SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 Commission File Number 1-922
THE GILLETTE COMPANY
(Exact name of registrant as specified in its charter)
Incorporated in Delaware 04-1366970
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Prudential Tower Building, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 421-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class
Common Stock, $1.00 par value
Shares Outstanding July 31, 2002 . . . . . . . . . . . . . . . . .1,057,747,501
PAGE 1
PART I. FINANCIAL INFORMATION
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(Millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales .......................................... $ 2,024 $ 1,922 $ 3,756 $ 3,543
Cost of Sales ...................................... 798 772 1,492 1,395
------- ------- ------- -------
Gross Profit ..................................... 1,226 1,150 2,264 2,148
Selling, General and Administrative Expenses ....... 807 775 1,517 1,454
Restructuring - Gain on Sale of Vaniqa ............. (30) - (30) -
------- ------- ------- -------
Profit from Operations ........................... 449 375 777 694
Nonoperating Charges (Income):
Interest income .................................. (6) (1) (11) (2)
Interest expense ................................. 24 40 44 85
Exchange ......................................... (2) (6) (8) 7
Other charges - net .............................. 8 6 4 4
------- ------- ------- -------
24 39 29 94
------- ------- ------- -------
Income before Income Taxes ......................... 425 336 748 600
Income Taxes ....................................... 132 104 232 186
------- ------- ------- -------
Net Income ....................................... $ 293 $ 232 $ 516 $ 414
======= ======= ======= =======
Adjusted Net Income, assuming the adoption
of SFAS 142 for 2001 ............................. $ 293 $ 237 $ 516 $ 425
======= ======= ======= =======
Net Income per Common Share:
Basic ............................................ $ .28 $ .22 $ .49 $ .39
======= ======= ======= =======
Assuming Full Dilution ........................... $ .28 $ .22 $ .49 $ .39
======= ======= ======= =======
Adjusted Net Income per Common Share:
Basic ............................................ $ .28 $ .22 $ .49 $ .40
======= ======= ======= =======
Assuming Full Dilution ........................... $ .28 $ .22 $ .49 $ .40
======= ======= ======= =======
Dividends per Common Share:
Declared ......................................... $ .3250 $ .1625 $ .3250 $ .1625
Paid ............................................. $ .1625 $ .1625 $ .3250 $ .3250
Weighted average number of common shares outstanding
Basic ............................................ 1,057 1,055 1,056 1,054
Assuming full dilution ........................... 1,062 1,057 1,061 1,058
See Accompanying Notes to Consolidated Financial Statements.
PAGE 2
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Millions)
June 30, December 31, June 30,
2002 2001 2001
------------ ------------ ------------
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents .......................... $ 980 $ 947 $ 55
Trade receivables, less allowances, June 2002, $61;
December 2001, $69; June 2001, $67 ............... 1,210 1,473 1,381
Other receivables .................................. 296 313 342
Inventories
Raw materials and supplies ...................... 133 130 136
Work in process ................................. 277 183 240
Finished goods .................................. 800 698 1,000
------- ------- -------
Total Inventories ............................. 1,210 1,011 1,376
------- ------- -------
Deferred income taxes .............................. 507 481 587
Other current assets ............................... 294 207 220
Net assets of discontinued operations............... - 23 44
------- ------- -------
Total Current Assets .......................... 4,497 4,455 4,005
------- ------- -------
Property, Plant and Equipment, at cost ............... 6,303 6,005 5,824
Less accumulated depreciation ........................ (2,756) (2,457) (2,343)
------- ------- -------
Net Property, Plant and Equipment ............. 3,547 3,548 3,481
