Item 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, “we,” 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, we are tightly focused on two product segments: Oral, Personal and Home Care; and Pet Nutrition. Within these segments, we follow a closely defined business strategy to grow our key product categories and increase our overall market share. Within the categories in which we compete, we prioritize our 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, we are organized along geographic lines with management teams having responsibility for the business and financial results in each region. We compete in more than 200 countries and territories worldwide with established businesses in all regions contributing to our sales and profitability. Approximately 70% of our Net sales are generated from markets outside the U.S., with approximately 50% of our 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 our 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 primarily to a variety of traditional and eCommerce retailers, wholesalers and distributors. Through Hill’s Pet Nutrition, we also compete on a worldwide basis in the pet nutrition market, selling products principally through authorized pet supply retailers, veterinarians and eCommerce retailers.

On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include net sales (including volume, pricing and foreign exchange components), organic sales growth (net sales growth excluding, 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. In addition, we review market share data to assess how our brands are performing within their categories on a global and regional basis. The monitoring of these indicators and our Code of Conduct and corporate governance practices help to maintain business health and strong internal controls. For additional information regarding non-GAAP financial measures and the Company's use of market share data and the limitations of such data, see “Non-GAAP Financial Measures” and "Market Share Information" below.

To achieve our business and financial objectives, we are focused on innovating our core businesses; improving our brand building activities with an elevated brand purpose model and the use of equity advertising; innovating to gain market share in high growth segments and adjacencies; expanding into new channels and markets; maximizing growth online; and investing to drive consumption in growing populations. We continue to develop initiatives to build strong relationships with consumers, dental, veterinary and skin health professionals and traditional and eCommerce retailers. In addition, we continue to invest behind our brands, not just in terms of advertising, but also to build key growth capabilities in areas such as innovation and data and analytics. We also continue to broaden our eCommerce offerings, including direct-to-consumer and subscription services. We continue to believe that 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. We are also working to integrate our sustainability strategy across our organization.

We are also changing the way we work to drive growth and how we approach innovation to respond to the dynamic retail landscape and the evolving preferences of our customers and consumers. The retail landscape, the ease of new entrants into the market in many of our categories and the evolving preferences of our customers and consumers demand that we work differently and faster in an agile, authentic and culturally relevant manner to drive innovation.

(Dollars in Millions Except Per Share Amounts)

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 our funding-the-growth initiatives, we seek to become even more effective and efficient throughout our 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. We also continue to prioritize our investments in high growth segments within our Oral Care, Personal Care and Pet Nutrition businesses, including by expanding our portfolio in premium skin health.

(Dollars in Millions Except Per Share Amounts)

Significant Items Impacting Comparability

On September 19, 2019, the Company acquired Laboratoires Filorga Cosmétiques S.A. (“Filorga”), a skin health business, for cash consideration of €1,548 (approximately $1,712). Filorga is a premium anti-aging skin health brand focused primarily on facial care. The acquisition was financed with a combination of debt and cash. This acquisition is part of our strategy to focus on high growth segments within our Oral Care, Personal Care and Pet Nutrition businesses, including by expanding our portfolio in premium skin health. See Note 3, Acquisitions to the Consolidated Financial Statements for additional information.

In December 2019, the Swiss government enacted changes to its corporate tax regime, which included, among other items, the repeal of certain preferential tax regimes and an increase to the cantonal tax rate for future periods. Additionally, the government provided transition rules which allowed companies to record goodwill for tax purposes, partially offsetting the impact on cash taxes of the higher cantonal rate over the next ten years. As a result of these changes, the Company recorded an estimated net benefit of $29 to the Provision for income taxes.

In 2019, the Company received a favorable judgment regarding certain value-added tax previously paid in Brazil. As a result of the favorable judgment, during the fourth quarter of 2019, the Company filed an application with the Brazilian government to recover value-added tax previously paid and recorded a benefit of $30 pretax ($20 aftertax). The recovery will be utilized to offset corporate income tax payments in Brazil in future periods.

In January 2018, the Company acquired all of the outstanding equity interests of Physicians Care Alliance, LLC and Elta MD Holdings, Inc., professional skin health businesses, for aggregate cash consideration of approximately $730. See Note 3, Acquisitions to the Consolidated Financial Statements for additional information.

As a result of the enactment of the Tax Cuts and Jobs Act (the “TCJA” or “U.S. tax reform”), 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.

Our restructuring program, known as the “Global Growth and Efficiency Program,” concluded on December 31, 2019. The program’s initiatives were designed to help us ensure sustained solid worldwide growth in unit volume, organic sales, operating profit and earnings per share and to enhance our global leadership positions in our core businesses. Substantially all initiatives under the program were implemented as of December 31, 2019.

The initiatives under the Global Growth and Efficiency Program 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 have been realized, are projected to be in the range of $640 to $660 pretax ($580 to $590 aftertax) annually. Substantially all of the savings are expected to increase future cash flows. Total pretax charges resulting from the Global Growth and Efficiency Program were $1,854 pretax ($1,380 aftertax), in line with the previously disclosed range.

In 2019 and 2018, we incurred aftertax costs of $102 and $125, 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.

(Dollars in Millions Except Per Share Amounts)

Effective January 1, 2019, as required by the Financial Accounting Standards Board ("FASB"), the Company adopted ASU No. 2016-02, "Leases (Topic 842)," which superseded Topic 840, "Leases," which was further modified in ASU No. 2018-10, "Codification Improvements to Topic 842, Leases," ASU No. 2018-11, "Leases (Topic 842) Targeted Improvements" and ASU No. 2019-01 "Leases (Topic 842) Codification Improvements" to clarify the implementation guidance. The new accounting standard required the recognition on the balance sheet of right-of-use assets and leases liabilities for all long-term leases, including operating leases. The Company elected the optional transition method and adopted the new guidance on January 1, 2019, on a modified retrospective basis, 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, leases 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 resulted in the recognition of right-of-use assets of $458 and liabilities of $574, with no material cumulative effect adjustment to equity as of the date of adoption. In connection with the adoption of this guidance, as required, the Company reclassified certain restructuring reserves incurred in connection with the Global Growth and Efficiency Program (see Note 4, Restructuring and Related Implementation Charges to the Consolidated Financial Statements for additional information) and deferred rent liabilities as reductions to lease assets. Adoption of the new standard did not have a material impact on the Company's Consolidated Statements of Income or Cash Flows. See Note 15, Leases to the Consolidated Financial Statements for additional information.

