ITEM 1. BUSINESS
(a) General Development of the Business
Colgate-Palmolive Company (together with its subsidiaries, the "Company"), which was organized under the laws of the State of Delaware in 1923, is a leading consumer products company whose products are marketed in over 200 countries and territories throughout the world.
For recent business developments, refer to the information set forth under the captions "Results of Operations", "Liquidity and Capital Resources" and "Outlook" in Part II, Item 7 of this report.
(b) Financial Information About Industry Segments
Worldwide net sales and earnings by business segment and geographic region during the last three years appear under the caption "Results of Operations" in Part II, Item 7 of this report on pages 6 and 7.
(c) Narrative Description of the Business
The Company manages its business in two distinct product segments: Oral, Personal and Household Care, and Pet Nutrition. Colgate is a global leader in Oral Care with the leading toothpaste brand in the U.S. and throughout many parts of the world. Colgate's Oral Care products include toothbrushes, toothpaste, mouth rinses and dental floss, and pharmaceutical products for dentists and other oral health professionals. Significant recent product launches in this segment include Colgate Fresh Confidence, Colgate Sparkling White and Colgate Total Plus Whitening toothpastes, and the Colgate Actibrush battery-powered toothbrush.
Colgate leads many segments of the Personal Care market with several products including bar and liquid soaps, shampoos, conditioners, deodorants and antiperspirants and shave products. Colgate is the market leader in liquid soaps in the U.S. and globally is the market leader in male deodorant sticks. Strong brands in this segment include Irish Spring, Softsoap brand liquid soap and Palmolive, which is available as a soap and, in many countries, as a shampoo and conditioner. Colgate also manufactures and markets Mennen deodorants and men's toiletries.
Colgate manufactures and markets a wide array of products for Household Care. Major products include Palmolive and Ajax dishwashing liquid and antibacterial hand soaps and new Palmolive Spring Sensations dishwashing liquid. Colgate also markets other household names in cleaning and laundry products such as Fab, Ajax and Murphy's oil soap which is North America's leading wood floor cleaner. In the Company's major markets outside the U.S., Colgate is number one in fabric softeners with leading brands Suavitel in Latin America, Soupline in Europe and Softlan in Asia.
Sales of Oral, Personal, Household and Fabric Care products accounted for 34%, 24%, 16% and 14% of total worldwide sales in 2000, respectively. Geographically, Oral Care is a significant part of the Company's business in Asia/Africa, comprising approximately 54% of sales in that region for 2000. See also Note 1 to the Consolidated Financial Statements.
Colgate, through its Hill's Pet Nutrition subsidiary, is the world leader in specialty pet nutrition products for dogs and cats. Hill's markets pet foods primarily under two trademarks: Science Diet, which is sold by authorized pet supply retailers, breeders and veterinarians for every day nutritional needs, and Prescription Diet for dogs and cats with disease conditions. Hill's recently relaunched the entire Science Diet line and added several innovative products to both the Science Diet and Prescription Diet brands. Hill's sells its products in 85 countries and leads the premium pet food segment in Japan. Sales of Pet Nutrition products accounted for 12% of total worldwide sales in 2000.
Research and Development
Strong research and development capabilities enable Colgate to support its many brands with technologically sophisticated products for consumers' personal needs and pet nutrition needs. During 2000, the Company spent $176.1 million on research and development activities.
Distribution; Competition; Trademarks and Patents
The Company's products are generally marketed by a direct sales force at each individual operating subsidiary or business unit. In some instances, distributors or brokers are used. No single customer accounts for as much as 10% of the Company's sales.
Most raw materials are purchased from other companies and are available from several sources. While it is generally the Company's policy to streamline supply chain sources, raw materials used in the manufacture of the Company's products are generally available in adequate supply. Raw material commodities such as tallow and essential oils are subject to wide price variations. No one raw material represents a significant portion of the Company's total material requirements.
The Company's products are marketed under highly competitive conditions. Products similar to those produced and sold by the Company are available from competitors in the U.S. and overseas. Certain of the Company's competitors are larger and have greater resources than the Company. Product quality, brand recognition and acceptance and marketing capability largely determine success in the Company's business segments.
Trademarks are considered to be of material importance to the Company's business. The Company follows a practice of seeking trademark protection by all available means in the United States and throughout the world where the Company's products are sold. Principal global trademarks include Colgate, Palmolive, Mennen, Protex, Ajax, Soupline, Suavitel, Fab, Science Diet and Prescription Diet in addition to several regional trademarks. These trademarks are of significant importance to the Company and its subsidiaries within their markets. The Company's rights in these trademarks endure for as long as they are used and registered. Although the Company owns a number of patents, no one patent is considered significant to the business as a whole.
Employees
At year-end, the Company employed approximately 38,300 employees of which approximately 80% were located outside the United States.
Environmental Matters
Compliance with environmental rules and regulations has not significantly affected the Company's earnings or competitive position. Capital expenditures for environmental control facilities totaled $15.3 million for 2000. For future years, expenditures are expected to be in the same range. The Company has programs that are designed to ensure that its operations and facilities meet or exceed applicable rules and regulations. Please refer to Note 14 to the Consolidated Financial Statements.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
For information concerning geographic area financial data refer to the information set forth under the caption "Results of Operations" in Part II, Item 7 of this report.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns and leases a total of 280 manufacturing, distribution, research and office facilities worldwide. Corporate headquarters is housed in leased facilities at 300 Park Avenue, New York, New York.
In the United States, the Company operates 43 facilities, of which 21 are owned. Major U.S. manufacturing and warehousing facilities used by the Oral, Personal and Household Care segment are located in Kansas City, Kansas; Morristown, New Jersey; Jeffersonville, Indiana, and Cambridge, Ohio. The Pet Nutrition segment has major facilities in Bowling Green, Kentucky; Topeka, Kansas; Commerce, California; and Richmond, Indiana. Research facilities are located throughout the world with the primary research center for Oral, Personal and Household Care products located in Piscataway, New Jersey and the primary research center for Pet Nutrition products located in Topeka, Kansas.
Overseas, the Company operates 237 facilities, of which 92 are owned, in over 70 countries. Major overseas facilities used by the Oral, Personal and Household Care segment are located in Australia, Brazil, Canada, China, Colombia, France, Italy, Mexico, Thailand, the United Kingdom and elsewhere throughout the world. In some areas outside the United States, products are either manufactured by independent contractors under Company specifications or are imported from the United States or elsewhere.
