Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Gillette Company and Subsidiary Companies
RESULTS OF OPERATIONS
Net Sales
Net sales in 2002 were $8.45 billion, 5% above those of 2001. The 2002
sales growth is at the upper end of the 3-5% growth range that the Company
expects to consistently deliver. Volume/mix accounted for nearly the entire
sales gain, as the impacts of pricing and exchange had no material effect for
the year. Sales increased due to new product introductions, the strength of
established products and the comparison with the lower volumes that resulted
from the Company's trade inventory reductions in 2001. Net sales in 2001 were
$8.08 billion, 3% below those of 2000. Excluding the adverse effect of
exchange, 3%, sales in 2001 were level with those of the prior year. The level
sales were attributable to favorable pricing of 1%, offset by negative
volume/mix of 1%, which included the significant unfavorable impact of trade
inventory reductions.
An analysis of sales by business segment follows.
% increase/(decrease)
Years ended December 31, 2002 2001 2000 02/01 01/00
- ------------------------------------------------------------------------------------
(millions)
Blades & Razors $3,435 $3,200 $3,177 7 1
Duracell 1,898 1,953 2,137 (3) (9)
Oral Care 1,248 1,149 1,079 9 7
Braun 1,056 981 1,042 8 (6)
Special Care 816 801 875 2 (8)
-------------------------------------------------------
$8,453 $8,084 $8,310 5 (3)
=======================================================
See Notes to Consolidated Financial Statements for segment data.
Sales of Blades and Razors in 2002 were 7% higher than those of the prior
year. Without the negative effect of exchange, sales grew 8%. Sales growth was
driven by the success of premium shaving systems, specifically the Mach3 and
Venus, and favorable comparisons to 2001, when actual sales were below
consumption due to the Company's program to reduce trade inventories. In
addition, the Mach3Turbo shaving system made significant gains in North
America. Growth was offset by increased spending on trade and consumer programs
and the absence of a pre-price increase buy-in in North America that occurred
in 2001, but not in 2002. In addition, sales of disposable razors continued to
improve. In 2001, sales of Blades and Razors were 1% higher than in the prior
year. Excluding the adverse effect of exchange, sales grew 4%. The sales
increase was due to the continued strength of the Mach3 shaving system, as well
as strong shipments of the Venus system in North America and Europe, offset by
lower volumes related to the Company's program to reduce trade inventories of
blades.
Sales of Duracell products in 2002 were 3% lower than in the prior year,
and exchange had no material impact. Favorable unit shipments, despite category
weakness in Latin America, were offset by increased trade and consumer spending
and an adverse shift in product mix among brands, pack sizes and retail
channels. In January 2003, the Company announced Duracell's price-deal
realignment program for the U.S. in an effort to restore brand value to
Duracell. Through the program, the Company will simplify the offering to the
customer with fewer SKU's and price points, improve everyday competitive
pricing on the shelf, engage in more efficient trade and consumer promotion and
increase investment in category- and brand-building activities. In 2001, sales
of Duracell products declined 9%. Excluding the adverse effect of exchange,
sales declined 7% versus the prior year. The sales decline reflected the
Company's program to reduce trade inventory levels and a change in mix, as the
proportion of CopperTop battery sales increased versus those of the
premium-priced Duracell Ultra brand.
Oral Care sales were 9% above those of 2001, as the success of new
product introductions drove strong growth in both the manual and power
segments. Without the effect of exchange, sales would have been 7% above those
of 2001. In manual Oral Care, sales gains reflected the successful North
American launch of the Oral-B Stages line of children's toothbrushes and strong
growth in the developing markets of Asia and AMEE (Africa, Middle East and
Eastern Europe) from entry-level Exceed, Vision and Classic toothbrushes. In
power Oral Care, sales growth reflected incremental battery toothbrush sales in
both North America and Europe. Higher promotional spending partially offset
these gains. In 2001, sales of Oral Care products were 7% above those of 2000,
22
but would have been 9% higher without the impact of exchange. Strong gains in
power Oral Care products more than offset lower sales of manual Oral Care
products.
Sales of Braun products were 8% above those of 2001. Excluding the impact
of exchange, Braun sales were 5% above those of the prior year. Growth was
driven by the success of new electric shavers, partially offset by lower sales
in Latin America and increased trade and consumer spending. In 2001, Braun
sales were 6% lower than in the previous year, but would have been 2% lower,
excluding the impact of exchange. The decrease reflects reduced product
offerings within non-shaving categories.
Personal Care sales were 2% higher than those of 2001, and exchange had
no material impact in 2002. The sales gain was driven by the success of new
products, namely PowerStripe antiperspirants, the reformulated line of Gillette
Series shave preparations and the re-staged Satin Care line, offset by
increased trade and consumer spending. All regions showed sales growth except
Latin America, which experienced economic downturn and increased competitive
activity. In 2001, Personal Care sales decreased 8% from those of 2000, but
would have been 4% below that year's level without the negative effect of
exchange, 6%, and the divestiture of White Rain hair care products, 2%, in
April 2000. Sales declined in shave preparations, as well as in
antiperspirants/deodorants.
The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for 12% of sales in both 2002 and 2001. These sales occurred
primarily in the United States and were across all product segments.
Gross Profit
Gross profit was $4.94 billion in 2002, $4.68 billion in 2001 and $4.84
billion in 2000. As a percent of net sales, gross profit was 58.5% in 2002,
compared with 57.9% in 2001 and 58.3% in 2000. In 2002, the margin gain was
driven by favorable blade/razor mix, savings from our Strategic Sourcing
Initiative to reduce costs of materials and services, and benefits from
restructuring. These savings were offset by $27 million of incremental expenses
related to our Functional Excellence initiative, which is described below,
higher year-over-year trade spending and unfavorable product mix shifts in both
Duracell and Oral Care. In 2001, the margin decline versus 2000 was mainly due
to the planned unfavorable mix in Duracell and Blades and Razors, as well as
the reduced efficiencies resulting from the Company's program to lower trade
inventories of blades.
Selling, General and Administrative Expenses
Selling, general and administrative expenses amounted to 37.5% of 2002
net sales, compared with 37.2% and 33.2% in 2001 and 2000, respectively. In
absolute terms, these expenses increased 6% in 2002 and 9% in 2001. Advertising
increased 12% in 2002, driven by higher investment behind both new and
established products. The 7% rise in advertising spending in 2001 was in line
with objectives to increase advertising investment levels. The table below
shows the breakout of advertising and sales promotion within selling, general
and administrative expenses for 2002, 2001 and 2000, and the percentage
increase from the prior year for 2002 and 2001.
% of % of % of
2002 Net Sales 2001 Net Sales 2000 Net Sales
- ---------------------------------------------------------------------------------------------------------------
(millions)
Advertising $647 $576 $539
Sales promotion 319 319 300
---------------- ---------------- ----------------
$966 11% $895 11% $839 10%
---------------- ---------------- ----------------
Percentage increase from prior year 8% 7%
In 2002, other marketing and administrative expenses were 5% above those
of the prior year, but were flat as a percentage of sales at 26%, due to
incremental Functional Excellence expenses amounting to $94 million, which
offset savings from the December 2000 restructuring, Zero Overhead Growth
efforts and a $34 million reduction in amortization associated with the
adoption of Statement of Financial Accounting Standards (SFAS) 142. Excluding
the incremental Functional Excellence charges, other marketing and
administrative expenses were comparable to those of the prior year. In 2001,
other marketing and administrative expenses increased 10%, due to substantial
investment behind merchandising activity.
Profit from Operations
Profit from operations was $1.81 billion in 2002, compared with $1.50
billion in 2001 and $1.51 billion in 2000.
Excluding the pretax $30 million gain on the sale of Vaniqa, a female
facial hair growth retardant, and the restructuring recovery of $9 million in
2002, and restructuring and asset impairment charges of $172 million
23
in 2001 and $572 million in 2000, profit from operations was $1.77 billion in
2002 (20.9% of net sales), $1.67 billion in 2001 (20.7% of net sales) and $2.08
billion in 2000 (25.1% of net sales). The 6% increase in 2002 profit from
operations was driven by cost reductions across the organization, an
improvement in product mix in Blades and Razors, and a decrease in amortization
of $34 million, due to the adoption of SFAS 142, partially offset by $121
million of incremental Functional Excellence expenses. The 20% decrease in 2001
was due to lower net sales, increased advertising spending and higher other
marketing and administrative expenses.
An analysis of profit from operations by business segment follows.
Functional Excellence charges for 2002 are included in the relevant segments.
Restructuring, asset impairment charges and the gain on the sale of Vaniqa are
included in Corporate/Other.
% increase/(decrease)
Years ended December 31, 2002 2001 2000 02/01 01/00
- ---------------------------------------------------------------------------------------------------
(millions)
Blades & Razors $1,299 $1,141 $1,272 14 (10)
Duracell 233 217 456 7 (52)
Oral Care 222 240 226 (7) 6
Braun 75 98 94 (23) 4
Personal Care 51 68 100 (25) (32)
-------------------------------------------------------
1,880 1,764 2,148 7 (18)
-------------------------------------------------------
Corporate/Other (71) (266) (636)
-------------------------------------------------------
Profit from Operations $1,809 $1,498 $1,512 21 (1)
=======================================================
Gain on sale of Vaniqa (30) -- --
Restructuring and Asset Impairment (9) 172 572
Profit from Operations, excluding
special items $1,770 $1,670 $2,084 6 (20)
=======================================================
See Notes to Consolidated Financial Statements for segment data.
Blades and Razors profit from operations was 14% higher in 2002, due
mainly to favorable blade versus razor mix and favorable comparisons due to the
2001 trade inventory reduction program, offset partially by incremental
Functional Excellence costs in 2002. In 2001, Blades and Razors profit was 10%
below that of the year before, due to unfavorable razor versus blade mix,
increased advertising support and higher administrative costs.
Duracell profit from operations increased 7% from the prior year, due to
the realization of cost savings that more than offset higher promotional
spending, incremental Functional Excellence expenses, the planned shift in mix
to lower margin product and pack sizes and the first-quarter 2002 costs of
withdrawing selected hearing aid batteries from the market. In 2001, Duracell
profit from operations was 52% lower than in 2000, the result of lower net
sales, greater advertising spending and increased overhead costs.
Oral Care profit from operations was 7% below that of 2001, as sales
gains from new products and cost savings were more than offset by increased
marketing spending, incremental Functional Excellence charges and incremental
expenses related to the write-down of excess real property. In 2001, Oral Care
profit from operations was 6% above that of 2000, due primarily to increased
sales and manufacturing efficiencies, offset by higher overhead expenses.
Braun profit from operations was 23% lower than in the prior year, due to
increased advertising costs, unfavorable product mix and significant Functional
Excellence expenses, which offset progress in reducing manufacturing costs. In
2001, Braun profit from operations was 4% higher than in 2000, reflecting
favorable mix, manufacturing cost savings and lower marketing expenses.
Personal Care profit from operations in 2002 was 25% lower than that of
the prior year, due to higher advertising and promotional support, as well as
incremental Functional Excellence expenses. In 2001, Personal Care profit was
32% below that of the previous year, due to lower sales and increased
administrative costs.
Nonoperating Charges/Income
Net interest expense amounted to $59 million in 2002, $141 million in
2001 and $218 million in 2000. Net interest expense fell in 2002 and 2001, due
to reduced borrowings and significantly lower interest rates year-over-year. A
net exchange gain of $16 million in 2002 was due to transactional gains. This
compared with a net exchange loss of $3 million in 2001 that stemmed primarily
from subsidiaries in highly inflationary countries, and a net exchange gain of
$8 million in 2000. Translation adjustments resulting from currency
fluctuations of net foreign investments in non-highly inflationary countries
are accumulated in a separate section of stockholders'
24
equity, as noted on page 41. In 2002, the favorable translation adjustment was
$41 million, compared with unfavorable translation adjustments of $93 million
in 2001 and $249 million in 2000, reflecting significant exchange rate
movements.
Income Taxes
The effective tax rate was 31.0% in 2002, compared with rates of 32.2% in
2001 and 36.3% in 2000. The 2002 effective tax rate of 31.0% was unchanged from
that of 2001, when the effect of certain items included in the 2001
restructuring and asset impairment charge is excluded. The decrease in the
effective tax rate in 2001 from 2000 was due primarily to the nondeductibility
of certain asset impairment charges in 2000. Excluding the impact of certain
restructuring and asset impairment charges in 2001 and 2000, the tax rate
declined to 31.0% in 2001 from 32.8% in 2000.
Income from Continuing Operations
Income from continuing operations was $1.21 billion in 2002, compared
with $910 million in 2001 and $821 million in 2000. Diluted net income per
common share from continuing operations was $1.14 in 2002, compared with $.86
in 2001 and $.77 in 2000.
