SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2002 Commission File Number 1-922
THE GILLETTE COMPANY
(Exact name of registrant as specified in its charter)
Incorporated in Delaware 04-1366970
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Prudential Tower Building, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 421-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class
Common Stock, $1.00 par value
Shares Outstanding October 31, 2002 .. . . . . . . . . . . . . . .1,054,979,520
PAGE 1
PART I. FINANCIAL INFORMATION
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(Millions, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales .......................................... $ 2,168 $ 2,123 $ 5,924 $ 5,666
Cost of Sales ...................................... 882 922 2,374 2,317
------- ------- ------- -------
Gross Profit ..................................... 1,286 1,201 3,550 3,349
Selling, General and Administrative Expenses ....... 764 728 2,281 2,182
Restructuring - Gain on Sale of Vaniqa ............. - - (30) -
------- ------- ------- -------
Profit from Operations ........................... 522 473 1,299 1,167
Nonoperating Charges (Income):
Interest income .................................. (7) (1) (18) (3)
Interest expense ................................. 21 34 65 119
Exchange ......................................... (9) 6 (17) 13
Other charges - net .............................. 4 5 8 9
------- ------- ------- -------
9 44 38 138
------- ------- ------- -------
Income before Income Taxes ......................... 513 429 1,261 1,029
Income Taxes ....................................... 159 133 391 319
------- ------- ------- -------
Net Income ....................................... $ 354 $ 296 $ 870 $ 710
======= ======= ======= =======
Adjusted Net Income, assuming the adoption
of SFAS 142 for 2001 ............................. $ 354 $ 302 $ 870 $ 727
======= ======= ======= =======
Net Income per Common Share:
Basic ............................................ $ .33 $ .28 $ .82 $ .67
======= ======= ======= =======
Assuming Full Dilution ........................... $ .33 $ .28 $ .82 $ .67
======= ======= ======= =======
Adjusted Net Income per Common Share:
Basic ............................................ $ .33 $ .28 $ .82 $ .69
======= ======= ======= =======
Assuming Full Dilution ........................... $ .33 $ .28 $ .82 $ .69
======= ======= ======= =======
Dividends per Common Share:
Declared ......................................... $ - $ .1625 $ .3250 $ .3250
Paid ............................................. $ .1625 $ .1625 $ .4875 $ .4875
Weighted average number of common shares outstanding
Basic ............................................ 1,058 1,055 1,057 1,055
Assuming full dilution ........................... 1,060 1,058 1,061 1,058
See Accompanying Notes to Consolidated Financial Statements.
PAGE 2
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Millions)
September 30, December 31, September 30,
2002 2001 2001
------------ ------------ ------------
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents .............................. $ 981 $ 947 $ 68
Trade receivables, less allowances, September 2002, $61;
December 2001, $69; September 2001, $62 .............. 1,220 1,473 1,499
Other receivables ...................................... 282 313 304
Inventories
Raw materials and supplies .......................... 113 130 145
Work in process ..................................... 246 183 215
Finished goods ...................................... 821 698 954
------- ------- -------
Total Inventories ................................. 1,180 1,011 1,314
------- ------- -------
Deferred income taxes .................................. 491 481 578
Other current assets ................................... 251 207 200
Net assets of discontinued operations................... - 23 28
------- ------- -------
Total Current Assets .............................. 4,405 4,455 3,991
------- ------- -------
Property, Plant and Equipment, at cost ................... 6,304 6,005 5,991
Less accumulated depreciation ............................ (2,809) (2,457) (2,454)
------- ------- -------
Net Property, Plant and Equipment ................. 3,495 3,548 3,537
------- ------- -------
Goodwill ................................................. 952 935 1,051
Intangible Assets, less accumulated amortization ......... 400 418 480
Other Assets ............................................. 766 613 618
------- ------- -------
$10,018 $ 9,969 $ 9,677
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
PAGE 3
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(Millions, except per share amount)
September 30, December 31, September 30,
2002 2001 2001
------------ ------------ ------------
(Unaudited) (Unaudited)
Current Liabilities:
Loans payable .................................... $ 1,176 $ 2,235 $ 1,808
Current portion of long-term debt ................ 755 428 565
Accounts payable ................................. 519 401 353
Accrued liabilities .............................. 1,238 1,307 1,306
Dividends payable ................................ - 172 -
Income taxes ..................................... 345 295 416
-------- -------- --------
Total Current Liabilities ..................... 4,033 4,838 4,448
-------- -------- --------
Long-Term Debt ..................................... 1,852 1,654 1,669
Deferred Income Taxes .............................. 591 459 449
Other Long-Term Liabilities ........................ 713 805 715
Minority Interest .................................. 44 42 44
Contingent Redemption Value of Common Stock
Put Options ...................................... 241 34 99
Stockholders' Equity:
Common stock, par value $1.00 per share:
Authorized 2,320 shares
Issued: Sept. 2002, 1,370 shares;
Dec. 2001, 1,368 shares;
Sept. 2001, 1,367 shares ............... 1,370 1,368 1,367
Additional paid-in capital ....................... 931 1,094 1,013
Earnings reinvested in the business .............. 6,604 6,077 6,220
Accumulated other comprehensive loss ............. (1,396) (1,437) (1,382)
Treasury stock, at cost: Sept. 2002,
Dec. and Sept. 2001, 312 shares ................. (4,965) (4,965) (4,965)
-------- -------- --------
Total Stockholders' Equity ............... 2,544 2,137 2,253
-------- -------- --------
$10,018 $ 9,969 $ 9,677
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
(Unaudited)
Nine Months Ended
September 30
------------------
2002 2001
---- ----
Operating Activities
Net income ..................................... $ 870 $ 710
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 371 359
Other ........................................ 12 (9)
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures:
Accounts receivable ........................ 323 637
Inventories ................................ (146) (183)
Accounts payable and accrued liabilities ... 82 (235)
Other working capital items ................ (97) (39)
Other noncurrent assets and liabilities .... 5 (60)
----- -----
Net cash provided by operating activities 1,420 1,180
----- -----
Investing Activities
Additions to property, plant and equipment ..... (278) (449)
Disposals of property, plant and equipment ..... 31 84
Other .......................................... 1 1
----- -----
Net cash used in investing activities .... (246) (364)
----- -----
Financing Activities
Purchase of treasury stock - (12)
Proceeds from sale of put options .............. 15 8
Proceeds from exercise of stock option and
purchase plans ............................ 31 33
Proceeds from long-term debt ................... 619 200
Repayment of long-term debt .................... (197) (256)
Decrease in loans payable ...................... (1,061) (372)
Dividends paid ................................. (515) (514)
Settlements of debt-related derivative contracts (8) 6
----- -----
Net cash used in financing activities .... (1,116) (907)
----- -----
Effect of Exchange Rate Changes on Cash ............ 2 (2)
Net Cash Provided (Used) by Discontinued Operations. (26) 99
----- -----
Increase in Cash and Cash Equivalents .............. 34 6
Cash and Cash Equivalents at Beginning of Period ... 947 62
----- -----
Cash and Cash Equivalents at End of Period ......... $ 981 $ 68
===== =====
Supplemental disclosure of cash paid for:
Interest ....................................... $ 66 $ 135
Income taxes ................................... $218 $ 153
See Accompanying Notes to Consolidated Financial Statements.
