Exhibit 13
Founded in 1901, The Gillette Company is the world leader in male grooming
products, a category that includes blades and razors, shaving preparations and
electric shavers. Gillette also holds the number one position worldwide in
selected female grooming products, such as wet shaving products and hair
epilation appliances. The Company is the world's top seller of writing
instruments and correction products. In addition, the Company is the world
leader in toothbrushes and oral care appliances.
Gillette manufacturing operations are conducted at 57 facilities in 28
countries, and products are distributed through wholesalers, retailers and
agents in over 200 countries and territories.
LETTER TO STOCKHOLDERS
The Gillette Company achieved new highs in sales and earnings in 1994,
continuing the strong momentum of the last several years. Business growth was
broadly based, with new product introductions, geographic expansion and the
vitality of our established brands all contributing to this record performance.
Total sales increased 12% to $6.07 billion. Net income and earnings per common
share advanced at a faster pace of 18% to $698 million and $3.14 per share.
These profit measures are compared with 1993 results before special charges.
For the 89th consecutive year, the Company paid cash dividends on its common
stock. Dividends declared increased 19% to $1.00 per share, up from 84 cents in
1993.
The double-digit improvements in Gillette financial results in 1994 are
consistent with the longer-term pattern of continued progress. During the
five-year period from 1989 to 1994, sales have grown at a 10% compounded annual
rate, net income at 20%, earnings per common share at 18% and dividends per
common share at 16%.
The Company's sustained profitable growth has been reflected in the
outstanding performance of Gillette common stock. In 1994, Gillette stock
outperformed the stock market averages by a wide margin in terms of total
return. The annual return to shareholders on Gillette common stock was 27% in
1994, compared with returns of 5% for the Dow Jones Industrial Average and 1%
for the Standard & Poor's 500.
[ART APPEARS HERE]
Furthermore, this superior performance has been maintained over an extended
period. During the last five years, the compounded annual return to shareholders
on Gillette stock has been 27%, significantly outpacing the returns of 10% for
the DJIA and 9% for the S&P 500. In terms of total dollars, Gillette stock has
added over $11 billion in market value in the last five years -- from $5.4
billion at the end of 1989 to $16.6 billion at the end of 1994.
The Company's stock continued to be an excellent long-term investment, with
a 30% annual rate of return over the last 10 years. The value of a $1,000
investment in Gillette stock at the end of 1984 grew to $13,499 by the end of
1994, three times the value of a comparable investment in either of the market
averages.
Investment Value Compounded
12/31/84 12/31/94 Rate of Return
- ------------------------------------------------------------------------------
Gillette $1,000 $13,499 30%
DJIA $1,000 $ 4,480 16%
S&P 500 $1,000 $ 3,815 14%
- ------------------------------------------------------------------------------
The strong long-term performance of our stock reflects not only the past
growth of the business, but the perception by investors that Gillette is
well-positioned for future growth. Both actual results and perceptions of the
future are largely due to our continuing focus on carrying out the Company's
mission to achieve or enhance clear leadership, worldwide, in the core
2
"GILLETTE STOCK HAS ADDED OVER $11 BILLION IN MARKET VALUE IN FIVE YEARS."
consumer product categories in which we choose to compete. In 1994,
three-fourths of the Company's total sales came from product categories in
which Gillette holds the worldwide leadership position. This is up sharply
from five years ago, when the comparable proportion was just over one-half
of sales.
To attain these results, we emphasize geographic expansion and three
principal growth drivers-research and development, capital spending and
advertising. In combination, these growth drivers should rise at least as fast
as sales over the long term to assure future growth. (In 1994, they rose 14%,
compared with 12% for sales.) We also look to increase the level of incremental
spending on these growth drivers over time by as much as we add to profit from
operations. As an indication of the effectiveness of this approach, 45% of our
1994 sales came from products introduced in the last five years -- exceeding
the 37% ratio achieved in 1993 and the 35% ratio in 1991 and 1992.
The pace of new product activity has accelerated to an all-time high, with
more than 20 new products introduced in 1994.
[GRAPH APPEARS HERE]
The high level of activity will continue in 1995, along with extending the
geographic rollout of major products such as the SensorExcel and Sensor for
Women shaving systems, the Gillette Series male grooming line and the Braun
Supervolume hair dryer.
An important element of the Company's long-term growth plans is the
development of our business in "new geographies" such as Eastern Europe, Russia
and China. The latest example is a Braun shaver production facility established
in China during 1994. Gillette sales in all international markets outside of
Western Europe advanced by 18% this year. Gillette ranks among the most
global of Fortune 500 corporations, with approximately 70% of total sales and
operating profit generated outside the United States.
The review of operations section of this Annual Report describes the
performance of all of our product lines, but I'd like to highlight a few areas
of outstanding progress that illustrate how the Company's mission is being
carried out.
. The Sensor shaving system franchise has continued to grow vigorously and now
accounts for almost 40% of total Gillette blade and razor sales dollars. The
success of the original Sensor razor and cartridge, which now have complete
worldwide distribution, has been enhanced by the excellent acceptance of the
Sensor for Women and SensorExcel shaving systems.
The Sensor for Women system, introduced in the United States in mid-1992,
substantially broadened its geographic availability this year with highly
successful introductions in European, Latin American and Asian markets. The
SensorExcel system, introduced in Continental Europe and Canada in the second
half of 1993, has achieved rapid growth, accounting for one-third of total
Sensor sales in these markets after one year. In 1994, SensorExcel introductions
were made in several major markets such as the United Kingdom, Japan and, in
the fourth quarter, the United States. In all markets, it is establishing a new
standard of shaving excellence.
. The innovative clear gel technology developed by Gillette scientists for
deodorants and antiperspirants has been the primary contributor to the vitality
of the Company's business in this category.
3
"THREE-FOURTHS OF 1994 SALES CAME FROM CATEGORIES IN WHICH WE HOLD THE WORLDWIDE
LEADERSHIP."
The clear gel technology, which debuted in the Gillette Series male grooming
line in late 1992, was incorporated into the Right Guard line a year later and
into Soft & Dri and Dry Idea antiperspirants in 1994. In the three markets where
they first were introduced -- the United States, Canada and the United
Kingdom -- these gel products have boosted total Gillette brand shares by four
points and now account for over one-fourth of Gillette consumer sales in the
deodorant/antiperspirant category.
. The Braun Oral-B plaque remover, now in its fourth year, has strengthened its
position as the world-wide leader in oral care appliances, outselling the
closest competitor by more than two-to-one. As sales of the Braun Oral-B
appliances have grown, there has been a considerable build-up in the number of
satisfied, loyal users, resulting in steadily increasing demand for our
replacement brushes. The cooperative efforts of Braun and Oral-B in developing
products, gaining dental profession endorsements and assuring wide retail
distribution have made a major contribution to the rapid growth of the Company's
oral care appliance business.
. The acquisition of Parker Pen in mid-1993 substantially increased the size and
strength of our stationery products franchise. This has been a year of
integrating, reorganizing and realigning the stationery products business to
take advantage of opportunities offered by the Parker acquisition. The initial
challenges have been met successfully, and operating profit margins for this
product segment improved significantly in 1994. With the integration process
still under way, there appear to be further opportunities to enhance the growth
and profitability of this business, now the clear worldwide leader in writing
instruments and correction products.
. .
Two recent developments in 1995 are noteworthy:
. Michael C. Hawley has been named President and Chief Operating Officer, to be
effective at the annual meeting on April 20. Mr. Hawley is currently Executive
Vice President, International Group, and has served in a wide variety of
domestic and overseas management posts during his 34 years with the Company.
. In February 1995, the Board of Directors recommended to the stockholders an
increase in the Company's authorized common stock. If this is approved at the
annual meeting on April 20, the Board will declare a two-for-one stock split in
the form of a 100% stock dividend. The Board also has proposed an increase of
20% in the annual dividend rate, the largest percentage increase in over 30
years.
"45% OF OUR 1994 SALES CAME FROM PRODUCTS INTRODUCED IN THE LAST FIVE YEARS.
. .
Our record of success is based on the combined strength of the world-class
brands, products and people that define Gillette as a company. These strengths
are not only the fundamental source of our past and present performance -- they
underlie our confidence in The Gillette Company's future worldwide growth and
prosperity.
/s/ Alfred M. Zeien
Alfred M. Zeien
Chairman of the Board
March 1, 1995
4
BLADES & RAZORS
Building on the record results of 1993, Gillette again achieved notable
growth in its principal line of business. This performance continued the strong
momentum of the past five years, during which blades and razors generated annual
gains averaging 14% in sales and 15% in profits.
Reflecting the exceptional success of the Sensor family of shaving systems, the
Company further strengthened its global leadership position in the blade and
razor business.
[ART APPEARS HERE]
The most recent addition to the Sensor franchise, the SensorExcel shaving
system, achieved excellent increases in sales and market share in Continental
Europe and Canada, areas where it made its debut in 1993. This innovative
system, whose patented technology offers unrivaled shaving closeness and
comfort, was introduced during the year in the United States, United Kingdom and
Japan. Trade and consumer response has been outstanding, and distribution
throughout international markets is planned for 1995.
The Sensor for Women shaving system also contributed to the upward trend,
posting substantial sales advances and significantly enlarging its share of
market, particularly in North America and Europe. Rapid geographic expansion is
continuing.
The Sensor shaving system, introduced in 1990, remained the top seller in
the United States and many other key markets throughout the world.
[GRAPH APPEARS HERE]
With the resounding success of the Sensor family of products, sales of the
Atra and Trac II twin blade shaving systems, leading brands since the 1970's,
gradually are slowing. However, these brands continued to hold sizable share
positions worldwide.
Gillette twin blade disposable razor sales climbed well above those of a
year ago, fueled by the strong performance of CustomPlus razors for men and
women. Introduced in 1994, primarily in North America and Europe, the new
disposable razor offers an improved lubricating strip and a longer handle for
greater control.
The worldwide rollout of this product is under way. Among established brands,
the Good News razor remained the best-selling disposable razor in the United
States for the 19th consecutive year. Abroad, Gillette disposables were again
the leaders in Canada, Europe and Latin America.
[ART APPEARS HERE]
In the double edge blade business, which showed little change in sales, the
Company maintained its long-established leadership worldwide.
During 1994, Gillette increased blade market value worldwide by building the
Sensor franchise and by upgrading consumers in emerging markets from double edge
blades to better-performing twin blade products. The Company also expanded
geographically with new and established products. Successful execution of these
two global business strategies provides a sound basis to accelerate future
growth.
THE GILLETTE SENSOREXCEL SHAVING SYSTEM(right arrow)
5
TOILETRIES & COSMETICS
Buoyed by substantial progress in several major product categories, the
toiletries and cosmetics business turned in a strong performance in 1994. Sales
rose considerably, and profits climbed even more rapidly. The Gillette Series
men's toiletries line, introduced in 1993, was a major factor in these gains.
[ART APPEARS HERE]
Deodorants/antiperspirants are the Company's principal toiletries category.
Worldwide growth in both sales and unit volume was significant, chiefly due to
excellent consumer response to the Company's innovative clear gel technology.