Excluding the gain from the sale of Vaniqa and the restructuring recovery
in 2002, and restructuring and asset impairment charges in 2001 and 2000,
income from continuing operations was $1.18 billion in 2002 ($1.12 per diluted
share), compared with $1.05 billion in 2001 ($.99 per diluted share) and $1.25
billion in 2000 ($1.18 per diluted share).
Financial Condition
The Company's financial condition, most notably its cash-generating
capabilities, continued to strengthen during 2002. Cash provided by operations
is the Company's primary source of funds to finance operations, capital
investments, stock repurchases and dividends. Free cash flow, defined as cash
remaining from operations after capital investments, for 2002 was $1.72 billion,
more than doubling over the last two years. A reconciliation of net cash
provided by operating activities to free cash flow follows.
Years Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------
(millions)
Net cash provided by operating activities $2,077 $2,092 $1,604
Less: additions to property, plant and equipment (405) (624) (793)
Plus: disposals of property, plant and equipment 43 59 41
------------------------------
Free cash flow $1,715 $1,527 $ 852
==============================
Net cash provided by operating activities was $2.08 billion in 2002, in
line with 2001. Higher profits and continued working capital improvements were
offset by significant contributions to pension plans. Net cash from operating
activities of $2.09 billion in 2001 increased 31% from $1.60 billion in 2000.
This increase was principally due to improved accounts receivable collections.
Net working capital as a percentage of net sales decreased dramatically
over the last two years, dropping from 22% in 2000 to 16% in 2001, to 8% by the
end of 2002, due entirely to improvements in accounts receivable, accounts
payable and inventory. Net working capital is defined as current assets from
continuing operations (less cash and cash equivalents) minus current liabilities
(before loans payable and current portion of long-term debt).
Capital spending has also been dramatically reduced. In 2002, capital
spending of $405 million, or 5% of net sales, was $219 million below 2001, a 35%
reduction. Capital spending in 2001, at $624 million, or 8% of net sales, was
$169 million below 2000 spending, a 21% reduction. The 2000 spending was $793
million, or 10% of sales. Capital spending is focused on new products and cost
reduction projects.
Since 2001, the Company has sought to improve the efficiency of its
working capital. The working capital improvements, reduced capital spending and
higher profits greatly increased the Company's financial flexibility. The
Company was able to reduce net debt (total debt net of associated swaps, less
cash and cash equivalents) by $594 million during 2002, despite outlays of $427
million to repurchase 14 million shares of the Company's stock and $529 million
in contributions to its pension plans. Over the last two years, net debt has
dropped by $1.73 billion to $2.72 billion at December 31, 2002, from $3.32
billion at December 31, 2001, and $4.45 billion at December 31, 2000. As a
component of net debt, cash and cash equivalents decreased by $146 million to
$801 million in 2002, after increasing by $885 million in 2001 to $947 million.
Cash equivalents are invested in highly liquid deposits and marketable
securities of institutions with high credit quality.
The market value of outstanding Gillette equity was $32 billion at the
end of 2002, compared with $35 billion and $38 billion at the end of 2001 and
2000, respectively. The Company's stockholders' equity position
25
was $2.26 billion at the end of 2002, compared with $2.14 billion at the end of
2001 and $1.92 billion at the end of 2000.
The Company's investment grade long-term credit ratings of AA- from
Standard & Poor's and Aa3 from Moody's and commercial paper ratings of A1+ from
Standard & Poor's and P1 from Moody's provide a high degree of flexibility in
obtaining funds. The Company has the ability to issue up to $1.47 billion in
commercial paper in the U.S. and Euro markets. The Company's commercial paper
program is supported by its revolving credit facility and other sources of
liquidity, primarily the Company's cash flow from operations. At December 31,
2002, there was $549 million outstanding under the Company's commercial paper
program, a substantial drop from $1.98 billion at the end of 2001 and $2.04
billion at the end of 2000, due primarily to new long-term debt issuances and
operating cash flows. On October 15, 2002, the Company entered into a new
364-day revolving bank credit facility in the amount of $1.1 billion, expiring
on October 14, 2003. Liquidity is enhanced through a provision in this
agreement that gives the Company the option to enter into a one-year term loan
in the amount of up to $1.1 billion. The Company believes it has sufficient
alternative sources of funding available to replace its commercial paper
program, if necessary.
On March 6, 2002, the Company privately placed $350 million 4.0% notes,
due June 2005. The proceeds from this debt issuance were used to reduce
commercial paper borrowings. On August 21, 2002, the Company exchanged $327
million of these notes for notes registered under the Securities Act.
During 2002, two shelf registration statements were filed allowing the
Company to issue up to $2.8 billion in debt securities in the U.S. It is
currently anticipated that the proceeds from the sale of any debt securities
issued under these shelf registrations will be used to repay commercial paper
borrowings and replace other maturing debt, although the proceeds may also be
used for other corporate purposes, including repurchase of the Company's stock.
At December 31, 2002, $824 million was issued under these shelf
registrations, consisting of $250 million 4.125% notes, due August 2007; $500
million 3.5% notes, due October 2007; and $74 million in fixed interest notes
with various terms and maturities, issued under the Gillette CoreNotes program.
The $500 million 3.5% notes, due October 2007, are redeemable at par, at the
Company's option, on any interest payment date on or after October 15, 2004.
The fixed interest notes issued under the Gillette CoreNotes program are
redeemable at par, at the Company's option, on any interest payment date on or
after one year from the date of issuance. All proceeds from these issuances
were used to reduce commercial paper borrowings. At December 31, 2002, a total
of $1.98 billion was available under these shelf registration statements.
With its strong brands, leading market positions, strong financial
condition and substantially improved cash-generating capability, Gillette
expects to continue to have capital available for growth through both
internally generated funds and significant credit resources. The Company has
substantial unused lines of credit and access to worldwide financial markets,
enabling the Company to raise funds at favorable rates.
The Company has contractual obligations payable or maturing in the
following years.
2004, 2006, 2008
2003 2005 2007 and beyond Total
- ------------------------------------------------------------------------------------------------------
(millions)
Long-term debt, at face value, including
current portion $ 522 $1,113 $1,175 $ 76 $2,886
Loans payable 673 - - - 673
Operating leases & other 114 151 108 167 540
---------------------------------------------------------
$1,309 $1,264 $1,283 $243 $4,099
=========================================================
The Company has no material contingent commitments. The Company has no
material "off balance sheet" arrangements or nonconsolidated Variable Interest
Entities.
Market Risk
The Company is subject to market risks, such as changes in currency and
interest rates, that arise from normal business operations. The Company
regularly assesses these risks and has established business strategies to
provide natural offsets, supplemented by the use of derivative financial
instruments, to protect against the adverse effects of these and other market
risks.
To manage the impact of currency changes on foreign-denominated profits,
the Company primarily uses product sourcing and pricing strategies,
supplemented by purchases of foreign currency options when considered
appropriate.
26
The Company uses foreign-denominated debt and forward contracts to hedge
the impact of currency changes on its net foreign investments, normally in
currencies with low interest rates.
The Company uses primarily floating rate debt in order to match interest
costs to the impact of inflation on earnings. The Company manages its mix of
fixed and floating rate debt by entering into interest rate swaps and forward
rate agreements.
Most of the Company's transactional exchange exposure is managed through
centralized cash management. The Company hedges net residual transactional
exchange exposures primarily through forward contracts.
More detailed information about the strategies, policies and use of
derivative financial instruments is provided in the Financial Instruments and
Risk Management Activities note in Notes to Consolidated Financial Statements.
The Company has established policies, procedures and internal controls governing
the use of derivative financial instruments and does not use them for trading,
investment or other speculative purposes. In addition, the Company's use of
derivative instruments is reviewed by the Finance Committee of the Board of
Directors annually. Financial instrument positions are monitored using a
value-at-risk model. Value at risk is estimated for each instrument based on
historical volatility of market rates and a 95% confidence level.
Based on the Company's overall evaluation of its market risk exposures
from all of its financial instruments at December 31, 2002 and 2001, a
near-term change in market rates would not materially affect the consolidated
financial position, results of operations or cash flows of the Company.
Restructuring and Asset Impairments
2000 Restructuring Program and Impaired Assets On December 18, 2000, the
Company announced a restructuring program and the impairment of certain
intangible assets. This resulted in a 2000 charge to operations of $572 million
($430 million after taxes, or $.41 per common share, diluted) that included
$360 million for the restructuring program and $212 million to write down
impaired intangible assets. The worldwide restructuring of operations improved
the Company's operating efficiency, streamlined the supply chain and further
decreased costs. The program budgeted a net reduction of approximately 2,700
employees across all business functions, operating units and geographies.
The charge for the 2000 restructuring program was $360 million, which
included a write-down of approximately $120 million to the carrying amount of
factories, as well as the write-off of manufacturing, distribution and office
equipment assets. Payments under the program continued throughout 2001 and
2002. Pretax cash outlays for the restructuring program were estimated at
approximately $240 million. Cash severance payments will continue in 2003, due
to the severance payment deferral options available to terminated employees. At
December 31, 2002, remaining cash outlays were $13 million. Pretax savings from
the program were $119 million for 2002. Due to lower than anticipated spending,
a pretax recovery of $3 million was recorded to the 2000 restructuring program
in 2002. The Company recorded an additional pretax gain of $3 million that was
not charged to the restructuring program, reflecting better than anticipated
results relating to property, plant and equipment disposals.
The 2000 charge for impaired intangible assets was $212 million to write
down $157 million of acquired goodwill relating to the Thermoscan personal
diagnostic appliance brand in the Braun segment and $55 million of acquired
goodwill and identifiable intangible assets for certain national battery brands
in the Duracell segment.
2001 Restructuring Program and Impaired Assets During the fourth quarter
of 2001, the Company recorded a charge of $63 million associated with the
withdrawal from several minor noncore businesses and the cessation of
operations in one factory in the Duracell segment. The factory closure, based
on a study that showed excess worldwide capacity, resulted in the reduction of
170 employees. Pretax savings from the program were $6 million for the year
ended December 31, 2002.
In the fourth quarter of 2001, in connection with a decision to exit
battery brands in certain international markets, the Company announced a
noncash impairment charge relating to the write-down of goodwill, other
intangibles and related long-lived assets. This resulted in a fourth-quarter
2001 pretax charge to operations of $164 million. The businesses covered
represent regional battery products that do not carry the Duracell brand. The
value of the impaired assets was determined based on discounted cash flow
analyses for future operating periods.
In June 2002, the Company recorded a $30 million pretax gain on the sale
of its rights in the Vaniqa business. Vaniqa, a prescription cream that slows
the growth of unwanted facial hair in women, was distributed through a joint
venture with Bristol-Myers Squibb. This gain included a recovery of $8 million
to the 2001 restructuring program. Due to lower than anticipated spending, the
Company recorded a pretax recovery of $2 million to the 2001 restructuring
program in December 2002 and also recorded an additional pretax gain of $1
million that was not charged to the restructuring program, reflecting better
than anticipated results relating to property, plant and equipment disposals.
27
Functional Excellence
In the second quarter of 2002, the Company began actions associated with
its Functional Excellence initiative. This initiative is focused on upgrading
capabilities, while reducing overhead costs by improving processes and
eliminating duplication across functions. The total cost of this project is
estimated at $350-$400 million. During 2002, the Company recorded expenses
related to this initiative in the amount of $121 million. Additional costs will
be recorded in 2003-2005 as programs are prepared and approved. Annualized
savings from the Functional Excellence initiative are currently expected to be
approximately $300-$350 million by 2006. These forward-looking cost and savings
numbers contain management estimates that are subject to change over time.
CRITICAL ACCOUNTING POLICIES
Restructuring
The Company estimates its restructuring liability for the exit plans
approved by senior management by accumulating detailed estimates of costs for
such plans from each of the affected geographic locations. This includes the
estimated costs of employee severance and related benefits, impairment of
property and equipment, contract termination payments for leases, distributor
arrangements and other contractual obligations, and any other qualifying exit
costs related to the exit plan. These estimated costs are grouped by specific
projects within the overall exit plan and are then monitored on a monthly basis
by corporate finance personnel, as well as by finance personnel at each
affected geographic location. Such disclosures represent management's best
estimate, but require assumptions about the programs that may change over time.
Changes in estimates for individual locations are evaluated periodically to
determine if a change in estimate is required for the overall restructuring
program. Changes in estimates occurred during 2002 for the 2001 and 2000
restructuring programs, as discussed above. The Company recorded pretax
recoveries in 2002 of approximately $10 million and $3 million, reflecting
better than anticipated results within the 2001 and 2000 restructuring
programs, respectively. Additional pretax gains of $1 million and $3 million
that were not charged to the restructuring program were recorded to the 2001
and 2000 restructuring programs, respectively, due to better than anticipated
results related to property, plant and equipment disposals. Changes in
estimates also occurred during 2001 for the 2000 restructuring program. The
primary reason for the change in 2001 was a strategic redirection of the
Company's Personal Care unit that resulted in a pretax reduction of $33 million
in the 2000 reserve. In addition, the Company recorded a pretax recovery of
approximately $22 million in 2001, reflecting better than anticipated results
in other projects within the 2000 restructuring program.