PAGE 5
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net Income, as reported $ 354 $ 296 $ 870 $ 710
Other Comprehensive Income (Loss),
net of tax:
Foreign Currency Translation 32 21 39 (58)
Cash Flow Hedges - (3) 2 (10)
----- ----- ----- -----
Comprehensive Income $ 386 $ 314 $ 911 $ 642
===== ===== ===== =====
Adjusted Comprehensive Income,
assuming the adoption of SFAS 142
for 2001 $ 386 $ 320 $ 911 $ 659
===== ===== ===== =====
Accumulated Other Comprehensive Loss
- ------------------------------------
The accumulated balances for the components of Other Comprehensive Loss are:
Accumulated
Foreign Other
Currency Pension Cash Flow Comprehensive
Translation Adjustment Hedges Loss
----------- ---------- ----------- -------------
Balance December 31, 2000 $(1,280) $ (34) $ - $(1,314)
Change in period 19 - (7) 12
Income tax benefit (expense) (62) - 2 (60)
------ ------ ------ -------
Balance March 31, 2001 $(1,323) $ (34) $ (5) $(1,362)
Change in period (16) - (4) (20)
Income tax benefit (expense) (20) - 2 (18)
------ ------ ------ -------
Balance June 30, 2001 $(1,359) $ (34) $ (7) $(1,400)
Change in period (2) - (4) (6)
Income tax benefit (expense) 23 - 1 24
------ ------ ------ -------
Balance September 30, 2001 $(1,338) $ (34) $ (10) $(1,382)
====== ====== ====== =======
Balance December 31, 2001 $(1,373) $ (56) $ (8) $(1,437)
Change in period (46) - 5 (41)
Income tax benefit (expense) 6 - (2) 4
------ ------ ------ -------
Balance March 31, 2002 $(1,413) $ (56) $ (5) $(1,474)
Change in period 172 - (2) 170
Income tax benefit (expense) (125) - 1 (124)
------ ------ ------ -------
Balance June 30, 2002 $(1,366) $ (56) $ (6) $(1,428)
Change in period (37) - - (37)
Income tax benefit (expense) 69 - - 69
------ ------ ------ -------
Balance September 30, 2002 $(1,334) $ (56) $ (6) $(1,396)
====== ====== ====== =======
The change in accumulated foreign currency translation adjustments for the
quarters ending September 30, 2002 and 2001, were gains, net of tax, of $32
million and $21 million, respectively. The gains in both quarters were due to
strengthening European currencies offset by weakening Latin American currencies
versus the U.S. dollar.
See Accompanying Notes to Consolidated Financial Statements.
PAGE 6
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Comments
- -------------------
Reference is made to the registrant's 2001 Annual Report to Stockholders, which
contains, at pages 26 through 50, the audited consolidated financial statements
and the notes thereto, which are incorporated by reference into the registrant's
Annual Report on Form 10-K for the year ended December 31, 2001.
With respect to the financial information for the interim periods included in
this report, which is unaudited, the management of the Company believes that all
adjustments necessary for a fair presentation of the results for such interim
periods have been included.
Financial statements of subsidiaries outside the U.S., other than those
operating in highly inflationary environments, are measured using the local
currency as the functional currency. Adjustments from translating these
financial statements into U.S. dollars are accumulated in the equity section of
the balance sheet under the caption, "Accumulated Other Comprehensive Gain or
Loss."
For subsidiaries operating in highly inflationary economies, the U.S. dollar is
the functional currency. Therefore, exchange gains and losses for these
subsidiaries are included with all other transactional exchange gains and losses
in the Consolidated Statement of Income under the caption, "Exchange."
Prior-year financial statements have been reclassified to conform to the 2002
presentations.
Accounting Pronouncements
- -------------------------
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services." In November 2001, the issues discussed in EITF 00-25 were
codified with related issues into EITF 01-9, "Accounting for Consideration Given
By a Vendor To a Customer (Including a Reseller of the Vendor's Products)." This
issue addresses the income statement classification of slotting fees,
cooperative advertising arrangements and buydowns. The consensus requires that
certain customer promotional payments that were previously classified as
marketing expenses be classified as a reduction of revenue. The Company adopted
the consensus on January 1, 2002. The adoption of EITF 00-25 resulted in the
following reclassifications in the three months ended September 30, 2001, income
statement: net sales, gross profit and selling, general and administrative
expenses were reduced by $238 million. The adoption of EITF 00-25 resulted in
the following reclassifications in the nine months ended September 30, 2001,
income statement: net sales, gross profit and selling, general and
administrative expenses were reduced by $576 million. The adoption of EITF 00-25
had no impact on profit from operations, net income or earnings per share.
PAGE 7
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2001, Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," was issued. The Company adopted the
provisions of SFAS 142 on January 1, 2002. SFAS 142 requires that goodwill and
other intangible assets with indefinite lives no longer be amortized, but
instead be tested for impairment, at least annually, in accordance with the new
impairment testing provisions of SFAS 142. Statement 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
During the first quarter of 2002, the Company completed its evaluation of the
carrying amounts of goodwill and other intangible assets, and noted that certain
goodwill and indefinite-lived intangible assets were inadvertently excluded from
the Company's disclosures of goodwill and indefinite-lived intangible assets in
the "Effect of Recent Accounting Pronouncements" footnote in the consolidated
financial statements for the year ended December 31, 2001. Unamortized goodwill
at December 31, 2001, was $935 million. Unamortized other intangible assets with
indefinite lives at December 31, 2001, was $313 million.
The net impact of the adoption of SFAS 142 is a reduction of annual amortization
expense of $34 million. No impairment losses were recognized due to the change
in accounting principle.
