected to result in the recognition of right-of-use assets of approximately $450 and liabilities of approximately $575, with no material cumulative effect adjustment to its Consolidated Balance Sheet as of the date of adoption. Adoption of the new standard will not have a material impact on the Company’s Consolidated Statements of Income or Cash Flows.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The amendment to the standard was effective for the Company beginning on January 1, 2018 and did not have an impact on the Company’s Consolidated Financial Statements.
In May 2014, the FASB and the International Accounting Standards Board issued their final converged standard on revenue recognition. The standard, issued as ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by the FASB, provides a comprehensive revenue recognition model for all contracts with customers and supersedes current revenue recognition guidance. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to its customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The new standard also includes enhanced disclosures. During 2016, the FASB issued several accounting updates (ASU No. 2016-08, 2016-10 and 2016-12) to clarify implementation guidance and correct unintended application of the guidance. The standard allows for either full retrospective adoption or modified retrospective adoption. The Company adopted the new standard on January 1, 2018, on a “modified retrospective” basis, which did not have a material impact on the Company’s Consolidated Financial Statements. As required, the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the 2018 opening balance of retained earnings. Results for periods beginning on or after January 1, 2018 are presented under Topic 606, “Revenue from Contracts with Customers,” while prior period amounts are not adjusted and continue to be reported in accordance with the prior accounting guidance under Topic 605, “Revenue Recognition.”
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment and make estimates. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could ultimately differ from those estimates. The accounting policies that are most critical in the preparation of the Company’s Consolidated Financial Statements are those that are both important to the presentation of the Consolidated Financial Statements and require significant or complex judgments and estimates on the part of management. The Company’s critical accounting policies are reviewed periodically with the Audit Committee of the Board of Directors.
(Dollars in Millions Except Per Share Amounts)
In certain instances, accounting principles generally accepted in the United States of America allow for the selection of alternative accounting methods. The Company’s significant policies that involve the selection of alternative methods are accounting for shipping and handling costs for the years ended December 31, 2017 and 2016 and inventories.
| ▪ | The Company accounts for shipping and handling costs, primarily related to warehousing and outbound freight, as fulfillment costs and reports such costs in the Consolidated Statements of Income as a component of Selling, general and administrative expenses. |
Prior to ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which the Company adopted on January 1, 2018, shipping and handling costs could be reported as either a component of Cost of sales or Selling, general and administrative expenses. Prior to 2018, the Company also reported such costs as a component of Selling, general and administrative expenses. Accordingly, the Company’s Gross profit margin was not comparable with the gross profit margin of those companies that include shipping and handling charges in cost of sales. If such costs had been included in Cost of sales, the Company’s Gross profit margin would have decreased by 760 bps and 750 bps in 2017 and 2016, respectively, with no impact on reported earnings.
| ▪ | The Company accounts for inventories using both the first-in, first-out (“FIFO”) method (75% of inventories) and the LIFO method (25% of inventories). There would have been no material impact on reported earnings for 2018, 2017 or 2016 had all inventories been accounted for under the FIFO method. |
The areas of accounting that involve significant or complex judgments and estimates are pensions and other retiree benefit cost assumptions, stock-based compensation, asset impairments, uncertain tax positions, tax valuation allowances, legal and other contingency reserves.
| ▪ | In pension accounting, the most significant actuarial assumptions are the discount rate and the long-term rate of return on plan assets. The discount rate used to measure the benefit obligation for U.S. defined benefit plans was 4.38%, 3.73% and 4.27% as of December 31, 2018, 2017 and 2016, respectively. The discount rate used to measure the benefit obligation for other U.S. postretirement plans was 4.43%, 3.80% and 4.41% as of December 31, 2018, 2017 and 2016, respectively. Discount rates used for the U.S. and international defined benefit and other postretirement plans are based on a yield curve constructed from a portfolio of high-quality bonds whose projected cash flows approximate the projected benefit payments of the plans. The assumed long-term rate of return on plan assets for U.S. plans was 6.60% as of December 31, 2018 and 2017 and 6.80% as of December 31, 2016. In determining the long-term rate of return, the Company considers the nature of the plans’ investments and the historical rate of return. |
Average annual rates of return for the U.S. plans for the most recent 1-year, 5-year, 10-year, 15-year and 25-year periods were (5)%, 5%, 8%, 6% and 7%, respectively. In addition, the current assumed rate of return for the U.S. plans is based upon the nature of the plans’ investments with a target asset allocation of approximately 60% in fixed income securities, 22% in equity securities and 18% in real estate and other investments. A 1% change in the assumed rate of return on plan assets of the U.S. pension plans would impact future Net income attributable to Colgate-Palmolive Company by approximately $12. A 1% change in the discount rate for the U.S. pension plans would impact future Net income attributable to Colgate-Palmolive Company by approximately $3. A third assumption is the long-term rate of compensation increase, a change in which would partially offset the impact of a change in either the discount rate or the long-term rate of return. This rate was 3.50% as of December 31, 2018, 2017 and 2016. Refer to Note 10, Retirement Plans and Other Retiree Benefits to the Consolidated Financial Statements for further discussion of the Company’s pension and other postretirement plans.