------- ------- -------
Goodwill ............................................. 954 935 1,053
Intangible Assets, less accumulated amortization ..... 409 418 462
Other Assets ......................................... 814 613 634
------- ------- -------
$10,221 $ 9,969 $ 9,635
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
PAGE 3
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(Millions, except per share amount)
June 30, December 31, June 30,
2002 2001 2001
------------ ------------ ------------
(Unaudited) (Unaudited)
Current Liabilities:
Loans payable .................................... $ 1,903 $ 2,235 $ 2,039
Current portion of long-term debt ................ 606 428 724
Accounts payable ................................. 532 401 362
Accrued liabilities .............................. 1,188 1,307 1,349
Dividends payable ................................ 172 172 -
Income taxes ..................................... 392 295 407
-------- -------- --------
Total Current Liabilities ..................... 4,793 4,838 4,881
-------- -------- --------
Long-Term Debt ..................................... 1,724 1,654 1,367
Deferred Income Taxes .............................. 571 459 423
Other Long-Term Liabilities ........................ 713 805 707
Minority Interest .................................. 42 42 44
Contingent Redemption Value of Common Stock
Put Options ...................................... - 34 99
Stockholders' Equity:
Common stock, par value $1.00 per share:
Authorized 2,320 shares
Issued: June 2002, 1,370 shares;
Dec. 2001, 1,368 shares;
June 2001, 1,367 shares ................ 1,370 1,368 1,367
Additional paid-in capital ....................... 1,151 1,094 1,004
Earnings reinvested in the business .............. 6,250 6,077 6,095
Accumulated other comprehensive loss ............. (1,428) (1,437) (1,400)
Treasury stock, at cost: June 2002,
Dec. and June 2001, 312 shares ................. (4,965) (4,965) (4,952)
-------- -------- --------
Total Stockholders' Equity ............... 2,378 2,137 2,114
-------- -------- --------
$ 10,221 $ 9,969 $ 9,635
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
(Unaudited)
Six Months Ended
June 30
------------------
2002 2001
---- ----
Operating Activities
Net income ..................................... $ 516 $ 414
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 244 240
Other ........................................ 7 (8)
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures:
Accounts receivable ........................ 334 679
Inventories ................................ (160) (269)
Accounts payable and accrued liabilities ... 25 (208)
Other working capital items ................ (180) (86)
Other noncurrent assets and liabilities .... (86) (90)
----- -----
Net cash provided by operating activities 700 672
----- -----
Investing Activities
Additions to property, plant and equipment ..... (175) (319)
Disposals of property, plant and equipment ..... 21 61
----- -----
Net cash used in investing activities .... (154) (258)
----- -----
Financing Activities
Proceeds from sale of put options .............. - 5
Proceeds from exercise of stock option and
purchase plans ............................ 23 22
Proceeds from long-term debt ................... 350 -
Repayment of long-term debt .................... (197) (56)
Decrease in loans payable ...................... (333) (143)
Dividends paid ................................. (343) (342)
Settlements of debt-related derivative contracts 9 3
----- -----
Net cash used in financing activities .... (491) (511)
----- -----
Effect of Exchange Rate Changes on Cash ............ - (1)
Net Cash Provided (Used) by Discontinued Operations. (22) 91
----- -----
Increase (decrease) in Cash and Cash Equivalents ... 33 (7)
Cash and Cash Equivalents at Beginning of Period ... 947 62
----- -----
Cash and Cash Equivalents at End of Period ......... $ 980 $ 55
===== =====
Supplemental disclosure of cash paid for:
Interest ....................................... $ 50 $ 92
Income taxes ................................... $ 149 $ 136
See Accompanying Notes to Consolidated Financial Statements.