Intangible Assets (Millions)
- ----------------------------
Weighted
Average September 30, 2002 December 31, 2001 September 30, 2001
Amortization ---------------------- ---------------------- ----------------------
Period Carrying Accumulated Carrying Accumulated Carrying Accumulated
(Years) Amount Amortization Amount Amortization Amount Amortization
------------ -------- ------------ -------- ------------ -------- ------------
Amortized Intangible Assets
Patents 6 $ 103 $ 50 $ 103 $ 38 $ 175 $ 46
Trademarks 6 11 2 11 1 11 1
Software 5 11 9 16 7 16 7
Endorsements - 61 61 61 61 61 61
Other 23 12 3 12 3 12 2
----- ----- ----- ----- ----- -----
Total 7 $ 198 $ 125 $ 203 $ 110 $ 275 $ 117
===== ===== ===== ===== ===== =====
Unamortized Intangible Assets
Trademarks $ 315 $ 313 $ 316
Pension 12 12 6
Aggregate Amortization Expense:
For the Three Months ended
September 30, 2002 $ 5
September 30, 2001 $ 14
For the Nine Months ended
September 30, 2002 $ 15
September 30, 2001 $ 42
Estimated Amortization Expense:
For the Years ended
December 31, 2002 $ 20
2003 $ 19
2004 $ 18
2005 $ 5
2006 $ 5
2007 $ 2
PAGE 8
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total Goodwill by segment follows.
September 30, Decemeber 31, September 30,
Net Carrying Amount 2002 2001 2001
------------ ------------ ------------
Blades & Razors $ 140 $ 140 $ 140
Personal Care - - -
Duracell 563 550 660
Oral Care 173 172 174
Braun 76 73 77
------ ----- ------
Total $ 952 $ 935 $1,051
====== ===== ======
The change between the December 31, 2001, and September 30, 2002, balances is
mainly due to the impact of foreign currency translation.
PAGE 9
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present a reconciliation of net income, earnings per share
and comprehensive income, as reported, to adjusted amounts which include the
impact of the adoption of SFAS 142 for all periods presented.
Goodwill and Intangible Assets - Adoption of SFAS 142
(millions, except per share amounts)
- -----------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2002 2001 2002 2001
------ ------ ------ ------
Net Income
- ----------
Net income, as reported $ 354 $ 296 $ 870 $ 710
Add: Goodwill amortization, net of tax 6 17
Add: Trademark amortization, net of tax 2 6
Less: Amortization from change in useful (2) (6)
lives, net of tax
----- ----- ----- -----
Adjusted net income $ 354 $ 302 $ 870 $ 727
===== ===== ===== =====
Net Income Per Common Share
- ---------------------------
Basic, as reported $ .33 $ .28 $ .82 $ .67
Add: Goodwill amortization, net of tax - .02
Add: Trademark amortization, net of tax - -
Less: Amortization from change in useful - -
lives, net of tax
----- ----- ----- -----
Basic, adjusted $ .33 $ .28 $ .82 $ .69
===== ===== ===== =====
Assuming full dilution, as reported $ .33 $ .28 $ .82 $ .67
Add: Goodwill amortization, net of tax - .02
Add: Trademark amortization, net of tax - -
Less: Amortization from change in useful - -
lives, net of tax
----- ----- ----- -----
Assuming full dilution, adjusted $ .33 $ .28 $ .82 $ .69
===== ===== ===== =====
Comprehensive Income
- --------------------
Comprehensive income, as reported $ 386 $ 314 $ 911 $ 642
Add: Goodwill amortization, net of tax 6 17
Add: Trademark amortization, net of tax 2 6
Less: Amortization from change in useful (2) (6)
lives, net of tax
----- ----- ----- -----
Adjusted comprehensive income $ 386 $ 320 $ 911 $ 659
===== ===== ===== =====
PAGE 10
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations," was
issued. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The Company plans to adopt
the provisions of SFAS 143 on January 1, 2003, and does not expect the adoption
to have a material impact on its financial statements.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued. It provides new guidance that modifies the
existing guidance in SFAS 121 and in APB Opinion No. 30. Goodwill will still be
evaluated for impairment under SFAS 142. The Company adopted SFAS 144 on January
1, 2002. Its adoption did not have any impact on the Company's financial
statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued. SFAS
145 rescinds SFAS 4 and SFAS 64 related to classification of gains and losses on
debt extinguishment such that most debt extinguishment gains and losses will no
longer be classified as extraordinary. SFAS 145 also amends SFAS 13 with respect
to sales-leaseback transactions. The Company adopted the provisions of SFAS 145
effective April 1, 2002, and the adoption had no impact on the Company's
reported results of operations or financial position.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The statement is
effective for exit or disposal activities initiated after December 31, 2002,
with early application encouraged. Management is in the process of evaluating
the impact of this statement and does not believe that its adoption will have a
material impact on the financial statements.
Advertising
- -----------
The advertising expense detailed below is included in selling, general and
administrative expenses.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 2,168 $ 2,123 $ 5,924 $ 5,666
Advertising 160 160 456 422
% Net Sales 7.4% 7.5% 7.7% 7.4%
PAGE 11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring and Asset Impairments
- -----------------------------------
On December 18, 2000, the Company announced a restructuring program and impaired
certain intangible assets. In accordance with EITF Issue No. 94-3, SFAS 121 and
SAB 100, the Company recorded, in the fourth quarter of 2000, a charge to
operating expenses of $572 million ($430 million after taxes, or $.41 in net
income per common share, fully diluted).
The charge for the restructuring program was $360 million, and activity under
the program is virtually complete. The majority of the remaining balance is due
to the timing of severance and other benefit payments. The charge for impaired
intangible assets was $212 million to write down $157 million of acquired
goodwill relating to the Thermoscan personal diagnostic appliance brand in the
Braun segment and $55 million of acquired goodwill and identifiable intangible
assets for certain national battery brands in the Duracell segment.
Details of the activity in the 2000 restructuring program follow. The other
benefits portion of employee-related expenses, shown below, include fringe
benefits, outplacement fees and special termination benefits related to
pensions.
2000 Restructuring Program
- --------------------------
Year to Plan
Activity Date Inception
Initial Through 2002 Through Balance
(Millions) Provision 2001 Activity Sept. 30, 2002 Sept. 30, 2002
- --------------------- --------- ----------- -------- -------------- --------------
Employee-related expenses
Severance payments $146 $ 90 $ 38 $128 $ 18
Other benefits 67 47 11 58 9
Asset impairments
Prop., plant, & equip. 120 120 - 120 -
Contractual obligations
and other 27 24 3 27 -
---- ---- ---- ---- ----
Total $360 $281 $ 52 $333 $ 27
==== ==== ==== ==== ====
Employee Reductions 2,700 2,620 139 2,759 -
PAGE 12
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring and Asset Impairments (Continued)
- -----------------------------------------------
During the fourth quarter of 2001, the Company recorded a charge of $63 million
associated with the withdrawal from several noncore businesses and the closing
of one factory in the Duracell segment. The factory closure, based on a study
that revealed excess worldwide capacity, resulted in the reduction of 170
employees. The factory closure and the majority of employee reductions have been
completed.