| ▪ | The assumption requiring the most judgment in accounting for other postretirement benefits is the medical cost trend rate. The Company reviews external data and its own historical trends for health care costs to determine the medical cost trend rate. The assumed rate of increase for the U.S. postretirement benefit plans is 6.00% for 2019, declining to 4.75% by 2024 and remaining at 4.75% for the years thereafter. The effect on the total of service and interest cost components of a 1% increase in the assumed long-term medical cost trend rate would decrease Net income attributable to Colgate-Palmolive Company by $7. |
(Dollars in Millions Except Per Share Amounts)
| ▪ | The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock units, based on the fair value of those awards at the date of grant. The Company uses the Black-Scholes-Merton (“Black-Scholes”) option pricing model to estimate the fair value of stock option awards. The weighted-average estimated fair value of each stock option award granted in the year ended December 31, 2018 was $9.48. The Black-Scholes model uses various assumptions to estimate the fair value of stock option awards. These assumptions include the expected term of stock option awards, expected volatility rate, risk-free interest rate and expected dividend yield. While these assumptions do not require significant judgment, as the significant inputs are determined from historical experience or independent third-party sources, changes in these inputs could result in significant changes in the fair value of stock option awards. A one-year change in expected term would result in a change in fair value of approximately 8%. A 1% change in volatility would change fair value by approximately 5%. |
| ▪ | Goodwill and indefinite life intangible assets, such as the Company’s global brands, are subject to impairment tests at least annually. The Company performs either a quantitative or qualitative assessment to determine the fair value of its reporting units for goodwill and fair value of its indefinite life intangible assets. The asset impairment analysis is generally performed using an income method, which requires several estimates, including future cash flows consistent with management’s strategic plans, sales growth rates, foreign exchange rates and the selection of a discount rate. For the Company’s goodwill impairment analysis, fair value is also determined using the market approach, which is generally derived from metrics of comparable publicly traded companies. When multiple valuation methodologies are used in a reporting unit’s goodwill impairment analysis, the Company performs a qualitative analysis comparing the fair value of a reporting unit under each method to assess its reasonableness and ensure consistency of results. Other qualitative factors the Company considers, in addition to those quantitative measures discussed above, include assessments of general macroeconomic conditions, industry-specific considerations and historical financial performance. |
The estimated fair value of the Company’s intangible assets substantially exceeds the recorded carrying value, except for the intangible assets acquired in the Sanex acquisition in 2011 and the PCA Skin and Elta MD acquisitions in 2018, which were recorded at fair value. The estimated fair value of the Company’s reporting units also substantially exceeds the recorded carrying value. Therefore, it is not reasonably likely that significant changes in these estimates would occur that would result in an impairment charge related to these assets.
The Company applies the ‘relief from royalty method’ to estimate the fair value of the intangible assets acquired in the Sanex acquisition (the “Sanex intangible assets”). Under this method, the fair value of an intangible asset is calculated as the present value of future royalty savings generated as a result of owning the intangible asset. The key assumptions used in determining the Company’s estimate of the fair value of the Sanex intangible assets include royalty rates, discount rates and long-term revenue growth rates. Estimating long-term revenue growth rates requires significant judgment by management in areas such as future economic conditions, product pricing and consumer tastes and preferences. In determining an appropriate discount rate, the Company considers the current interest rate environment and its estimated cost of capital. As a result of the analysis, the Company determined that the fair value of the Sanex intangible assets exceeded their carrying value by more than 10% and concluded that such excess was reasonable considering the brand’s relatively recent acquisition. Based on this, the brand’s recent performance and the Company’s future plans for it, the Company does not believe there is a significant risk of impairment related to the Sanex intangible assets. Given the recent acquisitions of PCA Skin and Elta MD, the performance of PCA Skin and Elta MD since acquisition and the Company’s future plans for these brands, the Company does not believe there is a significant risk of impairment related to either PCA Skin’s and Elta MD’s intangible assets.
Asset impairment analysis related to certain fixed assets in connection with the Global Growth and Efficiency Program requires management’s best estimate of net realizable values.