In the United States, clear gel versions of the Right Guard and Gillette
Series brands posted sizable sales advances, while Soft & Dri and Dry Idea
clear gel deodorants/antiperspirants met with strong acceptance following their
midyear introduction. These gains enabled the Company to improve its share of
market considerably. Abroad, Gillette Series deodorants/antiperspirants showed
particular strength, and distribution is being extended to some 20 additional
countries in 1995.
A SELECTION OF GILLETTE SERIES MALE [LEFT ARROW] GROOMING PRODUCTS
Paced by rapid growth overseas, shave preparation sales rose markedly.
Progress was especially strong in Europe, where sales of the Gillette Series
brand more than tripled following its rollout on the Continent. Reflecting
these gains, the Company expanded its leading position in the worldwide shave
preparation market.
Early in 1995, Gillette broadened its product range with the launch of Satin
Care for Women, the first non-soap-based shaving gel formulated exclusively for
women.
SALES OF PRODUCT LINE $ MILLIONS
Sales of Gillette Series after-shave products climbed substantially, due
primarily to the excellent performance of after-shave fragrances in Cool Wave
and Wild Rain scents. Gillette Series after-shave skin conditioners also
recorded a significant sales advance, as distribution was extended throughout
Europe.
Among hair care products, the Company continued to emphasize White Rain,
the number two volume brand in the United States. Sales of this brand registered
a good increase, reflecting sharply higher sales of White Rain Essentials
shampoos and conditions and the successful launch of the White Rain Exotics
line.
[ART APPEARS HERE]
Jafra skin care and cosmetic products, sold by consultants at classes in the
home or office, are an important part of the toiletries and cosmetics line.
Sales rose slightly in 1994, due chiefly to Jafra's largest market, Mexico. With
sales well above those of 1993, Jafra continued to hold a top position among
direct sellers in the growing Mexican skin care and color cosmetics market.
Operating in the United States and 10 countries abroad, Jafra increased its
consultant force by 20,000 in 1994, to a worldwide total of nearly 217,000. This
expansion, together with new products that reflect its commitment to
state-of-the-art formulations, will be the primary drivers of future Jafra
growth.
6
STATIONERY PRODUCTS
In 1994, the Company was again the clear worldwide leader in the highly
competitive businesses of writing instruments and correction products. Both
sales and profits of the stationery products line rose sharply, due in large
part to the inclusion of full-year results of Parker Pen, acquired in mid-1993.
The integration and development of Parker Pen within the Gillette stationery
products business continued throughout the year, both in the United States and
abroad. This integration, affecting virtually every aspect of the business,
substantially increased worldwide operating efficiency. During the year, Parker
introduced the Sonnet "C" range of writing instruments to excellent trade and
consumer response.
[ART APPEARS HERE]
With the Parker, Paper Mate and Waterman franchises, the Company holds a
strong position within all writing systems, price levels, distribution channels
and geographic areas.
Worldwide sales of Paper Mate writing instruments grew moderately, with much
of the advance driven by a considerable increase in sales of low-priced
disposable pens. The Flexgrip family of refillable pens also contributed,
achieving good sales gains in the United States and Latin America. The Dynagrip
pen line, led by the strong performance of a disposable version introduced in
late 1993, posted a significant advance in sales. Another plus was the
Rubberstik disposable pen, which recorded sharply higher domestic sales and was
introduced successfully in several international markets.
[GRAPH APPEARS HERE]
Sales of the Waterman line of luxury writing instruments were somewhat
lower, primarily reflecting decreased sales in France, Waterman's largest
market. This shortfall, related in part to weak economic conditions,
overshadowed Waterman's good sales progress in North America and its sizable
growth in Latin America and the Asia-Pacific region. During the year, Waterman
introduced new writing instrument entries -- under the Reflex, Hemisphere and
Preface names -- in several price ranges. Initial trade and consumer reaction
has been encouraging.
[ART APPEARS HERE]
Led by a strong showing in the United States, sales of Liquid Paper
correction products moved ahead considerably. This was due chiefly to a steep
increase in domestic sales of Liquid Paper correction fluids, which retained
their traditional number one market position. Another factor was sharply higher
sales of Liquid Paper correction pens in the United States, Latin America and
Southeast Asia. Liquid Paper DryLine correction films also showed notable sales
gains, supported by the successful introduction of a disposable version.
In addition to the superior performance of the Company's stationery
products, a major contributor to this line's future prospects is its
increasingly strong global presence, in terms of both geographic reach and brand
name recognition. With these strengths, the stationery products line is poised
for sustained profitable growth in the years ahead.
THE WATERMAN PREFACE FOUNTAIN PEN(right arrow)
7
BRAUN
With innovative new products contributing to substantial sales in the United
States and Asia-Pacific markets, Braun sales in 1994 moved well above those of a
year ago. Profits rose significantly from the prior year's level.
[ART APPEARS HERE]
THE BRAUN MULTIMIX HANDMIXER
Braun shaving products achieved a moderate sales increase in 1994. Men's
electric shaver sales were somewhat higher, led by the strong growth of the
FlexControl family of shavers. During the year, Braun also successfully launched
a range of mid-priced shavers in cord and rechargeable models. This performance
enabled Braun to strengthen its worldwide sales leadership of the foil shaver
market.
In October, Braun introduced in Japan the new Flex Integral electric shaver,
which provides faster, more comfortable shaves by incorporating a middle cutter
positioned between two shaving foils mounted on a pivoting head. This
top-of-the-line shaver range is being distributed worldwide in 1995.
THE BRAUN FLEX INTEGRAL [LEFT ARROW] ELECTRIC SHAVER
Reflecting sales well above those of 1993, the Braun Silk-epil electric hair
epilator for women strengthened its number one market standing worldwide. The
Silk-epil facial hair epilator, launched in 1993, recorded significant sales
progress.
Household appliance sales climbed well above those of the prior year. Braun
expanded its worldwide leadership position in hand blenders, with especially
good sales gains in Asia-Pacific countries. The FlavorSelect coffeemaker
achieved great success in many countries, while the versatile Braun Multimix
handmixer recorded excellent sales results in its debut.
[GRAPH APPEARS HERE]
Sales of personal care appliances, which include oral care and hair care
appliances, increased rapidly. Amid intensifying competition, the Braun Oral-B
plaque remover continued its extraordinary success, with sales again rising
sharply. The plaque remover gained the number one position in the United States,
significantly strengthening its worldwide market leadership and outselling its
nearest competitor by more than two-to-one. An improved model achieved highly
promising initial results.
[ART APPEARS HERE]
THE SUPERVOLUME HAIR DRYER AND IMPROVED BRAUN ORAL-B PLAQUE REMOVER
Hair care appliance sales climbed substantially, due primarily to the
Super-volume hair dryer. This innovative product generated sizable sales
advances in Europe, enabling Braun to increase its market leadership, and
surpassed all expectations in the United States, where it was launched in
September.
New products introduced in the last five years accounted for two-thirds of
total Braun sales in 1994. This commitment to innovation has been accompanied by
geographic expansion, most recently Braun's entry into China during the year.
Promising new markets, an accelerating flow of superior products and momentum
from 1994's strong performance offer excellent growth prospects.
8
ORAL-B
Despite intense competitive activity, Oral-B in 1994 boosted sales to a
level considerably above that of the year before, due to the excellent reception
given several new products. Spending in support of these product introductions
reduced profits substantially.
In a strong partnership with dental professionals, Oral-B develops, markets and
distributes worldwide a broad array of innovative oral care products. These
include toothbrushes, interdental products, specialty toothpastes, mouth rinses
and professional dental products.
[ART APPEARS HERE]
Oral-B toothbrushes -- the brand used by more dentists than any other in the
United States and many countries abroad -- are the foundation of the company's
thriving oral care business. Worldwide sales achieved good progress, due
primarily to the strong showing of the Advantage toothbrush, introduced at
year-end 1993. Two additional new products also contributed to the sales
advance. The Advantage Control Grip toothbrush features a dual-material handle
with rubberized grip for greater comfort and control. The Contura toothbrush is
designed to attract value-oriented consumers by offering traditional Oral-B
quality at a lower price. Both products were launched in the United States in
1994 and will be distributed throughout international markets in 1995.
Supported by these gains, Oral-B remained the number one brand in the
worldwide toothbrush market.
[GRAPH APPEARS HERE]
Worldwide sales of Oral-B interdental products rose markedly for the seventh
consecutive year, led by the new Ultra Floss brand. This innovative dental floss
features a network of shred-resistant interlocking fibers that stretch thin to
fit between teeth and then spring back to brush away plaque. Initial response
from the trade and consumers has been excellent. Sales of other Oral-B dental
flosses were well above those of the year before, and both dental tape and
inter-dental brushes posted sizable sales gains.
In the fast-growing specialty toothpaste and mouth rinse markets, Oral-B
sales climbed significantly as distribution of several new products was
broadened. Both Oral-B Tooth & Gum Care toothpaste, featuring a patented
stabilized stannous fluoride formula, and Sensitive with Fluoride toothpaste
contributed to the growth. Led by the alcohol-free version of Oral-B anti-plaque
rinse, mouth rinse sales moved much higher.
[ART APPEARS HERE]
Sales of Oral-B professional products were considerably above those of a
year ago. Fueling the gain was the Minute Foam fluoride treatment for use by
dentists in their offices.
Oral-B's growth strategy is based on superior new products, increased
investment in research and technology and geographic expansion. Following its
entry into China in 1993, Oral-B opened the markets of Vietnam and Pakistan in
1994, bringing to 32 the number of new markets entered in the past five years.
THE ORAL-B ADVANTAGE CONTROL GRIP TOOTHBRUSH (FOREGROUND) AND ORIGINAL ADVANTAGE
TOOTHBRUSH (right arrow)
9
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION ..................... 25
FINANCIAL STATEMENTS ........................ 28
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS ........................ 31
RESPONSIBILITY FOR
FINANCIAL STATEMENTS ........................ 41
INDEPENDENT AUDITORS' REPORT ................ 41
OTHER FINANCIAL INFORMATION ................. 42
HISTORICAL FINANCIAL SUMMARY ................ 43
10
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION
RESULTS OF OPERATIONS
In 1994, the Company achieved record levels of net sales, profit from
operations, net income and net income per common share.
SALES
Net sales in 1994 climbed 12% to $6.07 billion, compared with $5.41 billion in
1993. The growth was due to an 11% increase from volume and new products,
including Parker Pen, and a 1% gain from the combined effect of changes in
selling prices and fluctuations in exchange rates. In 1993, these factors
affected sales by a 7% increase and a 2% decrease, respectively. Without Parker
Pen, 1994 net sales increased 9%.
Sales in the United States advanced 11% in both 1994 and 1993. Foreign sales
rose 13% in 1994, following a 2% gain in 1993. Sales in Europe during 1994 were
well above those of 1993, due to improving economic conditions and strengthening
European currencies. Sales of operations outside the United States accounted for
68% of sales in 1994 and 67% in 1993.
An analysis of sales by business segment follows.
% Increase/
(Millions of dollars) (Decrease)
------------------------ -------------
94 93 92 94/93 93/92
- ------------------------------------------------------------------------------
Blades & Razors $2,351 $2,118 $1,978 11 7
Toiletries & Cosmetics 1,162 1,047 971 11 8
Stationery Products 807 633 520 27 22
Braun Products 1,348 1,249 1,326 8 (6)
Oral-B Products 402 363 366 11 (1)
Other -- 1 2 -- (34)
------------------------ ------------
$6,070 $5,411 $5,163 12 5
------------------------ ------------
Further information by business segment is set forth on pages 6 through 15.