PAGE 5
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Millions)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net Income, as reported $ 293 $ 232 $ 516 $ 414
Other Comprehensive Income (Loss),
net of tax:
Foreign Currency Translation 47 (36) 7 (79)
Cash Flow Hedges (1) (2) 2 (7)
----- ----- ----- -----
Comprehensive Income $ 339 $ 194 $ 525 $ 328
===== ===== ===== =====
Adjusted Comprehensive Income,
assuming the adoption of SFAS 142
for 2001 $ 339 $ 199 $ 525 $ 339
===== ===== ===== =====
Accumulated Other Comprehensive Loss
- ------------------------------------
The accumulated balances for the components of Other Comprehensive Loss are:
Accumulated
Foreign Other
Currency Pension Cash Flow Comprehensive
Translation Adjustment Hedges Loss
----------- ---------- ----------- -------------
Balance December 31, 2000 $(1,280) $ (34) $ - $(1,314)
Change in period 19 - (7) 12
Income tax benefit (expense) (62) - 2 (60)
------ ------ ------ -------
Balance March 31, 2001 $(1,323) $ (34) $ (5) $(1,362)
Change in period (16) - (4) (20)
Income tax benefit (expense) (20) - 2 (18)
------ ------ ------ -------
Balance June 30, 2001 $(1,359) $ (34) $ (7) $(1,400)
====== ====== ====== =======
Balance December 31, 2001 $(1,373) $ (56) $ (8) $(1,437)
Change in period (46) - 5 (41)
Income tax benefit (expense) 6 - (2) 4
------ ------ ------ -------
Balance March 31, 2002 $(1,413) $ (56) $ (5) $(1,474)
Change in period 172 - (2) 170
Income tax benefit (expense) (125) - 1 (124)
------ ------ ------ -------
Balance June 30, 2002 $(1,366) $ (56) $ (6) $(1,428)
====== ====== ====== =======
The change in accumulated foreign currency translation adjustment for the
quarter ended June 30, 2002, was a gain, net of tax, of $47 million, with gains
in Europe largely offset by losses in Latin America. Losses for the quarter
ended June 30, 2001, were $36 million, with Europe being the largest component.
See Accompanying Notes to Consolidated Financial Statements.
PAGE 6
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Comments
- -------------------
Reference is made to the registrant's 2001 Annual Report to Stockholders, which
contains, at pages 26 through 50, the audited consolidated financial statements
and the notes thereto, which are incorporated by reference into the registrant's
Annual Report on Form 10-K for the year ended December 31, 2001.
With respect to the financial information for the interim periods included in
this report, which is unaudited, the management of the Company believes that all
adjustments necessary for a fair presentation of the results for such interim
periods have been included.
Financial statements of subsidiaries outside the U.S., other than those
operating in highly inflationary environments, are measured using the local
currency as the functional currency. Adjustments from translating these
financial statements into U.S. dollars are accumulated in the equity section of
the balance sheet under the caption "Accumulated Other Comprehensive Gain or
Loss."
For subsidiaries operating in highly inflationary economies, the U.S. dollar is
the functional currency. Therefore, exchange gains and losses for these
subsidiaries are included with all other transactional exchange gains and losses
in the Consolidated Statement of Income under the caption "Exchange."
Prior-year financial statements have been reclassified to conform to the 2002
presentations.
Accounting Pronouncements
- -------------------------
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services." In November 2001, the issues discussed in EITF 00-25 were
codified with related issues into EITF 01-9, "Accounting for Consideration Given
By a Vendor To a Customer (Including a Reseller of the Vendor's Products)." This
issue addresses the income statement classification of slotting fees,
cooperative advertising arrangements and buydowns. The consensus requires that
certain customer promotional payments that were previously classified as
marketing expenses be classified as a reduction of revenue. The Company adopted
the consensus on January 1, 2002. The adoption of EITF 00-25 resulted in the
following reclassifications in the three months ended June 30, 2001 income
statement: net sales, gross profit and selling, general and administrative
expenses were reduced by $196 million. The adoption of EITF 00-25 resulted in
the following reclassifications in the six months ended June 30, 2001 income
statement: net sales, gross profit and selling, general and administrative
expenses were reduced by $338 million. The adoption of EITF 00-25 had no impact
on profit from operations, net income or earnings per share.