Asset Impairment
Carrying values of goodwill and other intangible assets with indefinite
lives are reviewed annually for possible impairment in accordance with SFAS
142, "Goodwill and Other Intangible Assets," which was adopted on January 1,
2002. The Company's impairment review is based on a discounted cash flow
approach, at the segment reporting level, that requires significant management
judgment with respect to revenue and expense growth rates, changes in working
capital and the selection and use of an appropriate discount rate. Management
uses the Company's approved Strategic Growth Plan for the first five years of
the estimate. The use of different assumptions would increase or decrease
estimated discounted future operating cash flows and could increase or decrease
an impairment charge. Management uses its judgment in assessing whether assets
may have become impaired between annual impairment tests. Indicators such as
unexpected adverse business conditions, economic factors, unanticipated
technological change or competitive activities, loss of key personnel and acts
by government and courts, may signal that an asset has become impaired.
Carrying values for long-lived tangible assets and definite-lived
intangible assets, excluding goodwill, are reviewed for possible impairment as
circumstances warrant in connection with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which was adopted on January 1,
2002. Impairment reviews are conducted at the judgment of management when it
believes that a change in circumstances in the business or external factors
warrants a review. Circumstances such as the discontinuation of a product or
product line, a sudden or consistent decline in the forecast for a product,
changes in technology or in the way an asset is being used, a history of
operating or cash flow losses, or an adverse change in legal factors or in the
business climate, among others, may trigger an impairment review. The Company's
initial impairment review to determine if an impairment test is required is
based on an undiscounted cash flow analysis at the lowest level for which
identifiable cash flows exist. The analysis requires management judgment with
respect to changes in technology, the continued success of product lines and
future volume, revenue and expense growth rates and discount rates.
There were no impairment charges recorded by the Company during 2002.
Pretax impairment charges for goodwill and other long-lived assets of $164
million and $332 million were recorded in 2001 and 2000, respec-
28
tively. These charges related to discrete product lines for which estimated
discounted future operating cash flows indicated that the carrying values of
the assets were not recoverable.
Pensions and Retiree Medical Benefits
The costs and obligations of the Company's pension and retiree medical
plans are calculated using many assumptions to estimate the benefit that the
employee earns while working, the amount of which cannot be completely
determined until the benefit payments cease. The most significant assumptions,
as presented in the Pensions and Other Retiree Benefits note in the Notes to
Consolidated Financial Statements, include discount rate, expected return on
plan assets, future trends in health care costs and future pay increases. The
selection of assumptions is based on historical trends and known economic and
market conditions at the time of valuation. Actual results may differ
substantially from these assumptions. These differences may significantly
impact future pension or retiree medical expenses.
Annual pension and retiree medical expense is principally the sum of four
components: 1) value of benefits earned by employees for working during the
year; 2) increase in liability from interest; less 3) expected return on plan
assets; and 4) other gains and losses as described below. The expected return
on plan assets is calculated by applying an assumed long-term rate of return to
the fair value of plan assets. In any given year, actual returns can differ
significantly from the expected return. Differences between the actual and
expected return on plan assets are combined with gains or losses resulting from
the revaluation of plan liabilities. Plan liabilities are revalued annually,
based on updated assumptions and information about the individuals covered by
the plan. The combined gain or loss is generally expensed evenly over the
remaining years that employees are expected to work.
Total accumulated losses were $1.1 billion at December 31, 2002, of which
$681 million occurred during 2002. The difference between the expected return
on plan assets, and the actual asset losses resulting from the substantial
decline in equity markets, accounted for $382 million of the 2002 losses. The
rest of the 2002 losses were due to higher plan liabilities, primarily the
result of a 60-basis-point drop in discount rates. The losses accumulated
during 2002 will increase pension and retiree medical expense by $53 million in
2003.
If the value of pension plan assets is less than the accumulated pension
benefit obligation, accounting standards require a company's balance sheet to
include a pension liability equal to the difference. The adjustment to record
this additional liability is charged to other comprehensive loss in
stockholders' equity. The Company recorded a charge of $130 million to other
comprehensive loss in 2002 to reflect required minimum pension liabilities.
The Company voluntarily contributed $529 million to pension plans during
2002 to reduce the widening gap between pension assets and liabilities.
Employee Stock Options
As further explained in the Stock Compensation Plans and Capital Stock
note in Notes to Consolidated Financial Statements, stock options are granted
to key employees and nonemployee directors. Upon vesting, an option becomes
exercisable, that is, the employee or director can purchase a share of Company
common stock at a price that is equal to the share price on the day of grant.
SFAS 123, "Accounting for Stock-Based Compensation," permits companies
either to continue accounting for stock options under Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," or to
adopt a fair-value-based method to measure compensation cost. Under APB No. 25,
which the Company has elected to continue using, there is no compensation cost
if, on the day of grant, the option's exercise price is equal to the share
price.
Under SFAS 123, an option is valued on grant day, then expensed evenly
over its vesting period. The Summary of Significant Accounting Policies note in
Notes to Consolidated Financial Statements provides the pro forma effects of
the fair-value-based method on compensation expense (net of tax), net income
and net income per common share.
The Company uses the Black-Scholes option valuation model to estimate the
option's fair value. The option valuation model requires a number of
assumptions, including future stock price volatility and expected option life
(the amount of time until the options are exercised or expire). Expected option
life is based on actual exercise activity from previous option grants.
Volatility is calculated based upon stock price movements over the most recent
period equal to the expected option life. Additionally, the Company's share
price on grant day influences the option value. The higher the share price, the
more the option is worth. Changes in the option value after grant day are not
reflected in expense.
Changes in these assumptions could significantly impact the values
produced by the option valuation model and, consequently, the pro forma effects
reported in the Summary of Significant Accounting Policies note.
29
If the Company had elected the SFAS 123 fair-value-based method, net income
would have been reduced by $111 million, $109 million and $110 million for
2002, 2001 and 2000, respectively.
The Financial Accounting Standards Board (FASB) is currently deliberating
whether it should undertake a comprehensive reconsideration of accounting for
stock options in light of the recently proposed guidance issued by the
International Accounting Standards Board. The Company generally agrees with the
concept of recognizing compensation cost based on a fair-value approach, but
does not intend to adopt such an approach unless there is agreement on
standardized rules that are applicable to all companies.
Revenue Recognition
Revenue is recorded net of the cost of trade and consumer promotions,
which are recognized as a reduction of revenue at the time of sale. The Company
enters into promotional arrangements, primarily with its retail customers, many
of which require periodic payments based on estimated total-year purchases of
the Company's products. Therefore, the Company is required to estimate these
future purchases on a routine basis in order to properly account for these
payments. In addition, the Company routinely commits to one-time promotional
programs with customers that require the Company to estimate the ultimate cost
of each promotional program and accrue that cost until paid. The Company tracks
its commitments for promotional programs and, using experience gained over many
years, records an accrual at the end of each period for the earned, but unpaid,
costs of promotional programs. Based on this experience, management believes
that all promotional accruals fairly represent future requirements.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
See pages 39-41 in Notes to Consolidated Financial Statements for a
complete description of the effect of recent accounting pronouncements.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Company is responsible for the objectivity, integrity and
presentation of the accompanying consolidated financial statements, which have
been prepared in conformity with accounting principles generally accepted in
the United States. 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 2002 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 accounting
principles generally accepted in the United States.
KPMG LLP, independent auditors, are engaged by the Audit Committee of the
Board of Directors 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 on page 31. Their audit was made in
accordance with auditing standards generally accepted in the United States 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
independent directors, as defined by the listing standards of the New York
Stock Exchange that meet the criteria for independence set forth in the
Sarbanes-Oxley Act of 2002. The Committee meets periodically and privately with
the independent auditors, internal auditors and financial officers of the
Company, as it deems necessary, to review the quality of the financial
reporting of the Company, the internal accounting controls and the scope and
results of audits. In addition, the Committee is responsible for the
appointment, compensation, retention and oversight of the Company's independent
auditors.
30
Independent Auditors' Report
The Gillette Company and Subsidiary Companies
[KPMG LOGO]
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, 2002 and 2001, and
the related consolidated statements of income, cash flows and stockholders'
equity for each of the years in the three-year period ended December 31, 2002.
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 auditing standards generally
accepted in the United States of America. 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 as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
February 14, 2003
31
Consolidated Statement of Income
The Gillette Company and Subsidiary Companies
Years Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
(millions, except per share amounts)
Net Sales $8,453 $8,084 $8,310
Cost of Sales 3,511 3,407 3,469
------------------------------------
Gross Profit 4,942 4,677 4,841
Selling, General and Administrative Expenses 3,172 3,007 2,757
Restructuring, Asset Impairment and Other (39) 172 572
------------------------------------
Profit from Operations 1,809 1,498 1,512
Nonoperating Charges (Income)
Interest income (25) (4) (5)
Interest expense 84 145 223
Other charges (income) - net (2) 15 6
------------------------------------
57 156 224
------------------------------------
Income from Continuing Operations before Income Taxes 1,752 1,342 1,288
Income Taxes 543 432 467
------------------------------------
Income from Continuing Operations 1,209 910 821
Loss on Disposal of Discontinued Operations, net of tax - - (428)
Income (Loss) from Discontinued Operations, net of tax 7 - (1)
-------------------------------------
Net Income $1,216 $ 910 $ 392
====================================
Net Income (Loss) per Common
Share, basic
Continuing Operations $ 1.15 $ .86 $ .78
Disposal of Discontinued Operations - - (.41)
Discontinued Operations - - -
-----------------------------------
Net Income $ 1.15 $ .86 $ .37
===================================
Net Income (Loss) per Common Share,
assuming full dilution
Continuing Operations $ 1.14 $ .86 $ .77
Disposal of Discontinued Operations - - (.40)
Discontinued Operations .01 - -
-----------------------------------
Net Income $ 1.15 $ .86 $ .37
===================================
Adjusted Net Income, assuming the adoption of SFAS 142
for 2001 and 2000 $1,216 $ 934 $ 423
Adjusted Net Income per Common Share, assuming the adoption
of SFAS 142 for 2001 and 2000
Basic $ 1.15 $ .89 $ .40
Assuming full dilution $ 1.15 $ .88 $ .40
Weighted average number of common shares outstanding
Basic 1,055 1,055 1,054
Assuming full dilution 1,059 1,058 1,063
See accompanying Notes to Consolidated Financial Statements.
32
Consolidated Balance Sheet
The Gillette Company and Subsidiary Companies
At December 31, 2002 2001
- ---------------------------------------------------------------------------------------
(millions, except per share amount)
Assets
Current Assets
Cash and cash equivalents $ 801 $ 947
Trade receivables, less allowances: 2002 - $73; 2001 - $69 1,202 1,473
Other receivables 311 313
Inventories 928 1,011
Deferred income taxes 380 481
Other current assets 175 230
----------------------
Total Current Assets 3,797 4,455
======================
Property, Plant and Equipment, net 3,565 3,548
Goodwill 962 935
Intangible Assets, net 400 418
Other Assets 1,139 613
----------------------
$ 9,863 $ 9,969
======================
Liabilities and Stockholders' Equity
Current Liabilities
Loans payable $ 673 $ 2,235
Current portion of long-term debt 527 428
Accounts payable and accrued liabilities 2,054 1,880
Income taxes 234 295
----------------------
Total Current Liabilities 3,488 4,838
======================
Long-Term Debt 2,457 1,654
Deferred Income Taxes 692 459
Other Long-Term Liabilities 920 805
Minority Interest 46 42
Contingent Redemption Value of Common Stock Put Options - 34
Stockholders' Equity
Common stock, par value $1 per share
Authorized: 2,320 shares
Issued 2002 - 1,370 shares; 2001 - 1,368 shares 1,370 1,368
Additional paid-in capital 1,197 1,094
Earnings reinvested in the business 6,608 6,077
Accumulated other comprehensive loss (1,523) (1,437)
Treasury stock, at cost:
2002 - 326 shares; 2001 - 312 shares (5,392) (4,965)
----------------------
Total Stockholders' Equity 2,260 2,137
----------------------
$ 9,863 $ 9,969
======================
See accompanying Notes to Consolidated Financial Statements.