Sales of blades and razors were considerably higher than those of a year
earlier. The continued growth of the Gillette Sensor franchise, including the
Sensor for Women shaving system and the successful launch of the SensorExcel
brand, contributed to gains in all major geographic regions. In 1993, the
Gillette Sensor system was the major contributor to sales growth.
In 1994, sales of toiletries and cosmetics rose appreciably, with increases
in all major markets, including Europe, where sales were substantially higher
than in 1993. Contributing to the sales growth were deodorant/antiperspirant
products, reflecting the introduction of clear gel technology in the Soft & Dri
and Dry Idea brands in the United States, and the launch of the Gillette Series
male toiletries line in Continental Europe. In 1993, sales were well above those
of the prior year, due to the strength of the Gillette Series line and other
deodorant/antiperspirant brands.
Sales of stationery products increased substantially in 1994, due primarily
to the inclusion of Parker Pen. Without Parker Pen, sales rose slightly, as
higher sales in the United States and most overseas regions offset shortfalls in
Europe. In 1993, sales climbed significantly, reflecting the inclusion of Parker
Pen for the last six months. Without Parker Pen, both domestic and foreign sales
were lower.
In 1994, sales of Braun products were well above those of the prior year.
Sales grew sharply in the United States, primarily in the oral care and
household businesses, and in Japan, due to the improved shaver business, while
sales in Europe were virtually unchanged. In 1993, sales declined from those of
1992, as substantial sales increases in the United States were overshadowed by
significantly lower sales in Europe as a result of the economic recession and
weaker European currencies.
Sales of Oral-B products advanced in all major geographic regions, aided by
new products, including the Advantage and Contura toothbrushes, Ultra Floss
dental floss, and specialty rinses and toothpastes. In 1993, sales were
virtually unchanged. Domestic sales were lower, due to competition in the
premium toothbrush category, while foreign sales were level.
GROSS PROFIT
Gross profit increased $482 million in 1994 and $230 million in 1993. As a
percent of sales, gross profit continued to show a positive trend, increasing to
63.4% in 1994, as compared with 62.2% and 60.8% in 1993 and 1992, respectively.
The improving trend reflected sales increases in products with higher profit
margins, such as those in the Gillette Sensor franchise, the Braun Flex Control
shaver and the Braun Oral-B plaque remover. Improved production efficiencies for
these and other products also contributed to the positive trend.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to 43.2% of sales,
compared with 42.1% in 1993 and 42.0% in 1992. In absolute terms, these expenses
increased 15% in 1994, 5% in 1993 and 13% in 1992.
11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION
These increases reflected the higher level of marketing support given to
major brands, particularly the Gillette Sensor franchise, the Gillette Series
line and the new Oral-B products. In 1994, $545 million was spent on
advertising, including sampling, and $533 million on sales promotion, for a
total of $1,078 million, an increase of 23% over 1993. This compares with 1993
amounts of $428 million, $450 million and $878 million, respectively. In 1992,
these were $447 million, $409 million and $856 million, respectively. The
spending in 1994 represented 17.8% of sales, compared with 16.2% in 1993 and
16.6% in 1992. Spending for research and development grew 3% in 1994, compared
with 8% and 14% in 1993 and 1992, respectively. Other marketing and
administrative expenses rose 11% in 1994, 6% in 1993 and 9% in 1992.
PROFIT FROM OPERATIONS
Profit from operations was $1,227 million, compared with $825 million in 1993
and $967 million in 1992. Included in 1993 results was a realignment provision
of $263 million.
Compared with 1993 profit from operations before realignment expense, 1994
profit from operations increased 13%, representing 20.2% of sales, compared with
20.1% and 18.7% in 1993 and 1992, respectively.
Within the United States, profit from operations rose 16%, compared with
10% in 1993 and 9% in 1992. Outside the United States, it increased 12%,
compared with gains of 13% in 1993 and 14% in 1992.
In the fourth quarter of 1993, the Company recorded charges for a
realignment plan to take advantage of opportunities created by the continuing
trend to more open world trade and the growth of the Company's global
operations, and to improve the competitive position of the Company's business.
Additional information concerning the realignment plan is included on pages 38
and 39.
An analysis of profit from operations by business segment follows.
% Increase/
(Millions of dollars) (Decrease)
----------------------------- ------------------------
94 93/(a)/ 93/(b)/ 92 94/93/(b)/ 93/92/(b)/
- ---------------------------------------------------------------------------------------------
Blades & Razors.............. $ 878 $692 $ 797 $ 665 10 20
Toiletries & Cosmetics....... 79 (6) 58 89 36 (35)
Stationery Products.......... 95 27 64 49 47 32
Braun Products............... 200 146 167 163 20 3
Oral-B Products.............. 25 17 45 47 (45) (3)
------------------------------- -------------------
1,277 876 1,131 1,013 13 12
------------------------------- -------------------
Corporate.................... (50) (51) (44) (46)
-------------------------------
$1,227 $825 $1,087 $ 967
===============================
(a) after charges for realignment
(b) before charges for realignment
See Notes to Consolidated Financial Statements for geographic area and segment
data.
In 1994 and 1993, profits for the blade and razor segment rose, due to
sales growth, improved product mix and lower product costs. In 1994, gains were
partly offset by higher marketing expenses. The strong gain in the toiletries
and cosmetics segment, primarily in the United States, was due to sales growth
which offset costs associated with new products. In the prior year, profits were
lower, due to the introductory marketing support given to the Gillette Series
line and to established brands. In 1994, as in 1993, profits of the stationery
segment increased substantially, reflecting the inclusion of Parker Pen. This
growth was partly offset by the continued economic weakness in Europe, primarily
in France. The Braun segment reported a significant advance in profits in 1994,
due to increased sales of products with higher profit margins, primarily in the
United States and Japan, and lower operating expenses. In 1993, the increase in
profits was due to improved product mix and lower product costs, which offset
lower sales and the adverse impact of weaker European currencies. The decline in
1994 for Oral-B, as in 1993, reflected the higher costs associated with new
products.
NONOPERATING CHARGES/INCOME
In 1994, net interest expense (interest expense less interest income) amounted
to $42 million, higher than the $33 million in 1993, but lower than the $56
million in 1992. The increase in 1994 reflected lower interest income, higher
interest rates and a slightly higher average borrowing level, due to the
full-year impact of the financing related to the Parker Pen acquisition in May
1993.
Net exchange losses of $77 million, compared with the 1993 and 1992 totals
of $105 million and $69 million, respectively, were attributable principally to
subsidiaries in highly inflationary countries. The decrease in 1994 reflected
the favorable impact of the economic recovery plan implemented in Brazil in
mid-1994. Translation adjustments resulting from currency fluctuations in
non-highly inflationary countries are accumulated in a separate section of
stockholders' equity, as noted on page 31. Due principally to the improvement of
European currencies against the U.S. dollar, the 1994 adjustment was a favorable
$38 million, compared with the negative adjustments of $150 million and $48
million in 1993 and 1992, respectively.
12
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION
TAXES AND NET INCOME
In 1994, the effective tax rate on income was 36.8%, compared with rates of
37.5% and 38.1% in 1993 and 1992, respectively.
Net income for 1994 was $698 million, compared with $288 million in 1993 and
$513 million in 1992. Net income per common share in 1994 was $3.14, compared
with $1.29 and $2.32 in 1993 and 1992, respectively. In 1993, net income and net
income per common share were reduced by $139 million and $63, respectively, for
the cumulative one-time effect of adopting mandated accounting changes for
income taxes, postretirement benefits other than pensions and postemployment
benefits.
Compared with 1993, before the charges for realignment and the cumulative
effect of adopting accounting changes, both 1994 net income and net income per
common share increased 18%.
Management is unaware of any trends or conditions that could adversely
affect the Company's consolidated financial position, future results of
operations or liquidity.
FINANCIAL CONDITION
The Company's financial condition strengthened further in 1994. Net debt was
reduced by $216 million through strong operating cash flow, and the credit
ratings of the Company were again upgraded by the credit rating agencies.
Net debt (total debt, net of associated swaps, less cash and short-term
investments) at December 31, 1994, amounted to $1,041 million, compared with
$1,257 million in 1993 and 1994 million in 1992. The increase in 1993 was the
result of the acquisition of Parker Pen.
The market value of Gillette equity was over $16 billion at the end of 1994.
The Company's book equity position amounted to $2,017 million at the end of
1994, compared with $1,479 million at the end of 1993 and $1,496 million at the
end of 1992.
Net cash provided by operating activities in 1994 was $806 million, compared
with $732 million in 1993 and $620 million in 1992. Requirements for net working
capital increased in all three years, reflecting the growth of the business. The
Company's current ratio for 1994 was 1.54, compared with ratios of 1.44 and 1.50
for 1993 and 1992, respectively.
Capital spending in 1994 amounted to $400 million, compared with $352
million and $321 million in 1993 and 1992, respectively. Spending in all three
years was principally for the Sensor system franchise, other twin blade shaving
products and Braun products.
For 1995, it is expected that spending for property, plant and equipment will
increase over the 1994 level, reflecting additional production capacity for twin
blade shaving, Braun and toiletries and cosmetics products. Spending will be
financed primarily by funds from operations.
At year-end 1994, there was $292 million outstanding under the U.S.
commercial paper program and no borrowings under the Company's $500 million
revolving credit agreements. At year-end 1993 and 1992, there was $154 million
and $42 million, respectively, in debt outstanding under the commercial paper
program. At year-end 1993 and 1992, there was no debt outstanding under the
revolving credit agreement.
During 1994, the Company replaced its $350 million revolving credit agreement
with new revolving facilities provided by a syndicate of 15 banks for $150
million, expiring June 20, 1995, and $350 million, expiring June 20, 1999. The
Company generally borrows through the commercial paper market, and these
facilities primarily provide back-up to that program.
Both Moody's and Standard & Poor's upgraded the Company's long-term credit
ratings in 1994. Moody's raised the Company's long-term debt rating from A1 to
Aa3, while Standard & Poor's increased the rating from A+ to AA-. These
commercial paper rating was increased to A1+ by Standard & Poor's. Moody's rates
the Company's commercial paper at P1.
In 1994, the Company spent $26 million to increase its interests in certain
core businesses. In 1993, the Company spend $481 million for acquisitions in
certain existing core businesses, primarily Parker Pen. In 1992, the Company
invested $66 million in acquisitions.
In 1994, no long-term debt was issued. In 1993, the Company issued $500
million in long-term notes under $600 million in shelf registrations filed with
the Securities and Exchange Commission. This indebtedness was primarily used for
the Parker Pen acquisition and for maturing long-term debt.
Gillette continues to have access to substantial sources of capital in world
financial markets. The Company's ability to generate funds internally, its
substantial unused lines of credit and its access to worldwide credit markets
are ample to cover all anticipated needs.