PAGE 7
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2001, Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," was issued. The Company adopted the
provisions of SFAS 142 on January 1, 2002. SFAS 142 requires that goodwill and
other intangible assets with indefinite lives no longer be amortized, but
instead be tested for impairment, at least annually, in accordance with the new
impairment testing provisions of SFAS 142. Statement 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
During the first quarter of 2002, the Company completed its evaluation of the
carrying amounts of goodwill and other intangible assets, and noted that certain
goodwill and indefinite-lived intangible assets were inadvertently excluded from
the Company's disclosures of goodwill and indefinite-lived intangible assets in
the "Effect of Recent Accounting Pronouncements" footnote in the consolidated
financial statements for the year ended December 31, 2001. Unamortized goodwill
at December 31, 2001, was $935 million. Unamortized other intangible assets with
indefinite lives at December 31, 2001, was $313 million.
The net impact of the adoption of SFAS 142 is a reduction of annual amortization
expense of $34 million. No impairment losses were recognized due to the change
in accounting principle.
Intangible Assets (Millions)
- ----------------------------
Weighted
Average June 30, 2002 December 31, 2001 June 30, 2001
Amortization ---------------------- ---------------------- ----------------------
Period Carrying Accumulated Carrying Accumulated Carrying Accumulated
(Years) Amount Amortization Amount Amortization Amount Amortization
------------ -------- ------------ -------- ------------ -------- ------------
Amortized Intangible Assets
Patents 6 $ 103 $ 46 $ 103 $ 38 $ 152 $ 45
Trademarks 6 11 2 11 1 11 1
Software 5 16 8 16 7 16 6
Other 23 12 3 12 3 12 2
----- ----- ----- ----- ----- -----
Total 7 $ 142 $ 59 $ 142 $ 49 $ 191 $ 54
===== ===== ===== ===== ===== =====
Unamortized Intangible Assets
Trademarks $ 314 $ 313 $ 319
Pension 12 12 6
Aggregate Amortization Expense:
For the Three Months ended
June 30, 2002 $ 5
June 30, 2001 $ 14
For the Six Months ended
June 30, 2002 $ 10
June 30, 2001 $ 28
Estimated Amortization Expense:
For the Years ended
December 31, 2002 $ 20
2003 $ 19
2004 $ 18
2005 $ 5
2006 $ 5
2007 $ 2
PAGE 8
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total Goodwill by segment follows.
June 30, Dec. 31, June 30,
Net Carrying Amount 2002 2001 2001
--------- -------- ---------
Blades & Razors $ 142 $ 140 $ 141
Personal Care - - -
Duracell 563 550 664
Oral Care 172 172 176
Braun 77 73 72
------ ----- ------
Total $ 954 $ 935 $1,053
====== ===== ======
The change between the December 31, 2001 and June 30, 2002 balances is due to
the impact of foreign currency translation.
PAGE 9
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present a reconciliation of net income, earnings per share
and comprehensive income, as reported, to adjusted amounts which include the
impact of the adoption of SFAS 142 for all periods presented.