33
Consolidated Statement of Cash Flows
The Gillette Company and Subsidiary Companies
Years Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
(millions)
Operating Activities
Income from continuing operations $ 1,209 $ 910 $ 821
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Restructuring and asset impairment charge (recovery) (9) 172 572
Depreciation and amortization 500 509 535
Funding of Company pension plans (529) (35) (31)
Pension expense 70 46 26
Deferred income taxes 162 45 (112)
Other 12 (18) 5
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Accounts receivable 364 622 (100)
Inventories 123 101 149
Accounts payable and accrued liabilities 188 (191) (45)
Other working capital items (137) (20) 18
Other noncurrent assets and liabilities 124 (49) (234)
------------- ------------------------
Net cash provided by operating activities 2,077 2,092 1,604
------------- ------------------------
Investing Activities
Additions to property, plant and equipment (405) (624) (793)
Disposals of property, plant and equipment 43 59 41
Sale of businesses - - 539
Other - 1 (1)
------------- ------------------------
Net cash used in investing activities (362) (564) (214)
------------- ------------------------
Financing Activities
Purchase of treasury stock (427) (12) (944)
Proceeds from sale of put options 15 9 23
Proceeds from exercise of stock option and purchase plans 57 53 36
Proceeds from long-term debt 1,174 525 494
Repayment of long-term debt (458) (684) (365)
Increase (decrease) in loans payable (1,565) 56 (385)
Dividends paid (685) (686) (671)
Settlements of debt-related derivative contracts 45 4 279
------------- ------------------------
Net cash used in financing activities (1,844) (735) (1,533)
------------- ------------------------
Effect of Exchange Rate Changes on Cash 5 (1) (5)
Net Cash Provided (Used) by Discontinued Operations (22) 93 130
------------- ------------------------
Increase (Decrease) in Cash and Cash Equivalents (146) 885 (18)
Cash and Cash Equivalents at Beginning of Year 947 62 80
------------- ------------------------
Cash and Cash Equivalents at End of Year $ 801 $ 947 $ 62
============= ========================
Supplemental disclosure of cash paid for:
Interest $ 83 $ 154 $ 243
Income taxes $ 345 $ 232 $ 480
============= ========================
See accompanying Notes to Consolidated Financial Statements.
34
Consolidated Statement of Stockholders' Equity
The Gillette Company and Subsidiary Companies
Unearned Additional
Preferred ESOP Common Paid-in
Stock Compensation Stock Capital
- --------------------------------------------------------------------------------------
(millions, except per share amounts)
Balance at December 31, 1999 $85 $(4) $1,364 $ 748
===========================================
Net income - - - -
Foreign currency translation - - - -
Pension adjustment - - - -
-------------------------------------------
Other comprehensive loss - - - -
-------------------------------------------
Comprehensive income
Dividends declared
(per share $.65) - - - -
Stock option and purchase
plans (1.8 shares) - - 1 34
Conversion of Series C ESOP
preferred stock (11.3 shares) (85) - - (92)
Purchase of Gillette treasury
stock (24.5 shares) - - - -
Proceeds from sale of put options - - - 23
Contingent liability of put options - - - 260
Earned ESOP compensation - 4 - -
-------------------------------------------
Balance at December 31, 2000 - - 1,365 973
===========================================
Net income - - - -
Foreign currency translation - - - -
Pension adjustment - - - -
Cash flow hedges - - - -
-------------------------------------------
Other comprehensive loss - - - -
-------------------------------------------
Comprehensive income
Dividends declared
(per share $.65) - - - -
Stock option and purchase
plans (2.4 shares) - - 3 47
Purchase of Gillette treasury
stock (0.4 shares) - - - -
Proceeds from sale of put options - - - 9
Contingent liability of put options - - - 65
-------------------------------------------
Balance at December 31, 2001 - - 1,368 1,094
===========================================
Net income - - - -
Foreign currency translation - - - -
Pension adjustment - - - -
Cash flow hedges - - - -
-------------------------------------------
Other comprehensive loss - - - -
-------------------------------------------
Comprehensive income
Dividends declared
(per share $.65) - - - -
Stock option and purchase
plans (3.8 shares) - - 2 54
Purchase of Gillette treasury
stock (14.1 shares) - - - -
Proceeds from sale of put options - - - 15
Contingent liability of put options - - - 34
-------------------------------------------
Balance at December 31, 2002 $ - $ - $1,370 $1,197
===========================================
Other Total
Earnings Comprehensive Treasury Stockholders'
Reinvested Income (Loss) Stock Equity
- ----------------------------------------------------------------------------------------------
(millions, except per share amounts)
Balance at December 31, 1999 $6,147 $(1,061) $ (4,219) $3,060
====================================================
Net income 392 - - 392
Foreign currency translation - (249) - (249)
Pension adjustment - (4) - (4)
---------------------------------------------------
Other comprehensive loss - (253) - (253)
---------------------------------------------------
Comprehensive income 139
---------------------------------------------------
Dividends declared
(per share $.65) (686) - - (686)
Stock option and purchase
plans (1.8 shares) - - - 35
Conversion of Series C ESOP
preferred stock (11.3 shares) - - 177 -
Purchase of Gillette treasury
stock (24.5 shares) - - (911) (911)
Proceeds from sale of put options - - - 23
Contingent liability of put options - - - 260
Earned ESOP compensation - - - 4
---------------------------------------------------
Balance at December 31, 2000 5,853 (1,314) (4,953) 1,924
===================================================
Net income 910 - - 910
Foreign currency translation - (93) - (93)
Pension adjustment - (22) - (22)
Cash flow hedges - (8) - (8)
---------------------------------------------------
Other comprehensive loss - (123) - (123)
---------------------------------------------------
Comprehensive income 787
---------------------------------------------------
Dividends declared
(per share $.65) (686) - - (686)
Stock option and purchase
plans (2.4 shares) - - - 50
Purchase of Gillette treasury
stock (0.4 shares) - - (12) (12)
Proceeds from sale of put options - - - 9
Contingent liability of put options - - - 65
---------------------------------------------------
Balance at December 31, 2001 6,077 (1,437) (4,965) 2,137
===================================================
Net income 1,216 - - 1,216
Foreign currency translation - 41 - 41
Pension adjustment - (130) - (130)
Cash flow hedges - 3 - 3
---------------------------------------------------
Other comprehensive loss - (86) - (86)
---------------------------------------------------
Comprehensive income 1,130
---------------------------------------------------
Dividends declared
(per share $.65) (685) - - (685)
Stock option and purchase
plans (3.8 shares) - - - 56
Purchase of Gillette treasury
stock (14.1 shares) - - (427) (427)
Proceeds from sale of put options - - - 15
Contingent liability of put options - - - 34
---------------------------------------------------
Balance at December 31, 2002 $6,608 $(1,523) $ (5,392) $2,260
===================================================
See accompanying Notes to Consolidated Financial Statements.
35
Notes to Consolidated Financial Statements
The Gillette Company and Subsidiary Companies
NATURE OF OPERATIONS
The Gillette Company is a global consumer products firm, with
manufacturing operations conducted at 32 facilities in 15 countries. Products
are sold in over 200 countries and territories. Gillette is the world leader in
male grooming, a category that includes blades, razors and shaving
preparations, and also in female grooming products, such as wet shaving
products and hair epilation devices. The Company is the world leader in
alkaline batteries and manual and power toothbrushes.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and disclosure of contingent
assets and liabilities at the date of the financial statements. Actual results
could differ from those estimates.
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Intercompany accounts and transactions are
eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits and marketable
securities that are highly liquid and have maturities of three months or less
at the date of purchase.
Revenue Recognition
Revenue from product sales is recognized when the goods are shipped and
title passes to the customer, provided that: there are no uncertainties
regarding customer acceptance; persuasive evidence of an arrangement exists;
the sales price is fixed or determinable; and collectibility is deemed
probable. Revenue is recorded net of the cost of trade promotions, coupons and
other discounts, which are recognized as a reduction of revenue at the time of
sale.
Shipping and Handling Costs
Shipping and handling costs of $175 million in 2002, $165 million in 2001
and $152 million in 2000 are included in selling, general and administrative
expenses.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed primarily on a straight-line basis over the estimated useful lives of
assets: buildings and building equipment, five to 40 years; machinery and
equipment, three to 20 years.
Intangible Assets
The Company accounts for intangible assets in accordance with Statement
of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets," which was adopted by the Company on January 1, 2002. In accordance
with that statement, goodwill and intangible assets with indefinite lives are
no longer amortized, but rather are tested for impairment, at least annually.
Intangible assets with estimable useful lives, consisting primarily of patents,
trademarks, software and other similar items, are amortized on a straight-line
basis over the estimated useful lives of three to 40 years, and are reviewed
for impairment in accordance with SFAS 144, "Accounting for the Impairment of
Long-Lived Assets."
For the years 2001 and 2000, goodwill was amortized using the
straight-line method, generally over a period of 40 years. Other intangible
assets, consisting primarily of trademarks, trade names, patents and other
similar items, were amortized on the straight-line method over a period of 10
to 40 years, predominantly 40 years.
36
Impairment of Goodwill and Long-Lived Assets
Goodwill and intangible assets with indefinite lives are tested annually
for impairment in accordance with the provisions of SFAS 142. The Company's
impairment review is based on a discounted cash flow approach, at the segment
reporting level, that requires significant management judgment with respect to
revenue and expense growth rates, changes in working capital and the selection
and use of an appropriate discount rate. The Company uses its judgment in
assessing whether assets may have become impaired between annual impairment
tests. Indicators such as unexpected adverse business conditions, economic
factors, unanticipated technological change or competitive activities, loss of
key personnel and acts by governments and courts, may signal that an asset has
become impaired.
Intangible assets with estimable lives and other long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset or asset group may not be recoverable in
accordance with SFAS 144. Recoverability of intangible assets with estimable
lives and other long-lived assets is measured by a comparison of the carrying
amount of an asset or asset group to future net undiscounted pretax cash flows
expected to be generated by the asset or asset group. If these comparisons
indicate that an asset is not recoverable, the impairment loss recognized is
the amount by which the carrying amount of the asset or asset group exceeds the
related estimated fair value. Estimated fair value is based on either
discounted future pretax operating cash flows or appraised values, depending on
the nature of the asset. The Company determines the discount rate for this
analysis based on the expected internal rate of return for the related business
and does not allocate interest charges to the asset or asset group being
measured. Considerable judgment is required to estimate discounted future
operating cash flows.
Advertising
Advertising costs are expensed in the year incurred. Advertising was $647
million in 2002, $576 million in 2001 and $539 million in 2000. For interim
reporting purposes, advertising expenses are charged to operations as a
percentage of sales, based on estimated sales and related advertising expense
for the full year.
Research and Development
Research and development costs, included in selling, general and
administrative expenses, amounted to $185 million in 2002, $187 million in 2001
and $179 million in 2000.
Financial Instruments
Cash and cash equivalents, trade receivables, long-term investments,
accounts payable, loans payable and all derivative instruments are carried at
fair value. The fair values of cash equivalents, trade receivables, accounts
payable and loans payable approximate cost. The fair value of long-term
investments is based on quoted market prices. The estimated fair values of
derivative instruments are calculated based on market rates. These values
represent the estimated amounts the Company would receive or pay to terminate
agreements, taking into consideration current market rates and the current
creditworthiness of the counterparties. The fair value of long-term debt,
including the current portion, is estimated based on quoted market prices or
rates currently offered to the Company for debt of the same remaining
maturities.
Foreign Currency Translation
Financial statements of subsidiaries outside the U.S., other than those
operating in highly inflationary environments, are measured using the local
currency as the functional currency. Adjustments from translating these
financial statements into U.S. dollars are accumulated in the equity section of
the balance sheet under the caption, "Accumulated other comprehensive loss."
For those non-U.S. subsidiaries that are included in the Company's U.S. tax
return, these adjustments are net of U.S. tax.
For subsidiaries operating in highly inflationary economies, the U.S.
dollar is the functional currency. Therefore, exchange gains and losses for
these subsidiaries are included with all other transactional exchange gains and
losses in the Consolidated Statement of Income under the caption, "Other
charges (income) - net."
Income Taxes
Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period
that
37
includes the enactment date. The Company reinvests unremitted earnings of
certain foreign operations and, accordingly, does not provide for Federal
income taxes that could result from the remittance of such earnings. These
unremitted earnings amounted to $2.6 billion, $3.0 billion and $3.5 billion at
December 31, 2002, 2001 and 2000, respectively.
Stock-Based Compensation
The Company has stock option plans, which are described more fully in the
Stock Compensation Plans and Capital Stock note on page 51. The Company
accounts for those plans under Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, no compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net income and net income per common share if the
Company had applied the fair-value-based method of SFAS No. 123, "Accounting
for Stock-Based Compensation," to record expense for stock option compensation.
Years ended December 31, 2002 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(millions, except per share amounts)
Net income, as reported $1,216 $ 910 $ 392 $ 1,260 $1,081 $1,427
Less: Compensation expense for option
awards determined by the fair-value-
based method, net of related tax effects (111) (109) (110) (81) (50) (17)
-------------------------------------------------------------------
Pro forma net income $1,105 $ 801 $ 282 $ 1,179 $1,031 $1,410
===================================================================
Net income per common share
Basic
As reported $ 1.15 $ .86 $ .37 $ 1.15 $ .96 $ 1.27
Pro forma 1.05 .76 .27 1.08 .92 1.24
Assuming full dilution
As reported $ 1.15 $ .86 $ .37 $ 1.14 $ .95 $ 1.24
Pro forma 1.05 .76 .27 1.06 .90 1.21
The pro forma amounts for the years 1997 through 2001 have been changed
to reflect the recognition of compensation costs over a three-year vesting
period for options granted after April 16, 1997. Amounts previously reported
were calculated based on a one-year vesting period, even though the stock
option plan was amended, effective April 16, 1997, to provide for vesting in
one-third increments over a three-year period.