(Dollars in Millions Except Per Share Amounts)

Outlook

Looking forward, we expect global macroeconomic, political and market conditions to remain challenging. Although we have seen improvement in category growth rates, we expect category growth rates to remain below historical levels. While the global marketplace in which we operate has always been highly competitive, we continue to experience heightened competitive activity in certain markets from strong local competitors, from other large multinational companies, some of which have greater resources than we do, and from new entrants into the market in many of our categories. Such activities have included more aggressive product claims and marketing challenges, as well as increased promotional spending and geographic expansion. We have also been negatively affected by changes in the policies or practices of our retail trade customers in key markets, such as inventory de-stocking, limitations on access to shelf space or delisting of our products. In addition, the retail landscape in many of our markets continues to be impacted by the rapid growth of eCommerce 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 eCommerce and the emergence of alternative retail channels have created and may continue to create pricing pressures and/or adversely affect our relationships with our key retailers. In addition, given that approximately 70% of our Net sales originate in markets outside the U.S., we have experienced and will likely continue to experience volatile foreign currency fluctuations and higher raw and packaging material costs. While we have taken, and will continue to take, measures to mitigate the effect of these conditions, should they persist, they could adversely affect our future results. In addition, although we are taking steps to mitigate the impact of the novel coronavirus on our business, we expect it will negatively impact our business and results of operations in the near term. Because this situation is continuing to develop, the full extent of the impact is not yet known and will depend on, among other things, the duration of quarantines and other travel restrictions, both within China and into and out of China, and the degree to which the virus spreads beyond currently affected geographies. For more information about factors that could impact our business see Part I, Item 1A "Risk Factors."

In summary, we believe we are well prepared to meet the challenges ahead due to our strong financial condition, experience operating in challenging environments and continued focus on our 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. Our commitment to these priorities, together with the strength of our global brands, our broad international presence in both developed and emerging markets and cost-saving initiatives, such as our funding-the-growth initiatives, should position us well to increase shareholder value over the long term.

(Dollars in Millions Except Per Share Amounts)

Results of Operations

This section of this Annual Report on Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Annual Report on Form 10-K can be found in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Net Sales

Worldwide Net sales were $15,693 in 2019, up 1.0% from 2018, as volume growth of 2.5% and net selling price increases of 2.0% were partially offset by negative foreign exchange of 3.5%. The Company’s acquisition of Filorga increased volume by 0.5%. Organic sales (Net sales excluding, as applicable, the impact of foreign exchange, acquisitions and divestments), a non-GAAP financial measure as discussed below, increased 4.0% in 2019.

Net sales in the Oral, Personal and Home Care product segment were $13,168 in 2019, even with 2018, as volume growth of 2.5% and net selling price increases of 1.5% were offset by negative foreign exchange of 4.0%. The Company’s acquisition of Filorga increased volume by 0.5%. Organic sales in the Oral, Personal and Home Care product segment increased 3.5% in 2019.

The increase in organic sales in 2019 versus 2018 was due to increases in Oral Care, Personal Care and Home Care organic sales. The increase in Oral Care was primarily due to organic sales growth in the toothpaste category. The increase in Personal Care was primarily due to organic sales growth in the skin health, body wash, bar soap, shampoo and underarm protection categories, partially offset by a decline in organic sales 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.

The Company’s share of the global toothpaste market was 41.1% for full year 2019, down 0.7 share points from full year 2018, and its share of the global manual toothbrush market was 31.6% for full year 2019, down 0.5 share points from full year 2018. Full year 2019 market shares in toothpaste were flat in Europe and down in all other operating units versus full year 2018. In the manual toothbrush category, full year 2019 market shares were down in all operating units versus full year 2018. For additional information regarding the Company’s use of market share data and limitations of such data, see “Market Share Information” below.

Net sales for Hill’s Pet Nutrition were $2,525 in 2019, an increase of 6.0% from 2018, driven by volume growth of 3.5% and net selling price increases of 4.0%, partially offset by negative foreign exchange of 1.5%. Organic sales for Hill’s Pet Nutrition increased 7.5% in 2019.

The increase in organic sales in 2019 versus 2018 was primarily due to increases in organic sales in the Science Diet and Prescription Diet categories.

(Dollars in Millions Except Per Share Amounts)

Gross Profit/Margin

Worldwide Gross profit increased 1% to $9,325 in 2019 from $9,231 in 2018. Gross profit in both periods included charges resulting from the Global Growth and Efficiency Program. Excluding these charges in both periods and acquisition-related costs in 2019, Gross profit increased to $9,336 in 2019 from $9,262 in 2018, reflecting an increase of $90 resulting from higher Net sales, partially offset by a decrease of $16 resulting from lower Gross profit margin.

Worldwide Gross profit margin was 59.4% in 2019, even with 2018. Excluding charges resulting from the Global Growth and Efficiency Program in both periods and acquisition-related costs in 2019, Gross profit margin decreased by 10 basis points (bps) to 59.5% in 2019, from 59.6% in 2018. This decrease in Gross profit margin was primarily due to higher raw and packaging material costs (300 bps), which included foreign exchange transaction costs, largely offset by cost savings from the Company’s funding-the-growth initiatives (220 bps) and higher pricing (70 bps).

20192018
Gross profit, GAAP$9,325$9,231
Global Growth and Efficiency Program831
Acquisition-related costs3—
Gross profit, non-GAAP$9,336$9,262
20192018Basis Point Change
Gross profit margin, GAAP59.4%59.4%—
Global Growth and Efficiency Program0.10.2
Acquisition-related costs——
Gross profit margin, non-GAAP59.5%59.6%(10)

(Dollars in Millions Except Per Share Amounts)

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $5,575 in 2019 from $5,389 in 2018. Selling, general and administrative expenses in both periods included charges resulting from the Global Growth and Efficiency Program. Excluding these charges in both periods, Selling, general and administrative expenses increased to $5,515 in 2019 from $5,356 in 2018, reflecting increased advertising investment of $104 and higher overhead expenses of $55.

Selling, general and administrative expenses as a percentage of Net sales increased to 35.5% in 2019 from 34.7% in 2018. Excluding charges resulting from the Global Growth and Efficiency Program in both periods, Selling, general and administrative expenses as a percentage of Net sales were 35.1% in 2019, an increase of 60 bps as compared to 2018. This increase in 2019 was due to increased advertising investment (60 bps) as a percentage of Net sales. In 2019, advertising investment increased as a percentage of Net sales to 10.8% from 10.2% in 2018 or 6.5% in absolute terms to $1,694 as compared with $1,590 in 2018.