13
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME AND EARNINGS REINVESTED IN THE BUSINESS
(Millions of dollars, except per share amounts)
Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992
- -------------------------------------------------------------------------------
Net Sales ................................... $6,070.2 $5,410.8 $5,162.8
Cost of Sales ............................... 2,221.9 2,044.3 2,025.8
--------------------------------
Gross Profit ................................ 3,848.3 3,366.5 3,137.0
Selling, General and Administrative Expenses . 2,621.6 2,279.2 2,169.9
Realignment Expense ......................... -- 262.6 --
--------------------------------
Profit from Operations ...................... 1,226.7 824.7 967.1
Nonoperating Charges (Income) ...............
Interest income ........................... (19.0) (27.3) (27.3)
Interest expense .......................... 61.1 59.8 83.3
Other charges -- net ...................... 80.5 109.5 81.4
--------------------------------
122.6 142.0 137.4
--------------------------------
Income before Income Taxes and Cumulative
Effect of Accounting Changes .............. 1,104.1 682.7 829.7
Income Taxes ................................ 405.8 255.8 316.3
--------------------------------
Income before Cumulative Effect of Accounting
Changes ................................... 698.3 426.9 513.4
Cumulative Effect of Accounting Changes ..... -- (138.6) --
--------------------------------
Net Income .................................. 698.3 288.3 513.4
Preferred Stock dividends, net of tax
benefit ................................... 4.7 4.7 4.8
--------------------------------
Net Income Available to Common Stockholders . 693.6 283.6 508.6
Earnings Reinvested in the Business at
beginning of year ......................... 2,357.9 2,259.6 1,909.3
--------------------------------
3,051.5 2,543.2 2,417.9
Common Stock dividends declared ............. 221.3 185.3 158.3
--------------------------------
Earnings Reinvested in the Business at end
of year ................................... $2,830.2 $2,357.9 $2,259.6
================================
Income per Common Share before Cumulative
Effect of Accounting Changes .............. $ 3.14 $ 1.92 $ 2.32
Cumulative Effect of Accounting Changes ..... -- (.63) --
--------------------------------
Net Income per Common Share ................. $ 3.14 $ 1.29 $ 2.32
================================
Dividends declared per common share ......... $ 1.00 $ .84 $ .72
Weighted average number of common shares
outstanding (millions) .................... 221.2 220.4 219.5
- -------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
14
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(Millions of dollars)
December 31, 1994 and 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents............................................................. $ 43.8 $ 37.1
Short-term investments, at cost, which approximates market value...................... 2.3 1.5
Receivables, less allowances: 1994, $52.1; 1993, $45.9................................ 1,379.5 1,226.9
Inventories........................................................................... 941.2 874.6
Deferred income taxes................................................................. 267.6 291.5
Prepaid expenses...................................................................... 113.0 96.4
-----------------------
Total Current Assets................................................................ 2,747.4 2,528.0
-----------------------
Property, Plant and Equipment, at cost less accumulated depreciation.................... 1,411.0 1,214.5
Intangible Assets, less accumulated amortization........................................ 887.4 916.9
Deferred Income Taxes................................................................... 133.6 136.9
Other Assets............................................................................ 314.6 306.0
-----------------------
$ 5,494.0 $ 5,102.3
=======================
Liabilities and Stockholders' Equity
Current Liabilities
Loans payable......................................................................... $ 344.4 $ 395.0
Current portion of long-term debt..................................................... 28.1 46.2
Accounts payable and accrued liabilities.............................................. 1,178.2 1,122.4
Deferred income taxes................................................................. 47.0 6.2
Income taxes.......................................................................... 185.5 190.5
-----------------------
Total Current Liabilities........................................................... 1,783.2 1,760.3
-----------------------
Long-Term Debt.......................................................................... 715.1 840.1
Deferred Income Taxes................................................................... 186.7 166.1
Other Long-Term Liabilities............................................................. 774.3 835.5
Minority Interest....................................................................... 17.4 21.3
Stockholders' Equity
8.0% Cumulative Series C ESOP Convertible Preferred, without par value,
Issued: 1994--162,928 shares; 1993--164,243 shares.................................. 98.2 99.0
Unearned ESOP compensation............................................................ (44.2) (53.8)
Common stock, par value $1 per share
Authorized 580,000,000 shares
Issued: 1994--279,121,205 shares; 1993--278,587,610 shares.......................... 279.1 278.6
Additional paid-in capital............................................................ 277.7 259.4
Earnings reinvested in the business................................................... 2,830.2 2,357.9
Cumulative foreign currency translation adjustments................................... (377.1) (415.0)
Treasury stock, at cost:
1994--57,671,702 shares; 1993--57,697,990 shares..................................... (1,046.6) (1,047.1)
-----------------------
Total Stockholders' Equity.......................................................... 2,017.3 1,479.0
-----------------------
$ 5,494.0 $ 5,102.3
=======================
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
15
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income............................................................................ $ 698.3 $ 288.3 $ 513.4
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting changes............................................. -- 138.6 --
Provision for realignment expense................................................... -- 164.1 --
Depreciation and amortization....................................................... 215.4 218.5 210.9
Other............................................................................... 15.1 51.8 10.7
Changes in assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable............................................................... (147.4) (101.8) (146.8)
Inventories....................................................................... (66.7) (56.0) (77.5)
Accounts payable and accrued liabilities.......................................... 93.7 10.8 58.0
Other working capital items....................................................... 37.4 (30.7) 2.9
Other noncurrent assets and liabilities........................................... (40.3) 48.1 48.8
-------------------------------------
Net cash provided by operating activities....................................... 805.5 731.7 620.4
-------------------------------------
Investing Activities
Additions to property, plant and equipment............................................ (399.8) (352.0) (321.4)
Disposals of property, plant and equipment............................................ 24.9 10.2 15.6
Acquisition of businesses, less cash acquired......................................... (25.6) (452.9) (64.5)
Other................................................................................. 16.9 (35.6) (10.7)
-------------------------------------
Net cash used in investing activities........................................... (383.6) (830.3) (381.0)
-------------------------------------
Financing Activities
Proceeds from exercise of stock option and purchase plans............................. 18.4 24.5 22.2
Proceeds from long-term debt.......................................................... -- 500.0 --
Reduction of long-term debt........................................................... (200.7) (414.8) (239.2)
Increase (decrease) in loans payable.................................................. (12.9) 177.5 117.1
Dividends paid........................................................................ (217.1) (183.3) (157.4)
-------------------------------------
Net cash provided by (used in) financing activities............................. (412.3) 103.9 (257.3)
-------------------------------------
Effect of Exchange Rate Changes on Cash................................................. (2.9) (3.5) .4
-------------------------------------
Increase (Decrease) in Cash and Cash Equivalents........................................ 6.7 1.8 (17.5)
Cash and Cash Equivalents at Beginning of Year.......................................... 37.1 35.3 52.8
-------------------------------------
Cash and Cash Equivalents at End of Year................................................ $ 43.8 $ 37.1 $ 35.3
=====================================
Supplemental disclosure of cash paid for:
Interest............................................................................ $ 61.6 $ 72.5 $ 87.9
Income taxes........................................................................ $ 240.6 $ 180.9 $ 198.2
Noncash investing and financing activities:
Acquisition of businesses
Fair value of assets acquired..................................................... $ 19.0 $ 705.8 $ 62.3
Cash paid......................................................................... 25.6 481.1 65.9
-------------------------------------
Liabilities assumed............................................................. $ (6.6) $ 224.7 $ (3.6)
=====================================
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
16
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany accounts and transactions are eliminated.
Accounts of subsidiaries outside the United States and Canada are included
on the basis of fiscal years generally ending November 30, except for the Braun
group of companies, whose fiscal year ends September 30.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits and all highly liquid
debt instruments with an original maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. In general, cost is
currently adjusted standard cost, which approximates actual cost on a first-in,
first-out basis.
DEPRECIATION
Depreciation is computed primarily on a straight-line basis over the estimated
useful lives of assets.
INTANGIBLE ASSETS
Intangible assets principally consist of goodwill, which is being amortized to
expense using the straight-line method generally over a period of 40 years.
Other intangible assets are being amortized to expense on the straight-line
method over a weighted average period of approximately 19 years. The carving
amounts of intangible assets are assessed for impairment when operating profit
from the applicable related business indicates that the carrying amount of the
assets may not be recoverable.
NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net income less dividends
on preferred stock, net of tax benefits, by the weighted average number of
common shares outstanding.
The calculation of fully diluted net income per common share assumes
conversion of the preferred stock into common stock, and also adjusts net income
for the ESOP debt service expense due to the assumed replacement of the
preferred stock dividends with common stock dividends. The dilutive effect is
not significant.
INCOME TAXES
The Company reinvests unremitted earnings of foreign operations and,
accordingly, does not provide for Federal income taxes which could result from
the remittance of such earnings. The unremitted earnings amounted to $1,955
million at December 31, 1994.
Beginning in 1993, deferred taxes are provided using the asset and liability
method for temporary differences between financial and tax reporting.
ACQUISITIONS AND DIVESTITURES
In 1994, the Company increased it's interest in several businesses at a total
cost of $26 million.
On May 7, 1993, the Company acquired Parker Pen Holdings Limited (Parker
Pen), a worldwide writing instruments company headquartered in England. The
acquisition has been accounted for by the purchase method of accounting. The
purchase price and other costs of the acquisition were $484 million,
substantially all of which was allocated to goodwill. The Company consolidated
Parker Pen's results of operations commencing with the third quarter of 1993,
including amortization of the associated goodwill over a 40-year period.
The following unaudited pro forma summary for 1993 and 1992 presents combined
results of operations of the Company and Parker Pen as if the acquisition had
occurred at the beginning of each period presented. The results do not purport
to indicate what would have occurred had the acquisition been made on those
dates, or what results may be in the future.
(Millions of dollars, except per share amounts) 1993(a) 1993(b) 1992
- ---------------------------------------------------------------------------------------------------
Net sales..................................................... $5,562 $5,562 $5,496
Before cumulative effect of accounting changes:
Income...................................................... $ 435 $ 599 $ 523
Income per common share..................................... $ 1.95 $ 2.69 $ 2.36
(a) after charges for realignment (b) before charges for realignment
FOREIGN CURRENCY TRANSLATION
Net exchange gains or losses resulting from the translation of assets and
liabilities of foreign subsidiaries, except those in highly inflationary
economies, are accumulated in a separate section of stockholders' equity titled,
"Cumulative foreign currency translation adjustments." Also included are the
effects of exchange rate changes on intercompany transactions of a long-term
investment nature and transactions designated as hedges of net foreign
investments.
An analysis of this account follows.
(Millions of dollars) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
Balance at beginning of year....................................... $(415.0) $(265.2) $(216.9)
Translation adjustments, including
the effect of hedging............................................ 43.0 (154.2) (60.2)
Related income tax effect.......................................... (5.1) 4.4 11.9
-------------------------------
Balance at end of year........................................... $(377.1) $(415.0) $(265.2)
===============================
17
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in Other charges were net exchange losses of $77.4 million, $105.4
million and $68.8 million for 1994, 1993 and 1992, respectively, primarily
relating to subsidiaries in highly inflationary countries, principally Brazil.