The weighted average fair value of options granted was $11.18 in 2002,
$9.44 in 2001 and $10.58 in 2000. The fair value of each option grant for the
Company's plans is estimated on the date of the grant using the Black-Scholes
option pricing model, with the following weighted average assumptions.
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------
Risk-free interest rates 4.2% 5.4% 6.3%
Expected option lives 5.5 years 5.5 years 4.9 years
Expected volatilities 33.1% 33.3% 33.4%
Expected dividend yields 1.8% 2.2% 2.0%
Net Income per Common Share
Basic 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 diluted net income per
common share assumes conversion of preferred stock and stock options into
common stock, and also adjusts net income for the effect of converting the
preferred stock to common stock. At December 31, 2002, 2001 and 2000, 56
million, 44 million and 33 million shares of common stock issuable under stock
options, respectively, were not included in the calculation of fully diluted
earnings per share because their effects would have been antidilutive. There
were no preferred shares outstanding in 2002 or 2001.
38
Income from continuing operations and shares used to compute income from
continuing operations per share, basic and assuming full dilution, are
reconciled below.
Years ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------
(millions)
Income from Continuing Operations $1,209 $ 910 $ 821
Less: Preferred stock dividends - - (1)
-----------------------------
Income from Continuing Operations, basic 1,209 910 820
Effect of dilutive securities:
Convertible preferred stock - - 2
-----------------------------
Income from Continuing Operations, assuming full dilution $1,209 $ 910 $ 822
=============================
Common shares, basic 1,055 1,055 1,054
Effect of dilutive securities:
Convertible preferred stock - - 3
Stock options 4 3 6
-----------------------------
Common shares, assuming full dilution 1,059 1,058 1,063
=============================
Reclassification of Prior Years
Prior-year financial statements have been reclassified to conform to the
2002 presentation.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration
to a Purchaser of the Vendor's Products or Services." In November 2001, the
issues discussed in EITF 00-25 were codified with related issues into EITF No.
01-9, "Accounting for Consideration Given By a Vendor To a Customer (Including
a Reseller of the Vendor's Products)." This issue addresses the income
statement classification of slotting fees, cooperative advertising arrangements
and buydowns. The consensus requires that certain customer promotional payments
that were previously classified as marketing expenses be classified as a
reduction of revenue. The Company adopted the consensus on January 1, 2002. The
adoption of EITF 00-25 resulted in the following reclassifications in the 2001
income statement: net sales, gross profit and selling, general and
administrative expenses were reduced by $877 million. The adoption of EITF
00-25 resulted in the following reclassifications in the 2000 income statement:
net sales, gross profit and selling, general and administrative expenses were
reduced by $915 million. The adoption of EITF 00-25 had no impact on profit
from operations, net income or earnings per share.
In July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued. The Company adopted the provisions of SFAS 142 on January 1, 2002. SFAS
142 requires that goodwill and other intangible assets with indefinite lives no
longer be amortized, but instead be tested for impairment, at least annually,
in accordance with the new impairment testing provisions of SFAS 142. Statement
142 also requires that intangible assets with estimable useful lives be
amortized over their respective useful lives to their estimated residual
values, and be reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The net
impact of the adoption of SFAS 142 was a reduction of annual amortization
expense of $34 million in 2002. No impairment losses were recognized due to the
change in accounting principle.
39
The following tables present a reconciliation of net income, earnings per
share and comprehensive income, as reported, to adjusted amounts that include
the impact of the adoption of SFAS 142 for all periods presented.
Goodwill and Intangible Assets-Adoption of SFAS 142
Years Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------
(millions, except per share amounts)
Net Income
Net income, as reported $ 1,216 $ 910 $ 392
Add: Goodwill amortization, net of tax - 24 31
Add: Trademark amortization, net of tax - 8 8
Less: Amortization from change in useful lives, net of tax - (8) (8)
----------------------------------
Adjusted net income $ 1,216 $ 934 $ 423
==================================
Net Income Per Common Share
Basic, as reported $ 1.15 $ .86 $ .37
Add: Goodwill amortization, net of tax - .03 .03
Add: Trademark amortization, net of tax - .01 .01
Less: Amortization from change in useful lives, net of tax - (.01) (.01)
----------------------------------
Basic, adjusted $ 1.15 $ .89 $ .40
==================================
Assuming full dilution, as reported $ 1.15 $ .86 $ .37
Add: Goodwill amortization, net of tax - .02 .03
Add: Trademark amortization, net of tax - .01 .01
Less: Amortization from change in useful lives, net of tax - (.01) (.01)
----------------------------------
Assuming full dilution, adjusted $ 1.15 $ .88 $ .40
==================================
Comprehensive Income
Comprehensive income, as reported $ 1,130 $ 787 $ 139
Add: Goodwill amortization, net of tax - 24 31
Add: Trademark amortization, net of tax - 8 8
Less: Amortization from change in useful lives, net of tax - (8) (8)
----------------------------------
Adjusted comprehensive income $ 1,130 $ 811 $ 170
==================================
In June 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations," was issued. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. It requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company adopted the provisions of SFAS 143 on January 1, 2003. Its adoption
will not have a material impact on the Company's financial statements.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," was issued. It provides new guidance that modifies the
existing guidance in SFAS 121 and in APB Opinion No. 30. The Company adopted
SFAS 144 in the first quarter of 2002. Its adoption did not have any impact on
the Company's financial statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued.
SFAS 145 rescinds SFAS 4 and SFAS 64 related to classification of gains and
losses on debt extinguishment such that most debt extinguishment gains and
losses will no longer be classified as extraordinary. SFAS 145 also amends SFAS
13 with respect to sales-leaseback transactions. The Company adopted the
provisions of SFAS 145, effective April 1, 2002, and the adoption had no impact
on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
40
Restructuring)." The Company adopted the provisions of SFAS 146, effective
January 1, 2003, as it relates to nonemployee-related exit and disposal costs,
primarily contract termination costs and costs to consolidate or close
facilities. Adoption of SFAS 146 is not expected to have a material impact on
the Company's financial statements. The Company expects to continue to account
for employee-related post-employment benefit costs, including severance
payments, under the provisions of SFAS No. 112, "Employer's Accounting for
Post-Employment Benefits."
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company accounts for
stock-based employee compensation arrangements in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and complies with the disclosure provisions of SFAS 123
and SFAS 148.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," was issued. This interpretation requires the initial
recognition and initial measurement, on a prospective basis only, to guarantees
issued or modified after December 31, 2002. Additionally, certain disclosure
requirements are effective for financial statements ending after December 15,
2002. There were no disclosures required of the Company in the 2002
consolidated financial statements, and the Company does not believe that the
adoption of this interpretation in 2003 will have any impact on its financial
statements.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," ("VIE's") was issued. This interpretation clarifies
situations in which entities shall be subject to consolidation. This
interpretation is effective for all VIE's created after January 31, 2003. The
Company does not believe that the adoption of this interpretation will have any
impact on its financial statements.
ACCUMULATED OTHER COMPREHENSIVE LOSS
An analysis of accumulated other comprehensive loss follows.
Accumulated
Foreign Cash Other
Currency Pension Flow Comprehensive
Translation Adjustment Hedges Loss
- -----------------------------------------------------------------------------------------
(millions)
Balance at December 31, 1999 $(1,031) $ (30) $ - $(1,061)
Change in period (216) (4) - (220)
Income tax expense (33) - - (33)
-----------------------------------------------------
Balance at December 31, 2000 $(1,280) $ (34) $ - $(1,314)
======================================================
Change in period (48) (53) (13) (114)
Income tax benefit (expense) (45) 31 5 (9)
-----------------------------------------------------
Balance at December 31, 2001 $(1,373) $ (56) $ (8) $(1,437)
======================================================
Change in period 196 (183) 5 18
Income tax benefit (expense) (155) 53 (2) (104)
-----------------------------------------------------
Balance at December 31, 2002 $(1,332) $(186) $ (5) $(1,523)
======================================================
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. Also
included are the effects of exchange rate changes on intercompany balances of a
long-term investment nature and transactions designated as hedges of net
foreign investments. The changes in accumulated foreign currency translation in
2002 were gains of $41 million, primarily due to strengthening European
currencies offset by weakening Latin American currencies. Losses in 2001 were
$93 million, primarily from currency devaluation in Argentina and Brazil.
Losses in 2000 were $249 million, with the United Kingdom accounting for $115
million.
41
Included in Other charges (income)-net in the Consolidated Statement of
Income are a net exchange gain of $16 million in 2002, a net exchange loss of
$3 million in 2001 and a net exchange gain of $8 million in 2000 for the
foreign currency effects of transactions in those years.
SUPPLEMENTAL BALANCE SHEET INFORMATION
Allowance for Doubtful Accounts
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
(millions)
Balance at beginning of year $ 69 $ 81 $ 74
Additions, charged to profit and loss 37 30 63
Deductions, losses charged to allowance (33) (42) (56)
--------------------------
Balance at end of year $ 73 $ 69 $ 81
==========================
Inventories
At December 31, 2002 2001
- -----------------------------------------------
(millions)
Raw materials and supplies $115 $ 130
Work in process 191 183
Finished goods 622 698
---------------
$928 $1,011
===============
Property, Plant and Equipment
At December 31, 2002 2001
- ---------------------------------------------------
(millions)
Land $ 81 $ 77
Buildings 844 788
Machinery and equipment 5,504 5,140
-----------------
6,429 6,005
Less accumulated depreciation 2,864 2,457
-----------------
$3,565 $3,548
=================
Interest on funds used to finance construction of significant additions
to tangible property and equipment is capitalized and recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life. During 2002, 2001 and 2000, interest cost was capitalized in the amounts
of $4 million, $11 million and $23 million, respectively.
Goodwill and Intangible Assets
Total goodwill by segment follows.
At December 31, 2002 2001
- ----------------------------------
(millions)
Blades & Razors $140 $140
Duracell 571 550
Oral Care 173 172
Braun 78 73
Personal Care - -
-------------
Total $962 $935
=============
The change between the balances at December 31, 2002, and December 31,
2001, is due to the impact of foreign currency translation.
42
The detail of intangible assets follows.
Weighted
Average 2002 2001
Amortization ------------------------- ------------------------
Period Carrying Accumulated Carrying Accumulated
At December 31, (Years) Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------------------------
(millions)
Amortized Intangible Assets
Patents 6 $101 $ 53 $103 $ 38
Trademarks 6 13 4 11 1
Software 5 12 9 16 7
Endorsements - 61 61 61 61
Other 23 11 3 12 3
----------------------------------------------------------------
Total 7 $198 $130 $203 $110
================================================================
Unamortized Intangible Assets
Trademarks $317 $313
Pension 15 12
----------------------------------------------------------------
Total $530 $130 $528 $110
----------------------------------------------------------------
Intangible Assets, net $400 $418
================================================================
Aggregate Amortization Expense:
For the Years ended December 31:
2002 $20
2001 $56
2000 $68
Estimated Amortization Expense:
For the Years ended December 31:
2003 $20
2004 $18
2005 $ 6
2006 $ 5
2007 $ 3
Accounts Payable and Accrued Liabilities
At December 31, 2002 2001
- ---------------------------------------------------------
(millions)
Accounts payable $ 581 $ 401
Advertising and sales promotion 472 438
Payroll and payroll taxes 211 183
Dividends payable on common stock 170 172
Restructuring reserve 16 112
Miscellaneous 604 574
------------------
$2,054 $1,880
==================
43
Other Long-Term Liabilities
At December 31, 2002 2001
- ----------------------------------------------
(millions)
Pensions $ 382 $ 259
Postretirement medical 286 283
Deferred compensation 159 182
Miscellaneous 93 81
------------------
$ 920 $ 805
==================
DEBT
Loans Payable
At December 31, 2002 2001
- --------------------------------------------------------------------
(millions)
U.S. dollar Commercial Paper (1.5% and 2.1%) $ 549 $1,975
Payable to banks (2.6% and 2.2%) 124 260
------------------
$ 673 $2,235
==================
Long-Term Debt
At December 31, 2002 2001
- -------------------------------------------------------
(millions)
5.25% Euro notes due 2002 $ - $ 230
1.53% Euro obligation due 2002 - 199
2.23% Euro obligation due 2003 297 252
6.25% Notes due 2003 154 158
Floating rate notes due 2003 75 75
3.25% Euro notes due 2004 312 264
3.75% Notes due 2004 259 252
5.75% Notes due 2005 219 213
4.00% Notes due 2005 373 -
5.25% Notes due 2006 142 130
5.00% Notes due 2006 325 308
4.125% Notes due 2007 254 -
3.50% Notes due 2007 499 -
Gillette CoreNotes due 2012 74 -
Other, multicurrency borrowings 1 1
Current portion of long-term debt (527) (428)
------------------
$2,457 $1,654
==================
The Company's commercial paper program is supported by its revolving
credit facility and other sources of liquidity. The Company has a $1.1 billion
revolving bank credit agreement, which expires in October 2003, that supports
up to $1.47 billion in commercial paper issuances. Under the agreement, the
Company has the option to borrow at various interest rates, including the prime
rate, and is required to pay a facility fee of .04% per annum. At December 31,
2002 and 2001, there were no borrowings under such agreements. Other unused
lines of credit amounted to $167 million at December 31, 2002.