All facilities operated by the Company are, in general, well maintained and adequate for the purpose for which they are intended. The Company conducts continuing reviews of its facilities with the view to modernization and cost reduction.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In 1995, the Company acquired the Kolynos oral care business from American Home Products, as described in the Company's Form 8-K dated January 10, 1995. On September 8, 1998, the Company's Brazilian subsidiary received notice of an administrative proceeding from the Central Bank of Brazil primarily taking issue with certain filings made with the Central Bank in connection with the financing of this strategic transaction, but in no way challenging or seeking to unwind the acquisition. The Central Bank of Brazil in January 2001 notified the Company of its decision in this administrative proceeding to impose a fine which, at current exchange rates, approximates $125 million. The Company has appealed the decision to the Brazilian Monetary System Appeals Council, thereby suspending the fine pending the decision of the Council. Further appeals are available within the Brazilian federal courts. Management believes, based on the opinion of its Brazilian legal counsel and other experts, that the filings challenged by the Central Bank fully complied with Brazilian law and that the Company will prevail on appeal. The Company intends to challenge this fine vigorously.
For information regarding other legal matters refer to Note 14 of the Consolidated Financial Statements included herein.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of executive officers as of March 28, 2001:
Each of the executive officers listed above has served the registrant or its subsidiaries in various executive capacities for the past five years.
The Company By-Laws, paragraph 38, states: The officers of the corporation shall hold office until their respective successors are chosen and qualified in their stead, or until they have resigned, retired or been removed in the manner hereinafter provided. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the whole board of directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Refer to the information regarding the market for the Company's Common Stock and the quarterly market price information appearing under the caption "Market and Dividend Information" included herein; the information under "Capital Stock and Stock Compensation Plans" in Note 5 to the Consolidated Financial Statements included herein; and the "Number of shareholders of record" and "Cash dividends declared and paid per common share" under the caption "Historical Financial Summary" included herein.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Refer to the information set forth under the caption "Historical Financial Summary" included herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions Except Per Share Amounts)
Results of Operations
- -------- (/1/Net)sales in the United States for Oral, Personal and Household Care were $2,025.7, $1,880.8 and $1,799.6 in 2000, 1999 and 1998, respectively. (/2/Net)sales in the United States for Pet Nutrition were $736.0, $709.2 and $688.6 in 2000, 1999 and 1998, respectively.
Net Sales and Earnings Before Interest and Taxes (EBIT)
Worldwide net sales increased 3% to $9,357.9 in 2000 on volume growth of 6%. Net sales would have grown 7% excluding foreign currency translation. Net sales in the Oral, Personal and Household Care segment increased 2% on 6% volume growth, while net sales and volume in Pet Nutrition increased by 5%. In 1999, worldwide net sales increased 2% to $9,118.2 on volume growth of 5%, reflecting the negative impact of foreign currency translation.
EBIT rose from $1,566.2 in 1999 to $1,740.5 in 2000. The 11% increase reflected the Company's strong volume growth and cost-control initiatives that were effective in increasing margins. EBIT increased 10% in 1999 to $1,566.2 from $1,423.0 in 1998.
Gross Profit
Gross profit margin increased to 54.4%, above both the 1999 level of 53.7% and the 1998 level of 52.2%. This favorable trend continues to reflect the Company's financial strategy to improve all aspects of its supply
(Dollars in Millions Except Per Share Amounts)
chain through global sourcing, restructuring and other cost-reduction initiatives, as well as its emphasis on higher margin products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales were 35% in 2000, 36% in 1999 and 36% in 1998. The overall spending as a percentage of sales declined slightly as a result of the Company's continued focus on expense containment, offset by higher advertising costs.
Other Expense, Net
Other expense, net, consists principally of amortization of goodwill and other intangible assets, minority interest in earnings of less-than-100%-owned consolidated subsidiaries, earnings from equity investments, gains on sale of real estate and non-core product lines, and other miscellaneous gains and losses. Other expense, net, decreased in 2000 from $73.6 to $52.3 primarily due to unrealized gains of $15.4 on foreign currency contracts.
Items included in other expense, net during 2000 were one-time charges of $92.7 ($61.2 aftertax), including a restructuring charge recorded in the fourth quarter related to the realignment of certain manufacturing operations and the exiting of our business in Nigeria. Also included are one-time gains of $102.0 ($60.9 aftertax) recorded on the sale of real estate and the sale of our Viva detergent brand in Mexico.
During 1999 the Company incurred one-time charges related to the exiting of certain activities, such as the manufacture of aluminum tubes in Brazil. These charges were offset by a gain of $33.0 ($17.6 aftertax) recorded on the sale of the U.S. Baby Magic brand and a gain of $17.4 ($11.4 aftertax) on the sale of real estate.
Segment Results
North America
North America achieved strong results for the year. Net sales grew 8% to $2,310.0 as unit volume rose 8% driven by the introduction of new products in all core categories. These new products included the battery-powered Colgate Actibrush toothbrush, Colgate 2in1 toothpaste & mouthwash, and Colgate Sensitive Maximum Strength and Colgate Sparkling White toothpastes. In the Personal Care category, the launch of Softsoap Fruit Essentials body wash and hand soap and Softsoap 2-in-1 with moisturizing lotion boosted sales and market shares as well. In 1999, North America achieved overall sales growth excluding divestments of 6% to $2,143.7 on volume growth of 8%.
(Dollars in Millions Except Per Share Amounts)
EBIT for North America was up 17% to $482.4. The region achieved earnings growth through volume gains, higher gross profit margins and continued focus on cost control. EBIT in 1999 was up 4% to $413.0.
Latin America
Net sales in Latin America increased 6% to $2,507.5 on 6% volume growth led by strong growth in Mexico, Brazil, Venezuela and Central America. The regional introduction of Colgate Fresh Confidence gel toothpaste as well as Palmolive Botanicals shampoo and soap strengthened market shares in the Oral and Personal Care categories. In 1999, Latin America net sales decreased 2% to $2,356.7 on 3% volume growth.
EBIT in Latin America increased 13% to $603.1 as a result of continued efforts in cost reduction, selective selling price increases and higher margins. EBIT in 1999 was up 7% to $535.7 due to selective selling price increases and lower advertising expenditures in Brazil.
Europe
Net sales in Europe declined 7% to $1,890.1 as unit volume gains of 4% were offset by the weakened euro. Germany, Italy, the Nordic Group and the Netherlands achieved the strongest volume increases in the region. The Colgate Actibrush, and Colgate Fresh Confidence and Colgate Whitening toothpastes led Oral Care market growth in the region. Market share growth in the Personal and Household Care categories coupled with the introduction of new products such as Ajax Shower Power cleaner, Palmolive Actif men's shower gel and Palmolive Spring Sensations dishwashing liquid contributed to increased volumes in Europe. In 1999, Europe net sales declined 2% to $2,028.8, due primarily to the weakened euro, while volume grew 2%.
EBIT for Europe decreased 6% to $320.0 as a result of foreign currency weakness. EBIT in 1999 rose 8% to $342.0 due to higher margins and higher volumes.