20192018
Selling, general and administrative expenses, GAAP$5,575$5,389
Global Growth and Efficiency Program(60)(33)
Selling, general and administrative expenses, non-GAAP$5,515$5,356
20192018Basis Point Change
Selling, general and administrative expenses as a percentage of Net sales, GAAP35.5%34.7%80
Global Growth and Efficiency Program(0.4)(0.2)
Selling, general and administrative expenses as a percentage of Net sales, non-GAAP35.1%34.5%60

(Dollars in Millions Except Per Share Amounts)

Other (Income) Expense, Net

Other (income) expense, net was $196 and $148 in 2019 and 2018, respectively. Other (income) expense, net in both periods included charges related to the Global Growth and Efficiency Program. Other (income) expense, net in 2019 also included acquisition-related costs and the benefit related to a value-added tax matter in Brazil.

20192018
Other (income) expense, net, GAAP$196$148
Global Growth and Efficiency Program(57)(88)
Acquisition-related costs(21)—
Value-added tax matter in Brazil30—
Other (income) expense, net, non-GAAP$148$60

Excluding the items described above in both periods, as applicable, Other (income) expense, net was $148 in 2019 and $60 in 2018, comprised of the following:

20192018
Amortization of intangible assets6259
Equity income(9)(10)
Write-off of certain investments and fixed assets511
Charges for a change in go-to-market strategy in certain countries15—
Other, net2910
Total Other (income) expense, net$148$60

(Dollars in Millions Except Per Share Amounts)

Operating Profit

Operating profit decreased 4% to $3,554 in 2019 from $3,694 in 2018.

In 2019 and 2018, Operating profit included charges resulting from the Global Growth and Efficiency Program. In 2019, Operating profit also included acquisition-related costs and a benefit related to a value-added tax matter in Brazil. Excluding these items in both periods, as applicable, Operating profit in 2019 decreased 4% compared to 2018, due to a decrease in Gross profit and increases in both Selling, general and administrative expenses and Other (income) expense.

Operating profit margin was 22.6% in 2019, a decrease of 120 bps compared with 23.8% in 2018. Excluding charges resulting from the Global Growth and Efficiency Program in both periods and acquisition-related costs and a benefit related to a value-added tax matter in Brazil in 2019, Operating profit margin decreased 130 bps to 23.4% in 2019 compared to 24.7% in 2018. This decrease in Operating profit in 2019 was due to a decrease in Gross profit (10 bps) and increases in Selling, general and administrative expenses (60 bps) and Other (income) expense, net (60 bps), all as a percentage of Net sales.

20192018% Change
Operating profit, GAAP$3,554$3,694(4)%
Global Growth and Efficiency Program125152
Acquisition-related costs24—
Value-added tax matter in Brazil(30)—
Operating profit, non-GAAP$3,673$3,846(4)%
20192018Basis Point Change
Operating profit margin, GAAP22.6%23.8%(120)
Global Growth and Efficiency Program0.80.9
Acquisition-related costs0.2—
Value-added tax matter in Brazil(0.2)—
Operating profit margin, non-GAAP23.4%24.7%(130)

Non-Service Related Postretirement Costs

Non-service related postretirement costs were $108 in 2019 compared to $87 in 2018. Non-service related postretirement costs in both periods included charges resulting from the Global Growth and Efficiency Program. Excluding these charges in both periods, Non-service related postretirement costs were $101 in 2019 compared to $78 in 2018. The increase in Non-service related postretirement costs in 2019 as compared to 2018 was primarily due to a lower expected return on plan assets and increased interest costs.

20192018
Non-service related postretirement costs, GAAP$108$87
Global Growth and Efficiency Program(7)(9)
Non-service related postretirement costs, non-GAAP$101$78

Interest (Income) Expense, Net

Interest (income) expense, net was $145 in 2019 compared with $143 in 2018. The increase in Interest (income) expense, net in 2019 as compared to 2018 was primarily due to lower interest income on investments held outside the United States.

(Dollars in Millions Except Per Share Amounts)

Income Taxes

The effective income tax rate was 23.4% in 2019 and 26.2% in 2018. As reflected in the table below, the non-GAAP effective income tax rate was 24.1% in 2019 and 24.2% in 2018.

2019
Income Before Income TaxesProvision For Income Taxes(1)Effective Income Tax Rate(2)
As Reported GAAP$3,301$77423.4%
Global Growth and Efficiency Program13230—
Acquisition-related costs244—
Value-added tax matter in Brazil(30)(10)(0.1)
Swiss income tax reform—290.8
Non-GAAP$3,427$82724.1%
2018
Income Before Income TaxesProvision For Income Taxes(1)Effective Income Tax Rate(2)
As Reported GAAP$3,464$90626.2%
Global Growth and Efficiency Program16137(0.1)
Benefit from a foreign tax matter—150.4
U.S. tax reform—(80)(2.3)
Non-GAAP$3,625$87824.2%
(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.

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.

The effective income tax rate in all years benefited from tax planning associated with the Company’s global business initiatives.

(Dollars in Millions Except Per Share Amounts)

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

Net income attributable to Colgate-Palmolive Company was $2,367, or $2.75 per share on a diluted basis, in 2019 compared to $2,400, or $2.75 per share on a diluted basis, in 2018. In 2019 and 2018, Net income attributable to Colgate-Palmolive Company included aftertax charges related to the Global Growth and Efficiency Program. In 2019, Net income attributable to Colgate-Palmolive Company also included aftertax acquisition-related costs, an aftertax benefit related to a value-added tax matter in Brazil and a tax benefit related to Swiss income tax reform. In 2018, Net income attributable to Colgate-Palmolive Company also included a benefit from a foreign tax matter and a charge related to U.S. tax reform. See "Income Taxes" above for additional information.

Excluding the items described above in both periods, as applicable, Net income attributable to Colgate-Palmolive Company decreased 6% to $2,440 in 2019 and Diluted earnings per share decreased 5% to $2.83, as compared to 2018.