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| ▪ | On December 22, 2017, the TCJA was enacted, which, among other things, lowered the U.S. corporate income tax rate to 21% from 35% and established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries. Beginning in 2018, the TCJA also requires a minimum tax on certain earnings generated by foreign subsidiaries while providing for tax-free repatriation of such earnings through a 100% dividends-received deduction. |
The Company’s effective income tax rate in 2017 included a provisional charge of $275, recorded in the fourth quarter of 2017, based on its initial analysis of the TCJA using information and estimates available as of February 15, 2018, the date on which the Company filed its Annual Report on Form 10-K for the year ended December 31, 2017. The provisional charge was comprised of $451 related to the one-time deemed repatriation of accumulated earnings of foreign subsidiaries and related withholding taxes and $20 related primarily to the remeasurement of net deferred tax assets as a result of the reduction in the corporate income tax rate, which were offset by $196 of income taxes which had been previously provided for planned repatriations of undistributed earnings of foreign subsidiaries. As a result, applicable U.S. and foreign taxes have been provided on substantially all of the Company’s accumulated earnings of foreign subsidiaries previously considered indefinitely reinvested.
During 2018, the Company finalized its assessment of the impact of the TCJA and recognized an additional tax expense of $80 reflecting the impact of transition tax guidance issued by the U.S. Treasury and the update of certain estimates and calculations based on information available through the end of 2018. Any further guidance issued after December 31, 2018 may have an impact to the Company’s Provision for income tax in the period such guidance is effective.
| ▪ | The recognition and measurement of uncertain tax positions involves consideration of the amounts and probabilities of various outcomes that could be realized upon ultimate resolution. |
| ▪ | Tax valuation allowances are established to reduce deferred tax assets, such as tax loss carryforwards, to net realizable value. Factors considered in estimating net realizable value include historical results by tax jurisdiction, carryforward periods, income tax strategies and forecasted taxable income. |
| ▪ | Legal and other contingency reserves are based on management’s assessment of the risk of potential loss, which includes consultation with outside legal counsel and other advisors. Such assessments are reviewed each period and revised based on current facts and circumstances, if necessary. While it is possible that the Company’s cash flows and results of operations in a particular quarter or year could be materially affected by the impact of such contingencies, based on current knowledge it is the opinion of management that these matters will not have a material effect on the Company’s financial position, or its ongoing results of operations or cash flows. Refer to Note 13, Commitments and Contingencies to the Consolidated Financial Statements for further discussion of the Company’s contingencies. |
The Company generates revenue through the sale of well-known consumer products to trade customers under established trading terms. While the recognition of revenue and receivables requires the use of estimates, there is a short time frame (typically less than 60 days) between the shipment of product and cash receipt, thereby reducing the level of uncertainty in these estimates. Refer to Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements for further description of the Company’s significant accounting policies.
(Dollars in Millions Except Per Share Amounts)
Cautionary Statement on Forward-Looking Statements
This Annual Report on Form 10-K may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases that set forth anticipated results based on management’s current plans and assumptions. Such statements may relate, for example, to sales or volume growth, net selling price increases, organic sales growth, profit or profit margin growth, earnings per share growth, financial goals, the impact of foreign exchange volatility, cost-reduction plans including the Global Growth and Efficiency Program, tax rates, U.S. tax reform, new product introductions, commercial investment levels, acquisitions and divestitures, or legal or tax proceedings, among other matters. These statements are made on the basis of the Company’s views and assumptions as of this time and the Company undertakes no obligation to update these statements whether as a result of new information, future events or otherwise, except as required by law or by the rules and regulations of the SEC. Moreover, the Company does not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. The Company cautions investors that any such forward-looking statements are not guarantees of future performance and that actual events or results may differ materially from those statements. Actual events or results may differ materially because of factors that affect international businesses and global economic conditions, as well as matters specific to the Company and the markets it serves, including the uncertain economic environment in different countries and its effect on consumer spending habits, increased competition and evolving competitive practices, foreign currency rate fluctuations, exchange controls, price or profit controls, labor relations, changes in foreign or domestic laws, or regulations or their interpretation, political and fiscal developments, including changes in trade, tax and immigration policies, disruptions in global supply chain, the availability and cost of raw and packaging materials, the ability to maintain or increase selling prices as needed, the ability to implement the Global Growth and Efficiency Program as planned or differences between the actual and the estimated costs or savings under such program, changes in the policies of retail trade customers, the emergence of new sales channels, the growth of e-commerce and the changing retail landscape, the ability to continue lowering costs, the ability to complete acquisitions and divestitures as planned, the ability to successfully integrate acquired businesses, and the uncertainty of the outcome of legal proceedings, whether or not the Company believes they have merit. For information about these and other factors that could impact the Company’s business and cause actual results to differ materially from forward-looking statements, refer to Part I, Item 1A “Risk Factors.”
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