Asia/Africa
Net sales in the Asia/Africa region excluding divestments increased 2% to $1,532.0 as volume grew 7% with the strongest performance in China, India and the Philippines. China continued to experience significant growth through introduction of new products such as Softlan fabric softener and Palmolive Naturals shampoo as well as its newly formed majority-owned joint venture with China's leading toothbrush manufacturer. Throughout the region the Company continues to benefit from the success of products such as the Colgate Actibrush toothbrush and Colgate Fresh Confidence and Colgate Herbal toothpastes. In 1999, net sales in the Asia/Africa region increased 5% to $1,519.7 as volume increased 7%.
EBIT grew 16% in Asia/Africa to $194.0 driven by increased volumes across the region. EBIT in 1999 grew 5% to $166.7.
Pet Nutrition
Net sales for Hill's Pet Nutrition increased 5% to $1,118.3 on 5% volume growth. North American sales increased due to the introduction of new products including Science Diet products for sensitive skin and sensitive stomach, as well as the relaunch of the entire Science Diet line with a proprietary antioxidant formulation. Strong growth occurred in Japan, Europe and Latin America due to the introduction of new feline varieties and improvements in the entire dry cat food line, complemented by increased advertising. In 1999, net sales for the Pet Nutrition segment increased 7% to $1,069.3 on 8% volume gains.
EBIT in the Pet Nutrition segment grew 11% to $243.5 driven by volume and cost-improvement initiatives. EBIT in 1999 increased 27% to $219.9 on both higher volumes and lower raw material costs.
(Dollars in Millions Except Per Share Amounts)
Interest Expense, Net
Interest expense, net, was $173.3 compared with $171.6 in 1999 and $172.9 in 1998. The increase in net interest expense in 2000 reflected increased average debt levels related to increased share repurchases during the year compared with 1999.
Income Taxes
The effective tax rate on income was 32.1% in 2000 versus 32.8% in 1999 and 32.1% in 1998. Global tax planning strategies, including the realization of tax credits, benefited the effective tax rate in all three years presented.
Net Income
Net income was $1,063.8 in 2000 or $1.70 per share on a diluted basis compared with $937.3 in 1999 or $1.47 per share and $848.6 in 1998 or $1.30 per share.
- -------- (/1/Long-lived)assets in the United States, primarily fixed assets and goodwill, represented approximately one-third of total long-lived assets of $4,813.3, $4,952.3 and $5,330.0 in 2000, 1999 and 1998, respectively.
Liquidity and Capital Resources
Net cash provided by operations increased 19% to $1,536.2 compared with $1,292.7 in 1999 and $1,178.8 in 1998. The increases reflect the Company's improved profitability and working capital management. Cash generated from operations was used to fund capital spending, increase dividends and repurchase common shares.
During 2000, long-term debt increased to $2,857.1 from $2,582.2 and total debt increased to $2,978.2 from $2,789.5 primarily due to increased share repurchases.
As of December 31, 2000, $436.1 of domestic and foreign commercial paper was outstanding. These borrowings carry a Standard & Poor's rating of A1 and a Moody's rating of P1. The commercial paper as well as other short-term borrowings are classified as long-term debt at December 31, 2000, as it is the Company's intent and ability to refinance such obligations on a long-term basis. The Company has additional sources of liquidity available in the form of lines of credit maintained with various banks. At December 31, 2000, such unused lines of credit amounted to $1,398.1. In addition, at December 31, 2000, the Company had $438.2 available under a shelf registration filed in 2000.
As of December 31, 1999, $477.3 of domestic and foreign commercial paper was outstanding. An unused line of credit of approximately $1,527.9 was available.
(Dollars in Millions Except Per Share Amounts)
The ratio of EBITDA (defined as earnings before interest, income taxes, depreciation and amortization) to interest expense increased to 10.4 in 2000 from 9.0 in 1999 and 8.6 in 1998. The ratio has increased each year consistent with the Company's trend of higher earnings.
Capital expenditures were 4% of net sales for 2000, 1999 and 1998. Capital spending continues to be focused primarily on projects that yield high aftertax returns. Capital expenditures for 2001 are expected to continue at the current rate of approximately 4% of net sales.
Other investing activities in 2000, 1999 and 1998 included strategic acquisitions and divestitures around the world. The aggregate purchase price of all 2000, 1999 and 1998 acquisitions was $64.9, $46.4 and $22.6, respectively. The Mexico Viva detergent brand was sold in 2000, U.S. Baby Magic brand was sold in 1999 and the HandiWipes brand was sold in 1998. The aggregate sale price of all 2000, 1999 and 1998 sales of brands was $102.5, $94.7 and $57.4, respectively.
In 1993, the Company participated in the formation of a financing subsidiary with outside investors. The Company consolidated this entity and reported the amounts invested by outside investors as a minority interest. During 2000 this subsidiary ceased operations resulting in a cash payment of $113.9 to the outside investors.
The Company repurchases common shares in open market and private transactions for employee benefit plans and to maintain its targeted capital structure. Aggregate repurchases for 2000 were 19.1 million shares, with a total purchase price of $1,040.6. In 1999, 12.8 million shares were repurchased, with a total purchase price of $624.4.
Dividend payments were $382.4, up from $366.0 in 1999 and $345.6 in 1998. Common stock dividend payments increased to $.63 per share in 2000 from $.59 per share in 1999 and $.55 per share in 1998. The Series B Preference Stock dividends were declared and paid at the rate of $5.04 per share in 2000, $4.96 per share in 1999 and $4.88 in 1998.
(Dollars in Millions Except Per Share Amounts)
Internally generated cash flows are adequate to support currently planned business operations, acquisitions and capital expenditures. Significant acquisitions would require external financing.
The Company is a party to various superfund and other environmental matters and is contingently liable with respect to lawsuits, taxes and other matters arising out of the normal course of business. Management proactively reviews and manages its exposure to, and the impact of, environmental matters. While it is possible that the Company's cash flows and results of operations in a particular quarter or year could be affected by the one-time impacts of the resolution of such contingencies, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material impact on the Company's financial position or ongoing cash flows and results of operations.
Restructuring Reserves
In December 2000 the Company recorded a charge of $63.9 ($42.5 aftertax) associated with the realignment of three manufacturing locations in Latin America and the exiting of our business in Nigeria. The charge recorded included $14.2 for termination costs and $49.7 for exiting of manufacturing operations. At December 31, 2000, the remaining reserve of $7.2 is classified as a current liability representing termination costs for 979 employees to be paid during 2001.
In September 1995, a reserve of $460.5 was established to cover a worldwide restructuring of manufacturing and administrative operations. The cost of completing the restructuring activities approximated the original estimate. The planned restructuring projects, primarily in North America and Europe but also affecting Hill's Pet Nutrition and Colgate locations in Asia/Africa and certain Latin America locations, were completed as of December 31, 2000.