The 3.5% Notes due 2007 are redeemable at par, at the Company's option,
on any interest payment date on or after October 15, 2004. Under the Gillette
$500 million CoreNotes program, the Company may periodically issue fixed rate
notes in $1,000 increments. At December 31, 2002, the coupon rates of the
outstanding notes varied between 4.55% and 5%, and the interest payments are
made quarterly. The notes mature on various dates in 2012 and are redeemable at
par, at the Company's option, on any interest payment date on or after one year
from the date of issuance.
44
During 2002, two shelf registration statements were filed allowing the
Company to issue up to $2.8 billion in debt securities in the U.S. At December
31, 2002, $824 million was issued under the shelf registrations, representing
the 4.125% and 3.50% notes due 2007 and the Gillette CoreNotes due 2012, less
market value adjustments. At December 31, 2002, a total of $1.98 billion was
available under these shelf registrations.
Long-term weighted average interest rates were 1.9% and 2.6% as of
December 31, 2002 and 2001, respectively, after giving effect to interest rate
hedging instruments. Aggregate maturities of total long-term debt, excluding $95
million in market value adjustments, for the five years after December 31, 2002,
are $522 million in 2003, $563 million in 2004, $550 million in 2005, $425
million in 2006 and $750 million in 2007.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
The estimated fair values of the Company's financial instruments are
summarized below.
2002 2001
----------------- ----------------
Carrying Amount/ Carrying Amount/
At December 31, Fair Value Fair Value
- -------------------------------------------- ----------------- ----------------
(millions)
Long-term investments $ 161 $ 176
Long-term debt, including current portion (2,984) (2,082)
Derivative instruments
Currency forwards hedging net investments (4) 9
Interest rate swaps 108 49
Forward rate agreements (2) (5)
Commodity swaps (2) (3)
Other currency forwards and swaps
Assets 70 12
Liabilities (17) (8)
Equity contracts 3 5
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, which requires
that all derivative instruments be reported on the balance sheet at fair value.
The cumulative effect of adopting SFAS 133 as of January 1, 2001, was not
material to the Company's consolidated financial statements.
The Company is subject to market risks, such as changes in currency and
interest rates that arise from normal business operations. The Company regularly
assesses these risks and has established business strategies to provide natural
offsets, supplemented by the use of derivative financial instruments to protect
against the adverse effects of these and other market risks. The Company has
established clear policies, procedures and internal controls governing the use
of derivatives and does not use them for trading, investment or other
speculative purposes.
The Company uses derivative contracts to efficiently structure its debt in
the desired currencies and mix of fixed to floating interest rates. Forward
contracts effectively convert U.S. dollar commercial paper borrowings into
non-U.S. dollar obligations, primarily in currencies with low interest rates. At
December 31, 2002, the Company had forward contracts designated as hedges of the
currency changes on the Company's foreign net investments with fair values of $4
million recorded in liabilities. Currency effects of the net investment hedges
are reflected as a component of foreign currency translation in accumulated
other comprehensive loss and produced a $5 million aftertax loss and a $53
million aftertax gain for the years ended December 31, 2002 and 2001,
respectively. Interest effects of these hedges are reported in interest expense.
The Company uses primarily floating rate debt in order to match interest
costs to the impact of inflation on earnings. The Company manages its mix of
fixed to floating rate debt by entering into interest rate swaps and forward
rate agreements. At December 31, 2002 and 2001, the Company had interest rate
swaps designated as fair value hedges with fair values of $108 million and $49
million, respectively, recorded in assets. These swaps effectively convert
certain fixed rate debt into variable rate debt. The terms of the swaps match
the terms of the underlying debt. The fair values of both the swaps and the
debt are recorded as equal and offsetting gains and losses in interest expense.
There is no current impact on earnings due to hedge ineffectiveness, since
these hedges were generally 100% effective for the years ended December 31,
2002 and 2001.
45
At December 31, 2002 and 2001, the Company had forward rate agreements
designated as cash flow hedges with fair values of $2 million and $5 million,
respectively, recorded in liabilities, effectively fixing certain variable
interest payments. Aftertax net losses of $4 million ($7 million pretax) and $9
million ($14 million pretax) were recorded in other comprehensive loss during
the years ended December 31, 2002 and 2001, respectively. Remaining pretax
amounts of $3 million in other comprehensive loss will be reclassified into
interest expense over the first seven months of 2003 during which the hedged
interest payments are expensed. Ineffective amounts had no impact on earnings
for the years ended December 31, 2002 and 2001.
The Company also enters into commodity swaps to fix the price of certain
forecasted purchases of raw material used in the manufacturing process. At
December 31, 2002 and 2001, the Company had swaps designated as cash flow
hedges with fair values of $2 million and $3 million, respectively, recorded as
liabilities. Changes in fair values are included in other comprehensive loss to
the extent effective and are charged to cost of sales in the period during
which the hedged transaction affects earnings. Total aftertax losses recorded
in other comprehensive loss were $2 million ($3 million pretax) in the year
ended December 31, 2002. During the year ended December 31, 2001, total
aftertax losses recorded in other comprehensive loss were $6 million ($9
million pretax), including the cumulative effect of change in accounting
principle upon adoption of SFAS 133. Remaining pretax amounts of $3 million in
other comprehensive loss will be charged to earnings in 2003. Ineffective
amounts had no material impact on earnings for the years ended December 31,
2002 and 2001.
Most of the Company's transactional exchange exposure is managed through
centralized cash management. The Company hedges net residual transactional
exchange exposures, principally foreign denominated debt and intercompany
balances, through forward contracts and currency swaps that were recorded at
their net fair value of $53 million and $4 million at December 31, 2002 and
2001, respectively. Changes in fair value are recorded in nonoperating charges
and offset gains and losses resulting from the underlying exposures.
The Company also uses derivatives to hedge equity-linked employee
compensation. The Company fixes the cost of certain employee compensation
expenses linked to its stock price by entering into equity swap and option
contracts. These contracts were recorded in assets at their fair value of $3
million and $5 million at December 31, 2002 and 2001, respectively. Changes in
fair value are recorded in profit from operations and offset the changes in the
value of the underlying liabilities.
The equity put options associated with the share repurchase program are
described separately in the Share Repurchase Program 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 to 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 Gillette operations.
Using the best information available, the Company has provided an allowance for
doubtful accounts based on estimated bad debt loss.
COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under noncancellable operating leases,
primarily for office and warehouse facilities, are $88 million in 2003, $75
million in 2004, $63 million in 2005, $55 million in 2006, $49 million in 2007
and $167 million for years thereafter. Rental expense amounted to $130 million
in 2002, $121 million in 2001 and $113 million in 2000.
The Company is subject to legal proceedings and claims arising out of its
businesses that cover a wide range of matters, including antitrust and trade
regulation, contracts, advertising, 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 legal proceedings and claims would not materially affect the
consolidated financial position, results of operations or liquidity of the
Company.
DISCONTINUED OPERATIONS
On December 29, 2000, the sale of the Stationery Products business to
Newell Rubbermaid Inc. was finalized. The sale resulted in a loss of $429
million (net of a tax benefit of $102 million), or $.40 per common share, fully
diluted. The net loss included the book loss on the transaction, the operating
loss of the segment in 2000 and other costs directly associated with the
decision to divest, including postdivestiture reorganization costs.
The Stationery Products segment was accounted for as a discontinued
operation. Accordingly, its operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements
46
of income and cash flows, and related notes. For the period ended December 31,
2000, the results were as follows: net sales, $691 million; loss before income
taxes, $8 million; income taxes, $3 million; and loss from discontinued
operations, $5 million. The net loss from discontinued operations in 2000
subsequent to the measurement date was $1 million.
The cash flow of the business is reported as Net Cash Provided (Used) by
Discontinued Operations and the results of operations of the segment are
reported as Income (Loss) from Discontinued Operations, net of tax.
As of December 31, 2002, the Company had significantly completed all
postdivestiture reorganization activities. Due to lower than anticipated
spending, a pretax recovery of $10 million ($7 million aftertax) was recorded in
discontinued operations in December 2002.
RESTRUCTURING AND ASSET IMPAIRMENTS
2000 Restructuring Program and Impaired Assets. On December 18, 2000, the
Company announced a restructuring program and impaired certain intangible
assets. The Company recorded, in the fourth quarter of 2000, a charge to
operating expenses of $572 million ($430 million after taxes, or $.41 per common
share, diluted).
The charge for the restructuring program was $360 million, and activity
under the program is virtually complete. The charge for impaired intangible
assets was $212 million to write down $157 million of acquired goodwill relating
to the Thermoscan personal diagnostic appliance brand in the Braun segment and
$55 million of acquired goodwill and identifiable intangible assets for certain
national battery brands in the Duracell segment.
The other benefits portion of employee-related expenses, shown below,
includes fringe benefits, outplacement fees and special termination benefits
related to pensions. At the end of December 2002, the Company had completed the
majority of its 2000 restructuring program. Due to lower than anticipated
spending, a pretax recovery of $3 million was recorded to the 2000 restructuring
program in 2002. The Company recorded an additional pretax gain of $3 million
that was not charged to the restructuring program, reflecting better than
anticipated results relating to property, plant and equipment disposals. The
majority of the remaining balance is due to the timing of severance and other
benefit payments. Details of the activity in the 2000 restructuring program
follow.
2000 Restructuring Program
2002 Activity
Initial 2001 2002 Recovery/ from Plan Balance
Provision Activity Activity Reclassification Inception Dec. 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------
(millions)
Employee-related expenses
Severance payments $146 $ (90) $(44) $(3) $ (137) $ 9
Other benefits 67 (47) (15) (1) (63) 4
Asset impairments
Property, plant and equipment 120 (120) - - (120) -
Contractual obligations and other 27 (24) (4) 1 (27) -
-----------------------------------------------------------------------------------
$360 $ (281) $(63) $(3) $ (347) $13
===================================================================================
2001 Restructuring Program and Impaired Assets. During the fourth quarter
of 2001, the Company recorded a charge of $63 million associated with the
withdrawal from several noncore businesses and the closing of one factory in
the Duracell segment. The factory closure, based on a study that revealed
excess worldwide capacity, resulted in the reduction of 170 employees. The
factory closure and the majority of employee reductions have been completed.
In June 2002, the Company recorded a $30 million pretax gain on the sale
of its rights in the Vaniqa business. Vaniqa, a prescription cream that slows
the growth of unwanted facial hair in women, was distributed through a joint
venture with Bristol-Myers Squibb. This gain included a recovery of $8 million
to the 2001 restructuring program. Proceeds from the sale were received in June
2002. At December 31, 2002, the Company had completed the majority of the
activity in the 2001 restructuring program. Due to lower than anticipated
spending, the Company recorded a pretax recovery of $2 million to the 2001
restructuring program in 2002 and recorded an additional pretax gain of $1
million that was not charged to the restructuring program, reflecting better
than anticipated results relating to property, plant and equipment disposals.
Details of the activity in the 2001 restructuring program follow.
47
2001 Restructuring Program
Activity
Initial 2001 2002 from Plan Balance
Provision Activity Activity* Inception Dec. 31, 2002
- ---------------------------------------------------------------------------------------------------------
(millions)
Employee-related expenses
Severance payments $ 3 $ - $ (2) $ (2) $1
Property, plant and equipment 23 (23) - (23) -
Contractual obligations and other 37 (7) (28) (35) 2
----------------------------------------------------------------
$63 $(30) $(30) $ (60) $3
================================================================
* Includes recovery of $8 million in June 2002, which was recorded as part of
the gain on the sale of Vaniqa, and $2 million in December 2002.
In the fourth quarter of 2001, in connection with a decision to exit
certain regional battery brands in international markets that do not carry the
Duracell brand, the Company announced a noncash impairment charge relating to
the write-down of goodwill, other intangibles and related long-lived assets to
fair value. This resulted in a fourth-quarter 2001 pretax charge to operations
of $164 million. The fair value of the impaired assets was determined based on
discounted cash flow analyses for future operating periods.
A summary of restructuring and asset impairment charges follows.