Goodwill and Intangible Assets - Adoption of SFAS 142
(millions, except per share amounts)
- -----------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
2002 2001 2002 2001
------ ------ ------ ------
Net Income
- ----------
Net income, as reported $ 293 $ 232 $ 516 $ 414
Add: Goodwill amortization, net of tax 5 11
Add: Trademark amortization, net of tax 2 4
Less: Amortization from change in useful (2) (4)
lives, net of tax
----- ----- ----- -----
Adjusted net income $ 293 $ 237 $ 516 $ 425
===== ===== ===== =====
Net Income Per Common Share
- ---------------------------
Basic, as reported $ .28 $ .22 $ .49 $ .39
Add: Goodwill amortization, net of tax - .01
Add: Trademark amortization, net of tax - -
Less: Amortization from change in useful - -
lives, net of tax
----- ----- ----- -----
Basic, adjusted $ .28 $ .22 $ .49 $ .40
===== ===== ===== =====
Assuming full dilution, as reported $ .28 $ .22 $ .49 $ .39
Add: Goodwill amortization, net of tax - .01
Add: Trademark amortization, net of tax - -
Less: Amortization from change in useful - -
lives, net of tax
----- ----- ----- -----
Assuming full dilution, adjusted $ .28 $ .22 $ .49 $ .40
===== ===== ===== =====
Comprehensive Income
- --------------------
Comprehensive income, as reported $ 339 $ 194 $ 525 $ 328
Add: Goodwill amortization, net of tax 5 11
Add: Trademark amortization, net of tax 2 4
Less: Amortization from change in useful (2) (4)
lives, net of tax
----- ----- ----- -----
Adjusted comprehensive income $ 339 $ 199 $ 525 $ 339
===== ===== ===== =====
PAGE 10
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations," was
issued. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The Company plans to adopt
the provisions of SFAS 143 on January 1, 2003, and does not expect the adoption
to have a material impact on its financial statements.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued. It provides new guidance that modifies the
existing guidance in SFAS 121 and in APB Opinion No. 30. Goodwill will still be
evaluated for impairment under SFAS 142. The Company adopted SFAS 144 on January
1, 2002. Its adoption did not have any impact on the Company's financial
statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued. SFAS
145 rescinds SFAS 4 and SFAS 64 related to classification of gains and losses on
debt extinguishment such that most debt extinguishment gains and losses will no
longer be classified as extraordinary. SFAS 145 also amends SFAS 13 with respect
to sales-leaseback transactions. The Company adopted the provisions of SFAS 145
effective April 1, 2002, and the adoption had no impact on the Company's
reported results of operations or financial position.
Advertising
- -----------
The advertising expense detailed below is included in selling, general and
administrative expenses.
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 2,024 $ 1,922 $ 3,756 $ 3,543
Advertising 159 145 296 263
% Net Sales 7.9% 7.5% 7.9% 7.4%
PAGE 11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring and Asset Impairments
- -----------------------------------
On December 18, 2000, the Company announced a restructuring program and impaired
certain intangible assets. In accordance with EITF Issue No. 94-3, SFAS 121 and
SAB 100, the Company recorded, in the fourth quarter of 2000, a charge to
operating expenses of $572 million ($430 million after taxes, or $.41 in net
income per common share, fully diluted).
The charge for the restructuring program was $360 million, and activity under
the program is virtually complete. The majority of the remaining balance is due
to the timing of severance and other benefit payments. The charge for impaired
intangible assets was $212 million to write down $157 million of acquired
goodwill relating to the Thermoscan personal diagnostic appliance brand in the
Braun segment and $55 million of acquired goodwill and identifiable intangible
assets for certain national battery brands in the Duracell segment.
Details of the activity in the 2000 restructuring program follow. The other
benefits portion of employee-related expenses, shown below, include fringe
benefits, outplacement fees and special termination benefits related to
pensions.
PAGE 12
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 Restructuring Program
- --------------------------
Year to Plan
Activity Date Inception
Initial Through 2002 Through Balance
(Millions) Provision 2001 Activity June 30, 2002 June 30, 2002
- --------------------- --------- ----------- -------- -------------- --------------
Employee-related expenses
Severance payments $146 $ 90 $ 33 $123 $ 23
Other benefits 67 47 9 56 11
Asset impairments
Prop., plant, & equip. 120 120 - 120 -
Contractual obligations
and other 27 24 2 26 1
---- ---- ---- ---- ----
Total $360 $281 $ 44 $325 $ 35
==== ==== ==== ==== ====
Employee Reductions 2,700 2,620 80 2,700 -
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 employee reductions have been completed.
In June 2002, the Company recorded a $30 million pre-tax gain on the sale of
Gillette's rights in the Vaniqa business. Vaniqa was a joint venture with
Bristol-Myers Squibb for a prescription cream that slows the growth of unwanted
facial hair in women. This gain included a recovery of $8 million to the
restructuring reserve. Proceeds from the sale were received in June 2002.