Managing Foreign Currency and Interest Rate Exposure
The Company is exposed to market risk from foreign currency exchange rate fluctuations and interest rates. To manage the volatility relating to foreign currency exposures on a consolidated basis, the Company utilizes a number of techniques, including selective borrowings in local currencies, purchases of forward foreign currency exchange contracts, balance sheet management and increases in selling prices.
The Company operates in over 200 countries and territories and is exposed to currency fluctuation related to manufacturing and selling its products in currencies other than the U.S. dollar. The major foreign currency exposures involve the markets in the European Union, Mexico and Brazil, which represent 13%, 11% and 5%, respectively, of 2000 worldwide sales. The Company actively monitors its foreign currency exposures in these markets and has been able to offset the impact of foreign currency rate movements through a combination of selling price increases, cost-containment measures and foreign currency hedging activities. The Company primarily utilizes forward exchange and currency swap contracts to hedge portions of its exposures relating to foreign currency purchases and sales, as well as assets and liabilities created in the normal course of business.
The Company utilizes simple instruments such as interest rate swaps to manage the Company's mix of fixed and floating rate debt. The Company's target floating rate obligations as a percentage of the Company's global debt is set by policy.
It is the Company's policy to enter into foreign exchange and interest rate swap contracts with diversified and reputable counterparties and as such, the Company does not anticipate non-performance by any counterparty.
Value at Risk
The Company's risk management procedures include the monitoring of interest rate and foreign exchange exposures and the Company's offsetting hedge positions utilizing statistical analyses of cash flows, market value,
(Dollars in Millions Except Per Share Amounts)
sensitivity analysis and value-at-risk estimations. However, the use of these techniques to quantify the market risk of such instruments should not be construed as an endorsement of their accuracy or the accuracy of the related assumptions. The Company utilizes a Value-at-Risk (VAR) model and an Earnings- at-Risk (EAR) model that are intended to measure the maximum potential loss in its interest rate and foreign exchange financial instruments assuming adverse market conditions occur, given a 95% confidence level. The models utilize a variance/covariance modeling technique. Historical interest rates and foreign exchange rates from the preceding year are used to estimate the volatility and correlation of future rates.
The estimated maximum potential one-day loss in fair value of interest rate or foreign exchange rate instruments, calculated using the VAR model, is not material to the consolidated financial position, results of operations or cash flows of the Company. The estimated maximum yearly loss in earnings due to interest rate or foreign exchange rate instruments, calculated utilizing the EAR model, is not material to the Company's results of operations. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets.
A discussion of the Company's accounting policies for financial instruments is included in the Summary of Significant Accounting Policies in the notes to the Consolidated Financial Statements, and further disclosure relating to financial instruments is included in the Fair Value of Financial Instruments note.
Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings or other comprehensive income depending on whether a derivative is designated as part of a hedge transaction. The adoption of SFAS 133 on January 1, 2001 did not result in a material impact on the Company's financial position, results of operations or cash flows.
In July 2000, the FASB's Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement and income statement classification for various types of sales incentives including discounts, coupons, rebates and free products. The Company will adopt this consensus effective April 1, 2001 and it is not expected to have a material impact on the Company's financial position, results of operations or cash flows. The effect of adoption will result in the reclassification of approximately $150.6, $129.1 and $117.5 for the years ending December 31, 2000, 1999 and 1998, respectively, from selling, general and administrative expenses to a reduction of net sales.
Conversion to the Euro Currency
On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and adopted the euro as their new common legal currency. As of that date, the euro began trading on currency exchanges and the legacy currencies were to remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002.
The Company is addressing the issues involved with the introduction of the euro through its worldwide conversion to the SAP system and other measures. The more important issues facing the Company include reassessing currency risk and processing tax and accounting records.
Based upon progress to date, the Company believes that use of the euro will not have a significant impact on the manner in which it conducts its business affairs and processes its business and accounting records. Accordingly, conversion to the euro is not expected to have a material effect on the Company's financial position, cash flows or results of operations.
(Dollars in Millions Except Per Share Amounts)
Outlook
Looking forward into 2001, the Company is well positioned for continued growth in most of its markets. However, movements in foreign currency exchange rates can impact future operating results as measured in U.S. dollars. In particular, economic uncertainty in some countries in Latin America and changes in the value of the euro may impact the overall results of Latin America and Europe.
The Company expects the continued success of Colgate Total toothpaste, using patented proprietary technology, to bolster worldwide oral care leadership and expects new products in Oral Care and other categories to add potential for further growth. Overall, subject to global economic conditions, the Company does not expect the 2001 market conditions to be materially different from those experienced in 2000 and the Company expects its positive momentum to continue. Historically, the consumer products industry has been less susceptible to changes in economic growth than many other industries, and therefore the Company constantly evaluates projects that will focus operations on opportunities for enhanced growth potential. Over the long term, Colgate's continued focus on its consumer products business and the strength of its global brand names, its broad international presence in both developed and developing markets, and its strong capital base all position the Company to take advantage of growth opportunities and to continue to increase profitability and shareholder value.
Forward-Looking Statements
Readers are cautioned that the Results of Operations and other sections of this report contain forward-looking statements that are based on management's estimates, assumptions and projections. A description of some of the factors that could cause actual results to differ materially from expectations expressed in the Company's forward-looking statements set forth in the Company's Form 8-K filed with the Securities and Exchange Commission on November 13, 1998 under the caption "Cautionary Statement on Forward-Looking Statements," together with any future such filings made with the Securities and Exchange Commission, are incorporated herein by reference. These factors include, but are not limited to, the risks associated with international operations, the activities of competitors, retail trade practices, the success of new product introductions, cost pressures, manufacturing and environmental matters.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the "Index to Financial Statements" which is located on page 17 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the registrant set forth in the Proxy Statement for the 2001 Annual Meeting is incorporated herein by reference, as is the text in Part I of this report under the caption "Executive Officers of the Registrant".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement for the 2001 Annual Meeting is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of management set forth in the Proxy Statement for the 2001 Annual Meeting is incorporated herein by reference.
(b) There are no arrangements known to the registrant that may at a subsequent date result in a change in control of the registrant.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement for the 2001 Annual Meeting is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
See the "Index to Financial Statements" which is located on page 17 of this report.
(b) Exhibits. See the exhibit index which is included herein.
(c) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Colgate-Palmolive Company (Registrant)
By: /s/ Reuben Mark --------------------------------- Reuben Mark Chairman of the Board and Chief Executive Officer
Date: March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 28, 2001 by the following persons on behalf of the registrant and in the capacities indicated.