2019
Income Before Income TaxesProvision For Income Taxes(1)Net Income Including Noncontrolling InterestsLess: Income Attributable To Noncontrolling InterestsNet Income Attributable to Colgate-Palmolive CompanyDiluted Earnings Per Share(2)
As Reported GAAP$3,301$774$2,527$160$2,367$2.75
Global Growth and Efficiency Program13230102—1020.12
Acquisition-related costs24420—200.02
Value-added tax matter in Brazil(30)(10)(20)—(20)(0.02)
Swiss income tax reform—29(29)—(29)(0.04)
Non-GAAP$3,427$827$2,600$160$2,440$2.83
2018
Income Before Income TaxesProvision For Income Taxes(1)Net Income Including Noncontrolling InterestsLess: Income Attributable To Noncontrolling InterestsNet Income Attributable to Colgate-Palmolive CompanyDiluted Earnings Per Share(2)
As Reported GAAP$3,464$906$2,558$158$2,400$2.75
Global Growth and Efficiency Program16137124(1)1250.15
Benefit from a foreign tax matter—15(15)—(15)(0.02)
U.S. tax reform—(80)80—800.09
Non-GAAP$3,625$878$2,747$157$2,590$2.97
(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

20192018% Change
Net sales$3,424$3,3482.0%
Operating profit$982$1,037(5)%
% of Net sales28.7%31.0%(230)bps

Net sales in North America increased 2.0% in 2019 to $3,424, as volume growth of 2.0% and net selling price increases of 0.5% were partially offset by negative foreign exchange of 0.5%. Organic sales in North America increased 2.5% in 2019.

The increase in organic sales in North America in 2019 versus 2018 was due to increases in Oral Care, Personal Care and Home Care organic sales. The increase in Oral Care was primarily due to organic sales growth in the toothpaste category, partially offset by declines in organic sales in the manual toothbrush and mouthwash categories. The increase in Personal Care was primarily due to organic sales growth in the skin health, body wash and bar soap categories, partially offset by a decline in organic sales in the liquid hand soap category. The increase in Home Care was primarily due to organic sales growth in the liquid cleaner and fabric softener categories, partially offset by a decline in organic sales in the hand dish category.

Operating profit in North America decreased 5% in 2019 to $982, or 230 bps to 28.7% of Net sales. This decrease in Operating profit as a percentage of Net sales was due to a decrease in Gross profit (130 bps), an increase in Selling, general and administrative expenses (70 bps) and an increase 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 (300 bps), partially offset by cost savings from the Company’s funding-the-growth initiatives (210 bps). This increase in Selling, general and administrative expenses was due to increased advertising investment (50 bps) and higher overhead expenses (20 bps). This increase in Other (income) expense, net was primarily due to the write-off of certain fixed assets.

(Dollars in Millions Except Per Share Amounts)

Latin America

20192018% Change
Net sales$3,606$3,605—%
Operating profit$963$995(3)%
% of Net sales26.7%27.6%(90)bps

Net sales in Latin America were $3,606 in 2019, even with 2018, as volume growth of 3.0% and net selling price increases of 4.0% were offset by negative foreign exchange of 7.0%. Volume gains were led by Mexico, Brazil and Central America. Organic sales in Latin America increased 7.0% in 2019.

The increase in organic sales in Latin America in 2019 versus 2018 was due to increases in Oral Care, Personal Care and Home Care organic sales. The increase in Oral Care was primarily due to organic sales growth in the toothpaste and manual toothbrush categories. The increase in Personal Care was primarily due to organic sales growth in the bar soap and shampoo categories. The increase in Home Care was primarily due to organic sales growth in the liquid cleaner, fabric softener and hand dish categories.

Operating profit in Latin America decreased 3% in 2019 to $963, or 90 bps to 26.7% 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 (80 bps), partially offset by an increase in Gross profit (10 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 (240 bps) and higher pricing, which were partially offset by higher raw and packaging material costs (360 bps), which included foreign exchange transaction costs. This increase in Selling, general and administrative expenses was due to higher overhead expenses (70 bps) and increased advertising investment (10 bps).

(Dollars in Millions Except Per Share Amounts)

Europe

20192018% Change
Net sales$2,450$2,502(2.0)%
Operating profit$624$634(2)%
% of Net sales25.5%25.3%20bps

Net sales in Europe decreased 2.0% in 2019 to $2,450, as volume growth of 4.0% was more than offset by net selling price decreases of 0.5% and negative foreign exchange of 5.5%. Volume gains were led by France, Spain and the United Kingdom. The Filorga acquisition, which closed on September 19, 2019, contributed 3.0% to volume in Europe. Organic sales in Europe increased 0.5% in 2019.

The increase in organic sales in Europe in 2019 versus 2018 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 driven by organic sales growth in the toothpaste category, partially offset by a decline in organic sales in the battery-powered toothbrush category. The decrease in Personal Care was primarily due to declines in organic sales in the liquid hand soap and shampoo categories.

Operating profit in Europe decreased 2% in 2019 to $624, while as a percentage of Net sales it increased 20 bps to 25.5%. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross profit (80 bps), partially offset by an increase in Selling, general and administrative expenses (50 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 mix (80 bps) primarily due to the Company's acquisition of Filorga, partially offset by higher raw and packaging material costs (140 bps). This increase in Selling, general and administrative expenses was due to higher overhead expenses (30 bps) and increased advertising investment (20 bps).

(Dollars in Millions Except Per Share Amounts)

Asia Pacific

20192018% Change
Net sales$2,707$2,734(1.0)%
Operating profit$749$777(4)%
% of Net sales27.7%28.4%(70)bps

Net sales in Asia Pacific decreased 1.0% in 2019 to $2,707, as volume growth of 0.5% and net selling price increases of 1.0% were more than offset by negative foreign exchange of 2.5%. Volume gains were led by the Philippines, Australia and Thailand. Organic sales in Asia Pacific increased 1.5% in 2019.

The increase in organic sales in 2019 versus 2018 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.

Operating profit in Asia Pacific decreased 4% in 2019 to $749, or 70 bps to 27.7% of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to a decrease in Gross profit (10 bps) and an increase in Selling, general and administrative expenses (70 bps), both as a percentage of Net sales. This decrease in Gross profit was primarily due to higher raw and packaging material costs (310 bps), largely offset by cost savings from the Company’s funding-the-growth initiatives (270 bps) and higher pricing. This increase in Selling, general and administrative expenses was due to increased advertising investment (80 bps), partially offset by lower overhead expenses (10 bps).

(Dollars in Millions Except Per Share Amounts)

Africa/Eurasia

20192018% Change
Net sales$981$9671.5%
Operating profit$187$1738%
% of Net sales19.1%17.9%120bps

Net sales in Africa/Eurasia increased 1.5% in 2019 to $981, as volume growth of 3.5% and net selling price increases of 4.0% were partially offset by negative foreign exchange of 6.0%. Volume gains were led by Russia, Kenya and the Gulf States. The Company’s acquisition of a 51% controlling interest in Colgate Toloram Pte. Ltd., a joint venture which owns the Nigeria-based Hypo Homecare Products Limited (the "Nigeria Joint Venture"), contributed 0.5% to volume in Africa/Eurasia. Organic sales in Africa/Eurasia increased 7.0% in 2019.

