Executive Overview
Colgate-Palmolive Company (together with its subsidiaries, "we," the "Company" or "Colgate") is a caring, innovative growth company reimagining a healthier future for people, their pets and our planet. We seek to deliver strong, consistent business results and superior shareholder returns, as well as to provide Colgate people with an innovative and inclusive work environment. We do this by developing and selling products globally that make people's lives healthier and more enjoyable and by embracing our sustainability, diversity, equity and inclusion and social responsibility strategy across our organization. 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, profitable 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 theU.S. , with approximately 45% of our Net sales coming from emerging markets (which consist ofLatin America ,Asia (excludingJapan ),Africa /Eurasia andCentral 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 andAfrica /Eurasia, all of which sell primarily to a variety of traditional and eCommerce retailers, wholesalers and distributors. ThroughHill'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. We are engaged in manufacturing and sourcing of products and materials on a global scale and have major manufacturing, warehousing facilities and distribution centers in every region around the world. 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. COVID-19 The COVID-19 pandemic and government steps to control the spread of COVID-19 have had and continue to have a profound impact on the way people live, work, interact and shop and have significantly impacted and may continue to impact economic activity around the world. We have a well-established Crisis Management Team ("CMT") process, and the CMT, together with our senior management team and Colgate people around the world, continue to respond to and manage the challenges presented by COVID-19. During the nine months endedSeptember 30, 2020 many of the communities in which we manufacture, market and sell our products experienced unprecedented "stay at home" orders, travel or movement restrictions and other government actions to reduce the spread and address the impact of COVID-19, and have implemented varying policies to resume economic activity. The situation continues to be uncertain and varies by geography, as infection rates of COVID-19 continue to increase in many regions throughout the world, and authorities have taken different approaches to address the pandemic and resume economic activity. Because the vast majority of our products (such as oral care products, soaps and other personal hygiene products, home cleaners and pet food) have been deemed essential for the health and well-being of people and their pets, we have, in most instances, been able to continue operating our business. 27 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) In so doing, the health and safety of Colgate employees has been and remains our first priority. Many of our employees globally continued to work from home during the quarter endedSeptember 30, 2020 . In those instances where our employees cannot perform their work at home, such as in our factories and in certain of our laboratories, or in geographies where circumstances have allowed us to offer employees the ability to return to the office, often on a voluntary and staggered basis, we have implemented additional health and safety measures and social distancing protocols, consistent with government recommendations and/or requirements, to help to ensure their safety, often at an additional cost. In addition, during the nine months endedSeptember 30, 2020 , we have experienced some limited factory closures, particularly inIndia , and in some cases we have seen increased instances of absenteeism. In addition, some of our suppliers, customers, distributors and service providers have experienced disruptions to their businesses. We saw a significant increase in demand across many of our categories in the nine months endedSeptember 30, 2020 , driven by consumer pantry-loading and increased consumption of our products. This was particularly true in certain categories, such as liquid hand soap, dish liquid, bar soap and cleaners, and we believe that some of the increase in demand in these categories is sustainable in light of changes in consumer behavior related to COVID-19. In other categories, such as oral care and pet food, consumer demand trends have continued to normalize in the quarter endedSeptember 30, 2020 . Across our business, changes in consumer demand for our products vary by product category and geography depending on, among other things, the severity of the COVID-19 outbreak and retailer availability. At the same time, during the nine months endedSeptember 30, 2020 , we continued to experience declines in certain channels, including professional sales and travel retail, due to the economic slowdown and restricted consumer movement in many geographies throughout the world. We also continue to see changes in the purchasing patterns of our consumers, including the nature and/or frequency of visits by consumers to retailers and dental, veterinary and skin health professionals and a shift in many markets to purchasing our products online. During the nine months endedSeptember 30, 2020 , in some instances, we were not able to keep up with the increased consumer demand for our products and our products were at times out of stock on retailers' shelves. In some cases, we incurred additional costs as we worked to meet this increased demand. Despite continuing to significantly ramp up production of in-demand products, we expect that some of our products may continue to be out of stock on retailers' shelves for a period of time. Government actions in response to COVID-19 have impacted and may continue to impact our consumers' ability to purchase and our ability to manufacture and distribute our products. While we believe that, in the long-term, consumer demand for the products in our categories will continue to be strong, uncertainties continue surrounding the timing and extent of the pandemic and its recovery. These uncertainties include: the impact of the timing and scale of changes to travel and movement restrictions in certain geographies, the availability and widespread distribution and use of a safe and effective COVID-19 vaccine, the timing and impact of consumer pantry-loading and destocking activity in certain markets, product demand trends and the impact of COVID-19 on the global economy. Our retail customers are also being impacted by the global pandemic; their success in addressing COVID-19 and maintaining their operations could impact consumer access to and sales of our products. We expect the ongoing economic impact and health concerns associated with COVID-19 to continue to impact consumer behavior, shopping patterns and consumption preferences despite the lifting of government restrictions and the reopening of economies around the world. While we currently expect to be able to continue operating our business as described above and we intend to continue to work with government authorities and to follow the necessary protocols to maintain the health and safety of our employees and contract providers, uncertainty resulting from COVID-19 could result in an unforeseen additional disruption to our business, including our global supply chain and retailer network, and/or require us to incur additional operational costs.