(a) Principal Executive Officer (c) Principal Accounting Officer
/s/ Reuben Mark /s/ Dennis J. Hickey - ------------------------------------- ------------------------------------- Reuben Mark Dennis J. Hickey Chairman of the Board Vice President and and Chief Executive Officer Corporate Controller
(b) Principal Financial Officer
(d) Directors:
/s/ Stephen C. Patrick Jill K. Conway, Ronald E. Ferguson, - ------------------------------------- Ellen M. Hancock, David W. Johnson, Stephen C. Patrick John P. Kendall, Richard J. Kogan, Chief Financial Officer Reuben Mark, Howard B. Wentz, Jr.
/s/ Andrew D. Hendry ------------------------------------- Andrew D. Hendry as Attorney-in-Fact
United States Securities and Exchange Commission Washington, D.C. 20549
FORM 10-K
FINANCIAL STATEMENTS For The Year Ended December 31, 2000
COLGATE-PALMOLIVE COMPANY
NEW YORK, NEW YORK 10022
All other financial statements and schedules not listed have been omitted since the required information is included in the financial statements or the notes thereto or is not applicable or required.
COLGATE-PALMOLIVE COMPANY
Consolidated Statements of Income
(Dollars in Millions Except Per Share Amounts)
See Notes to Consolidated Financial Statements.
COLGATE-PALMOLIVE COMPANY
Consolidated Balance Sheets
(Dollars in Millions Except Per Share Amounts)
See Notes to Consolidated Financial Statements.
COLGATE-PALMOLIVE COMPANY
Consolidated Statements of Retained Earnings, Comprehensive Income and Changes in Capital Accounts
(Dollars in Millions Except Per Share Amounts)
See Notes to Consolidated Financial Statements.
COLGATE-PALMOLIVE COMPANY
Consolidated Statements of Cash Flows
(Dollars in Millions Except Per Share Amounts)
See Notes to Consolidated Financial Statements.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Millions Except Per Share Amounts)
1. Nature of Operations
The Company manufactures and markets a wide variety of products in the U.S. and around the world in two distinct business segments: Oral, Personal and Household Care, and Pet Nutrition. Oral, Personal and Household Care products include toothpaste, oral rinses and toothbrushes, bar and liquid soaps, shampoos, conditioners, deodorants and antiperspirants, shave products, laundry and dishwashing detergents, fabric softeners, cleansers and cleaners, bleaches and other similar items. These products are sold primarily to wholesale and retail distributors worldwide. Pet Nutrition products include pet food products manufactured and marketed by Hill's Pet Nutrition. The principal customers for Pet Nutrition products are veterinarians and specialty pet retailers. Principal global trademarks include Colgate, Palmolive, Mennen Speed Stick, Protex, Ajax, Soupline, Suavitel, Fab, Science Diet and Prescription Diet in addition to various regional trademarks.
The Company's principal classes of products accounted for the following percentages of worldwide sales for the past three years:
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Colgate- Palmolive Company and its majority-owned subsidiaries. Intercompany transactions and balances have been eliminated. Investments in companies in which the Company's interest is between 20% and 50% are accounted for using the equity method. The Company's share of the net income from such investments is recorded as equity earnings and is classified as Other expense, net, in the Consolidated Statements of Income.
Revenue Recognition
Sales are recorded at the time products are shipped to trade customers. Net sales reflect units shipped at selling list prices reduced by promotion allowances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings or other comprehensive income depending on whether a derivative is designated as part of a hedge transaction. The adoption of SFAS 133 on January 1, 2001 did not result in a material impact on the Company's financial position, results of operations or cash flows.
In July 2000, the FASB's Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement and income statement classification for various types of sales incentives including discounts, coupons, rebates and free products. The Company will adopt this consensus effective April 1, 2001. The effect of adoption will result in the reclassification of approximately $150.6, $129.1 and $117.5 for the years ending December 31, 2000, 1999 and 1998, respectively, from selling, general and administrative expenses to a reduction of net sales.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Investments in short- term securities that do not meet the definition of cash equivalents are classified as marketable securities. Marketable securities are reported at cost, which approximates market.
Inventories
Inventories are valued at the lower of cost or market. The first-in, first- out (FIFO) method is used to value most inventories. The remaining inventories are valued using the last-in, first-out (LIFO) method.
Property, Plant and Equipment
Land, buildings, and machinery and equipment are stated at cost. Depreciation is provided, primarily using the straight-line method, over estimated useful lives ranging from 3 to 40 years.
Goodwill and Other Intangibles
Intangible assets principally consist of goodwill, which is amortized on the straight-line method, generally over a period of 40 years. Other intangible assets, principally non-compete agreements and customer lists, are amortized on the straight-line method over periods ranging from 5 to 20 years depending on their useful lives.
The recoverability of the carrying values of intangible assets is evaluated periodically based on a review of forecasted operating cash flows and the profitability of the related business. For the three-year period ended December 31, 2000, there were no material adjustments to the carrying values of intangible assets resulting from these evaluations.
Shipping and Handling Costs
Shipping and handling costs are classified as selling, general and administrative expenses and were $619.9, $590.0 and $575.9 for the years ended December 31, 2000, 1999 and 1998, respectively.
Advertising
Advertising costs are expensed in the year incurred.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
Income Taxes
Deferred taxes are recognized for the expected future tax consequences of temporary differences between the amounts carried for financial reporting and tax purposes. Provision is made currently for taxes payable on remittances of overseas earnings; no provision is made for taxes on overseas retained earnings that are deemed to be permanently reinvested.
Translation of Overseas Currencies
The assets and liabilities of subsidiaries, other than those operating in highly inflationary environments, 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 converted into U.S. dollars at average rates of exchange prevailing during the year.
For subsidiaries operating in highly inflationary environments, inventories, goodwill and property, plant and equipment are translated at the rate of exchange on the date the assets were acquired, while other assets and liabilities are translated at year-end exchange rates. Translation adjustments for these operations are included in net income.
In 1999, due to the devaluation of the Brazilian real, $242.4 was charged to cumulative translation adjustments which was, in effect, a write-down of foreign-currency-denominated assets (primarily goodwill and property, plant and equipment). This will be accompanied by lower amortization and depreciation expense in future periods.
Financial Instruments
The net effective cash payment of the interest rate swap contracts combined with the related interest payments on the debt that they hedge are accounted for as interest expense. Those interest rate instruments that do not qualify as hedge instruments for accounting purposes are marked to market and recorded at fair value.
Gains and losses from foreign exchange contracts that hedge the Company's investments in its foreign subsidiaries are shown in the cumulative translation adjustments account included in shareholders' equity. Gains and losses from contracts that hedge firm commitments are recorded in the balance sheets as a component of the related receivable or payable until realized, at which time they are recognized in the statements of income. The contracts that hedge anticipated sales and purchases do not qualify as hedges for accounting purposes. Accordingly, the related gains and losses are calculated using the current forward rates and are recorded in the Consolidated Statements of Income as Other expense, net.