The increase in organic sales in 2019 versus 2018 was primarily due to an increase in Oral Care organic sales. The increase in Oral Care was primarily due to organic sales growth in the toothpaste and manual toothbrush categories.

Operating profit in Africa/Eurasia increased 8% in 2019 to $187, or 120 bps to 19.1% of Net sales. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross Profit (170 bps), partially offset by an increase in Selling, general and administrative expenses (50 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 (290 bps) and higher pricing, partially offset by higher raw and packaging material costs (380 bps), which included foreign exchange transaction costs. The increase in Selling, general and administrative expenses was due to increased advertising investment (130 bps), partially offset by lower overhead expenses (80 bps).

(Dollars in Millions Except Per Share Amounts)

Hill’s Pet Nutrition

20192018% Change
Net sales$2,525$2,3886.0%
Operating profit$703$6803%
% of Net sales27.8%28.5%(70)bps

Net sales for Hill’s Pet Nutrition increased 6.0% in 2019 to $2,525, as volume growth of 3.5% and net selling price increases of 4.0% were partially offset by negative foreign exchange of 1.5%. Volume gains were led by the United States, Western Europe and Australia. Organic sales in Hill’s Pet Nutrition increased 7.5% in 2019.

The increase in organic sales in 2019 versus 2018 was due to organic sales growth in the Science Diet and Prescription Diet categories.

Operating profit in Hill’s Pet Nutrition increased to $703 in 2019 from $680 in 2018, while as a percentage of Net sales it decreased 70 bps to 27.8%. This decrease in Operating profit as a percentage of Net sales was due to a decrease in Gross profit (40 bps) and an increase in Selling, general and administrative expenses (30 bps), both 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 (160 bps) and higher pricing. This increase in Selling, general and administrative expenses was due to increased advertising investment (140 bps), partially offset by lower overhead expenses (110 bps).

During the quarter ended March 31, 2019, Hill’s announced a voluntary recall, which was subsequently expanded, of select canned dog food products due to potentially elevated levels of Vitamin D resulting from a supplier error. In the United States, the voluntary recall was conducted in cooperation with the U.S. Food and Drug Administration. Following the announcement of the voluntary recall, and as of December 31, 2019, Hill’s and/or the Company have been named as defendants in 37 putative class action lawsuits, one putative class action filed on behalf of a European Union class and one individual action, all related to the voluntary recall and filed in various jurisdictions in the United States. In addition, two putative class actions related to the voluntary recall have been filed in Canada. Eight of the putative class actions lawsuits in the United States have been voluntarily dismissed. Hill’s is entitled to indemnification from the supplier related to the voluntary recall. Sales of products voluntarily recalled represent less than 2% of Hill’s annual Net sales. The sales loss and other costs associated with the voluntary recall and subsequent expansion did not have a material impact on the Company’s Net sales or Operating profit for the year ended December 31, 2019 and are not expected to have a material impact in future periods.

(Dollars in Millions Except Per Share Amounts)

Corporate

20192018% Change
Operating profit (loss)$(654)$(602)9%

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:

20192018
Global Growth and Efficiency Program$(125)$(152)
Acquisition-related costs(24)—
Value-added tax matter in Brazil30—
Corporate overhead costs and other, net(535)(450)
Total Corporate Operating profit (loss)$(654)$(602)

Excluding charges related to the Global Growth and Efficiency program in both years and acquisition-related costs and the benefit related to a value-added tax matter in Brazil in 2019, Corporate Operating profit (loss) increased in 2019 as compared to 2018, driven primarily by the write-off of certain investments and fixed assets and higher 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, expanded and extended in each of 2015 and 2017 and expanded again on October 31, 2019 to take advantage of additional savings opportunities near the end of the program. The program concluded on December 31, 2019. Substantially all initiatives under the program have been implemented as of December 31, 2019.

Initiatives under the Global Growth and Efficiency Program were designed 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 included:

▪Becoming even stronger on the ground through the continued evolution and expansion of proven global and regional commercial capabilities.
▪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 were 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.

Savings, substantially all of which have been realized, are projected to be in the range of $640 to $660 pretax ($580 to $590 aftertax) annually. Substantially all of the savings are expected to increase future cash flows. The Company achieved savings in 2019 of approximately $65 pretax ($60 aftertax). Total pretax charges resulting from the Global Growth and Efficiency Program were $1,854 pretax ($1,380 aftertax), in line with the previously disclosed range.

Total pretax charges resulting from the Global Growth and Efficiency Program were comprised of the following categories: Employee-Related Costs, including severance, pension and other termination benefits (40%); asset-related costs, primarily Incremental Depreciation and Asset Impairments (10%); and Other charges, which include contract termination costs, consisting primarily of related implementation charges resulting directly from exit activities (30%) and the implementation of new strategies (20%). Over the course of the Global Growth and Efficiency Program, approximately 80% of the charges resulted in cash expenditures.

Total pretax charges related 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 Global Growth and Efficiency Program contributed a net reduction of approximately 4,400 positions from the Company’s global employee workforce.

For the years ended December 31, 2019 and 2018, restructuring and related implementation charges are reflected in the Consolidated Statements of Income as follows:

20192018
Cost of sales$8$31
Selling, general and administrative expenses6033
Other (income) expense, net5788
Non-service related postretirement costs79
Total Global Growth and Efficiency Program charges, pretax$132$161
Total Global Growth and Efficiency Program charges, aftertax$102$125

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

(Dollars in Millions Except Per Share Amounts)

Total pretax charges incurred for the Global Growth and Efficiency Program related to initiatives undertaken by the following reportable operating segments:

Total Program
20192018Charges
North America4%18%17%
Latin America12%10%5%
Europe4%(2)%19%
Asia Pacific6%13%4%
Africa/Eurasia(1)%5%5%
Hill’s Pet Nutrition2%19%8%
Corporate73%37%42%
Total100%100%100%

Over the course of the Global Growth and Efficiency Program, the Company incurred total pretax charges of $1,854 ($1,380 aftertax) in connection with the implementation of various projects as follows:

Total Program Charges
as of December 31, 2019
Employee-Related Costs$706
Incremental Depreciation128
Asset Impairments58
Other962
Total$1,854

Over the course of the Global Growth and Efficiency Program, the majority of the costs incurred related to the following projects: the implementation of the Company’s overall hubbing strategy; the consolidation of facilities; the extension of shared business services and streamlining of global functions; 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 CostsIncremental DepreciationAsset ImpairmentsOtherTotal
Balance at January 1, 2017$56$—$—$125$181
Charges163109151333
Cash payments(74)——(170)(244)
Charges against assets(21)(10)(9)—(40)
Foreign exchange3——14
Other—————
Balance at December 31, 2017$127$—$—$107$234
Charges5321690161
Cash payments(107)——(60)(167)
Charges against assets(9)(2)(16)—(27)
Foreign exchange(4)———(4)
Other———55
Balance at December 31, 2018$60$—$—$142$202
Charges2536665132
Cash payments(55)——(58)(113)
Charges against assets(7)(36)(6)(27)(76)
Foreign exchange3———3
Other———(48)(48)
Balance at December 31, 2019$26$—$—$74$100

Employee-Related Costs primarily include severance and other termination benefits and were 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 $7, $9, and $21 for the years ended December 31, 2019, 2018 and 2017, 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 for additional information.