For more information about the anticipated COVID-19 impact, see "Outlook" below.
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Business Strategy
To achieve our business and financial objectives, we are focused on innovating our core businesses; improving our brand building activities; 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, diversity, equity and inclusion and social responsibility 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. The investments needed to drive growth are supported by strong cash flow performance and our disciplined capital allocation strategy. These investments 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 ourOral Care , Personal Care and Pet Nutrition businesses, including by expanding our portfolio in premium skin health. Significant Items Impacting Comparability OnJanuary 31, 2020 , the Company acquiredHello Products LLC ("Hello"), an oral care business, for cash consideration of$351 . The acquisition was financed with a combination of debt and cash. This acquisition is part of the Company's strategy to focus on high growth segments within itsOral Care , Personal Care and Pet Nutrition businesses. See Note 4, Acquisitions to the Condensed Consolidated Financial Statements for additional information. The provision for income taxes for the nine months endedSeptember 30, 2020 includes$71 of income tax benefits recorded on a discrete period basis of which$45 relates to previously recorded foreign withholding taxes and$26 relates to a previously recorded valuation allowance against a deferred tax asset. As more fully described in "Results of Operations-Income Taxes," and in Note 10, Income Taxes to the Condensed Consolidated Financial Statements, both items were previously recorded in connection with the charge recorded in 2017 and revised in 2018 related to the Tax Cuts and Jobs Act (the "TCJA"). OnSeptember 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 ourOral Care , Personal Care and Pet Nutrition businesses, including by expanding our portfolio in premium skin health. OnJuly 17, 2020 , the Company completed the purchase of the outstanding non-controlling interest of Filorga's joint venture based inHong Kong and covering theHong Kong andChina markets for approximately €85 (approximately$99 ) in cash. See Note 4, Acquisitions to the Condensed Consolidated Financial Statements for additional information. 29
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Our restructuring program, known as the "Global Growth and Efficiency Program," concluded onDecember 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. During the three months endedSeptember 30, 2020 , the Company adjusted the accrual balances related to certain projects approved prior to the conclusion of the Global Growth and Efficiency Program to reflect its revised estimate of remaining liabilities. This adjustment resulted in a reduction of$16 ($13 after-tax) to restructuring accruals as ofSeptember 30, 2020 . No new restructuring projects were approved for implementation during the nine months endedSeptember 30, 2020 . See Note 5, Restructuring and Related Implementation Charges to the Condensed Consolidated Financial Statements for additional information. 30
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Outlook Looking forward, we expect global macroeconomic, political and market conditions to remain challenging, especially due to the COVID-19 pandemic. We have seen short-term improvement in category growth rates due to heightened demand for certain health and hygiene products, particularly liquid hand soap, dish liquid, bar soap and cleaners. While we believe some of this is sustainable due to consumer behavior changes resulting from the COVID-19 pandemic, we have seen increased volatility in consumption rates across all of our categories as a result of the pandemic and it is therefore difficult to predict category growth rates over the next six to twelve months. In the longer term, post COVID-19, we expect category growth rates to remain below historical levels, except for the categories discussed above and pet nutrition, where we expect consumption to remain elevated to some extent for the foreseeable future. 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 seen increases in promotional activities in certain markets as retailers try aggressively to get consumers back into the stores after prolonged "stay at home" and other government restrictions ease, a trend we expect will continue. We have 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. These trends have been magnified due to the COVID-19 pandemic in many of our geographies and we plan to continue to invest behind our eCommerce capabilities. 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 theU.S. , we have experienced and will likely continue to experience increasingly 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, in the current environment, it may become increasingly difficult to implement certain of these mitigation strategies. Should these conditions persist, they could adversely affect our future results. As discussed above, we continue to closely monitor the impact of COVID-19 on our business. While we have taken, and will continue to take, measures to mitigate the effects of COVID-19, we cannot estimate with certainty the full extent of COVID-19's impact on our business, results of operations, cash flows and/or financial condition. For more information about factors that could impact our business, including due to COVID-19, see "Risk Factors" in Part II, Item IA of this Quarterly Report and Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . In summary, we believe we are well prepared to meet the challenges ahead due to our strong financial condition, experience operating in challenging environments, resilient global supply chain 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 our culture and focusing on all of our stakeholders. Our key focus is to sustain the underlying momentum of our business, to adapt our financial plans to deliver on 2020, while leaving us well positioned for continued growth in 2021. 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 manage through the COVID-19 pandemic and to increase shareholder value over the long term. 31