INVENTORIES
December 31, December 31,
(Millions of dollars) 1994 1993
- --------------------------------------------------------------------------------
Raw materials and supplies........................... $ 207.3 $ 209.1
Work in process...................................... 95.0 90.8
Finished goods....................................... 638.9 574.7
--------------------------
$ 941.2 $ 874.6
==========================
PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
Land................................................. $ 36.9 $ 29.9
Buildings............................................ 465.8 420.5
Machinery and equipment.............................. 2,399.5 2,125.5
--------------------------
2,902.2 2,575.9
Less accumulated depreciation........................ 1,491.2 1,361.4
--------------------------
$1,411.0 $1,214.5
==========================
INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
Goodwill ($43.7 million not subject to amortization). $ 905.0 $ 884.5
Other intangible assets.............................. 148.1 168.7
--------------------------
1,053.1 1,053.2
Less accumulated amortization........................ 165.7 136.3
--------------------------
$ 887.4 $ 916.9
==========================
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
Accounts payable..................................... $ 334.6 $ 268.9
Advertising and sales promotion...................... 218.0 170.1
Payroll and payroll taxes............................ 197.8 187.6
Other taxes.......................................... 45.5 48.9
Interest payable..................................... 12.2 9.9
Dividends payable on common stock.................... 55.4 46.4
Realignment expense.................................. 107.3 155.4
Miscellaneous........................................ 207.4 235.2
--------------------------
$1,178.2 $1,122.4
==========================
OTHER LONG-TERM LIABILITIES
- --------------------------------------------------------------------------------
Pensions............................................. $ 368.4 $ 311.7
Postretirement medical............................... 193.1 193.9
Incentive plans...................................... 116.6 111.2
Realignment expense.................................. 15.0 107.2
Miscellaneous........................................ 91.2 111.5
--------------------------
$ 774.3 $ 835.5
==========================
DEBT
Loans payable at December 31, 1994 and 1993, included $142 million and $54
million, respectively, of commercial paper. The Company's commercial paper
program is supported by its revolving credit facilities.
Long-term debt is summarized as follows
December 31, December 31,
(Millions of dollars) 1994 1993
- --------------------------------------------------------------------------------
Commercial paper, floating rates.................... $150.0 $100.0
5.75% Notes due 2005................................. 200.0 200.0
6.25% Notes due 2003................................. 150.0 150.0
4.75% Notes due 1996................................. 150.0 150.0
6% Deutschmark notes due 1994........................ -- 167.9
8.03% Guaranteed ESOP notes due through 2000......... 51.5 60.7
Other, primarily foreign currency borrowings......... 41.7 57.7
--------------------------
Total long-term debt................................. 743.2 886.3
Less current portion................................. 28.1 46.2
--------------------------
Long-term portion.................................... $715.1 $840.1
==========================
At December 31, 1994, the Company had swap agreements that converted $500
million in U.S. dollar-denominated long-term fixed rate debt securities into
multi-currency principal and floating interest rate obligations over the term of
the respective issues. The $150 million notes due in 1996 were swapped into
floating interest rate U.S. dollar obligations, the $150 million notes due in
2003 were swapped to Deutschmark principal and floating interest rate
obligations and the $200 million notes due in 2005 were swapped to Deutschmark
and French franc principal and floating interest rate obligations, resulting in
an aggregate principal amount of $500 million at a weighted average interest
rate of 5.6% at December 31, 1994. As of December 31, 1993, the Company had swap
agreements that converted the interest obligations of the $500 million in U.S.
dollar-denominated long-term debt securities from fixed to floating interest
rates with a weighted average interest rate of 3.5%.
In addition, at December 31, 1994, the Company had forward exchange
contracts, maturing in 1995, that established Deutschmark and Yen principal and
interest obligations with respect to $119 million of U.S. dollar commercial
paper debt included in Long-Term Debt, with a weighted average interest rate of
3.7%. As of December 31, 1993, the Company also had swap agreements that
established U.S. dollar principal and interest obligations for the Deutschmark
notes due 1994 and certain European currency debt included in Loans payable.
The aggregate U.S. dollar principal obligation at December 31, 1993, amounted
to $400.3 million, with a weighted average interest rate of 3.2%.
18
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exchange rate movements give rise to changes in the values of these
agreements, which offset changes in the values of the underlying exposure.
Amounts associated with these agreements were nil at December 31, 1994, and were
liabilities of $14.6 million at December 31, 1993.
The weighted average interest rate on Loans payable, including any
associated swaps, was 6.5% at December 31, 1994, and 4.3% at December 31, 1993.
The weighted average interest rate on total long-term debt, including associated
swaps and excluding the guaranteed ESOP notes, was 5.3% at December 31, 1994,
compared with 3.5% at December 31, 1993.
The Company has a $150 million revolving bank credit agreement that expires
in June 1995 and a $350 million revolving bank credit agreement expiring in June
1999, both of which may be used for general corporate purposes. Under the
agreements, the Company has the option to borrow at various interest rates,
including the prime rate, and is required to pay a facility fee of .075% per
annum on both agreements and a commitment fee of .025% on the unused portion of
the $350 million credit facility. At year-end 1994 and 1993, there were no
borrowings under the Company's revolving credit agreements.
Based on the Company's intention and ability to maintain its $350 million
revolving credit agreement beyond 1995, $150 million of commercial paper
borrowings was classified as long-term debt at December 31, 1994. As of December
31, 1993, $100 million of commercial paper borrowings and $150 million of 1994
long-term debt maturities were so classified.
Aggregate maturities of total long-term debt for the five years subsequent
to December 31, 1994, are $28.1 million, $174.8 million, $14.5 million, $10.5
million and $8.7 million, respectively.
Unused lines of credit, including the revolving credit facilities, amounted
to $1.05 billion at December 31, 1994.
FINANCIAL INSTRUMENTS
The Company uses financial instruments, principally swaps, forward contracts and
options, in its management of foreign currency and interest rate exposures.
These contracts hedge transactions and balances for periods consistent with its
committed exposures and do not constitute investments independent of these
exposures. The Company does not hold or issue financial instruments for trading
purposes.
Realized and unrealized foreign exchange gains and losses on financial
instruments are recognized and offset foreign exchange gains or losses on the
underlying exposures. The interest differential paid or received on swap and
forward agreements is recognized as an adjustment to interest expense.
At December 31, 1994, the Company had $520 million of contracts
outstanding, which mature during 1995. The 1994 amount consists of purchased,
out-of-the-money, foreign currency put options which partially protect 1995
United States dollar results through the hedge of certain 1995 export
transactions. The cost of these options was $5.7 million, which has been
deferred and will be recognized in Cost of Sales during 1995, along with any
gains on these contracts. In 1993, outstanding contracts amounted to $75
million. These contracts required the Company to purchase, sell or swap certain
foreign currencies, either with or for United States dollars and Deutschmarks at
the contracted rate. The 1994 and 1993 amounts exclude the swap and forward
agreements described in the Debt note.
Several major international financial institutions are counterparties to
the Company's financial instruments. It is Company practice to monitor the
financial standing of the counterparties and limit the amount of exposure with
any one institution. The Company may be exposed to credit loss in the event of
nonperformance by the counterparties to these contracts, but does not anticipate
such nonperformance.
With respect to trade receivables, concentration of credit risk is limited,
due to the diverse geographic areas covered by Company operations. Any probable
bad debt loss has been provided for in the allowance for doubtful accounts.
The estimated fair values of the Company's financial instruments are
summarized as follows.
Carrying Estimated
(Millions of dollars) Amount Fair Value
- --------------------------------------------------------------------------------
December 31, 1994
Long-term investments $ 63.8 $ 63.8
Total long-term debt (743.2) (685.3)
Foreign currency and interest rate contracts 10.3 (53.6)
December 31, 1993
Long-term investments $ 54.8 $ 58.5
Total long-term debt (886.3) (887.6)
Foreign currency and interest rate contracts (4.7) (11.0)
The carrying amounts for cash, short-term investments, receivables,
accounts payable and accrued liabilities, and loans payable approximate fair
value because of the short maturity of these instruments. The fair value of
long-term investments is estimated based on quoted market prices. The fair value
of long-term debt, including the current portion, is estimated based on current
rates offered to the Company for debt of the same remaining maturities. The fair
values of foreign currency and interest rate contracts, including swaps and
forward agreements described in the Debt note, are estimated based on dealer
quotes. These values represent the estimated amount the Company would receive or
pay to terminate agreements, taking into consideration current exchange and
interest rates and the current creditworthiness of the counterparties.
19
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
Effective January 1, 1993, the Company changed its way of accounting for income
taxes from the deferred method to the asset and liability method. Accordingly,
deferred income taxes are recognized for the expected tax consequences of
temporary differences by applying enacted statutory tax rates, applicable to
future years, to differences between the financial reporting basis and tax basis
of assets and liabilities. The cumulative effect of this change in 1993 was a
charge of $13.0 million, or $.06 per common share. Prior periods were not
restated.
Income before income taxes and income tax expense are summarized below.
(Millions of dollars) 1994 1993 1992
- ------------------------------------------------------------------------------------------
Income before income taxes
United States................................. $ 426.6 $271.7 $325.0
Foreign....................................... 677.5 411.0 504.7
----------------------------------------
Total income before income taxes................ $1,104.1 $682.7 $829.7
========================================
Current tax expense:
Federal....................................... $ 81.6 $ 88.7 $ 88.3
Foreign....................................... 208.2 222.7 176.1
State......................................... 27.4 37.1 28.1
Deferred tax expense:
Federal....................................... 42.4 (15.8) 25.7
Foreign....................................... 39.2 (73.9) (1.9)
State......................................... 7.0 (3.0) --
----------------------------------------
Total income tax expense........................ $ 405.8 $255.8 $316.3
========================================
An analysis of deferred tax expense (benefit) follows.
(Millions of dollars) 1994 1993 1992
- ------------------------------------------------------------------------------------------
Depreciation.................................... $ 6.2 $ 2.6 $(1.9)
Stock equivalent unit plan...................... (2.3) .9 (2.3)
Realignment program............................. 52.6 (98.5) --
Oil and gas operations.......................... -- -- (.4)
Other........................................... 32.1 2.3 28.4
----------------------------------------
Total deferred tax expense (benefit)............ $88.6 $(92.7) $23.8
========================================
A reconciliation of the statutory Federal income tax rates to the Company's
effective tax rates follows.
1994 1993 1992
- ------------------------------------------------------------------------
Statutory Federal tax rate.................. 35.0% 35.0% 34.0%
Rate differential on foreign income......... 1.0 (3.4) (.8)
Effect of foreign currency translation...... (.1) 4.1 1.2
State taxes (net of Federal tax benefits)... 2.0 3.2 2.2
Other differences........................... (1.1) (1.4) 1.5
------------------------
Effective tax rate.......................... 36.8% 37.5% 38.1%
========================
The components of deferred tax assets and deferred tax liabilities are
shown below.