Details of the activity in the 2001 restructuring program follow.
2001 Restructuring Program
- --------------------------
Year to Plan
Activity Date Inception
Initial Through 2002 Through Balance
(Millions) Provision 2001 Activity June 30, 2002 June 30, 2002
- --------------------- --------- ----------- -------- ------------- -------------
Employee-related expenses
Severance payments $ 3 $ - $ 2 $ 2 $ 1
Prop., plant, & equipment 23 23 - 23 -
Contractual obligations
and other 37 7 20* 27* 10
---- ---- ---- ---- ----
Total $ 63 $ 30 $ 22 $ 52 $ 11
==== ==== ==== ==== ====
Employee Reductions 170 - 164 164 6
* Includes recovery of $8 million in June 2002.
PAGE 13
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Information by Business Segment
- -----------------------------------------
Net sales, profit (loss) from operations, adjusted profit (loss) from operations
for 2001 assuming adoption of SFAS 142 at January 1, 2001, and identifiable
assets for each of the Company's business segments are set forth below. There
are no material intersegment revenues.
Net Sales
--------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
(Millions) 2002 2001 2002 2001
------ ------ ------ ------
Blades & Razors $ 884 $ 806 $1,654 $1,486
Personal Care 204 202 382 372
Duracell 428 438 760 781
Oral Care 275 254 540 499
Braun 233 222 420 405
------ ------ ------ ------
Total $2,024 $1,922 $3,756 $3,543
====== ====== ====== ======
Profit/(Loss) from Operations
------------------------------
Three Months Ended
June 30
-----------------------
(Millions) 2002 2001 Amortization 2001
As Reported Adjustment As Adjusted
------ ----------- ------------ -----------
Blades & Razors $ 324 $ 272 $ - $ 272
Personal Care 5 12 - 12
Duracell 46 40 8 48
Oral Care 50 45 1 46
Braun 22 24 - 24
------ ------ ------ ------
Subtotal Reportable Segments 447 393 9 402
All Other (1) 2 (18) - (18)
------ ------ ------ ------
Total $ 449 $ 375 $ 9 $ 384
====== ====== ====== ======
Profit/(Loss) from Operations
------------------------------
Six Months Ended
June 30
-----------------------
(Millions) 2002 2001 Amortization 2001
As Reported Adjustment As Adjusted
------ ----------- ------------ -----------
Blades & Razors $ 612 $ 503 $ - $ 503
Personal Care 16 20 - 20
Duracell 45 78 16 94
Oral Care 103 95 2 97
Braun 25 40 - 40
------ ------ ------ ------
Subtotal Reportable Segments 801 736 18 754
All Other (24) (42) - (42)
------ ------ ------ ------
Total $ 777 $ 694 $ 18 $ 712
====== ====== ====== ======
(1) Second Quarter 2002 All Other includes the $30 million gain on the sale of Vaniqa.
PAGE 14
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable Assets
-------------------------------
June 30, Dec. 31, June 30,
(Millions) 2002 2001 2001
------- ------- -------
Blades & Razors $ 3,258 $ 3,195 $ 3,182
Personal Care 535 515 530
Duracell 2,782 2,932 2,988
Oral Care 1,057 976 938
Braun 1,014 963 1,010
------- ------- -------
Subtotal Reportable Segments 8,646 8,581 8,648
All Other 1,575 1,365 943
Discontinued Operations - 23 44
------- ------- -------
Total $10,221 $ 9,969 $ 9,635
======= ======= =======
PAGE 15
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Computation of net income per common share
(Millions, except per share amounts)
- ------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Income, as reported................. $ 293 $ 232 $ 516 $ 414
====== ====== ====== ======
Adjusted net income, assuming the
adoption of SFAS 142 for 2001 ........ $ 293 $ 237 $ 516 $ 425
====== ====== ====== ======
Common shares, basic ................... 1,057 1,055 1,056 1,054
Effect of dilutive securities:
Stock options ...................... 5 2 5 4
------ ------ ------ ------
Common shares, assuming full dilution 1,062 1,057 1,061 1,058
====== ====== ====== ======
Net Income per Common Share:
Basic ................................ $ .28 $ .22 $ .49 $ .39
====== ====== ====== ======
Assuming full dilution ........ $ .28 $ .22 $ .49 $ .39
====== ====== ====== ======
Adjusted Net Income per Common Share:
Basic $ .28 $ .22 $ .49 $ .40
====== ====== ====== ======
Assuming full dilution $ .28 $ .22 $ .49 $ .40
====== ====== ====== ======
As of June 30, 2002 and 2001, 43.7 million and 48.1 million shares of common
stock issuable under stock options, respectively, were not included in the
calculation of fully diluted earnings per share because the option exercise
price was above the market price. Therefore, the effect of including these
options in the calculation would have been anti-dilutive.