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Results of Operations
Three Months
Worldwide Net sales were$4,153 in the third quarter of 2020, up 5.5% from the third quarter of 2019, as volume growth of 5.0% and net selling price increases of 4.5% were partially offset by negative foreign exchange of 4.0%. Acquisitions contributed 2% to volume. Organic sales (Net sales excluding the impact of foreign exchange, acquisitions and divestments), a non-GAAP financial measure, increased 7.5% in the third quarter of 2020. A reconciliation of net sales growth to organic sales growth is provided under "Non-GAAP Financial Measures" below. Net sales in the Oral, Personal and Home Care product segment were$3,449 in the third quarter of 2020, up 4.5% from the third quarter of 2019, as volume growth of 4.5% and net selling price increases of 4.5% were partially offset by negative foreign exchange of 4.5%. Acquisitions contributed 2.5% to volume. Organic sales in the Oral, Personal and Home Care product segment increased 6.5% in the third quarter of 2020. The Company's share of the global toothpaste market was 39.9% on a year-to-date basis, down 0.8 share points from the year ago period, and its share of the global manual toothbrush market was 31.1% on a year-to-date basis, up 0.2 share points from the year ago period. Year-to-date market shares in toothpaste were up inNorth America andLatin America and down inEurope ,Asia Pacific andAfrica /Eurasia versus the comparable 2019 period. In the manual toothbrush category, year-to-date market shares were up inNorth America ,Latin America ,Europe andAfrica /Eurasia and down inAsia Pacific versus the comparable 2019 period. For additional information regarding market shares, see "Market Share Information" below. Net sales in theHill's Pet Nutrition segment were$704 in the third quarter of 2020, up 11.0% from the third quarter of 2019, due to volume growth of 6.5% and net selling price increases of 4.5% while foreign exchange was flat. Organic sales in theHill's Pet Nutrition segment increased 11.0% in the third quarter of 2020. 32 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Gross Profit/Margin
Worldwide Gross profit increased to$2,540 in the third quarter of 2020 from$2,316 in the third quarter of 2019. Gross profit in the third quarter of 2019 included charges resulting from the Global Growth and Efficiency Program. Excluding charges resulting from the Global Growth and Efficiency Program in the third quarter of 2019, Gross profit increased to$2,540 in the third quarter of 2020 from$2,317 in the third quarter of 2019, an increase of$134 resulting from higher Net sales and an increase of$89 resulting from higher Gross profit margin. Worldwide Gross profit margin increased to 61.2% in the third quarter of 2020 from 59.0% in the third quarter of 2019. Excluding charges resulting from the Global Growth and Efficiency Program in the third quarter of 2019, Gross profit margin increased by 220 basis points (bps) to 61.2% in the third quarter of 2020 from 59.0% in the third quarter of 2019. This increase in Gross profit margin was primarily due to cost savings from the Company's funding-the-growth initiatives (250 bps) and higher pricing (170 bps), partially offset by higher raw and packaging material costs (230 bps), which included foreign exchange transaction costs. Three Months Ended September 30, 2020 2019 Gross profit, GAAP $ 2,540$ 2,316 Global Growth and Efficiency Program - 1 Gross profit, non-GAAP $ 2,540$ 2,317
Three Months Ended
2020 2019 Basis Point Change Gross profit margin, GAAP 61.2 % 59.0 % 220 Global Growth and Efficiency Program - - Gross profit margin, non-GAAP 61.2 % 59.0 % 220 33
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 6% to$1,518 in the third quarter of 2020 from$1,429 in the third quarter of 2019. Selling, general and administrative expenses in the third quarter of 2020 included benefits resulting from the Global Growth and Efficiency Program and, in the third quarter of 2019, included charges resulting from the Global Growth and Efficiency Program. Excluding these items in both periods as applicable, Selling, general and administrative expenses increased to$1,521 in the third quarter of 2020 from$1,401 in the third quarter of 2019, reflecting higher overhead expenses of$67 and increased advertising investment of$53 . Selling, general and administrative expenses as a percentage of Net sales increased to 36.6% in the third quarter of 2020 from 36.4% in the third quarter of 2019. Excluding the items described above in both periods as applicable, Selling, general and administrative expenses as a percentage of Net sales increased by 90 bps to 36.6% in the third quarter of 2020 as compared to 35.7% in the third quarter of 2019. This increase was due to increased advertising investment (70 bps) and higher overhead expenses (20 bps), primarily driven by higher logistics costs, both as a percentage of Net sales. In the third quarter of 2020, advertising investment increased as a percentage of Net sales to 11.5% from 10.8% in the third quarter of 2019, or 13% in absolute terms to$476 as compared with$423 in the third quarter of 2019.