Years ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------
(millions)
Restructuring provisions $ - $ 63 $360
Asset impairments - 164 212
Changes to 2000 and 2001 restructuring programs,
including gain on the sale of Vaniqa (39) (55) -
--------------------------
$ (39) $ 172 $572
==========================
INCOME TAXES
Income from continuing operations before income taxes and income tax
expense are summarized below.
Years ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------
(millions)
Income from continuing operations before income taxes
United States $ 952 $ 533 $ 664
Foreign 800 809 624
-------------------------------
Total income from continuing operations before income taxes $1,752 $1,342 $1,288
================================
Current tax expense
Federal $ 114 $ 107 $ 365
Foreign 185 219 233
State 14 15 25
Deferred tax expense
Federal 166 44 (87)
Foreign 58 43 (68)
State 6 4 (1)
-------------------------------
Total income tax expense from continuing operations $ 543 $ 432 $ 467
===============================
48
A reconciliation of the statutory Federal income tax rate to the
Company's effective tax rate follows.
Years ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------
(percent)
Statutory Federal tax rate 35.0% 35.0% 35.0%
Goodwill amortization and asset impairments - 1.5 5.0
Taxes on foreign income (3.6) (5.9) (7.1)
Effect of foreign currency translation - (0.2) (0.2)
State taxes (net of Federal tax benefits) 0.7 0.9 1.2
Other differences (1.1) 0.9 2.4
-------------------------------
Effective tax rate 31.0% 32.2% 36.3%
===============================
The components of deferred tax assets and deferred tax liabilities are
shown below.
2002 2001
----------------------------- -----------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
At December 31, Assets Liabilities Assets Liabilities
- ------------------------------------------------------------------------------------- ------------------------
(millions)
Current
Advertising and sales promotion $ 35 $ - $ 37 $ -
Benefit plans 46 - 48 -
Discontinued operations 2 - 41 -
Inventory 85 - 127 -
Restructuring and asset impairments 15 - 97 -
Miscellaneous reserves and accruals 112 - 103 -
Operating loss and credit carryforwards - - 2 -
Other 85 - 26 -
------------------- -------------------
Total current 380 $ - 481 $ -
------------------- -------------------
Net current $380 $481
------------------- -------------------
Noncurrent
Benefit plans $ 77 $ - $136 $ -
Currency translation effect of pass-through entities - 101 - -
Intangibles - 128 - 151
Operating loss and credit carryforwards 15 - 19 -
Property, plant and equipment - 522 - 397
Other - 27 - 58
------------------- -------------------
Total noncurrent 92 778 155 606
------------------- -------------------
Valuation allowance $ (6) $ (8)
------------------- -------------------
Net noncurrent $692 $459
------------------- -------------------
Total
Net deferred tax assets/liabilities $312 $ 22
=================== ===================
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Based upon the level of historical
taxable income and projections for future taxable income over the periods for
which the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 2002. The
valuation allowance at December 31, 2002, was related to deferred tax assets in
certain foreign jurisdictions for which management believes it is more likely
than not that it will not generate sufficient future taxable income in order to
realize the deferred tax assets.
At December 31, 2002, the Company had net operating loss carryforwards
for foreign income tax purposes of $22 million, which are available to offset
future taxable income, if any, through 2007.
49
PENSIONS AND OTHER RETIREE BENEFITS
The Company has various retirement programs, including defined benefit,
defined contribution and other plans, that cover most employees worldwide.
Other retiree benefits are health care and life insurance benefits provided to
eligible retired employees, principally in the United States. The components of
defined benefit expense for continuing operations follow.
Pensions Benefits Other Retiree Benefits
--------------------------------- -------------------------------
Years ended December 31, 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
(millions)
Components of net benefit
expense:
Service cost-benefits earned $ 59 $ 61 $ 64 $ 5 $ 6 $ 6
Interest cost on benefit obligation 132 130 122 27 18 19
Estimated return on assets (153) (166) (171) (4) (4) (4)
Net amortization 23 9 5 2 (5) (7)
Plan curtailments and other - - (3) - - -
--------------------------------------------------------------
61 34 17 30 15 14
Other 9 12 9 - - -
--------------------------------------------------------------
Net defined benefit expense $ 70 $ 46 $ 26 $30 $15 $14
==============================================================
The funded status of the Company's principal defined benefit and other
retiree benefit plans and the amounts recognized in the balance sheet follow.
Pension Benefits Other Retiree Benefits
----------------------- ----------------------
Years ended December 31, 2002 2001 2002 2001
- ----------------------------------------------------------------------- --------------------
(millions)
Change in benefit obligation:
Balance at beginning of year $1,950 $1,961 $ 380 $ 259
Benefit payments (123) (113) (20) (21)
Service and interest costs 191 191 32 24
Amendments 3 12 (46) (14)
Actuarial (gains) losses 226 (57) 69 135
Plan curtailments - (3) - -
Currency translation adjustment 118 (41) (7) (3)
------------------ ------------------
Balance at end of year $2,365 $1,950 $ 408 $ 380
------------------ ------------------
Change in fair value of plan assets:
Balance at beginning of year $1,618 $1,878 $ 38 $ 40
Actual return on plan assets (220) (168) (5) (2)
Employer contribution 525 35 4 -
Benefit payments (99) (92) - -
Currency translation adjustment 111 (35) - -
------------------ ------------------
Balance at end of year $1,935 $1,618 $ 37 $ 38
------------------ ------------------
Benefit obligations in excess of plan assets $ (430) $ (332) $(371) $(342)
Unrecognized prior service cost and transition
obligation 51 41 (45) 2
Unrecognized net loss 1,007 399 130 57
Minimum liability adjustment included in:
Intangible assets (15) (12) - -
Stockholders' equity, pretax (270) (87) - -
------------------ ------------------
Net prepaid (accrued) benefit cost $ 343 $ 9 $(286) $(283)
================== ==================
Reported in other assets 706 242 - -
Reported in other long-term liabilities (363) (233) (286) (283)
50
The values for pension plans with accumulated benefit obligations in
excess of plan assets follow.
At December 31, 2002 2001
- -------------------------------------------------
(millions)
Projected benefit obligation $782 $550
Accumulated benefit obligation 684 490
Fair value of plan assets 475 276
The weighted average assumptions used in determining related obligations
of pension benefit plans are shown below.
At December 31, 2002 2001 2000
- -------------------------------------------------------------------
(percent)
Discount rate 6.2 6.8 7.0
Long-term rate of return on assets 8.0 8.6 9.1
Rate of compensation increases 3.8 4.2 4.7
The weighted average assumptions used in determining related obligations
of other retiree benefit plans are shown below.
At December 31, 2002 2001 2000
- -------------------------------------------------------------------
(percent)
Discount rate 6.5 7.2 7.2
Long-term rate of return on assets 8.5 9.0 10.0
The assumed health care cost trend rate for 2003 is 12%, decreasing to 5%
in 2008. 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 17%. A one percentage point decrease in the trend rate would
have decreased the accumulated postretirement benefit obligation by 11%, and
interest and service cost by 13%. The Employee Stock Ownership Plan (ESOP) was
established to assist Gillette employees in financing retiree medical costs.
ESOP accounts held by participants reduced the Company's obligations by $120
million and $139 million at December 31, 2002 and 2001, respectively. Account
balances are assumed to have an annual yield of 12%. A retiree health benefits
account within the Company's principal domestic pension plan also will be used
to pay these costs. In addition to the defined benefit and other retiree
benefit plans, the Company also sponsors defined contribution plans, primarily
covering U.S. employees. The Company's expense for defined contribution plans
in 2002, 2001 and 2000 totaled $34 million, $34 million and $35 million,
respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
On April 25, 2000, the trustee for the ESOP trust converted the Series C
preferred stock held by the trust to common stock. The preferred shares had a
stated cost of $84 million and were redeemed for common stock held in the
Company's treasury, at a cost of $174 million. Total stockholders' equity did
not change as a result of the redemption. In June 2000, all shares were fully
allocated to participants and the ESOP loan was fully repaid.
STOCK COMPENSATION PLANS AND CAPITAL STOCK
At December 31, 2002, the Company had stock-based compensation plans
described below.
Stock Option Plans
Stock option plans authorize the granting of options on shares of the
Company's common stock to selected key employees, including officers, and to
nonemployee directors, at not less than the fair market value of the stock on
the date of grant. Under the stock plans, options to purchase a maximum of
198,800,000 shares may be granted. At December 31, 2002, 28,254,171 shares were
available for future grants. Options granted under the plans may be either
incentive stock options or nonqualified options. Outstanding options have
seven- to 10-year terms.
51
Options granted prior to April 17, 1997, became exercisable one year from
the date of grant (except the Duracell premerger options, which became
exercisable upon the merger), provided the employee optionee was still
employed. For options granted to employees after April 16, 1997, one-third of
the options vest on each of the first three anniversaries of the stock option
award date. One-quarter of the 2 million options awarded to the Chief Executive
Officer on his hiring date vested immediately, and the remainder vest in
one-third increments annually over a three-year period. The 300,000 options
granted to the President/Chief Operating Officer on January 19, 2001, vest
one-half on the first anniversary and one-half on the second anniversary of the
stock option award date. The plans also permit payment for options exercised in
shares of the Company's common stock (except Duracell premerger options).
A summary of the status of the Company's stock option plans follows.
2002 2001 2000
-------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Years ended December 31, (Thousands) Price (Thousands) Price (Thousands) Price
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 71,052 $ 36.91 58,969 $ 38.76 51,956 $ 39.79
Granted 14,472 35.50 18,127 29.23 11,404 32.04
Exercised (3,789) 21.41 (2,488) 17.04 (2,071) 17.48
Cancelled (3,197) 40.58 (3,556) 42.31 (2,320) 47.86
------ -------- ------ -------- ------ --------
Outstanding at year-end 78,538 $ 37.25 71,052 $ 36.91 58,969 $ 38.76
------ -------- ------ -------- ------ --------
Options exercisable at year-end 50,417 42,242 35,067
====== ====== ======
The following table summarizes information about fixed stock options
outstanding.
At December 31, 2002
- ---------------------------------------------------------------------------------------------------------------
Range of
Exercise
Prices Outstanding Exercisable
- -------------- -------------------------------------------------------- ---------------------------------
Weighted Average
At Less Options Remaining Years Weighted Average Options Weighted Average
Least Than (Thousands) of Contractual Life Exercise Price (Thousands) Exercise Price
- ------- ------ ------------- --------------------- ------------------ ------------- -----------------
$12 $17 2,308 1.2 $ 15.70 2,308 $ 15.70
20 30 20,222 6.7 27.47 11,177 26.85
30 35 13,345 7.7 32.40 8,294 32.32
35 40 14,239 9.4 35.61 214 37.48
40 48 19,903 5.8 45.98 19,903 45.98
50 60 8,521 5.5 56.21 8,521 56.21
------ --- -------- ------ --------
78,538 6.9 $ 37.25 50,417 $ 39.80
====== === ======== ====== ========
Share Repurchase Program
The Company has a share repurchase program in place that authorizes the
purchase of up to 150 million shares in the open market or in privately
negotiated transactions, depending on market conditions and other factors. From
the inception of the program through December 31, 2002, the Company repurchased
108 million shares in the open market for $4.5 billion. In 2002, the Company
repurchased 14 million shares for $427 million.
In 2002, the Company sold equity put options as an enhancement to the
share repurchase program and earned $15 million in premiums. These options
provide the Company with an additional opportunity to supplement open-market
purchases of its common stock if the options expire "in the money" (the option
strike price is greater than the closing price for Gillette common stock on the
expiration date). In addition, the premiums received are a source of funding for
share purchases. The options are exercisable only on the last day of their term.
The Company, at its discretion, may elect to settle by paying net cash or by
purchasing the shares. The put option prices were based on the market value of
the Company's stock at the date of issuance.
At December 31, 2002, there were no outstanding put options. At December
31, 2001, there were 1 million put options outstanding. The redemption value of
the outstanding options, which represents the options' price multiplied by the
number of shares under option, is presented in the accompanying balance sheet as
"Contingent Redemption Value of Common Stock Put Options."
52
Preferred Stock Purchase Rights
At December 31, 2002, the Company had 522 million preferred stock
purchase rights outstanding, representing one-half right for each share of
common stock outstanding. Each right may be exercised to purchase one
ten-thousandth of a share of junior participating preferred stock for $225. The
rights will only become exercisable, or separately transferable, on the earlier
of the tenth business day after the Company announces that a person has
acquired 15% or more, or the tenth business day after a tender offer commences
that could result in ownership of more than 15%, of the Company's common stock.
If any person acquires 15% 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 15% 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 14, 2005,
subject to extension. 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 15% stockholder.
At December 31, 2002, there were authorized 5 million shares of preferred
stock without par value, of which 400 thousand Series A shares were reserved
for issuance upon exercise of the rights. No shares were outstanding.
OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain operating segment information.