1994 1993
-------------------------- --------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
(Millions of dollars) Assets Liabilities Assets Liabilities
- ------------------------------------------------------------------------------------------------
Current
Realignment program.............. $ 40.3 $ -- $ 58.3 $ --
Incentive plans.................. 38.6 -- 33.8 --
Advertising and sales
promotion...................... 15.4 -- 15.5 --
Inventory reserves............... 17.6 -- 9.7 --
Miscellaneous reserves &
accruals....................... 13.4 -- 25.6 --
All other........................ 142.3 47.0 148.6 6.2
------------------- --------------------
Total Current.................. 267.6 47.0 291.5 6.2
------------------- --------------------
Noncurrent
Postretirement benefits.......... 67.7 9.7 64.6 --
Property, plant and
equipment...................... 7.7 63.1 -- 74.8
Realignment program.............. 5.6 -- 40.2 --
Incentive plans.................. 36.2 33.0 17.8 --
All other........................ 16.4 80.9 14.3 91.3
------------------- --------------------
Total Noncurrent............... 133.6 186.7 136.9 166.1
------------------- --------------------
Total.............................. $401.2 $233.7 $428.4 $172.3
=================== ====================
Net Deferred Tax Assets............ $167.5 $256.1
====== ======
20
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENSION PLANS
The Company has noncontributory defined benefit pension plans in effect for
substantially all of its domestic employees. Benefits are based on age, years of
service and the level of compensation during the final years of employment. The
funding policy of the Company for these plans is to contribute annually the
amount necessary to meet the minimum funding standards established by the
Employee Retirement Income Security Act. In addition, the Company has various
foreign retirement programs, including defined benefit, defined contribution and
other plans, covering the majority of foreign employees. In Germany, under
common local practice and enabling tax law, pension costs are accrued but
unfunded.
Total pension expense for 1994 was $69.6 million, compared with $57.0
million and $53.6 million in 1993 and 1992, respectively. The components of net
pension expense follow.
1994 1993 1992
(Millions of dollars) Domestic Foreign Domestic Foreign Domestic Foreign
- ------------------------------------------------------------------------------------------------------------------------------
Defined Benefit Plans
Service cost--benefits earned............................ $ 15.0 $ 25.2 $ 12.3 $ 20.1 $ 11.8 $ 19.1
Interest cost on projected benefit obligation............ 42.0 40.1 38.1 35.5 34.9 35.3
Actual loss (return) on plan assets...................... 1.7 (28.3) (46.3) (64.5) (30.9) (12.2)
Net amortization and deferral............................ (37.8) 3.2 9.9 46.0 (1.8) (9.2)
------------------ ------------------ ------------------
20.9 40.2 14.0 37.1 14.0 33.0
Other Pension Costs
Defined contribution plans............................... -- 3.0 -- 1.7 -- 1.9
Foreign plans not on SFAS 87............................. -- 5.5 -- 4.2 -- 4.7
------------------ ------------------ ------------------
Total Pension Expense...................................... $ 20.9 $ 48.7 $ 14.0 $ 43.0 $ 14.0 $ 39.6
================== ================== ==================
The funded status of the Company's principal defined benefit plans and the
amounts recognized in the consolidated balance sheet at December 31 follow.
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
Vested benefit............................................. $ 428.5 $ 480.7 $ 431.1 $ 438.8 $ 343.9 $ 340.6
Nonvested benefit.......................................... 78.9 25.1 70.4 22.0 25.8 17.5
------------------ ------------------ ------------------
Accumulated benefit obligation............................. 507.4 505.8 501.5 460.8 369.7 358.1
Benefit obligation related to future compensation levels... 99.6 78.7 108.8 66.4 106.4 74.1
------------------ ------------------ ------------------
Projected benefit obligation............................... 607.0 584.5 610.3 527.2 476.1 432.2
Fair value of plan assets, invested primarily in equities
and debt securities...................................... 491.5 291.9 489.4 268.1 423.3 174.6
------------------ ------------------ ------------------
Plan assets less than projected benefit obligation......... (115.5) (292.6) (120.9) (259.1) (52.8) (257.6)
Unrecognized transition obligation (asset)................. 0.1 11.0 (2.3) 10.8 (2.6) 13.5
Unrecognized prior service cost............................ 24.6 11.3 27.4 9.5 17.8 6.3
Unrecognized net loss...................................... 124.5 37.6 117.1 44.3 54.4 36.2
Minimum liability adjustment............................... (2.4) (8.2) (8.9) (15.4) -- --
------------------ ------------------ ------------------
Net prepaid (accrued) pension cost included in
consolidated balance sheet............................... $ 31.3 $(240.9) $ 12.4 $(209.9) $ 16.8 $(201.6)
================== ================== ==================
The primary assumptions used in determining related obligations of the plans are
shown below.
(Percent)
- ----------------------------------------------------------------------------------------------------------------------------------
Discount rate.............................................. 8 1/2 5 - 9 7 5 - 9 8 5 -10
Increase in compensation levels............................ 5 3 1/2- 6 1/2 5 3 1/2- 7 1/2 5 1/2 3 1/2- 6 1/2
Long-term rate of return on assets......................... 9 5 -10 9 5 -10 9 5 -11
- ----------------------------------------------------------------------------------------------------------------------------------
21
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER POSTRETIREMENT BENEFITS
The Company and its subsidiaries also provide certain health care and life
insurance benefits to retired employees. Substantially all of the Company's
domestic employees and some employees in foreign countries become eligible for
these benefits upon retirement. At the time of retirement, domestic employees
who elect to participate are required to pay some portion of such medical costs
if hired before July 1, 1990, or all of such costs if hired after that date. The
Company's employee stock ownership plan (ESOP) was established to assist
employees who retire after January 1, 1992, to finance their retiree medical
costs.
Effective January 1, 1993, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for U.S. operations
and recognized immediately the aftertax transitional obligation of $109 million
as a cumulative effect of an accounting change. This standard requires that the
cost of these benefits be recognized in the financial statements during
employees' active working lives.
The other postretirement benefit expense for 1994 and 1993 was $12.1
million and $9.2 million, respectively. The components of the net expense
follow.
(Millions of dollars) 1994 1993
- -------------------------------------------------------------------------------
Interest cost.............................................. $15.7 $14.7
Service cost (income)...................................... (4.4) (5.2)
Actual loss (return) on assets............................. -- (.4)
Net amortization and deferral.............................. .8 .1
-----------------
Other postretirement benefit expense $12.1 $ 9.2
=================
The status of the Company's plans and the amounts recognized in the balance
sheet follow.
- -------------------------------------------------------------------------------
Retirees................................................... $146.8 $113.0
Fully eligible active employees............................ 25.5 32.8
Other active employees..................................... 45.7 65.4
------------------
Accumulated postretirement benefit obligation............. 218.0 211.2
Fair value of plan assets.................................. (10.3) (7.2)
Unrecognized net loss...................................... (14.6) (10.1)
------------------
Accrued postretirement liability........................... $193.1 $193.9
==================
The accumulated postretirement benefit obligation was determined using an
assumed discount rate of 8.5% and 7% in 1994 and 1993, respectively. The assumed
health care cost trend rate was 13% in 1993 and 12% in 1994, decreasing to 5% by
the year 2001. A one percentage point increase in the trend rate would have
increased the accumulated postretirement benefit obligation by 13%, and interest
and service cost by 20%, in 1994.
ESOP shares allocated to participants reduce Company obligations over the
period of allocation. The account balance is assumed to have an annual yield of
12%. In addition, the Company established a retiree health benefits account
within its domestic pension plan that will be used to partially fund health care
benefits for future retirees.
Adoption for foreign operations is not mandatory until 1995. Since most of
the Company's foreign operations are covered by government-sponsored programs,
the effect of adopting the statement is expected to be immaterial to the results
of operations.
EMPLOYEE STOCK OWNERSHIP PLAN
Under this plan, the Company sold to the ESOP 165,872 shares of a new issue of
Series C, cumulative convertible preferred stock for $100 million, or $602,875
per share. The Series C stock pays an annual dividend of 8% and is being
allocated to eligible employees over a 10-year period, which began in September
1990.
Each share of Series C stock is entitled to vote as if it were converted to
common stock and is convertible into 20 common shares at $30.14375 per share. At
December 31, 1994, 162,928 Series C shares were outstanding, of which 89,684
shares were allocated to employees and the remaining 73,244 shares were held in
the ESOP trust for future allocations. The 162,928 Series C shares are
equivalent to 3,258,558 shares of common stock, about 1.5% of the Company's
outstanding voting stock.
Each Series C share carries rights under the Company's preferred stock
purchase rights plan and currently is entitled to five rights. The Series C
stock is redeemable upon the occurrence of certain changes in control or other
events, at the option of the Company or the holder, depending on the event, at
varying prices not less than the purchase price plus accrued dividends.
22
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds received from the sale of Series C shares to the ESOP were used to
retire Company debt. The ESOP purchased the Series C shares with borrowed funds.
The ESOP loan principal and interest is being repaid on a semi-annual basis over
a 10-year period by the Company contributions to the ESOP and by the dividends
paid on the Series C shares.
As the ESOP loan is repaid, a corresponding amount of Series C stock held
in the trust is released to participant accounts. Allocations are made
quarterly to the accounts of eligible employees, generally on the basis of an
equal amount per participant. In general, regular U.S. employees, participate
in the ESOP after completing one year of service with the Company.
Company cash contributions and dividend payments of $13.9 million, $15.8
million and $18.1 million were paid to the ESOP during 1994, 1993 and 1992,
respectively. The ESOP made principal and interest payments of $9.2 million and
$4.7 million during 1994, $10.3 million and $5.5 million during 1993, and $11.7
million and $6.5 million during 1992, respectively.
The Company has guaranteed the ESOP's borrowings and has reported the unpaid
balance of this loan as a liability of the Company. An unearned ESOP
compensation amount is reported as an offset to the Series C share amount in the
equity section.
Compensation expense related to the plan is based upon the preferred shares
allocated to participants and amounted to $6.4 million, $8.5 million and $11.1
million in 1994, 1993 and 1992, respectively.
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Changes in these capital accounts are summarized below.
(Thousands of shares) (Millions of dollars)
---------------------------------- --------------------------------
Common Stock Additional
---------------------------------- Common Paid-in Treasury
Issued In Treasury Outstanding Stock Capital Stock
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991..................... 276,901 (57,722) 219,179 $276.9 $213.0 $(1,047.5)
Conversion of Series C ESOP Preferred Stock...... -- 17 17 -- .2 .3
Stock option and purchase plans.................. 973 -- 973 1.0 23.7 --
---------------------------------- --------------------------------
Balance at December 31, 1992..................... 277,874 (57,705) 220,169 277.9 236.9 (1,047.2)
Conversion of Series C ESOP Preferred Stock...... -- 7 7 -- .1 .1
Stock option and purchase plans.................. 714 -- 714 .7 22.4 --
---------------------------------- --------------------------------
Balance at December 31, 1993..................... 278,588 (57,698) 220,890 278.6 259.4 (1,047.1)
Conversion of Series C ESOP Preferred Stock...... -- 26 26 -- .3 .5
Stock option and purchase plans.................. 533 -- 533 .5 18.0 --
---------------------------------- --------------------------------
Balance at December 31, 1994..................... 279,121 (57,672) 221,449 $279.1 $277.7 $(1,046.6)
================================== ================================
PREFERRED STOCK PURCHASE RIGHTS
At December 31, 1994, the Company had 56,177,016 preferred stock purchase rights
outstanding as follows: one-quarter of a right for each outstanding share of
common stock and a total of 814,640 rights for the outstanding Series C
preferred stock. Each right may be exercised to purchase one two-hundredth of a
share of junior participating preferred stock for $160. The rights only become
exercisable, or separately transferable, 10 days after a person acquires 20% or
more, or 10 business days after a tender offer commences that could result in
ownership of more than 30%, of the Company's stock.