Three Months Ended
2020 2019 Selling, general and administrative expenses, GAAP $ 1,518$ 1,429 Global Growth and Efficiency Program 3 (28) Selling, general and administrative expenses, non-GAAP $ 1,521$ 1,401 Three Months Ended September 30, 2020 2019 Basis Point Change Selling, general and administrative expenses as a percentage of Net sales, GAAP 36.6 % 36.4 % 20 Global Growth and Efficiency Program - (0.7) Selling, general and administrative expenses as a percentage of Net sales, non-GAAP 36.6 % 35.7 % 90 34 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Operating Profit
Operating profit increased 19% to$1,018 in the third quarter of 2020 from$856 in the third quarter of 2019. Operating profit in the third quarter of 2020 included benefits resulting from the Global Growth and Efficiency Program. Operating profit in the third quarter of 2019 included charges resulting from the Global Growth and Efficiency Program and acquisition-related costs. Excluding these items in both periods as applicable, Operating profit increased to$1,002 in the third quarter of 2020 from$900 in the third quarter of 2019, as an increase in Gross profit was partially offset by an increase in Selling, general and administrative expenses. Operating profit margin was 24.5% in the third quarter of 2020, an increase of 270 bps compared to 21.8% in the third quarter of 2019. Excluding the items described above in both periods as applicable, Operating profit margin was 24.1% in the third quarter of 2020, an increase of 120 bps compared to 22.9% in the third quarter of 2019. This increase in Operating profit margin was primarily due to an increase in Gross profit (220 bps), partially offset by an increase in Selling, general and administrative expenses (90 bps), both as a percentage of Net sales.
Three Months Ended
2020 2019 % Change Operating profit, GAAP$ 1,018 $ 856 19 % Global Growth and Efficiency Program (16) 26 - Acquisition-related costs - 18 - Operating profit, non-GAAP$ 1,002 $ 900 11 % Three Months Ended September 30, 2020 2019 Basis Point Change Operating profit margin, GAAP 24.5 % 21.8 % 270 Global Growth and Efficiency Program (0.4) 0.7 - Acquisition-related costs - 0.4 - Operating profit margin, non-GAAP 24.1 % 22.9 % 120
Non-Service Related Postretirement Costs
Non-service related postretirement costs were$15 in the third quarter of 2020, as compared to$27 in the third quarter of 2019. Non-service related postretirement costs in the third quarter of 2019 included charges resulting from the Global Growth and Efficiency Program. Excluding charges resulting from the Global Growth and Efficiency Program in the third quarter of 2019, Non-service related postretirement costs were$15 in the third quarter of 2020, as compared to$26 in the third quarter of 2019, primarily due to lower interest cost.
Three Months Ended
2020 2019 Non-service related postretirement costs, GAAP $ 15$ 27 Global Growth and Efficiency Program - (1) Non-service related postretirement costs, non-GAAP $
15
Interest (Income) Expense, Net
Interest (income) expense, net was
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Net Income Attributable to
Net income attributable toColgate-Palmolive Company in the third quarter of 2020 increased to$698 from$578 in the third quarter of 2019, and Earnings per common share on a diluted basis increased to$0.81 per share in the third quarter of 2020 from$0.67 in the third quarter of 2019. Net income attributable toColgate-Palmolive Company in the third quarter of 2020 included benefits resulting from the Global Growth and Efficiency Program, and in the third quarter of 2019 included charges resulting from the Global Growth and Efficiency Program and acquisition-related costs. Excluding the items described above in both periods as applicable, Net income attributable toColgate-Palmolive Company in the third quarter of 2020 increased 12% to$685 from$614 in the third quarter of 2019, and Earnings per common share on a diluted basis increased 11% to$0.79 in the third quarter of 2020 from$0.71 in the third quarter of 2019. Three Months Ended September 30, 2020 Net Income Net Income Including Attributable To Income Before Provision For Noncontrolling Colgate-Palmolive Diluted Earnings Income Taxes Income Taxes(1) Interests Company Per Share(2) As Reported GAAP$ 967 $ 222 $ 745 $ 698$ 0.81 Global Growth and Efficiency Program (16) (3) (13) (13) (0.02) Non-GAAP$ 951 $ 219 $ 732 $ 685$ 0.79 Three
Months Ended
Net Income Net Income Including Attributable To Income Before Provision For Noncontrolling Colgate-Palmolive Diluted Earnings Income Taxes Income Taxes(1) Interests Company Per Share(2) As Reported GAAP$ 794 $ 167 $ 627 $ 578$ 0.67 Global Growth and Efficiency Program 27 5 22 22 0.03 Acquisition-related costs 18 4 14 14 0.01 Non-GAAP$ 839 $ 176 $ 663 $ 614$ 0.71 (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. 36 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Oral, Personal and Home Care
North America Three Months Ended September 30, 2020 2019 Change Net sales $ 923$ 869 6.5 % Operating profit $ 242$ 248 (2) % % of Net sales 26.2 % 28.5 % (230) bps Net sales inNorth America increased 6.5% in the third quarter of 2020 to$923 as a result of volume growth of 3.0% and net selling price increases of 3.5%, while foreign exchange was flat. The Company's acquisition of Hello contributed 1.5% to volume inNorth America . Organic sales inNorth America increased 5.0% in the third quarter of 2020. Organic sales growth was led bythe United States . The increase in organic sales inNorth America in the third quarter of 2020 versus the third quarter of 2019 was due to increases inOral Care , Personal Care and Home Care organic sales. The increase inOral Care was primarily due to organic sales growth in the power toothbrush and toothpaste categories. The increase in Personal Care was primarily due to organic sales growth in the liquid hand soap category, partially offset by declines in