Incremental Depreciation was 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 were 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 were net of cash proceeds pertaining to the sale of certain assets.

Other charges consisted 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, 2019, 2018 and 2017 included third-party incremental costs related to the development and implementation of new business and strategic initiatives of $32, $42 and $145, respectively, and contract termination costs and charges resulting directly from exit activities of $5, $48 and $6, respectively. These charges were expensed as incurred. Also included in Other charges for the year ended December 31, 2019 were other exit costs of $28 related to the consolidation of facilities.

Other decreases to the restructuring accruals in 2019 reflect the reclassification of restructuring accruals to lease assets as a result of the Company’s adoption of ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” on January 1, 2019. See Note 2, Summary of Significant Accounting Policies and Note 15, Leases to the Consolidated Financial Statements for additional information.

(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, the external factor of foreign exchange, as well as the impact of acquisitions and divestments, as applicable. A reconciliation of organic sales growth to Net sales growth for the years ended December 31, 2019 and 2018 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 the charges resulting from the Global Growth and Efficiency Program and, as applicable, acquisition-related costs, the benefits related to a value-added tax matter in Brazil and Swiss income tax reform, the benefit from a foreign tax matter and the charge related to U.S. tax reform (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 acquisitions, 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, 2019 and 2018 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 the years ended December 31, 2019 and 2018 versus the prior year:

Year ended December 31, 2019Net Sales Growth (GAAP)Foreign Exchange ImpactAcquisitions and Divestments ImpactOrganic Sales Growth (Non-GAAP)
Oral, Personal and Home Care
North America2.0%(0.5)%—%2.5%
Latin America—%(7.0)%—%7.0%
Europe(2.0)%(5.5)%3.0%0.5%
Asia Pacific(1.0)%(2.5)%—%1.5%
Africa/Eurasia1.5%(6.0)%0.5%7.0%
Total Oral, Personal and Home Care—%(4.0)%0.5%3.5%
Pet Nutrition6.0%(1.5)%—%7.5%
Total Company1.0%(3.5)%0.5%4.0%
Year ended December 31, 2018Net Sales Growth (GAAP)Foreign Exchange ImpactAcquisitions and Divestments ImpactOrganic Sales Growth (Non-GAAP)
Oral, Personal and Home Care
North America7.5%—%5.0%2.5%
Latin America(7.5)%(6.5)%—%(1.0)%
Europe4.5%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 Nutrition4.0%0.5%—%3.5%
Total Company0.5%(1.0)%1.0%0.5%

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. In particular, market share data is currently not generally available for certain retail channels, such as eCommerce or certain discounters. 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, stock repurchases and acquisitions). 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 increased to $3,133 in 2019 as compared to $3,056 in 2018, primarily due to improved working capital and lower income tax payments, which were partially offset by higher voluntary contributions to the Company’s pension plans and lower net income. The Company’s working capital as a percentage of Net sales was (1.6)% in 2019 and (1.7)% in 2018. This change in working capital as a percentage of Net sales is primarily due to lower accrued income taxes, partially offset by the impact of the Company’s adoption of the new lease accounting standard effective January 1, 2019. See Note 15, Leases to the Consolidated Financial Statements for additional information. 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).

In the fourth quarter of 2012, the Company commenced the Global Growth and Efficiency Program. The program was expanded in 2014, expanded and extended in each of 2015 and 2017, and expanded again on October 31, 2019 to take advantage of additional savings opportunities near the end of the program. The program concluded on December 31, 2019. Substantially all initiatives under the program were implemented as of December 31, 2019.

Total program charges resulting from the Global Growth and Efficiency Program were $1,854 pretax ($1,380 aftertax), in line with the previously disclosed range. Approximately 80% of total program charges resulting from the Global Growth and Efficiency Program resulted in cash expenditures. Savings from the Global Growth and Efficiency Program, substantially all of which have been realized, are projected to be in the range of $640 to $660 pretax ($580 to $590 aftertax) annually. Substantially all of the savings are expected to increase future cash flows. Total pretax charges for 2019 were $132 ($102 aftertax). Savings in 2019 were approximately $65 pretax ($60 aftertax). Approximately 85% of the restructuring accrual at December 31, 2019 is expected to be paid before year-end 2020.

Investing activities used $2,099 of cash in 2019 compared to $1,170 during 2018. As more fully described below, investing activities in 2019 include the Company’s acquisition of Filorga and the Nigeria Joint Venture. Investing activities in 2018 include the Company’s acquisition of the outstanding equity interests of Physicians Care Alliance, LLC and Elta MD Holdings, Inc. for aggregate cash consideration of approximately $730. Purchases of marketable securities and investments increased in 2019 to $184 from $169 in 2018. Proceeds from the sale of marketable securities and investments decreased in 2019 to $131 from $156 in 2018.

Capital expenditures in 2019 were $335, a decrease from $436 in 2018. Capital expenditures decreased in 2019 primarily due to lower spending on manufacturing facilities and capital projects related to the Global Growth and Efficiency Program. Capital expenditures for 2020 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.

On September 19, 2019, the Company acquired Filorga for cash consideration of €1,516 (approximately $1,674) plus additional consideration of €32 (approximately $38), the majority of which related to repayment of loans from former shareholders of Filorga. On August 15, 2019, the Company acquired a 51% controlling interest in the Nigeria Joint Venture for $31. These acquisitions were financed with a combination of debt and cash. As a result of the incremental debt related to these acquisitions, the Company moderated its share repurchases in the fourth quarter of 2019 and will continue to do so into 2021 in order to reduce debt levels.