In June 2002, the Company recorded a $30 million pretax gain on the sale of
Gillette's rights in the Vaniqa business. Vaniqa, a prescription cream that
slows the growth of unwanted facial hair in women, was distributed through a
joint venture with Bristol-Myers Squibb. This gain included a recovery of $8
million to the restructuring reserve. Proceeds from the sale were received in
June 2002. Details of the activity in the 2001 restructuring program follow.
2001 Restructuring Program
- --------------------------
Year to Plan
Activity Date Inception
Initial Through 2002 Through Balance
(Millions) Provision 2001 Activity Sept. 30, 2002 Sept. 30, 2002
- --------------------- --------- -------- -------- -------------- --------------
Employee-related expenses
Severance payments $ 3 $ - $ 2 $ 2 $ 1
Prop., plant, & equipment 23 23 - 23 -
Contractual obligations
and other 37 7 20* 27* 10
---- ---- ---- ---- ----
Total $ 63 $ 30 $ 22 $ 52 $ 11
==== ==== ==== ==== ====
Employee Reductions 170 - 164 164 6
* Includes recovery of $8 million in June 2002.
PAGE 13
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Functional Excellence
- ---------------------
In the second quarter of 2002, the Company began actions associated with its
Functional Excellence ("FE") initiative. This initiative is focused on reducing
overhead costs, while upgrading capabilities, by improving processes and
eliminating duplication across functions. Through September 2002, "FE" programs
amounting to $48 million have been prepared, approved and executed. The costs
related to these programs, primarily severance related, have been recorded as
normal operating expenses in selling, general and administrative expenses.
PAGE 14
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share Repurchase Program
- ------------------------
The Company has a share repurchase program that authorizes the purchase of up to
125 million shares in the open market or in privately negotiated transactions,
depending on market conditions and other factors. From the inception of the
program through December 31, 2001, the Company repurchased 94.1 million shares
in the open market for $4,096 million. There were no repurchases in the first
nine months of 2002.
During 2002, the Company has continued to sell equity put options as an
enhancement to the repurchase program and collected $15.2 million in premiums
during the three months and nine months ended September 30, 2002. These options
provide the Company with an additional opportunity to supplement open-market
purchases of its common stock if the options expire "in the money" (the option
strike price is greater than the closing price for Gillette common stock on the
expiration date). In addition, the premiums received are a source of funding for
share purchases. The options are exercisable only on the last day of their term.
The Company, at its discretion, may elect to settle by paying net cash or by
purchasing the shares.
The put option prices were based on the market value of the Company's stock at
the date of issuance. The redemption value of the outstanding options, which
represents the options' price multiplied by the number of shares under option,
is presented in the accompanying consolidated balance sheet as "Contingent
Redemption Value of Common Stock Put Options", with a value of $241 million. All
of the outstanding put options mature in the fourth quarter.
At September 30, 2002, the outstanding put options had strike prices which were
greater than the closing price for Gillette common stock on September 30, 2002.
Those options were, therefore, "in the money." Although the options are not
exercisable until a future date, the "in the money" obligation at September 30,
2002 was $10.3 million.
PAGE 15
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Information by Business Segment
- -----------------------------------------
Net sales, profit (loss) from operations, adjusted profit (loss) from operations
for 2001 assuming adoption of SFAS 142 at January 1, 2001, and identifiable
assets for each of the Company's business segments are set forth below. There
are no material intersegment revenues.
Net Sales
--------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
(Millions) 2002 2001 2002 2001
------ ------ ------ ------
Blades & Razors $ 887 $ 861 $2,541 $2,347
Personal Care 213 214 595 586
Duracell 482 503 1,242 1,284
Oral Care 321 300 861 799
Braun 265 245 685 650
------ ------ ------ ------
Total $2,168 $2,123 $5,924 $5,666
====== ====== ====== ======
Profit/(Loss) from Operations
Three Months Ended September 30
--------------------------------------------------------
(Millions) 2002 2001 Amortization 2001
As Reported Adjustment As Adjusted
------ ----------- ------------ -----------
Blades & Razors $ 377 $ 332 $ - $ 332
Personal Care 17 28 - 28
Duracell 78 56 8 64
Oral Care 60 68 1 69
Braun 22 25 - 25
------ ------ ------ ------
Subtotal Reportable Segments 554 509 9 518
All Other (32) (36) - (36)
------ ------ ------ ------
Total $ 522 $ 473 $ 9 $ 482
====== ====== ====== ======
Profit/(Loss) from Operations
Nine Months Ended September 30
--------------------------------------------------------
(Millions) 2002 2001 Amortization 2001
As Reported Adjustment As Adjusted
------ ----------- ------------ -----------
Blades & Razors $ 989 $ 835 $ - $ 835
Personal Care 33 48 - 48
Duracell 123 134 24 158
Oral Care 163 163 3 166
Braun 47 65 - 65
------ ------ ------ ------
Subtotal Reportable Segments 1,355 1,245 27 1,272
All Other (1) (56) (78) - (78)
------ ------ ------ ------
Total $1,299 $1,167 $ 27 $1,194
(1) Nine months ended September 30, 2002, All Other includes the $30 million
pretax gain on the sale of Vaniqa.
PAGE 16
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable Assets
-------------------------------
Sept. 30, Dec. 31, Sept. 30,
(Millions) 2002 2001 2001
-------- ------- --------
Blades & Razors $ 3,149 $ 3,195 $ 3,120
Personal Care 526 515 520
Duracell 2,786 2,932 3,102
Oral Care 1,062 976 948
Braun 1,009 963 1,032
------- ------- -------
Subtotal Reportable Segments 8,532 8,581 8,722
All Other 1,486 1,365 927
Discontinued Operations - 23 28
------- ------- -------
Total $10,018 $ 9,969 $ 9,677
======= ======= =======
PAGE 17
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Computation of net income per common share
(Millions, except per share amounts)
- ------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30 September 30
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Income, as reported................. $ 354 $ 296 $ 870 $ 710
====== ====== ====== ======
Adjusted net income, assuming the
adoption of SFAS 142 for 2001 ........ $ 354 $ 302 $ 870 $ 727
====== ====== ====== ======
Common shares, basic ................... 1,058 1,055 1,057 1,055
Effect of dilutive securities:
Stock options ...................... 2 3 4 3
------ ------ ------ ------
Common shares, assuming full dilution 1,060 1,058 1,061 1,058
====== ====== ====== ======
Net Income per Common Share:
Basic ................................ $ .33 $ .28 $ .82 $ .67
====== ====== ====== ======
Assuming full dilution ........ $ .33 $ .28 $ .82 $ .67
====== ====== ====== ======
Adjusted Net Income per Common Share:
Basic $ .33 $ .28 $ .82 $ .69
====== ====== ====== ======
Assuming full dilution $ .33 $ .28 $ .82 $ .69
====== ====== ====== ======
As of September 30, 2002 and 2001, 56.2 million and 47.3 million shares of
common stock issuable under stock options, respectively, were not included in
the calculation of fully diluted earnings per share because the option exercise
price was above the market price. Therefore, the effect of including these
options in the calculation would have been anti-dilutive.