organic sales in the skin health and underarm protection categories. The increase in Home Care was primarily due to organic sales growth in the hand dish category, partially offset by a decline in organic sales in the fabric softener category. Operating profit inNorth America decreased 2% in the third quarter of 2020 to$242 , or 230 bps to 26.2% as a percentage of Net sales. This decrease in Operating profit as a percentage of Net sales was due to increases in Selling, general and administrative expenses (340 bps) and Other (income) expense, net (150 bps), partially offset by an increase in Gross profit (260 bps), all 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 (220 bps) and higher pricing, partially offset by higher raw and packaging material costs (70 bps). This increase in Selling, general and administrative expenses was due to higher overhead expenses (190 bps), primarily driven by higher logistics costs, and increased advertising investment (150 bps). The increase in Other (income) expense, net was primarily due to an inventory write off.Latin America Three Months Ended September 30, 2020 2019 Change Net sales $ 837$ 881 (5.0) % Operating profit $ 250$ 235 6 % % of Net sales 29.9 % 26.7 % 320 bps Net sales inLatin America decreased 5.0% in the third quarter of 2020 to$837 , as negative foreign exchange of 16.5% was partially offset by volume growth of 2.0% and net selling price increases of 9.5%. Organic sales inLatin America increased 11.5% in the third quarter of 2020. Organic sales growth was led byBrazil ,Argentina ,Mexico andColombia . The increase in organic sales inLatin America in the third quarter of 2020 versus the third quarter of 2019 was due to increases inOral Care , Personal Care and Home Care organic sales. The increase inOral 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, shampoo and liquid hand soap categories, partially offset by a decline in organic sales in the underarm protection category. The increase in Home Care was primarily due to organic sales growth in the hand dish, fabric softener and liquid cleaner categories. 37 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Operating profit inLatin America increased 6% in the third quarter of 2020 to$250 , or 320 bps to 29.9% as a percentage of Net sales. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross profit (260 bps) and a decrease in Other (income) expense, net (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 (410 bps) and higher pricing, partially offset by higher raw and packaging material costs (580 bps), which included foreign exchange transaction costs. This decrease in Other (income) expense, net was due to a value added tax matter inBrazil . Europe Three Months Ended September 30, 2020 2019 Change Net sales $ 712$ 607 17.0 % Operating profit $ 169$ 153 10 % % of Net sales 23.7 % 25.2 % (150) bps Net sales inEurope increased 17.0% in the third quarter of 2020 to$712 due to volume growth of 12.0%, an increase in net selling prices of 0.5% and positive foreign exchange of 4.5%. The Company's acquisition of Filorga contributed 9.5% to volume inEurope . Organic sales inEurope increased 3.0% in the third quarter of 2020. Organic sales growth inFrance ,the Netherlands andDenmark were partially offset by an organic sales decline in theUnited Kingdom . The increase in organic sales inEurope in the third quarter of 2020 versus the third quarter of 2019 was primarily due to an increase in Personal Care and Home Care organic sales. The increase in Personal Care was primarily due to organic sales growth in the liquid hand soap and body wash categories, partially offset by a decline in organic sales in the underarm protection category. The increase in Home Care was primarily due to organic sales growth in the fabric softener and hand dish categories. Operating profit inEurope increased 10% in the third quarter of 2020 to$169 , while as a percentage of Net sales it decreased 150 bps to 23.7%. This decrease in Operating profit as a percentage of Net sales was due to increases in Selling, general and administrative expenses (330 bps) and Other (income) expense, net (80 bps), partially offset by an increase in Gross profit (260 bps), all 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 (200 bps) and favorable mix (140 bps), partially offset by higher raw and packaging material costs (70 bps). This increase in Selling, general and administrative expenses was due to increased advertising investment (200 bps) and higher overhead expenses (130 bps). This increase in Other (income) expense, net was due to amortization expense related to the Filorga acquisition.Asia Pacific Three Months Ended September 30, 2020 2019 Change Net sales $ 722$ 690 4.5 % Operating profit $ 222$ 193 15 % % of Net sales 30.7 % 28.0 % 270 bps Net sales inAsia Pacific increased 4.5% in the third quarter of 2020 to$722 due to volume growth of 2.5% and selling price increases of 2.0%, while foreign exchange was flat. Organic sales inAsia Pacific increased 4.5% in the third quarter of 2020. Organic sales growth was led byAustralia ,India ,the Philippines and theGreater China region. The increase in organic sales inAsia Pacific in the third quarter of 2020 versus the third quarter of 2019 was due to increases inOral Care , Personal Care and Home Care organic sales. The increase inOral Care was primarily due to an increase in organic sales in the toothpaste category. The increase in Personal Care was primarily due to organic sales growth in the liquid hand soap and shampoo categories. The increase in Home Care was primarily due to organic sales growth in the hand dish category. 38 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Operating profit inAsia Pacific increased 15% in the third quarter of 2020 to$222 , or 270 bps to 30.7% as a percentage of Net sales. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross profit (150 bps), and a decrease in Selling, general and administrative expenses (110 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 (230 bps) and higher pricing, partially offset by higher raw and packaging material costs (140 bps). This decrease in Selling, general and administrative expenses was due to lower overhead expenses (80 bps) and decreased advertising investment (30 bps).Africa /Eurasia Three Months Ended September 30, 2020 2019 Change Net sales $ 255$ 248 2.5 % Operating profit $ 61$ 48 27 % % of Net sales 23.9 % 19.4 % 450 bps Net sales inAfrica /Eurasia increased 2.5% in the third quarter of 2020 to$255 , as volume growth of 6.5% and net selling price increases of 6.5% were partially offset by negative foreign exchange of 10.5%. The Company's acquisition of a 51% controlling interest inColgate Tolaram Pte. Ltd. , a joint venture which owns theNigeria -basedHypo Homecare Products Limited (the "Nigeria Joint Venture"), contributed 1.0% to volume inAfrica /Eurasia. Organic sales inAfrica /Eurasia increased 12.0% in the third quarter of 2020. Organic sales growth was led byRussia ,South Africa andTurkey . The increase in organic sales inAfrica /Eurasia in the third quarter of 2020 versus the third quarter of 2019 was primarily due to increases inOral Care and Personal Care organic sales. The increase inOral 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 body wash, liquid hand soap and bar soap categories. Operating profit inAfrica /Eurasia increased 27% in the third quarter of 2020 to$61 , or 450 bps to 23.9% as a percentage of Net sales. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross profit (50 bps) and a decrease in Selling, general and administrative expenses (390 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 (290 bps) and higher pricing, partially offset by higher raw and packaging material costs (460 bps), which included foreign exchange transaction costs. This decrease in Selling, general and administrative expenses was due to lower overhead expenses (240 bps) and decreased advertising investment (150 bps). 39
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Hill's Pet Nutrition Three Months Ended September 30, 2020 2019 Change Net sales $ 704$ 633 11.0 % Operating profit $ 196$ 169 16 % % of Net sales 27.8 % 26.7 % 110 bps Net sales forHill's Pet Nutrition increased 11.0% in the third quarter of 2020 to$704 due to volume growth of 6.5% and net selling price increases of 4.5%, while foreign exchange was flat. Organic sales inHill's Pet Nutrition increased 11.0% in the third quarter of 2020. Organic sales growth was led bythe United States ,Europe ,Australia andCanada .
The increase in organic sales in the third quarter of 2020 was primarily due to organic sales growth in the Science Diet and Prescription Diet categories.
Operating profit inHill's Pet Nutrition increased 16% in the third quarter of 2020 to$196 , or 110 bps to 27.8% as a percentage of Net sales. This increase in Operating profit as a percentage of Net sales was due to an increase in Gross profit (140 bps), partially offset by an increase in Selling, general and administrative expenses (40 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 (160 bps) and higher pricing, partially offset by higher raw and packaging material costs (130 bps). This increase in Selling, general and administrative expenses was due to increased advertising investment (220 bps), partially offset by lower overhead expenses (180 bps). During the quarter endedMarch 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. Inthe United States , the voluntary recall was conducted in cooperation with theU.S. Food and Drug Administration . Following the announcement of the voluntary recall, and as ofSeptember 30, 2020 , 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 aEuropean Union class and one individual action, all related to the voluntary recall and filed in various jurisdictions inthe United States . In addition, two putative class actions related to the voluntary recall have been filed inCanada . Eight of the putative class actions lawsuits inthe United States and one of the putative class action lawsuits inCanada 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 and are not expected to have a material impact in future periods. Corporate Three Months Ended September 30, 2020 2019 Change Operating profit (loss) $ (122)$ (190) (36) % Operating profit (loss) related to Corporate was ($122 ) in the third quarter of 2020 as compared to ($190 ) in the third quarter of 2019. In the third quarter of 2020, Corporate Operating profit (loss) included benefits of$16 resulting from the Global Growth and Efficiency Program. In the third quarter of 2019, Corporate Operating profit (loss) included charges of$26 resulting from the Global Growth and Efficiency Program and acquisition-related costs of$18 . 40 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Nine Months
Worldwide Net sales were
Net sales in the Oral, Personal and Home Care product segment were$10,052 in the first nine months of 2020, an increase of 2.0% as compared to the first nine months of 2019, as volume growth of 4.5% and net selling price increases of 3.0% were partially offset by negative foreign exchange of 5.5%. Acquisitions contributed 2.0% to volume. Organic sales in the Oral, Personal and Home Care product segment increased 5.5% in the first nine months of 2020. The increase in organic sales in the first nine months of 2020 versus the first nine months of 2019 was due to increases inOral Care , Personal Care and Home Care organic sales. The increase inOral 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 liquid hand soap, bar soap and body wash categories, partially offset by a decline in organic sales in the underarm protection category. The increase in Home Care was primarily due to organic sales growth in the hand dish and liquid cleaner categories. Net sales in theHill's Pet Nutrition segment were$2,095 in the first nine months of 2020, an increase of 13.5% from the first nine months of 2019, as volume growth of 10.0% and net selling price increases of 4.5% were partially offset by negative foreign exchange of 1.0%. Organic sales in theHill's Pet Nutrition segment increased 14.5% in the first nine months of 2020. 41 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Net sales and Operating profit by segment were as follows:
Nine Months Ended September 30, 2020 2019 Net sales Oral, Personal and Home Care North America $ 2,801$ 2,568 Latin America 2,531 2,700 Europe 2,004 1,798 Asia Pacific 1,980 2,035 Africa/Eurasia 736 732 Total Oral, Personal and Home Care 10,052 9,833 Pet Nutrition 2,095 1,845 Total Net sales $ 12,147$ 11,678 Operating profit Oral, Personal and Home Care North America $ 753$ 750 Latin America 728 718 Europe 482 452 Asia Pacific 559 557 Africa/Eurasia 174 141 Total Oral, Personal and Home Care 2,696 2,618 Pet Nutrition 588 501 Corporate (368) (496) Total Operating profit $ 2,916$ 2,623 Within the Oral, Personal and Home Care product segment, North America Net sales increased 9.0%, driven by volume growth of 8.5% and net selling price increases of 1.0%, partially offset by negative foreign exchange of 0.5%. The Hello acquisition contributed 1.5% to volume inNorth America . Organic sales inNorth America increased 8.0%. Latin America Net sales decreased 6.0%, driven by negative foreign exchange of 14.5%, partially offset by volume growth of 0.5% and net selling price increases of 8.0%. Organic sales inLatin America increased 8.5%. Europe Net sales increased 11.5%, driven by volume growth of 12.0%, partially offset by net selling prices decreases of 0.5% while foreign exchange was flat. The Filorga acquisition contributed 9.0% to volume inEurope . Organic sales inEurope increased 2.5%. Asia Pacific Net sales decreased 2.5%, driven by volume declines of 3.0% and negative foreign exchange of 1.5%, partially offset by net selling prices increases of 2.0%. Organic sales inAsia Pacific decreased 1.0%.Africa /Eurasia Net sales increased 0.5%, as volume growth of 5.5% and net selling price increases of 3.5% were partially offset by negative foreign exchange of 8.5%. The Nigeria Joint Venture contributed 1.5% to volume inAfrica /Eurasia. Organic sales inAfrica /Eurasia increased 7.5%. In the first nine months of 2020, Operating profit (loss) related to Corporate was ($368 ) as compared to ($496 ) in the first nine months of 2019. In the first nine months of 2020, Corporate Operating profit (loss) included acquisition-related costs of$6 and benefits of$16 resulting from the Global Growth and Efficiency Program. In the first nine months of 2019, Corporate Operating profit (loss) included$94 of charges resulting from the Global Growth and Efficiency Program and acquisition-related costs of$18 . 42 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Gross Profit/Margin
Worldwide Gross profit increased to$7,374 in the first nine months of 2020 from$6,911 in the first nine months of 2019. Gross profit in the first nine months of 2020 included acquisition-related costs. Gross profit in the first nine months of 2019 included charges resulting from the Global Growth and Efficiency Program. Excluding these items in both periods as applicable, Gross profit increased to$7,378 in the first nine months of 2020 from$6,920 in the first nine months of 2019, reflecting an increase of$287 resulting from higher Net sales and an increase of$171 resulting from higher Gross profit margin. Worldwide Gross profit margin increased to 60.7% in the first nine months of 2020 from 59.2% in the first nine months of 2019. Excluding the items described above in both periods as applicable, Gross profit margin increased by 140 bps to 60.7% in the first nine months of 2020, from 59.3% in the first nine months of 2019, due to cost savings from the Company's funding-the-growth initiatives (210 bps) and higher pricing (120 bps), partially offset by higher raw and packaging material costs (190 bps), which included foreign exchange transaction costs. Nine Months Ended September 30, 2020 2019 Gross profit, GAAP $ 7,374$ 6,911 Acquisition-related costs 4 - Global Growth and Efficiency Program - 9 Gross profit, non-GAAP $ 7,378$ 6,920 Nine Months Ended September 30, 2020 2019 Basis Point Change Gross profit margin, GAAP 60.7 % 59.2 % 150 Acquisition-related costs - - Global Growth and Efficiency Program - 0.1 Gross profit margin, non-GAAP 60.7 % 59.3 % 140 43
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 5% to$4,386 in the first nine months of 2020 from$4,163 in the first nine months of 2019. Selling, general and administrative expenses in the first nine months of 2020 included benefits resulting from the Global Growth and Efficiency Program. Selling, general and administrative expenses in the first nine months of 2019 included charges resulting from the Global Growth and Efficiency Program. Excluding these items in both periods as applicable, Selling, general and administrative expenses increased to$4,389 in the first nine months of 2020 from$4,121 in the first nine months of 2019, reflecting higher overhead expenses of$137 and increased advertising investment of$131 . Selling, general and administrative expenses as a percentage of Net sales increased to 36.1% in the first nine months of 2020 from 35.6% in the first nine months of 2019. Excluding the items described above in both periods as applicable, Selling, general and administrative expenses as a percentage of Net sales increased by 80 bps to 36.1% in the first nine months of 2020 as compared to 35.3% in the first nine months of 2019. This increase was due to increased advertising investment (60 bps) and higher overhead expenses (20 bps), both as a percentage of Net sales. In the first nine months of 2020, advertising investment increased as a percentage of Net sales to 11.5% from 10.9% in the first nine months of 2019, or 10.3% in absolute terms to$1,399 , as compared with$1,268 in the first nine months of 2019.