Segment Information
The Company operates in two product segments: Oral, Personal and Household Care, and Pet Nutrition. The operations of the Oral, Personal and Household Care segment are managed geographically in four reportable operating segments: North America, Latin America, Europe and Asia/Africa.
Management measures segment profit as operating income, which is defined as income before interest expense and income taxes. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Corporate operations include research and development costs, unallocated overhead costs, and gains and losses on sales of non-strategic brands and assets. Corporate assets include primarily benefit plan assets.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
The financial and descriptive information on the Company's geographic area and industry segment data, appearing in the tables contained in management's discussion of this report, is an integral part of these financial statements.
Reclassifications
Certain prior year balances have been reclassified to conform with current year presentation.
3. Acquisitions and Divestitures
During 2000, 1999 and 1998, the Company made several acquisitions totaling $64.9, $46.4 and $22.6, respectively. Individually, none of these acquisitions were significant.
The acquisitions were accounted for as purchases, and accordingly, the purchase prices were allocated to the net tangible and intangible assets acquired based on estimated fair values at the dates the acquisitions were consummated. The results of operations of the acquired businesses have been included in the Consolidated Financial Statements since the respective acquisition dates. The inclusion of pro forma financial data for all acquisitions would not have materially affected the financial information included herein.
The aggregate sale price of all 2000, 1999 and 1998 divestitures was $102.5, $94.7 and $57.4, respectively. These divestitures included the Mexico Viva detergent brand in 2000, the U.S. Baby Magic brand in 1999 and the HandiWipes brand in 1998.
4. Long-Term Debt and Credit Facilities
Long-term debt consists of the following at December 31:
Commercial paper and certain other short-term borrowings are classified as long-term debt as it is the Company's intent and ability to refinance such obligations on a long-term basis. Scheduled maturities of debt outstanding at December 31, 2000, excluding short-term borrowings reclassified, are as follows: 2001--$320.2; 2002--$358.0; 2003--$623.4; 2004--$123.3; 2005--$77.2, and $918.9 thereafter. The Company has entered into interest rate swap agreements and foreign exchange contracts related to certain of these debt instruments (see Note 11).
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
At December 31, 2000, the Company had unused credit facilities amounting to $1,398.1. Commitment fees related to credit facilities are not material. The weighted average interest rate on short-term borrowings, excluding amounts reclassified, as of December 31, 2000 and 1999, was 7.6% and 7.8%, respectively.
The Company's long-term debt agreements include various restrictive covenants and require the maintenance of certain defined financial ratios with which the Company is in compliance.
5. Capital Stock and Stock Compensation Plans
Preferred Stock
Preferred Stock consists of 250,000 authorized shares without par value. It is issuable in series, of which one series of 125,000 shares, designated $4.25 Preferred Stock, with a stated and redeemable value of $100 per share, has been issued. The $4.25 Preferred Stock is redeemable only at the option of the Company. At December 31, 2000 and 1999, 103,350 and 115,510 shares of $4.25 Preferred Stock, respectively, were outstanding.
Preference Stock
In 1988, the Company authorized the issuance of 50,000,000 shares of Preference Stock, without par value. The Series B Convertible Preference Stock, which is convertible into eight shares of common stock, ranks junior to all series of the Preferred Stock. At December 31, 2000 and 1999, 5,254,847 and 5,446,442 shares of Series B Convertible Preference Stock, respectively, were outstanding and issued to the Company's Employee Stock Ownership Plan.
Shareholder Rights Plan
Under the Company's Shareholder Rights Plan, each share of the Company's common stock carries with it one Preference Share Purchase Right ("Rights"). The Rights themselves will at no time have voting power or pay dividends. The Rights become exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the common stock. When exercisable, each Right entitles a holder to buy one two- hundredth of a share of a new series of preference stock at an exercise price of $220.00, subject to adjustment.
If the Company is acquired in a merger or other business combination, each Right will entitle a holder to buy, at the Right's then current exercise price, a number of the acquiring company's common shares having a market value of twice such price. In addition, if a person or group acquires 15% or more of the Company's common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right's then current exercise price, a number of shares of the Company's common stock having a market value of twice the Right's exercise price.
Further, at any time after a person or group acquires 15% or more (but less than 50%) of the Company's common stock, the Board of Directors may, at its option, exchange part or all of the Rights (other than Rights held by the acquiring person or group) for shares of the Company's common stock on a one- for-one basis.
The Company, at the option of its Board of Directors, may amend the Rights or redeem the Rights for $.01 at any time before the acquisition by a person or group of beneficial ownership of 15% or more of its common stock. The Board of Directors is also authorized to reduce the 15% threshold to not less than 10%. Unless redeemed earlier, the Rights will expire on October 31, 2008.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
Stock Repurchases
During 1998, the Company entered into a series of forward purchase agreements on its common stock. These agreements are settled on a net basis in shares of the Company's common stock. To the extent that the market price of the Company's common stock on a settlement date is higher/(lower) than the forward purchase price, the net differential is received/(paid) by the Company. As of December 31, 2000, agreements were in place covering approximately $509.8 of the Company's common stock (7.9 million shares) that had forward prices averaging $64.55 per share. During 2000 and 1999, settlements resulted in the Company delivering 217,574 shares and receiving 2,322,701 shares, respectively, which were recorded as treasury stock transactions.
Incentive Stock Plan
The Company has a plan that provides for grants of restricted stock awards for officers and other executives of the Company and its major subsidiaries. A committee of non-employee members of the Board of Directors administers the plan. During 2000 and 1999, 667,090 and 692,238 shares, respectively, were awarded to employees in accordance with the provisions of the plan.
Stock Option Plans
The Company's Stock Option Plans ("Plans") provide for the issuance of non- qualified stock options to officers and key employees. Options are granted at prices not less than the fair market value on the date of grant and vest over three years. At 2000 year-end, 25,691,772 shares of common stock were available for future grants.
The Plans contain a feature that provides for the grant of new options when previously owned shares of Company stock are used to exercise existing options. The number of new options granted under this feature is equal to the number of shares of previously owned Company stock used to exercise the original options and to pay the related required U.S. income tax. The new options are granted at a price equal to the fair market value on the date of the new grant and have the same expiration date as the original options exercised.
Stock option plan activity is summarized below:
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
The following table summarizes information relating to currently outstanding and exercisable options as of December 31, 2000:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for options granted under the Plans. Accordingly, no compensation expense has been recognized. Had compensation expense been determined based on the Black-Scholes option pricing model value at the grant date for awards in 2000, 1999 and 1998 consistent with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's net income, basic earnings per common share and diluted earnings per common share would have been $1,006.1, $1.71 per share and $1.60 per share, respectively, in 2000; $891.9, $1.49 per share and $1.40 per share, respectively, in 1999; and $803.5, $1.33 per share and $1.25 per share, respectively, in 1998.