PAGE 18
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 123 Stock Options
- ----------------------
The Company applies APB 25 and related interpretations in accounting for its
stock option plans. In accordance with SFAS 123, the Company provides, on a pro
forma basis, the effect on the Company's net income and net income per common
share had the Company recorded an expense for the fair value of options granted
consistent with SFAS 123. For the years 1997 through 2001, the Company
calculated the fair value of the options granted under the plan based on a
one-year vesting period, even though the stock option plan was amended,
effective April 16, 1997, to provide for vesting in one-third increments over a
three-year period. The following tables present the pro forma information as
reported and as adjusted.
Years ended December 31,
(millions, except per share amounts) 2001 2000 1999 1998 1997
- ------------------------------------ ---- ---- ---- ---- ----
As Reported
- -----------
Net income
As reported $910 $392 $1,260 $1,081 $1,427
Pro forma 792 311 1,114 981 1,339
Net income per common share
Basic
As reported $.86 $.37 $ 1.15 .96 1.27
Pro forma .75 .29 1.02 .87 1.19
Assuming full dilution
As reported .86 .37 1.14 .95 1.24
Pro forma .75 .29 1.01 .86 1.16
As Adjusted
- -----------
Net income
As reported $910 $392 $1,260 $1,081 $1,427
Pro forma 801 282 1,179 1,031 1,410
Net income per common share
Basic
As reported $.86 $.37 $ 1.15 .96 1.27
Pro forma .76 .27 1.08 .92 1.24
Assuming full dilution
As reported .86 .37 1.14 .95 1.24
Pro forma .76 .27 1.06 .90 1.21
PAGE 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Results for any interim period, such as those described in the following
analysis, are not necessarily indicative of results for the entire year.
Third Quarter 2002 versus Third Quarter 2001
- --------------------------------------------
Total Company: Sales for the quarter ended September 30, 2002, were $2.17
billion, an increase of 2% versus the same quarter of the prior year. Pricing in
the quarter was favorable by 2%, and foreign exchange had no material impact.
Blades and Razors: Sales of blades and razors increased 3%, while profit from
operations increased 14%, compared with the third quarter of last year. Without
the effect of exchange, sales grew 4%. The key drivers to sales growth were
strong systems sales worldwide, higher pricing and ongoing trade-up to Mach3 and
Venus. In addition, shipments of disposable razors continued to improve during
the quarter. The increase in profits was driven by growth in Mach3 and Venus
globally, favorable systems versus disposables product mix and savings from our
strategic sourcing initiative. These gains more than offset incremental
Functional Excellence expenses. In the fourth quarter of 2001, we experienced a
pre-price increase buy-in of approximately two weeks supply of blade/razor
product in North America in advance of a price increase on select blade/razor
product effective January 1, 2002. The buy-in was equivalent to approximately
$50 million in sales. This year, we will not have a price increase effective
January 1, 2003. Therefore we anticipate no pre-price increase buy-in in the
fourth quarter of 2002. However, we have announced to our trade partners in
North America that we intend to increase prices on select blade/razor products
around February 1, 2003.
Personal Care: Personal Care sales in the quarter were 1% below those of 2001,
due to lower sales in Latin America, where the struggling economy in Argentina
and increased competitive pressures in Colombia continued to affect volumes and
pricing. The sales decline also reflected higher trade and consumer spending to
support new products in the US. These factors offset underlying unit growth in
the North America and AMEE markets. Personal Care profit from operations
declined 40%, as increased advertising to support new products more than offset
manufacturing efficiencies and savings from our strategic sourcing initiative.
Duracell: Sales of Duracell for the quarter decreased 4% versus those of a year
ago. Without the effect of exchange, sales fell 5%. Despite strong unit gains in
the Europe and AMEE markets, sales declined due to several factors, including
lower shipments in North America (share loss as a result of lower promotional
spending), the ongoing shift in product mix from Ultra to CopperTop, an adverse
shift in pack size mix related to the retail channel shift in sales towards mass
merchandisers and club stores, and battery category weakness in Latin America.
Profit from operations increased 41% versus the third quarter of the prior year,
due primarily to cost savings initiatives.
Oral Care: Oral Care sales were 7% above those of 2001. Without the effect of
exchange, sales were 6% above those of the prior year. In Manual Oral Care,
sales were driven by the successful North American launch of the Oral-B Stages
line of children's toothbrushes and the restage of the entry-level "Indicator"
brush. Strong growth in Asia and AMEE, particularly in Russia, from our entry
level Exceed, Vision and Classic toothbrushes also made a significant
contribution. In Power Oral Care, sales growth was driven by the 3D Excel
rechargeable power toothbrush in North America, incremental battery market share
in both North America and Europe and strong rechargeable gains in Asia plus
substantial gains in the battery powered business. Third-quarter profit from
operations fell 12%, reflecting incremental expenses related to the write-down
of excess real property, mix shift to battery brushes, higher advertising and
promotional support behind new products, and unfavorable pricing and higher
trade spending in the battery segment.
PAGE 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Braun: Sales of Braun in the quarter were 8% above those of the previous year.
Excluding exchange, Braun sales were 5% higher than in the prior year. The
increase in sales was driven by strong electric shaver performance in the North
America, Japan and AMEE markets, which offset weakness in the key German market
where conversion to the Euro negatively impacted consumer confidence resulting
in market contraction this quarter. Higher advertising spending behind new
products, the impact of the Yen on our margins in Japan and Functional
Excellence incremental costs more than offset the favorable impact of cost
savings initiatives, resulting in a 12% decrease in profit from operations,
compared with the prior year.
Nine Months 2002 versus Nine Months 2001
- ----------------------------------------
Total Company: Sales for the nine months ended September 30, 2002, were $5.92
billion, an increase of 5% versus the same period last year. Volume/mix
accounted for the entire increase, while pricing and exchange were immaterial.