If any person acquires 30% or more of the common stock (except in an offer
for all common stock that has been approved by the Board of Directors), or in
the event of certain mergers or other transactions involving a 20% or more
stockholder, each right not owned by that person or related parties will enable
its holder to purchase, at the right's exercise price, common stock (or a
combination of common stock and other assets) having double that value. In the
event of certain merger or asset sale transactions with another party, similar
terms would apply to the purchase of that party's common stock.
The rights, which have no voting power, expire on December 9, 1996. Upon
approval by the Board of Directors, the rights may be redeemed for $.01 each
under certain conditions, which may change after any person becomes a 20%
stockholder.
At December 31, 1994, there were authorized 5,000,000 shares of preferred
stock without par value, of which 162,928 Series C shares were issued and
outstanding and 400,000 Series A shares were reserved for issuance upon exercise
of the rights.
23
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION AND STOCK EQUIVALENT UNIT PLANS
Stock Option Plan activity is summarized below.
1994 1993 1992
----------------------- ----------------------- -----------------------
Average Average Average
Per Share Per Share Per Share
(Thousands of shares) Shares Option Price Shares Option Price Shares Option Price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year.............. 4,542 $37.17 4,347 $32.84 4,160 $26.22
Granted ...................................... 1,647 67.99 982 48.40 1,311 44.85
Exercised..................................... (577) 30.88 (765) 26.91 (1,116) 22.21
Cancelled..................................... (17) 61.14 (22) 39.88 (8) 38.54
----- ----- -----
Outstanding at end of year.................... 5,595 46.82 4,542 37.17 4,347 32.84
===== ===== =====
Shares reserved for future grants............. 6,432 62 1,022
===== ===== =====
The Stock Option Plan authorizes the granting of options on shares of the
Company's common stock to selected key employees, including those who also may
be officers, and to nonemployee directors, at not less than the fair market
value of the stock on the date of grant. All outstanding options have 10-year
terms and are exercisable one year from the date of grant, provided the employee
optionee is still employed or the director continues to serve. The plan also
permits payment for options exercised in shares of the Company's common stock
and the granting of incentive stock options. During 1994, stockholders approved
increasing by 8,000,000 the number of shares on which stock options may be
granted.
The Stock Purchase Plan provides for the sale at fair market value of the
Company's common stock to selected key employees, excluding officers and
directors. At December 31, 1994, 154,374 shares were reserved for issuance under
the plan.
The Stock Equivalent Unit Plan provides for awards of basic stock units to
key employees, excluding officers who are directors. Each unit is treated as
equivalent to one share of the Company's common stock. However, the employee
only receives appreciation, if any, in the market value of the stock and
dividend equivalent units as dividends are paid. Appreciation on basic stock
units is limited to 100% of the original market value. Benefits accrue over
seven years, and vesting commences in the third year.
Stock Equivalent Unit Plan expense amounted to $19.1 million in 1994, $14.5
million in 1993 and $22.1 million in 1992.
REALIGNMENT PLAN
Beginning with the fourth quarter of 1993, the Company's financial statements
reflect charges for a realignment plan designed to take advantage of
opportunities created by the continuing trend to more open world trade and the
growth of the Company's global operations, and to improve the competitive
position of the Company's business. Under the plan, there are both job additions
and reductions during 1994 and 1995, with the plan affecting some 2,000
positions, or about 6% of the Company's worldwide total, primarily outside the
United States. These actions resulted in a 1993 fourth quarter charge to profit
from operations of $262.6 million ($164.1 million after taxes, or $.74 per
share).
The provisions of the realignment plan were created according to
definitions in Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies." All provisions were specific. There were no provisions for
general contingencies or for any asset impairments other than those resulting
from changes in the expected use of assets as a result of the realignment plan.
Only specific incremental and direct costs clearly identifiable with various
projects and which could be estimated with reasonable accuracy were included in
the plan.
The estimated costs included severance for terminated employees, as
required by local country laws, union contracts and Company policies. All
salaries and benefits for periods prior to termination under the realignment
plan are being charged to operations, and are not part of the realignment
charge. No costs related to new employees have been included in the realignment
expense.
24
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The realignment charges included costs that are classified into two major
categories as follows.
1. Costs associated with the closure and disposal of major manufacturing
facilities in all business segments, due principally to excess manufacturing
capacity caused by falling global trade barriers. These costs totaled $72.0
million and consisted primarily of severance costs of $62.3 million for
terminated employees and $9.2 million in facility exit costs, distributor
termination payments and lease termination costs.
2. Costs associated with organizational realignment and related work force
reductions to improve the Company's competitive positioning of its business
and adaptation to the continuing trend of more open world trade.
Organizational realignment activities included the following:
a) Integration of various headquarters, marketing and administrative
functions in all business segments and geographical areas.
b) Downsizing of factory and distribution operations in the worldwide blades
and razors, toiletries and cosmetics, Braun and Oral-B business segments.
c) Integration by Gillette of the newly acquired Parker Pen facilities and
organizations into the worldwide Gillette organization.
d) Various other asset impairments and other minor related projects in all
business segments and geographical areas.
Costs for these activities included the following:
Asset
Severance Write- Integration
(Pretax $ Millions) Costs downs Costs Total
- ------------------------------------------------------------------------------------------------------------------------
a) Integration of various functions................ $30.2 $ 3.4 $ 8.0 $ 41.6
b) Downsizing of operations........................ 33.6 29.5 17.1 80.2
c) Integration of Parker Pen....................... 4.5 7.2 3.2 14.9
d) Other asset impairments......................... 9.2 43.8 .9 53.9
-----------------------------------------------------------------
Total........................................... $77.5 $83.9 $29.2 $190.6
=================================================================
Severance-related benefits are communicated to employees as the individual
realignment programs are executed. Assets are written down to net realizable
value for impairments due to expected changes in use of the assets as a result
of the realignment plan. Integration costs are those incurred for the closing of
smaller facilities, distributor termination payments and lease termination
costs.
The realignment program required cash expenditures (after income tax
effects) of approximately $15 million in 1994 and is expected to require $54
million in 1995 and $10 million in 1996. Noncash costs, principally for the
write-down of property, plant and equipment and other assets to net realizable
values, amounted to $72 million in 1994, and in 1995 will total $13 million. The
cash flow benefits of the realignment program, consisting principally of reduced
salaries, wages and overhead costs, are being reinvested primarily into research
and development, capital spending and advertising to support product line
development and expansion.
During 1994, the Company charged costs of $140.3 million to the realignment
accrual established in 1993. Under provisions of the realignment program, 1,410
positions were eliminated by the end of 1994. The realignment program, with some
minor exceptions, is being implemented, and realignment activities are planned
to be ongoing, through the fourth quarter of 1995.
CONTINGENCIES
The Company is subject to legal proceedings and claims arising out of its
business that cover a wide range of matters, including antitrust and trade
regulation, contracts, environmental issues, product liability, patent and
trademark matters and taxes.
Management, after review and consultation with counsel, considers that any
liability from all of these pending lawsuits and claims would not materially
affect the consolidated financial position, results of operations or liquidity
of the Company.
LEASE COMMITMENTS
Minimum rental commitments under noncancellable leases, primarily for office and
warehouse facilities, are $39.6 million in 1995, $31.9 million in 1996, $26.8
million in 1997, $21.4 million in 1998, $17.9 million in 1999 and $23.1 million
for years thereafter. Rental expense amounted to $63.2 million in 1994, $60.5
million in 1993 and $59.7 million in 1992.
RESEARCH AND DEVELOPMENT
Research and development costs, included in selling, general and administrative
expenses, amounted to $136.9 million in 1994, $133.1 million in 1993 and $123.8
million in 1992.
25
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Company is responsible for the objectivity and integrity of the accompanying
consolidated financial statements, which have been prepared in conformity with
generally accepted accounting principles. The financial statements of necessity
include the Company's estimates and judgments relating to matters not concluded
by year-end. Financial information contained elsewhere in the Annual Report is
consistent with that included in the financial statements.
The Company maintains a system of internal accounting controls that
includes careful selection and development of employees, division of duties, and
written accounting and operating policies and procedures augmented by a
continuing internal audit program. Although there are inherent limitations to
the effectiveness of any system of accounting controls, the Company believes
that its system provides reasonable, but not absolute, assurance that its
assets are safeguarded from unauthorized use or disposition and that its
accounting records are sufficiently reliable to permit the preparation of
financial statements that conform in all material respects with generally
accepted accounting principles.
KPMG Peat Marwick LLP, independent auditors, are engaged to render an
independent opinion regarding the fair presentation in the financial statements
of the Company's financial condition and operating results. Their report appears
below. Their examination was made in accordance with generally accepted auditing
standards and included a review of the system of internal accounting controls to
the extent they considered necessary to determine the audit procedures required
to support their opinion.
The Audit Committee of the Board of Directors is composed solely of
directors who are not employees of the Company. The Committee meets periodically
and privately with the independent auditors, with the internal auditor and with
the financial officers of the Company to review matters relating to the quality
of the financial reporting of the Company, the internal accounting controls and
the scope and results of audit examinations. The Committee also reviews
compliance with the Company's statement of policy as to the conduct of its
business, including proper accounting and dealing with auditors. In addition, it
is responsible for recommending the appointment of the Company's independent
auditors, subject to stockholder approval.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
[LOGO OF KPMG PEAT MARWICK LLP APPEARS HERE]
THE STOCKHOLDERS AND BOARD OF DIRECTORS OF THE GILLETTE COMPANY
We have audited the accompanying consolidated balance sheet of The Gillette
Company and subsidiary companies as of December 31, 1994 and 1993, and the
related consolidated statements of income and earnings reinvested in the
business and cash flows for each of the years in the three-year period ended
December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Gillette
Company and subsidiary companies at December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in the Notes to Consolidated Financial Statements, in 1993 the
Company changed its methods of accounting for income taxes, postretirement
medical benefits and postemployment benefits.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 26, 1995
26
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INFORMATION BY BUSINESS SEGMENT
(Millions of dollars) Blades & Toiletries & Stationary Braun Oral B
1994 Razors Cosmetics Products Products Products Other Corporate Total
- --------------------------------------------------------------------------------------------------------------------------------
Net sales......................... $2,350.7 $1,162.0 $ 806.7 $1,348.2 $401.9 $ .7 $ -- $6,070.2
Profit from operations............ 878.2 79.3 94.9 200.4 25.0 (5) (50.6) 1,226.7
Identifiable assets............... 1,843.3 628.4 1,111.6 1,094.5 352.4 2.9 460.9 5,494.0
Capital expenditures.............. 181.1 33.0 30.4 110.0 38.2 .4 6.7 399.8
Depreciation...................... 72.5 20.2 23.8 57.3 8.0 .4 1.9 184.1
1993
- --------------------------------------------------------------------------------------------------------------------------------
Net sales......................... $2,117.6 $1,047.1 $ 633.1 $1,248.8 $363.1 $1.1 $ -- $5,410.8
Profit from operations*........... 692.2 (6.2) 27.0 146.4 16.9 (.6) ( 51.0) 824.7
Identifiable assets............... 1,643.7 624.2 1,070.7 959.5 307.9 1.2 495.1 5,102.3
Capital expenditures.............. 161.7 40.5 23.7 90.5 27.7 .1 7.8 352.0
Depreciation...................... 73.0 20.5 19.8 64.4 8.2 .3 2.8 189.0
*After realignment expense of..... 104.3 64.6 37.5 20.9 28.7 -- 6.6 262.6
1992
- --------------------------------------------------------------------------------------------------------------------------------
Net sales......................... $1,978.2 $ 970.9 $ 520.4 $1,325.6 $365.9 $1.8 $ -- $5,162.8
Profit from operations............ 665.3 89.4 48.9 162.7 46.8 (.3) (45.7) 967.1
Identifiable assets............... 1,533.9 545.8 469.5 1,057.1 261.2 5.2 317.2 4,189.9
Capital expenditures.............. 133.5 46.7 25.5 87.4 23.4 .6 4.3 321.4
Depreciation...................... 75.2 20.1 15.6 64.4 8.5 .3 3.9 188.0
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INFORMATION BY GEOGRAPHIC AREA
(Millions of dollars) Western Latin Total United
1994 Europe America Other Foreign States Corporate Total
- --------------------------------------------------------------------------------------------------------------------------------
Net sales......................... $2,119.3 $859.8 $1,146.6 $4,125.7 $1,944.5 $ -- $6,070.2
Profit from operations............ 438.3 228.9 225.0 892.2 385.1 (50.6) 1,226.7
Identifiable assets............... 2,403.0 644.1 649.0 3,696.1 1,337.0 460.9 5,494.0
1993
- --------------------------------------------------------------------------------------------------------------------------------
Net sales......................... $1,948.9 $761.7 $ 940.7 $3,651.3 $1,759.5 $ -- $5,410.8
Profit from operations*........... 316.0 177.6 125.8 619.4 256.3 (51.0) 824.7
Identifiable assets............... 2,199.9 647.9 505.0 3,352.8 1,254.4 495.1 5,102.3
*After realignment expense of..... 109.8 39.6 30.6 180.0 76.0 6.6 262.6
1992
- --------------------------------------------------------------------------------------------------------------------------------
Net sales......................... $2,105.5 $646.6 $ 819.0 $3,571.1 $1,591.7 $ -- $5,162.8
Profit from operations............ 411.7 176.9 121.8 710.4 302.4 (45.7) 967.1
Identifiable assets............... 1,870.4 504.4 444.4 2,819.2 1,053.5 317.2 4,189.9
- --------------------------------------------------------------------------------------------------------------------------------
SEGMENT AND AREA COMMENTARY
Profit from operations is net sales less cost of sales and selling, general and
administrative expenses, but is not affected either by nonoperating
charges/income or by income taxes. Nonoperating charges/income consists
principally of net interest expense and exchange losses.