On January 31, 2020, the Company acquired Hello Products LLC, an oral care business, for cash consideration of $351 million. The acquisition was financed with a combination of debt and cash. This acquisition is part of the Company’s continued strategy to focus on the high growth segments within its Oral Care, Personal Care and Pet Nutrition businesses.

(Dollars in Millions Except Per Share Amounts)

Financing activities used $870 of cash during 2019 compared to $2,679 during 2018. The decrease in cash used in 2019 as compared to 2018 was primarily due to higher net proceeds from the issuance of debt and higher proceeds from the exercise of stock options.

Long-term debt, including the current portion, increased to $7,587 as of December 31, 2019, as compared to $6,354 as of December 31, 2018 and total debt increased to $7,847 as of December 31, 2019 as compared to $6,366 as of December 31, 2018, in both cases due primarily to the acquisition of Filorga. During the first quarter of 2019, the Company issued €500 of seven-year notes at a fixed coupon rate of 0.500% and €500 of fifteen-year notes at a fixed coupon rate of 1.375%. During the fourth quarter of 2019, the Company issued €500 of two-year notes at a fixed coupon rate of 0.000% and €500 of twenty-year notes at a fixed coupon rate of 0.875%. The debt issuances were under the Company’s shelf registration statement. The debt issuances support the Company’s capital structure objectives of funding its business and growth initiatives while minimizing its risk-adjusted cost of capital. Proceeds from the debt issuances were used for general corporate purposes, which included the retirement of commercial paper and, in the case of the debt issuances in the first quarter of 2019, the repayment of the Company’s $500 1.75% fixed rate notes, which became due in March 2019, and €500 floating rate notes, which became due May 2019.

At December 31, 2019, the Company had access to unused domestic and foreign lines of credit of $4,594 (including under the facilities discussed below) and could also issue medium-term notes pursuant to an effective shelf registration statement. In November 2018, the Company entered into an amended and restated $2,650 revolving credit facility with a syndicate of banks that was scheduled to expire in November 2023. In August 2019, the term of the facility was extended by one year and it now expires in November 2024. In August 2019, the Company entered into a $1,500 364-day credit facility with a syndicate of banks that is scheduled to expire in August 2020. Commitment fees related to the credit facilities are not material.

Domestic and foreign commercial paper outstanding was $829 and $534 as of December 31, 2019 and December 31, 2018, respectively. The average daily balances outstanding of commercial paper in 2019 and 2018 were $1,868 and $1,773, 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 lines of credit of $4,150 (under the facilities discussed above).

The following is a summary of the Company’s commercial paper and global short-term borrowings as of December 31, 2019 and 2018:

20192018
Weighted Average Interest RateMaturitiesOutstandingWeighted Average Interest RateMaturitiesOutstanding
Global short-term borrowings1.8%2020$105.3%2019$12
Commercial Paper (1)(0.4)%20208292.5%2019534
Total$839$546

(1) Commercial paper includes a current portion of $250, included in Notes and loans payable.

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. Refer to 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 2019 were $1,614, an increase from $1,591 in 2018. Dividend payments increased to $1.71 per share in 2019 from $1.66 per share in 2018. In the first quarter of 2019, the Company increased the quarterly common stock dividend to $0.43 per share from $0.42 per share, effective in the second quarter of 2019.

(Dollars in Millions Except Per Share Amounts)

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 the 2015 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.

Aggregate share repurchases in 2019 consisted of approximately 16.0 million common shares under the 2018 Program and 1.2 million common shares to fulfill the requirements of compensation and benefit plans, for a total purchase price of $1,202. Aggregate 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.

Cash and cash equivalents increased $157 during 2019 to $883 at December 31, 2019, compared to $726 at December 31, 2018. Cash and cash equivalents held by the Company’s foreign subsidiaries was $798 and $651, respectively, at December 31, 2019 and 2018.

The following represents the scheduled maturities of the Company’s contractual obligations as of December 31, 2019:

Total20202021202220232024Thereafter
Long-term debt including current portion(1)$7,018$267$860$903$895$498$3,595
Net cash interest payments on long-term debt(2)1,999153146131106891,374
Operating Leases7351671271016336241
Purchase obligations(3)559291148938127
U.S. tax reform payments220—1025466277
Total$10,531$878$1,291$1,253$1,118$697$5,294
(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 2019 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 2020. The Company does not expect to make any voluntary contributions to its U.S. postretirement plans in 2020. In addition, total benefit payments to be paid to participants for the year ending December 31, 2020 from the Company’s assets are estimated to be approximately $55.

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 loss of $6 and a net unrealized gain of $9 at December 31, 2019 and 2018, 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 2019, an unfavorable 10% change in exchange rates would have resulted in a net unrealized loss of $82.

(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 2019 variable rate debt levels, a 1% increase in interest rates would have increased Interest (income) expense, net by $9 in 2019.

The Company is assessing the impact of the discontinuation of LIBOR as a benchmark interest rate on its current financial instruments and contractual arrangements, including debt outstanding, and believes it will not be material as the Company does not have significant exposure to LIBOR in either its debt or other financing arrangements. The Company will continue to monitor its exposure in subsequent periods.

Commodity Price Risk

The Company is exposed to price volatility related to raw materials used in production, such as resins, essential oils, pulp, 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, 2019 and 2018, the Company’s open commodity derivative contracts, which qualify for cash flow hedge accounting, were not material. At the end of 2019, an unfavorable 10% change in commodity futures prices would have resulted in a net unrealized loss of $1.

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 January 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting and forward contracts and purchase options on certain types of securities. This new guidance is effective for the Company beginning on January 1, 2021, 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.

In December 2019, the FASB issued ASU No. 2019-12, “Income taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This new guidance is effective for the Company beginning on January 1, 2021, 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.

In November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments- Credit Losses.” This ASU clarifies and addresses certain items related to amendments in ASU 2016-13. This new guidance is effective for the Company beginning on January 1, 2020. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

(Dollars in Millions Except Per Share Amounts)

In July 2019, the FASB issued ASU No. 2019-07, “Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates.” ASU 2019-07 clarified or improved the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations, thereby eliminating redundancies and making the codification easier to apply. This ASU was effective upon issuance and did not have a material impact on the Company’s Consolidated Financial Statements.

In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825).” This ASU clarifies three topics related to financial instruments accounting. This new guidance is effective for the Company beginning on January 1, 2020. This 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 the use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. This new guidance was effective for the Company on a prospective basis beginning on January 1, 2019, concurrently with the adoption of ASU 2017-12, and did not have a material impact on the Company’s Consolidated Financial Statements.