Blades and Razors: Sales of blades and razors increased 8%, while profit was up
18%, compared with the first nine months of last year. Excluding exchange, sales
grew 10%. Sales growth was driven by the success of our premium shaving systems
and favorable comparisons to 2001, when we sold below consumption. The increase
in profits was driven by growth in Mach3 and Venus globally, favorable systems
versus disposables product mix and savings from our strategic sourcing
initiative. These gains more than offset incremental Functional Excellence
expenses and higher manufacturing costs, due to the strong Euro. In the fourth
quarter of 2001, we experienced a pre-price increase buy-in of approximately two
weeks supply of blade/razor product in North America in advance of a price
increase on select blade/razor product effective January 1, 2002. The buy-in was
equivalent to approximately $50 million in sales. This year, we will not have a
price increase effective January 1, 2003. Therefore we anticipate no pre-price
increase buy-in in the fourth quarter of 2002. However, we have announced to our
trade partners in North America that we intend to increase prices on select
blade/razor products around February 1, 2003.
Personal Care: Personal Care sales were 2% above those of 2001, driven by new
product successes that were partially offset by currency devaluations,
competitive activity and market contraction in Latin America. Profit from
operations declined 31%, due to increased marketing to support new product
launches, which more than offset the impact of higher sales and savings from our
strategic sourcing initiative.
Duracell: Sales of Duracell for the nine months decreased 3% from those of a
year ago. Favorable unit shipments were offset by increased promotional spending
and an adverse shift in pack size mix related to the retail channel shift in
sales towards mass merchandisers and club stores. The higher promotional
spending in the first and second quarters, unfavorable mix shift from Ultra to
CopperTop, and the first-quarter 2002 costs of withdrawing selected hearing aid
batteries contributed to an 8% decrease in profit from operations, as compared
with the prior year.
Oral Care: Oral Care sales were 8% above those of 2001, reflecting the success
of new product introductions in both the manual and power segments. Profit from
operations showed little change from that of the prior year, as sales gains from
new products and cost savings were offset by increased marketing spending and
incremental expenses related to the write-down of excess real property.
Braun: Sales of Braun were 5% above those of the previous year. Sales increased
4% over the prior year without the impact of exchange. Sales growth was driven
by the success of our new electric shavers. Profit from operations decreased
28%, as compared with the year-ago period. Higher advertising to support new
products and the Yen impact on our margin in Japan offset profit growth from
sales advances.
PAGE 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Costs and Expenses, Third Quarter 2002 versus Third Quarter 2001
- -----------------------------------------------------------------
Gross profit for the quarter ended September 30, 2002, was $1.29 billion, an
increase of 7%, compared with the third quarter of 2001. Gross profit as a
percentage of sales was 59.3%, compared with 56.6% in 2001. Gross margin
improvement was driven by cost savings from the December 2000 restructuring,
savings from our strategic sourcing initiative, favorable product mix in our
Blade/Razor business, and cost savings and lower trade spending in the Duracell
segment. This was partially offset by higher promotional spending and
unfavorable product mix in Oral Care.
Selling, general and administrative expenses increased by $36 million, or 5%,
reflecting higher marketing and administrative expenses. Advertising was
marginally up (1%), and sales promotion grew 4% to 3.4% of sales. Other
marketing and administrative expenses were 6% above those of the prior year.
Excluding the third-quarter provision of $17 million for the Functional
Excellence program, other marketing and administrative expenses were 3% above
those of the prior year and effectively unchanged year-over-year as a percentage
of sales.
Profit from operations was $522 million, up 10% versus $473 million a year
earlier. The adoption of SFAS 142 resulted in a third-quarter decrease in
amortization of approximately $9 million pretax, compared with a year ago.
Net interest expense was lower, due to lower interest rates year-over-year and
strong cash flow in the quarter. The impact of exchange was a net gain for the
third quarter of 2002, compared with a net loss, due to Turkish devaluation, in
the third quarter of 2001. The effective tax rate was unchanged at 31%.
Net income was $354 million, an increase of 20% from $296 million in 2001.
Diluted net income per common share of $.33 was 18% higher than the $.28 in
2001. Given the substantial decline in equity markets to date, the Company
estimates that it will incur higher pension costs in 2003. Current pension plan
asset levels and estimates of year-end pension liabilities could result in an
unfavorable earnings per share impact of approximately $.05 per share in 2003.
However, changes in equity markets and long-term interest rates, as well as
additional funding prior to year end could all impact this estimate.
Costs and Expenses, Nine Months 2002 versus Nine Months 2001
- ------------------------------------------------------------
Gross profit for the nine months ended September 30, 2002, was $3.6 billion, an
increase of 6% versus 2001. Gross profit as a percentage of sales was 59.9%,
compared with 59.1% in 2001. Favorable Blade/Razor mix and savings from our
restructuring programs and the strategic sourcing initiative, partially offset
by higher year-over-year trade spending and unfavorable product mix shifts in
both Duracell and Oral Care, contributed to the gross margin improvement.
Selling, general and administrative expenses increased by 3% over 2001.
Excluding the $30 million pretax gain on the sale of the Vaniqa business,
selling, general and administrative expenses increased 5%, compared with the
prior year. Advertising spending was up 8%, driven by higher investment behind
both new and established products. Sales promotion increased 5% over the prior
year, but was unchanged as a percentage of sales at 3.8%. Other marketing and
administrative expenses increased 2%, compared with the prior year, or 4%,
excluding the gain on the sale of Vaniqa in the second quarter of 2002. The
increase was driven by a year-to-date expense of $48 million related to our
Functional Excellence program.
Profit from operations was $1.30 billion, up 11% versus $1.17 billion in 2001.
Excluding the gain on the sale of Vaniqa, profit from operations was $1.27
billion, an increase of 9% from the prior year. The adoption of SFAS 142
resulted in a year-to-date decrease in amortization of approximately $26 million
pretax as compared with the prior year.
PAGE 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net interest expense declined, due to significantly lower rates year-over-year
and our strong cash flow. Transactional gains in the quarter compared with
losses a year ago that arose primarily in Turkey. The effective tax rate was
unchanged at 31%.
Net income of $870 million was 23% higher than the $710 million in 2001.
Excluding the gain on the sale of Vaniqa in the second quarter of 2002, net
income was $850 million, an increase of 20% over the previous year. Diluted net
income per common share of $.82 was 22% higher than the $.67 in 2001. Excluding
the gain on the sale of Vaniqa in the second quarter of 2002, diluted net income
per common share of $.80 was 19% above the previous year. Given the substantial
decline in equity markets to date, the Company estimates that it will incur
higher pension costs in 2003. Current pension plan asset levels and estimates of
year-end pension liabilities could result in an unfavorable earnings per share
impact of approximately $.05 per share in 2003. However, changes in equity
markets and long-term interest rates, as well as additional funding prior to
year end could all impact this estimate.