The weighted average Black-Scholes value of grants issued in 2000, 1999 and 1998 was $10.95, $8.61 and $6.24, respectively. The Black-Scholes value of each option granted is estimated using the Black-Scholes option pricing model with the following assumptions: option term until exercise ranging from 2 to 7 years, volatility ranging from 22% to 41%, risk-free interest rate ranging from 5.0% to 6.2% and an expected dividend yield of 2.5%. The Black-Scholes model used to determine the option values shown above was developed to estimate the fair value of short-term freely tradable, fully transferable options without vesting restrictions and was not designed to value reloads, all of which significantly differ from the Company's stock option awards. The value of this model is also limited by the inclusion of highly subjective assumptions which greatly affect calculated values.
6. Employee Stock Ownership Plan
In 1989, the Company expanded its Employee Stock Ownership Plan ("ESOP") through the introduction of a leveraged ESOP covering certain employees who have met certain eligibility requirements. The ESOP issued $410.0 of long-term notes due through 2009 bearing an average interest rate of 8.7%. The long-term notes, which are guaranteed by the Company, are reflected in the accompanying Consolidated Balance Sheets. The ESOP used the proceeds of the notes to purchase 6.3 million shares of Series B Convertible Preference Stock from the Company. The Stock has a minimum redemption price of $65 per share and pays semiannual dividends equal to the higher of $2.44 or the current dividend paid on eight common shares for the comparable six-month period. During 2000, the ESOP entered into a loan agreement with the Company under which the benefits of the ESOP may be extended through 2035.
Dividends on these preferred shares, as well as common shares also held by the ESOP, are paid to the ESOP trust and, together with contributions, are used by the ESOP to repay principal and interest on the outstanding
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
notes. Preferred shares are released for allocation to participants based upon the ratio of the current year's debt service to the sum of total principal and interest payments over the life of the loan. At December 31, 2000, 1,654,219 shares were allocated to participant accounts and 3,600,628 shares were available for future allocation. Each allocated share may be converted by the trustee into eight common shares but preferred shares generally convert only after the employee ceases to work for the Company.
Dividends on these preferred shares are deductible for income tax purposes and, accordingly, are reflected net of their tax benefit in the Consolidated Statements of Retained Earnings, Comprehensive Income and Changes in Capital Accounts.
Annual expense related to the leveraged ESOP, determined as interest incurred on the notes, less employee contributions and dividends received on the shares held by the ESOP, plus the higher of either principal repayments on the notes or the cost of shares allocated, was $3.4 in 2000, $9.2 in 1999 and $2.4 in 1998. Similarly, unearned compensation, shown as a reduction in shareholders' equity, is reduced by the higher of principal payments or the cost of shares allocated.
Interest incurred on the ESOP's notes was $31.4 in 2000, $32.0 in 1999 and $32.5 in 1998. The Company paid dividends on the stock held by the ESOP of $28.6 in 2000, $29.1 in 1999 and $29.3 in 1998. Company contributions to the ESOP were $4.8 in 2000, $9.3 in 1999 and $0 in 1998. Employee contributions to the ESOP were $0 in 2000, $.6 in 1999 and $9.4 in 1998.
7. Retirement Plans and Other Retiree Benefits
Retirement Plans
The Company, its U.S. subsidiaries and some of its overseas subsidiaries maintain defined benefit retirement plans covering substantially all of their employees. Benefits are based primarily on years of service and employees' career earnings. In the Company's principal U.S. plans, funds are contributed to the trusts in accordance with regulatory limits to provide for current service and for any unfunded projected benefit obligation over a reasonable period. Assets of the plans consist principally of common stocks, guaranteed investment contracts with insurance companies, investments in real estate funds and U.S. Government and corporate obligations. Domestic plan assets also include investments in the Company's common stock representing 11% and 10% of plan assets at December 31, 2000 and 1999, respectively.
Other Retiree Benefits
The Company and certain of its subsidiaries provide health care and life insurance benefits for retired employees to the extent not provided by government-sponsored plans. The Company utilizes a portion of its leveraged ESOP, in the form of future retiree contributions, to reduce its obligation to provide these postretirement benefits and offset its current service cost. Postretirement benefits otherwise are not currently funded.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
Summarized information of the Company's defined benefit retirement plans and postretirement plans are as follows:
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
The accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $202.0 and $5.4, respectively, as of December 31, 2000, and $203.7 and $9.7, respectively, as of December 31, 1999. These amounts represent non- qualified domestic plans and plans at foreign locations that are primarily unfunded, as such book reserves equal to the unfunded amount have been recorded.
The projected benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $291.7 and $50.4, respectively, as of December 31, 2000, and $271.6 and $42.9, respectively, as of December 31, 1999.
The assumed medical cost trend rate used in measuring the postretirement benefit obligation was 7.0% for 2001, 6.0% for 2002 and 5.0% for years thereafter. Changes in this rate can have a significant effect on amounts reported. The effect of a 1% increase/decrease in the assumed medical cost trend rate would change the accumulated postretirement benefit obligation by approximately $15.5; annual expense would change by approximately $1.8.
8. Income Taxes
The provision for income taxes consists of the following for the three years ended December 31:
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
The difference between the statutory U.S. federal income tax rate and the Company's global effective tax rate as reflected in the Consolidated Statements of Income is as follows:
The components of deferred tax assets (liabilities) are as follows at December 31:
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
The major component of the 2000 and 1999 valuation allowance relates to tax benefits in certain jurisdictions not expected to be realized. The net change in the valuation allowance for deferred taxes resulted from tax credits utilized.
Applicable U.S. income and foreign withholding taxes have not been provided on approximately $752.0 of undistributed earnings of foreign subsidiaries at December 31, 2000. These earnings are currently considered to be permanently invested and are not subject to such taxes. Determining the tax liability that would arise if these earnings were remitted is not practicable.
9. Supplemental Income Statement Information
10. Supplemental Balance Sheet Information
Inventories valued under LIFO amounted to $133.0 and $137.3 at December 31, 2000 and 1999, respectively. The excess of current cost over LIFO cost at the end of each year was $34.4 and $37.2, respectively. The liquidations of LIFO inventory quantities had no effect on income in 2000 and 1999, and increased income by $1.3 in 1998.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
11. Fair Value of Financial Instruments
The Company utilizes interest rate swap contracts and foreign currency exchange contracts to manage interest rate and foreign currency exposures. (See Management's Discussion and Analysis--Managing Foreign Currency and Interest Rate Exposure for further discussion.) In assessing the fair value of financial instruments at December 31, 2000 and 1999, the Company has used available market information and other valuation methodologies. Some judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
The carrying amounts of cash and cash equivalents, marketable securities, long-term investments and short-term debt approximated fair value as of December 31, 2000 and 1999. The estimated fair value of the Company's remaining financial instruments at December 31 are summarized as follows:
As of December 31, 2000 and 1999, the Company had interest rate agreements outstanding with an aggregate notional amount of $824.6 and $965.9, respectively, with maturities through 2018.