Blades & Oral Personal All
Years ended December 31, Razors Duracell Care Braun Care Other Total
- --------------------------------------------------------------------------------------------------------------
(millions)
2002
- --------------------------------------------------------------------------------------------------------------
Net sales $3,435 $1,898 $1,248 $1,056 $816 $ - $ 8,453
Profit from operations 1,299 233 222 75 51 (71) 1,809
Identifiable assets 3,170 2,741 1,094 1,065 520 1,273 9,863
Capital expenditures 168 67 69 57 40 4 405
Depreciation 225 82 73 66 26 8 480
2001
- --------------------------------------------------------------------------------------------------------------
Net sales $3,200 $1,953 $1,149 $ 981 $801 $ - $ 8,084
Profit from operations 1,141 217 240 98 68 (266) 1,498
Identifiable assets 3,195 2,932 976 963 515 1,388 9,969
Capital expenditures 222 162 92 69 49 30 624
Depreciation 197 78 53 53 26 46 453
2000
- --------------------------------------------------------------------------------------------------------------
Net sales $3,177 $2,137 $1,079 $1,042 $875 $ - $ 8,310
Profit from operations 1,272 456 226 94 100 (636) 1,512
Identifiable assets 3,740 3,304 901 1,078 538 841 10,402
Capital expenditures 477 156 45 59 52 4 793
Depreciation 222 59 54 59 43 30 467
Each operating segment is individually managed and has separate financial
results that are reviewed by the Company's chief operating decision-maker. Each
segment contains closely related products that are unique to the particular
segment. There were no changes to the composition of segments in 2002.
The Blades & Razors segment consists of blades and razors. The Duracell
segment consists of consumer batteries. Oral Care contains manual and power
oral care products. The Braun segment contains male and female hair removal,
household and hair care appliances and personal diagnostic devices, including
ear thermometers and blood pressure monitors. The Personal Care segment
includes shave preparations, after-shaves and antiperspirants/deodorants.
53
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 the effect of exchange. In calculating
profit from operations for individual operating segments, substantial
administrative expenses incurred at the operating level that are common to more
than one segment are allocated on a net sales basis. Headquarters expenses of
an operational nature also are allocated to segments. All intercompany
transactions, primarily merchandise transfers, have been eliminated.
Profit from operations includes all unallocated income/expense items,
including unallocated headquarters expenses, as well as the $30 million gain on
the sale of Vaniqa and the $9 million total recovery to the 2001 and 2000
restructuring reserves in 2002, and the $172 million and $572 million charges
for restructuring and asset impairments in 2001 and 2000, respectively. The All
Other column includes items not allocated to operating segments.
Identifiable assets includes financial instruments managed by the
Corporate Treasury Department, nonqualified benefit and compensation trusts,
corporate fixed assets, deferred income tax assets and net assets of
discontinued operations. Capital expenditures is primarily related to Research
and Development initiatives.
The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for 12% of net sales in both 2002 and 2001. These sales occurred
primarily in the United States and were across all product segments.
Net sales by geographic area follow.
Years ended December 31, 2002 2001 2000
- ----------------------------------------------------------
(millions)
Foreign $5,171 $4,839 $5,105
United States 3,282 3,245 3,205
------------------------------
$8,453 $8,084 $8,310
==============================
Long-lived assets follow.
At December 31, 2002 2001 2000
- -------------------------------------------------------
(millions)
Germany $ 606 $ 508 $ 519
Other Foreign 1,057 1,013 1,145
----------------------------
Total Foreign 1,663 1,521 1,664
United States 1,902 2,027 1,886
----------------------------
$3,565 $3,548 $3,550
============================
54
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Three Months Ended
---------------------------------------------------------
2002 March 31 June 30 September 30 December 31 Total Year
- ------------------------------------------------------------------------------------------------- ----------
(millions, except per share amounts)
Net sales $1,732 $2,024 $2,168 $2,529 $8,453
Gross profit 1,038 1,226 1,286 1,392 4,942
Profit from operations 328 449 522 510 1,809
Income from continuing operations before
income taxes 323 425 513 491 1,752
Discontinued operations, net of tax - - - 7 7
Net income 223 293 354 346 1,216
Net income per common share, basic(a)
Continuing operations .21 .28 .33 .32 1.15
Discontinued operations - - - .01 -
Net income .21 .28 .33 .33 1.15
Net income per common share, assuming
full dilution(a)
Continuing operations .21 .28 .33 .32 1.14
Discontinued operations - - - .01 .01
Net income .21 .28 .33 .33 1.15
Dividends paid per common share .16-1/4 .16-1/4 .16-1/4 .16-1/4 .65
Stock price range:
High 34.98 37.30 34.47 31.66 37.30
Low 31.28 33.02 27.75 27.57 27.57
2001
- ------------------------------------------------------------------------------------------------- =======
Net sales $1,621 $1,922 $2,123 $2,418 $8,084
Gross profit 998 1,150 1,201 1,328 4,677
Profit from operations 319 375 473 331 1,498
Income from continuing operations before
income taxes 264 336 429 313 1,342
Net income 182 232 296 200 910
Net income per common share, basic and
assuming full dilution(a) .17 .22 .28 .19 .86
Dividends paid per common share .16-1/4 .16-1/4 .16-1/4 .16-1/4 .65
Stock price range:
High 36.38 31.98 32.08 35.31 36.38
Low 29.50 24.50 26.00 29.00 24.50
(a) Net income per common share is computed independently for each of the
periods presented and, therefore, may not add up to the total for the year.
55
Historical Financial Summary
The Gillette Company and Subsidiary Companies
Years ended December 31, 2002(a) 2001(b) 2000(c) 1999 1998(d)
- -----------------------------------------------------------------------------------------------------------------
(millions, except per share amounts and employees)
Summary of Operations
Net Sales(f) $ 8,453 8,084 8,310 8,324 8,396
Profit from Operations(f) $ 1,809 1,498 1,512 2,087 1,776
Income from Continuing Operations before
Income Taxes $ 1,752 1,342 1,288 1,912 1,656
Net Income $ 1,216 910 392 1,260 1,081
Adjusted Net Income, assuming the adoption
of SFAS 142 for 1998-2001 $ 1,216 934 423 1,293 1,115
Weighted Average Common Shares Outstanding,
assuming full dilution 1,059 1,058 1,063 1,111 1,144
Per Common Share Data
Income per Common Share, assuming
full dilution
Continuing Operations $ 1.14 .86 .77 1.13 .94
Net Income $ 1.15 .86 .37 1.14 .95
Adjusted Net Income per Common Share,
assuming the adoption of SFAS 142 for
1998-2001, assuming full dilution $ 1.15 .88 .40 1.16 .97
Dividends Declared per
Common Share $ .65 .65 .65 .59 .51
Stock Price, December 31 $ 30.36 33.40 36.13 41.19 47.81
Balance Sheet Data
Net Property, Plant and Equipment(f) $ 3,565 3,548 3,550 3,467 3,285
Total Assets(f) $ 9,863 9,946 10,213 10,612 10,630
Long-Term Debt $ 2,457 1,654 1,650 2,931 2,256
Stockholders' Equity $ 2,260 2,137 1,924 3,060 4,543
Other Information
Net Interest Expense $ 59 141 218 129 86
Depreciation and Amortization(f) $ 500 509 535 464 421
Capital Expenditures(f) $ 405 624 793 889 952
Employees(f) 30,300 31,500 35,200 37,600 39,800
Ratio of Earnings to Fixed Charges(e) 14.5x 8.2x 5.7x 12.3x 13.7x
(a) In 2002, the gain on the sale of Vaniqa and recovery to the restructuring
reserve increased profit from operations and income from continuing
operations before income taxes by $39 million, net income by $27 million
and income from continuing operations per common share, assuming full
dilution, by $.02.
(b) In 2001, charges for restructuring and asset impairment expenses reduced
profit from operations and income before income taxes by $172 million, net
income by $135 million and net income per common share, assuming full
dilution, by $.13.
(c) In 2000, charges for restructuring and asset impairment expenses reduced
profit from operations and income before income taxes by $572 million, net
income by $430 million and net income per common share, assuming full
dilution, by $.41.
(d) In 1998, a charge for reorganization and realignment expenses reduced
profit from operations and income before income taxes by $440 million, net
income by $285 million and net income per common share, assuming full
dilution, by $.25.
(e) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before income taxes
and fixed charges. Fixed charges consist of interest on indebtedness,
amortization of debt premium, the interest component of rentals and
preferred stock dividend requirements.
(f) Represents continuing operations.
56
Directors and Executive Officers
DIRECTORS
Warren E. Buffett (3, 5)
Chairman and Chief Executive Officer,
Berkshire Hathaway Inc.
Edward F. DeGraan
President
Wilbur H. Gantz (2, 5)
Former Chairman and Chief Executive Officer,
PathoGenesis Corporation
Michael B. Gifford (1, 4)
Former Chief Executive Officer,
Danka Business Systems PLC
Ray J. Groves (1, 4)
Chief Executive Officer,
Marsh Inc.
Dennis F. Hightower (2, 3)
Retired Chief Executive Officer,
Europe Online Networks, S.A.
Herbert H. Jacobi (2, 4)
Chairman of the Supervisory Board,
HSBC Trinkaus & Burkhardt KGaA
Nancy J. Karch 1, 5
Retired Senior Partner,
McKinsey & Company
James M. Kilts (3)
Chairman of the Board
Jorge P. Lemann (1, 5)
General Partner,
GP Investimentos
Richard R. Pivirotto (2, 3)
President,
Richard R. Pivirotto Co., Inc.
Marjorie M.Yang (2, 4)
Chairman,
Esquel Group of Companies
(1) Audit Committee
(2) Compensation Committee
(3) Executive Committee
(4) Finance Committee
(5) Nominating and Corporate Governance Committee
Committee Chair
EXECUTIVE OFFICERS
Chairman of the Board and
Chief Executive Officer
James M. Kilts
President and
Chief Operating Officer
Edward F. DeGraan
Senior Vice Presidents
Michael T. Cowhig
Global Manufacturing and
Technical Operations
Charles W. Cramb
Finance
Edward E. Guillet
Human Resources
Peter Klein
Strategy and Business Development
Kathy S. Lane
Corporate Information Technology and Applications
John F. Manfredi
Corporate Affairs
Edward D. Shirley
Global Value Chain and Global Marketing Resources
Richard K.Willard
Legal
Vice Presidents
A. Bruce Cleverly
Global Business Management, Oral Care
Joseph F. Dooley
Commercial Operations, North America
Ernst A. Haberli
Commercial Operations, International
Peter K. Hoffman
Global Business Management, Blades and Razors
Mark M. Leckie
Global Business Management, Duracell
Claudio E. Ruben
Controller
Joseph Scalzo
Global Business Management, Personal Care
Corporate and Stockholder Information
STOCKHOLDER INQUIRIES TRANSFER AGENT AND REGISTRAR
William J. Mostyn III The Bank of New York
Secretary and Shareholder Relations Department - 12W
Deputy General Counsel P.O. Box 11258
Church Street Station
INVESTOR INQUIRIES NewYork, NewYork 10286
Christopher M. Jakubik Toll-free (888) 218-2841
Vice President, Investor Relations Email: shareowner-svcs@bankofny.com
Web site: www.stockbny.com
MEDIA INQUIRIES
Eric A. Kraus AUDITORS
Vice President, Corporate Communications KPMG LLP
ANNUAL MEETING FINANCIAL INFORMATION
The Annual Meeting of Stockholders will take The Gillette Company offers free of charge this
place on Thursday, May 15, 2003, at the Hotel du Annual Report, which includes the Form 10-K,
Pont,Wilmington, Delaware.The meeting will as well as quarterly earnings releases and other
convene at 10 a.m. announcements concerning financial results.
Printed copies of these materials may be
CORPORATE HEADQUARTERS requested by writing to the Office of the Secretary;
Prudential Tower Building by calling toll-free (877) 788-G-INFO from within
Boston, Massachusetts 02199 the United States; or by calling (703) 386-1171
(617) 421-7000 from outside the United States.
Web site: www.gillette.com Financial information also may be reviewed,
downloaded or requested in printed form by access-
INCORPORATED ing the Investors' section of www.gillette.com.
State of Delaware
BUYDIRECT -- DIRECT STOCK
COMMON STOCK PURCHASE PLAN
Major stock exchanges: New York, Boston, BuyDIRECT is a direct stock purchase plan
Chicago, Pacific, Frankfurt sponsored and administered by The Bank of New
York, Gillette's Transfer Agent. BuyDIRECT
New York Stock Exchange Symbol: G provides an economical, convenient way to pur-
chase your first shares or to purchase additional
At January 31, 2003, stockholders numbered shares of Gillette common stock. Plan partici-
45,103, living in all 50 states and more than 50 pants may also reinvest their cash dividends
countries abroad. through BuyDIRECT.
Interested individuals may request an enroll-
ment package by the calling The Bank of New
York toll-free at (888) 218-2841or by visiting its
web site at www.stockbny.com.