Restructuring and Asset Impairments
- -----------------------------------
On December 18, 2000, the Company announced a restructuring program and the
impairment of certain intangible assets. This resulted in a fourth-quarter
charge to operations of $572 million ($430 million after taxes, or $.41 in net
income per common share, fully diluted). The worldwide restructuring of
operations improved the Company's operating efficiency, streamlined the supply
chain and further decreased costs. The program budgeted a net reduction of
approximately 2,700 employees across all business functions, operating units and
geographies. The charge for impaired intangible assets was $212 million to write
down $157 million of acquired goodwill relating to the Thermoscan personal
diagnostic appliance brand in the Braun segment and $55 million of acquired
goodwill and identifiable intangible assets for certain national battery brands
in the Duracell segment.
The charge for the restructuring program was $360 million, and payments under
the program continued throughout the first nine months of 2002.
Pretax cash outlays for the restructuring program were estimated at
approximately $240 million. Cash severance payments will continue in 2002, due
to the severance payment deferral options available to terminated employees. At
September 30, 2002, remaining cash outlays were $27 million, which will occur
primarily this year. Pretax savings from the program were $31 million in the
third quarter of 2002 and $87 million for the nine months ended September 30,
2002. Savings will be approximately $115 million for the year.
During the fourth quarter of 2001, the Company recorded a charge of $63 million
associated with planned new actions, including the withdrawal from several minor
noncore businesses and the cessation of including operations in one factory in
the Duracell segment. The factory closure, based on a study that showed excess
worldwide capacity, resulted in the reduction of 170 employees. Pretax savings
from the program were $2 million in the third quarter of 2002 and $5 million for
the nine months ended September 30, 2002. Savings will be approximately $6
million for the year 2002.
In the second quarter of 2002, the Company began actions associated with its
Functional Excellence initiative. This initiative is focused on reducing
overhead costs, while upgrading capabilities, by improving processes and
eliminating duplication across functions. The total cost of this project is
estimated at $350-$400 million. During 2002, the Company expects that programs
related to this initiative will be prepared, approved and executed and that the
cost in 2002 will be between $80-$100 million. The balance of the costs will be
expensed (when the programs have been prepared, approved and executed) from
2003-2005. Annualized savings are expected to be $300-$350 million by 2006.
PAGE 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
- -------------------
Cash provided by operations has been the Company's primary source of funds to
finance operating needs, capital expenditures and dividend payments. During the
nine months ended September 30, 2002, the Company generated $1.42 billion in
cash from operations, compared with $1.18 billion in the same period last year,
a $240 million improvement, despite unmatched pension funding of $200 million in
2002. Continued focus on working capital management and lower capital spending
resulted in a net debt reduction of $630 million for the nine months. Net debt
(total debt net of associated swaps, less cash and cash equivalents) ended at
$2.69 billion at September 30, 2002, compared with the December 31, 2001,
balance of $3.32 billion.
The Company's investment grade long-term credit ratings of AA- from Standard &
Poor's and Aa3 from Moody's and commercial paper ratings of A1+ from Standard &
Poor's and P1 from Moody's provide a high degree of flexibility in obtaining
funds. The Company has the ability to issue up to $1.47 billion in commercial
paper in the U.S. and Euro markets. The Company's commercial paper program is
supported by its revolving credit facility and other sources of liquidity,
primarily the Company's cash flow. At September 30, 2002, there was $1.09
billion outstanding under the Company's commercial paper program, compared with
$1.97 billion at the end of 2001. On October 15, 2002, the Company entered into
a new 364-day revolving bank credit facility in the amount of $1.1 billion
expiring on October 14, 2003. A provision in this agreement gives the Company
the option to convert it into a one-year term loan in the amount of up to $1.1
billion.
On March 6, 2002, the Company privately placed $350 million 4.0% notes, due June
2005. The proceeds from the debt issuance were used to reduce commercial paper
borrowings. On August 21, 2002, the Company exchanged its 4.0% notes due June
2005, which were registered under the Securities Act of 1933 pursuant to a
registration statement on Form S-4, for approximately $327 million of the notes
that were privately placed on March 6, 2002.
A shelf registration statement on Form S-3 filed by the Company with the
Securities and Exchange Commission was declared effective on July 10, 2002.
Under the registration statement, the Company may issue debt securities in the
U.S. of up to $1.5 billion. It is currently anticipated that the proceeds from
the sale of any debt securities issued under the shelf registration statement
will be used to repay commercial paper borrowings and replace other maturing
debt, although the proceeds may also be used for other corporate purposes,
including repurchase of the Company's stock.
At September 30, 2002, $268 million was issued under this shelf registration
statement, consisting of $250 million 4.125% notes, due August 2007, and $18
million in fixed interest notes with various terms and maturities, issued under
the Gillette CoreNotes(TM) program. All proceeds from these issuances were used
to reduce commercial paper borrowings.
On October 1, 2002, the Company issued $500 million 3.5% notes, due October
2007, under its $1.5 billion shelf registration. These notes are redeemable at
par, at the Company's option on any interest payment date on or after October
15, 2004. The proceeds from this issuance were also used to reduce commercial
paper borrowings.
PAGE 24
DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and the Chief
Financial Officer ("CFO") of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation, the
Company's CEO and CFO have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) are
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these internal
controls subsequent to the completion of their evaluation.
PAGE 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject, from time to time, to legal proceedings and claims
arising out of its business that cover a wide range of matters, including
antitrust and trade regulation, advertising, product liability, contracts,
environmental issues, patent and trademark matters and taxes. Management, after
review and consultation with counsel, considers that any liability from all of
these legal proceedings and claims would not materially affect the consolidated
financial position, results of operations or liquidity of the Company.
Item 5. Other Information
Cautionary Statement
- --------------------
Certain statements that Gillette may make from time to time, including
statements contained in this report, constitute "forward-looking statements"
under the federal securities laws. Forward-looking statements may be identified
by words such as "plans," "expects," "believes," "anticipates," "estimates,"
"projects," "will" and other words of similar meaning used in conjunction with,
among other things, discussions of future operations, acquisitions and
divestitures, financial performance, Gillette's strategy for growth, product
development and new product launches, market position and expenditures.
Forward-looking statements are based on current expectations of future events,
but actual results could vary materially from Gillette's expectations and
projections. Investors are cautioned not to place undue reliance on any
forward-looking statements. Gillette assumes no obligation to update any
forward-looking statements. Gillette cautions that historical results should not
be relied upon as indications of future performance.
Factors that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, Gillette
include the following, some of which are described in greater detail below:
- - the pattern of Gillette's sales, including variations in sales volume within
periods;
- - consumer demands and preferences, including the acceptance by Gillette's
customers and consumers of new products and line extensions;
- - the mix of products sold;
- - Gillette's ability to control its internal costs and the cost of materials
and services;
- - competitive factors, including the prices, promotional incentives and trade
terms of Gillette's products and the response of its customers and competitors
to changes in these factors;
- - technological advances by Gillette and/or its competitors;
- - new patents granted to Gillette and/or its competitors;
- - changes in exchange rates in one or more of Gillette's geographic markets;
- - changes in accounting policies;
- - acquisition and divestiture activities; or
- - the impact of general economic conditions in the United States and in other
countries in which Gillette currently does business.