As of December 31, 2000 and 1999, the Company had approximately $728.6 and $431.6, respectively, of outstanding foreign exchange contracts. At December 31, 2000, approximately 3% of outstanding foreign exchange contracts served to hedge net investments in foreign subsidiaries, 35% hedged intercompany loans, 35% hedged third-party debt and other firm commitments, and 27% represented contracts used to redenominate foreign-currency debt into U.S. dollars.
The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate agreements and foreign exchange contracts; however, nonperformance by these counterparties is considered remote as it is the Company's policy to contract with diversified counterparties that have a long-term debt rating of A or higher.
12. Restructured Operations
In September 1995, a reserve of $460.5 was established to cover a worldwide restructuring of manufacturing and administrative operations. The cost of completing the restructuring activities approximated the original estimate. The planned restructuring projects, primarily in North America and Europe but also affecting Hill's Pet Nutrition and Colgate locations in Asia/Africa and certain Latin America locations, were completed as of December 31, 2000. As planned, the restructuring has produced savings that increase pretax earnings by over $150.0 annually.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
A summary of the changes in the restructuring reserve is as follows:
The headcount reductions resulting from the restructuring projects totaled 4,869. Factory closures and/or reconfigurations totaled 25. The headcount and factory totals were increased by 727 and 1, respectively, as a result of refinements of original estimates.
In December 2000 the Company recorded a charge of $63.9 ($42.5 aftertax) associated with the realignment of three manufacturing locations in Latin America and the exiting of our business in Nigeria. The charge, recorded in Other expense, net, included $14.2 for termination costs and $49.7 for exiting of manufacturing operations. At December 31, 2000, the remaining reserve of $7.2 is classified as a current liability representing termination costs for 979 employees to be paid during 2001.
13. Earnings Per Share
14. Commitments and Contingencies
Minimum rental commitments under noncancellable operating leases, primarily for office and warehouse facilities, are $70.3 in 2001, $63.9 in 2002, $55.1 in 2003, $47.2 in 2004, $44.6 in 2005 and $57.1 thereafter. Rental expense amounted to $90.6 in 2000, $102.4 in 1999 and $102.7 in 1998. Contingent rentals, sublease income and capital leases, which are included in fixed assets, are not significant.
The Company has various contractual commitments to purchase raw materials, products and services totaling $137.9 that expire through 2003.
The Company is a party to various superfund and other environmental matters and is contingently liable with respect to lawsuits, taxes and other matters arising out of the normal course of business. Management proactively reviews and manages its exposure to, and the impact of, environmental matters and other contingencies.
COLGATE-PALMOLIVE COMPANY
Notes to Consolidated Financial Statements--(continued)
(Dollars in Millions Except Per Share Amounts)
In 1995, the Company acquired the Kolynos oral care business from American Home Products, as described in the Company's Form 8-K dated January 10, 1995. On September 8, 1998, the Company's Brazilian subsidiary received notice of an administrative proceeding from the Central Bank of Brazil primarily taking issue with certain filings made with the Central Bank in connection with the financing of this strategic transaction, but in no way challenging or seeking to unwind the acquisition. The Central Bank of Brazil in January 2001 notified the Company of its decision and imposed a fine which has subsequently been appealed. During the appeal, the imposition of the fine is suspended. Further appeals are available within the Brazilian federal courts. Management believes, based on the opinion of its Brazilian legal counsel and other experts, that the filings challenged by the Central Bank fully complied with Brazilian law. The Company intends to challenge this fine vigorously and believes that ultimately it will prevail on appeal.
While it is possible that the Company's cash flows and results of operations in particular quarterly or annual periods could be affected by the one-time impacts of the resolution of the above contingencies, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material impact on the Company's financial condition or ongoing cash flows and results of operations.
15. Quarterly Financial Data (Unaudited)
COLGATE-PALMOLIVE COMPANY
Market and Dividend Information
The Company's common stock and $4.25 Preferred Stock are listed on the New York Stock Exchange. The trading symbol for the common stock is CL. Dividends on the common stock have been paid every year since 1895 and the amount of dividends paid per share has increased for 38 consecutive years.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 2000
(Dollars in Millions Except Per Share Amounts)
- -------- NOTES:
(/1/) Uncollectible accounts written off and cash discounts allowed. (/2/) Decrease in allowance due to utilization of tax credits and net operating loss carryforwards.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1999
(Dollars in Millions Except Per Share Amounts)
- -------- NOTES:
(/1/) Uncollectible accounts written off and cash discounts allowed. (/2/) Primarily due to the impact of exchange rate changes in Brazil. (/3/) Increase/decrease in allowance for tax loss and tax credit carryforward benefits that are likely not to be utilized in the future.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1998
(Dollars in Millions Except Per Share Amounts)
- -------- NOTES:
(/1/) Uncollectible accounts written off and cash discounts allowed. (/2/) Increase/decrease in allowance for tax loss and tax credit carryforward benefits that are likely not to be utilized in the future.
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Colgate-Palmolive Company:
We have audited the accompanying consolidated balance sheets of Colgate- Palmolive Company (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, retained earnings, comprehensive income and changes in capital accounts, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Colgate-Palmolive Company and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
New York, New York January 30, 2001
COLGATE-PALMOLIVE COMPANY
Historical Financial Summary(/1/)
Dollars in Millions Except Per Share Amounts
- ------- (/1/) All share and per share amounts have been restated to reflect the 1999, 1997 and the 1991 two-for-one stock splits. (/2/) Income in 1995 includes a net provision for restructured operations of $369.2. (Excluding this charge, earnings per share would have been $.89, basic and $.84, diluted.) (/3/) Income in 1994 includes a one-time charge of $5.2 for the sale of a non- core business, Princess House. (/4/) Income in 1993 includes a one-time impact of adopting new mandated accounting standards, effective in the first quarter of 1993, of $358.2. (Excluding this charge, earnings per share would have been $.84, basic and $.79, diluted.) (/5/) Income in 1991 includes a net provision for restructured operations of $243.0. (Excluding this charge, earnings per share would have been $.64, basic and $.60, diluted.)
COLGATE-PALMOLIVE COMPANY
EXHIBITS TO FORM 10-K
YEAR ENDED DECEMBER 31, 2000
Commission File No. 1-644
- -------- * Registrant hereby undertakes upon request to furnish the Commission with a copy of any instrument with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.
The exhibits indicated above that are not included with the Form 10-K are available upon request and payment of a reasonable fee approximating the registrant's cost of providing and mailing the exhibits. Inquiries should be directed to:
Colgate-Palmolive Company Office of the Secretary (10-K Exhibits) 300 Park Avenue New York, New York 10022-7499