Nine Months Ended
2020 2019 Selling, general and administrative expenses, GAAP $ 4,386$ 4,163 Global Growth and Efficiency Program 3 (42) Selling, general and administrative expenses, non-GAAP $ 4,389$ 4,121 Nine Months Ended September 30, 2020 2019 Basis Point Change Selling, general and administrative expenses as a percentage of Net sales, GAAP 36.1 % 35.6 % 50 Global Growth and Efficiency Program - (0.3) Selling, general and administrative expenses as a percentage of Net sales, non-GAAP 36.1 % 35.3 % 80 44 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Operating Profit
Operating profit increased 11% to$2,916 in the first nine months of 2020 from$2,623 in the first nine months of 2019. Operating profit in the first nine months of 2020 included acquisition-related costs and benefits resulting from the Global Growth and Efficiency Program. Operating profit in the first nine months of 2019 included charges resulting from the Global Growth and Efficiency Program and acquisitions-related costs. Excluding these items in both periods as applicable, Operating profit increased to$2,906 in the first nine months of 2020 from$2,735 in the first nine months of 2019, primarily due to an increase in Gross profit, partially offset by an increase in Selling, general and administrative expenses. Operating profit margin was 24.0% in the first nine months of 2020, an increase of 150 bps compared to 22.5% in the first nine months of 2019. Excluding the items described above in both periods as applicable, Operating profit margin was 23.9% in the first nine months of 2020, an increase of 50 bps compared to 23.4% in the first nine months of 2019, as higher Gross profit (140 bps) was partially offset by an increase in Selling, general and administrative expenses (80 bps), both as a percentage of Net sales.
Nine Months Ended
2020 2019 % Change Operating profit, GAAP$ 2,916 $ 2,623 11 % Global Growth and Efficiency Program (16) 94 Acquisition-related costs 6 18 Operating profit, non-GAAP$ 2,906 $ 2,735 6 % Nine Months Ended September 30, 2020 2019 Basis Point Change Operating profit margin, GAAP 24.0 % 22.5 % 150 Global Growth and Efficiency Program (0.1) 0.8 Acquisition-related costs - 0.1 Operating profit margin, non-GAAP 23.9 % 23.4 % 50
Non-Service Related Postretirement Costs
Non-service related postretirement costs were$56 in the first nine months of 2020, as compared to$79 in the first nine months of 2019. Non-service related postretirement costs in the first nine months of 2019 included charges resulting from the Global Growth and Efficiency Program. Excluding chargers resulting from the Global Growth and Efficiency Program in the first nine months of 2019, Non-service related postretirement costs were$56 in the first nine months of 2020, as compared to$75 in the first nine months of 2019, primarily due to lower interest cost. Nine Months Ended September 30, 2020 2019 Non-service related postretirement costs, GAAP $ 56$ 79 Global Growth and Efficiency Program - (4) Non-service related postretirement costs, non-GAAP $
56
Interest (Income) Expense, Net
Interest (income) expense, net was
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Income Taxes
The effective income tax rate was 23.0% for the third quarter of 2020 as
compared to 21.0% for the third quarter of 2019. As reflected in the table
below, the non-GAAP effective income tax rate was 23.0% for the quarter ended
The effective income tax rate was 21.2% for the first nine months of 2020 as compared to 24.1% for the first nine months of 2019. As reflected in the table below, the non-GAAP effective income tax rate was 23.9% for the first nine months of 2020, as compared to 24.1% in the comparable period of 2019. The quarterly provision for income taxes is determined based on the Company's estimated full year effective income tax rate adjusted by the amount of tax attributable to infrequent or unusual items that are separately recognized on a discrete basis in the income tax provision in the quarter in which they occur. The Company's current estimate of its full year effective income tax rate before discrete period items is 24.0%, compared to 24.3% in the third quarter of 2019. See Note 10, Income Taxes to the Condensed Consolidated Financial Statements for additional details.
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