PAGE 26
PART II. OTHER INFORMATION
Competitive Environment
- -----------------------
Gillette experiences intense competition for sales of its products in most
markets. Gillette's products compete with widely advertised, well-known, branded
products, as well as private label products, which typically are sold at lower
prices. In most of its markets, Gillette has major competitors, some of which
are larger and more diversified than Gillette. Competitive activity within
Gillette's markets, including advertising, pricing, promotion and new product
introductions, and new entrants into these markets, can affect Gillette's
results in any given period.
Changes in Technology and New Product Introductions
- ---------------------------------------------------
In most product categories in which Gillette competes, there are continuous
technological changes and frequent introductions of new products and line
extensions. Gillette's ability to successfully introduce new products and/or
extend lines of existing products will depend on, among other things, Gillette's
ability to identify changing consumer tastes and needs, develop new technology,
differentiate its products and gain market acceptance of new products. Gillette
cannot be certain that it will successfully achieve these goals.
With respect specifically to primary alkaline batteries, category growth could
be adversely affected by the following additional factors:
- - technological or design changes in portable electronic and other devices that
use batteries as a power source;
- - continued improvement in the service life of primary batteries;
- - improvements in rechargeable battery technology; and
- - the development of new battery technologies.
Intellectual Property
- ---------------------
Gillette relies upon patent, copyright, trademark and trade secret laws in the
United States and in other countries to establish and maintain its proprietary
rights in technology, products and Gillette's brands. Gillette's intellectual
property rights, however, could be challenged, invalidated or circumvented.
Gillette does not believe that its products infringe the intellectual property
rights of others, but such claims, if they are established, can result in
material liabilities or loss of business.
Cost-Savings Strategy
- ---------------------
Gillette has implemented a number of programs designed to reduce costs. Such
programs will require, among other things, the consolidation and integration of
facilities, functions, systems and procedures, all of which present significant
management challenges. There can be no assurance that such actions will be
accomplished as rapidly as anticipated or that the full extent of expected cost
reductions will be achieved.
PAGE 27
PART II. OTHER INFORMATION
Sales and Operations Outside of the United States
- -------------------------------------------------
Sales outside of the United States represent a substantial portion of Gillette's
business. In addition, Gillette has a number of manufacturing facilities and
suppliers located outside of the United States. Accordingly, the following
factors could adversely affect operating results in any reporting period:
- - changes in political or economic conditions;
- - trade protection measures;
- - import or export licensing requirements;
- - the overlap of different tax structures;
- - unexpected changes in regulatory requirements or tax laws; or
- - longer payment cycles in certain countries.
Gillette is also exposed to foreign currency exchange rate risk to its sales,
profits, and assets and liabilities denominated in currencies other than the
U.S. dollar. Although Gillette uses instruments to hedge certain foreign
currency risks (through foreign currency forward, swap and option contracts and
non-U.S. dollar denominated financings) and is implicitly hedged through its
foreign manufacturing operations, there can be no assurance that Gillette will
be fully protected against foreign currency fluctuations.
Retail Environment
- ------------------
With the growing trend towards retail trade consolidation, especially in
developed markets such as the United States and Europe, Gillette is increasingly
dependent upon key retailers whose bargaining strength is growing. Accordingly,
Gillette faces greater pressure from retail trade customers to provide more
favorable trade terms.
Gillette can be negatively affected by changes in the policies of its retail
trade customers, such as inventory destocking, limitations on access to shelf
space and other conditions. Many of Gillette's customers, particularly
Gillette's high-volume retail trade customers, have engaged in accelerated
efforts to reduce inventory levels and shrinkage and change inventory delivery
systems. While Gillette expects the level of trade inventory of its products to
decline over time, the speed and magnitude of such reductions, and/or the
inability of Gillette to develop satisfactory inventory delivery systems, could
adversely affect operating results in any reporting period.
PAGE 28
PART II. OTHER INFORMATION
Item 6(a) Exhibits
Exhibit 10.1 Amendment to Employment Agreement, dated January 19, 2001, between
The Gillette Company and James M. Kilts, filed herewith.
Exhibit 10.2 $1,100,000,000 364-Day Credit Agreement, dated as of October 15,
2002, among The Gillette Company, JPMorgan Chase Bank, as agent, and a syndicate
of domestic and foreign banks, filed herewith.
Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges, filed herewith.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Item 6(b) Reports on Form 8-K
(a) The Company filed, on August 6, 2002, a current report on Form 8-K
containing two exhibits: the Statements Under Oath of James M. Kilts and
Charles W. Cramb Regarding Facts and Circumstances Relating to Exchange Act
Filings.
(b) The Company filed, on August 6, 2002, a current report on Form 8-K
containing four exhibits: the Underwriting Agreement, the First Supplemental
Indenture, the Note and the Legal Opinion related to the public offering of the
Company's 4.125% Senior Notes due 2007.
(c) The Company filed, on August 23, 2002, a current report on Form 8-K
containing four exhibits: the Distribution Agreement, the Second Supplemental
Indenture, the Form of Note and the Legal Opinion related to public debt that
the Company may issue from time to time pursuant to its Medium Term Note
Program.
(d) The Company filed, on October 1, 2002, a current report on Form 8-K
containing four exhibits: the Underwriting Agreement, the Third Supplemental
Indenture, the Note and the Legal Opinion related to the public offering of the
Company's 3.50% Senior Notes due 2007.
PAGE 29
SIGNATURE
SIGNATURES
Pursuant to the requirements 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.
THE GILLETTE COMPANY
(Registrant)
/s/ Claudio E. Ruben
- --------------------------------
Claudio E. Ruben
Vice President, Controller
and Principal Accounting Officer
November 6, 2002
CERTIFICATION
I, James M. Kilts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Gillette Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
/s/ James M. Kilts
------------------------------
James M. Kilts
Chairman of the Board, Chief
Executive Officer
CERTIFICATION
I, Charles W. Cramb, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Gillette Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
/s/ Charles W. Cramb
------------------------------
Charles W. Cramb
Senior Vice President, Chief
Financial Officer
EXHIBIT INDEX
Exhibit Number and Description
10.1 Amendment to Employment Agreement, dated January 19, 2001, between
The Gillette Company and James M. Kilts.
10.2 $1,100,000,000 364-Day Credit Agreement, dated as of October 15, 2002,
among The Gillette Company, JPMorgan Chase Bank, as agent, and a
syndicate of domestic and foreign banks.
12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.