In August 2018, the FASB issued 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 was 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. The new guidance did not 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 was effective for the Company on a 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 retrospective basis. The new guidance did not have a material impact on the Company’s Consolidated Financial Statements.

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. Certain disclosure requirements in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. This new guidance 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 was 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.

(Dollars in Millions Except Per Share Amounts)

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 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 was effective for the Company on January 1, 2019 and did not 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.

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.

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 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. This new guidance is expected to have no 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, then the new guidance would define the transaction as an asset acquisition. If the threshold is not met, then the entity would, pursuant to the guidance, evaluate whether the assets meet 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 had no impact on the Company’s Consolidated Financial Statements.

(Dollars in Millions Except Per Share Amounts)

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 had no impact on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326).” This ASU introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. This new guidance is effective for the Company beginning on January 1, 2020 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued its final standard on lease accounting, ASU No. 2016-02, “Leases (Topic 842),” which superseded Topic 840, “Leases.” which was further modified in ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” ASU No. 2018-11, “Leases (Topic 842) Targeted Improvements” and ASU No. 2019-01 “Leases (Topic 842) Codification Improvements” to clarify the implementation guidance. 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, on the balance sheet. The Company elected the optional transition method and adopted the new guidance on January 1, 2019, on a modified retrospective basis, 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 resulted in the recognition of right-of-use assets of $458 and liabilities of $574, with no material cumulative effect adjustment to equity as of the date of adoption. In connection with the adoption of this guidance, as required, the Company reclassified certain restructuring reserves incurred in connection with the Global Growth and Efficiency Program and deferred rent liabilities as reductions to lease assets. Adoption of the new standard did not have a material impact on the Company’s Consolidated Statements of Income or Cash Flows. See Note 15 Leases for additional information.

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.”

(Dollars in Millions Except Per Share Amounts)

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.

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 inventories and shipping and handling costs.

▪The Company accounts for inventories using both the first-in, first-out (“FIFO”) method (80% of inventories) and the LIFO method (20% of inventories). There would have been no material impact on reported earnings for 2019 or 2018 had all inventories been accounted for under the FIFO method.
▪Shipping and handling costs may be reported as either a component of Cost of sales or Selling, general and administrative expenses. The Company accounts for such costs, primarily related to warehousing and outbound freight, as fulfillment costs and reports them in the Consolidated Statements of Income as a component of Selling, general and administrative expenses. Accordingly, the Company's Gross profit margin is 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 as a component of Cost of sales, the Company's Gross profit margin would have been lower by 810 bps in both 2019 and 2018 and 760 bps in 2017, with no impact on reported earnings.

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 accounting for pension and other postretirement benefit costs, 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 3.40% and 4.38% as of December 31, 2019 and 2018, respectively. The discount rate used to measure the benefit obligation for other U.S. postretirement plans was 3.56%, and 4.43% as of December 31, 2019 and 2018, 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 6.30% as of December 31, 2019 and 6.60% as of 2018. In determining the long-term rate of return, the Company considers the nature of the plans’ investments and the historical rate of return.

(Dollars in Millions Except Per Share Amounts)

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 17%, 6%, 8%, 7% and 8%, 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 68% in fixed income securities, 24% in equity securities and 8% 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 $14. 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, 2019, and 2018. 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 (other than the discount rate noted above) 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 2020, declining to 4.75% by 2025 and remaining at 4.75% for the years thereafter. The effect on the total of service cost and interest costs 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.
▪The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock units (both performance-based and time-vested), 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, 2019 was $10.48. 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 5%. A 1% change in volatility would change fair value by approximately 6%. The Company uses a Monte-Carlo simulation to determine the fair value of performance-based restricted stock units at the date of grant. The Monte-Carlo simulation model uses substantially the same inputs as the Black Scholes model.
▪Goodwill and indefinite life intangible assets, such as the Company’s global brands, are subject to impairment tests at least annually or when events or changes in circumstances indicate an asset may be impaired. In assessing impairment, the Company performs either a quantitative or a qualitative analysis.

Determining the fair value of the Company’s reporting units for goodwill and the fair value of its intangible assets requires significant estimates and judgments by management. When a quantitative analysis is performed, the Company generally uses the income approach, which requires several estimates, including future cash flows consistent with management’s strategic plans, sales growth rates, foreign exchange rates and the selection of royalty rates and a discount rate. Estimating sales growth rates requires significant judgment by management in areas such as future economic conditions, category growth rates, product pricing, consumer tastes and preferences and future expansion expectations. In selecting an appropriate royalty rate, the Company considers recent market transactions for similar brands and products. In determining an appropriate discount rate, the Company considers the current interest rate environment and its estimated cost of capital. 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 Company generally engages a third-party valuation firm to assist it in determining the fair value of intangible assets acquired in business combinations.

(Dollars in Millions Except Per Share Amounts)

In determining the fair value of the Company’s reporting units, fair value is also determined using the market approach, which is generally derived from metrics of comparable publicly traded companies. As multiple valuation methodologies are used, the Company also performs a qualitative analysis comparing the fair value of a reporting unit under each method to assess its reasonableness and ensure consistency of results.

Determining the expected life of a brand requires management judgment and is based on an evaluation of several factors including market share, brand history, future expansion expectations, the level of in-market support anticipated by management, legal or regulatory restrictions and the economic environment in the countries in which the brand is sold.

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 Filorga acquisition in 2019, which were recorded at fair value. Except for recently acquired businesses where there is inherently a lower surplus of fair value over carrying 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 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 the brand, the Company does not believe there is a significant risk of impairment related to the Sanex intangible assets. Given the recent acquisition of Filorga, its performance since its acquisition and the Company’s future plans for Filorga, the Company does not believe there is a significant risk of impairment related to the Filorga intangible assets.

▪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, tax rates, 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 and political environment in different countries and its effect on consumer spending habits, foreign currency rate fluctuations, exchange controls, tariffs, 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, increased competition and evolving competitive practices (including from the growth of eCommerce and the entry of new competitors and business models), disruptions in global supply chain, the availability and cost of raw and packaging materials, the ability to maintain or increase selling prices as needed, changes in the policies of retail trade customers, the emergence of new sales channels, the growth of eCommerce and the changing retail landscape (as consumers increasingly shop online), the ability to develop innovative new products, the ability to continue lowering costs and operate in an agile manner, the ability to maintain the security of our information technology systems from a cyber-security incident or data breach, the ability to achieve our sustainability goals, the ability to complete acquisitions and divestitures as planned, the ability to successfully integrate acquired businesses, the ability to attract and retain key employees, 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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