In calculating profit from operations for individual business segments,
substantial expenses incurred at the operating level which are common to more
than one segment are allocated on a net sales basis. Certain headquarters
expenses of an operational nature also are allocated to business segments and
geographic areas.
The principal products included in each of the Company's major business
segments are described in the review of operations, which appears earlier.
All intercompany transactions have been eliminated, and transfers of
finished goods between geographic areas are not significant. Assets in the
Corporate column include deferred income tax assets, primarily relating to the
realignment program and to mandated accounting changes, prepaid and intangible
pension assets, oil and gas investments, and nonqualified benefit trusts.
27
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
OTHER FINANCIAL INFORMATION
BUSINESS SEGMENTS
The percentages of consolidated net sales and segment profit from operations,
before corporate expenses, during the last five years for each of the Company's
major business segments are set forth below.
Blades & Toiletries & Stationery Braun Oral-B
Razors Cosmetics Products Products Products
--------------- --------------- -------------- -------------- ----------------
Net Segment Net Segment Net Segment Net Segment Net Segment
Year Sales Profit Sales Profit Sales Profit Sales Profit Sales Profit
- ----------------------------------------------------------------------------------------------------------------------------------
1994................................. 39% 69% 19% 6% 13% 7% 22% 16% 7% 2%
1993*................................ 39% 70% 19% 5% 12% 6% 23% 15% 7% 4%
1992................................. 38% 66% 19% 9% 10% 5% 26% 16% 7% 4%
1991................................. 37% 62% 20% 13% 10% 5% 26% 16% 7% 4%
1990................................. 36% 60% 22% 13% 11% 8% 25% 15% 6% 4%
*Segment profit percentages are
before realignment expense.
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QUARTERLY FINANCIAL INFORMATION
(Millions of dollars, except per share amounts) Three Months Ended
--------------------------------------------------------------------------------
1994 March 31 June 30 September 30 December 31 Total Year
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales............................ $1,361.1 $1,406.5 $1,503.4 $1,799.2 $6,070.2
Gross profit......................... 862.5 906.1 957.2 1,122.5 3,848.3
Profit from operations............... 297.1 293.0 297.7 338.9 1,226.7
Income before income taxes........... 259.3 256.5 272.2 316.1 1,104.1
Net income........................... 164.0 162.2 172.2 199.9 698.3
Net income per common share.......... .74 .73 .77 .90 3.14
Dividends declared per common share.. -- .25 .25 .50 1.00
Stock price range: (composite basis)
High............................... 67 3/8 69 3/4 73 76 1/2
Low................................ 57 3/4 62 1/8 64 5/8 69 1/2
1993*
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Net sales............................ $1,216.6 $1,237.3 $1,339.7 $1,617.2 $5,410.8
Gross profit......................... 753.1 773.6 839.0 1,000.8 3,366.5
Profit from operations............... 262.4 244.2 266.8 51.3 824.7
Income before income taxes and
cumulative effect of accounting
changes............................ 227.7 215.5 232.0 7.5 682.7
Income before cumulative effect of
accounting changes................. 142.3 134.7 145.0 4.9 426.9
Cumulative effect of accounting
changes............................ (138.6) -- -- -- (138.6)
Net income........................... 3.7 134.7 145.0 4.9 288.3
Income per common share before
cumulative effect of accounting
changes............................ .64 .61 .65 .02 1.92
Cumulative effect of accounting
changes............................ (.63) -- -- -- (.63)
Net income per common share.......... .01 .61 .65 .02 1.29
Dividends declared per common share.. -- .21 .21 .42 .84
Stock price range: (composite basis)
High............................... 61 3/8 60 5/8 59 1/4 63 3/4
Low................................ 52 1/2 47 3/8 50 57 1/8
*In the fourth quarter of 1993, charges for realignment expense reduced profit from operations and income before income taxes by
$262.6 million, income by $164.1 million and income per common share by $.74.
- ----------------------------------------------------------------------------------------------------------------------------------
28
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
HISTORICAL FINANCIAL SUMMARY
(In millions, except per share amounts, stock price and employees)
Profit Income Net Depreciation
Net from before Net interest and Total Capital
Year sales operations taxes income expense amortization assets expenditures
========================================================================================================================
1994 $6,070 $1,227 $1,104 $698 $ 42 $215 $5,494 $400
1993* 5,411 825 683 288 33 219 5,102 352
- ------------------------------------------------------------------------------------------------------------------------
1992 5,163 967 830 513 56 211 4,190 321
1991 4,684 862 694 427 94 193 3,887 286
1990 4,345 773 593 368 120 177 3,671 255
1989 3,819 664 474 285 115 149 3,114 223
1988 3,581 614 449 269 101 141 2,868 189
1987 3,167 523 392 230 82 126 2,731 147
1986** 2,818 229 58 16 47 108 2,540 199
1985 2,400 371 272 160 48 88 2,425 157
1984 2,289 347 259 159 35 82 2,024 119
========================================================================================================================
*In 1993, charges for realignment expense reduced profit from operations and
income before income taxes by $263 million, net income by $164 million and net
income per common share by $.74. In addition, in 1993, the cumulative effect of
adopting mandated changes in the methods of accounting for income taxes,
postretirement benefits and postemployment benefits reduced net income by $139
million and net income per common share by $.63.
Net Per Common Share Average
property, --------------------- common Year-end
plant and Long-term Stockholders' Net Dividends shares stock
Year equipment debt equity income declared outstanding price Employees
=======================================================================================================================
1994 $1,411 $ 715 $2,017 $3.14 $1.00 221 $74 7/8 32,800
1993* 1,215 840 1,479 1.29 .84 220 59 5/8 33,400
- -----------------------------------------------------------------------------------------------------------------------
1992 1,075 554 1,496 2.32 .72 220 56 7/8 30,900
1991 931 742 1,157 1.94 .62 211 56 1/8 31,200
1990 862 1,046 265 1.60 .54 194 31 3/8 30,400
1989 745 1,041 70 1.35 .48 193 24 5/8 30,400
1988 683 1,675 (85) 1.23 .43 219 16 5/8 29,600
1987 664 840 599 1.00 .39 1/4 230 14 1/8 30,100
1986** 637 915 461 .06 .34 255 12 3/8 32,100
1985 504 436 898 .65 .32 1/2 247 8 3/4 31,400
1984 430 443 791 .65 .31 246 7 1/8 31,400
===========================================================================================================================
**In 1986, special charges for restructuring expense reduced profit from
operations by $179 million and, along with tender offer response costs and a
change in accounting for oil and gas investments, reduced income before taxes by
$243 million, net income by $165 million and net income per common share by
$.65.
[GRAPHS APPEAR HERE]
29
CORPORATE AND STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of stockholders will take place on Thursday, April 20, 1995,
at the John F. Kennedy Library and Museum, Columbia Point, Boston,
Massachusetts. The meeting will convene at 10 a.m.
CORPORATE HEADQUARTERS
Prudential Tower Building
Boston, Massachusetts 02199
(617)421-7000
INCORPORATED
State of Delaware
COMMON STOCK
Major stock exchanges: New York, Boston, Midwest,
Pacific, London, Frankfurt, Zurich
New york Stock Exchange Symbol: G
At year-end, stockholders numbered 30,500, living in all 50 states and more than
30 countries abroad.
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
Shareholder Services Division
P.O. Box 644
Mail Stop 45-02-09
Boston,Massachusetts 02102-0644
(617)575-3170
Toll free:(800)730-4001
Hearing impaired:(800)952-9245 (TTY/TDD)
AUDITORS
KPMG Peat Marwick LLP
FORM 10-K
The Company's 1994 Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, is available without charge by written request from the
office of the Secretary, or by calling toll-free (800)291-7615.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
All registered holders of Gillette stock are invited to participate in the
Dividend Reinvestment and Stock Purchase Plan. The plan provides a convenient,
economical and systematic means of acquiring additional shares of the Company's
common stock through the reinvestment of cash dividends. Participants also may
invest additional cash amounts in the purchase of share as frequently as once
each month.
Interested stockholders can obtain a descriptive brochure and enrollment card
from:
The First National Bank of Boston
Dividend Reinvestment and
Stock Purchase Plan
P.O. Box 1681
Mail Stop 45-01-06
Boston, Massachusetts 02105-1681
(617)575-3170
Toll free: (800) 730-4001
Hearing impaired:(800)952-9245 (TTY/TDD)
QUARTERLY REPORTS
Currently, the Company mails quarterly reports only to registered holders of
Gillette common stock. If your shares are registered in the name of a broker or
other nominee, and you would like to receive the quarterly reports, the Company
will gladly mail them directly to you. You may add your name to our mailing list
by writing to the office of the Secretary, or by calling toll-free
(800)291-7615.
[RECYCLED LOGO APPEARS HERE]
This annual report is printed on recycled paper.
30