PAGE 16
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 123 Stock Options
- ----------------------
The Company applies APB 25 and related interpretations in accounting for its
stock option plans. In accordance with SFAS 123, the Company provides, on a pro
forma basis, the effect on the Company's net income and net income per common
share had the Company recorded an expense for the fair value of options granted
consistent with SFAS 123. For the years 1997 through 2001, the Company
calculated the fair value of the options granted under the plan based on a
one-year vesting period, even though the stock option plan was amended effective
April 16, 1997, to provide for vesting in one-third increments over a three-year
period. The following tables present the pro forma information as reported and
as adjusted.
Years ended December 31,
(millions, except per share amounts) 2001 2000 1999 1998 1997
- ------------------------------------ ---- ---- ---- ---- ----
As Reported
- -----------
Net income
As reported $910 $392 $1,260 $1,081 $1,427
Pro forma 792 311 1,114 981 1,339
Net income per common share
Basic
As reported $.86 $.37 $ 1.15 .96 1.27
Pro forma .75 .29 1.02 .87 1.19
Assuming full dilution
As reported .86 .37 1.14 .95 1.24
Pro forma .75 .29 1.01 .86 1.16
As Adjusted
- -----------
Net income
As reported $910 $392 $1,260 $1,081 $1,427
Pro forma 801 282 1,179 1,031 1,410
Net income per common share
Basic
As reported $.86 $.37 $ 1.15 .96 1.27
Pro forma .76 .27 1.08 .92 1.24
Assuming full dilution
As reported .86 .37 1.14 .95 1.24
Pro forma .76 .27 1.06 .90 1.21
PAGE 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Results for any interim period, such as those described in the following
analysis, are not necessarily indicative of results for the entire year.
As explained in the "Accounting Pronouncements" section of this document, on
January 1, 2002, the Company adopted EITF 00-25 "Vendor Income Statement
Characterization of Consideration to a Purchaser of a Vendor's Products and
Services," and SFAS 142, "Goodwill and Other Intangible Assets."
The effect of EITF 00-25 resulted in the following reclassifications in the
second quarter 2001 income statement: net sales, gross profit and selling,
general and administrative expenses were reduced by $196 million. The impact to
the income statement for the six months ended June 30, 2001, was: net sales,
gross profit and selling, general and administrative expenses were reduced by
$338 million. The adoption of EITF 00-25 had no impact on profit from
operations, net income or earnings per share.
SFAS 142 requires that goodwill and intangible assets with indefinite lives no
longer be amortized, but instead be tested for impairment, at least annually, in
accordance with the new impairment testing provisions of SFAS 142. Statement 142
also requires that intangible assets with estimable useful lives be amortized
over their respective useful lives to their estimated residual values, and
reviewed for impairment in accordance with FASB Statement 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". The Company realized a $9
million and $18 million reduction in selling, general and administrative
expenses in the second quarter and six months ended June 30, 2002, respectively,
due to the implementation of SFAS 142.
Second Quarter 2002 versus 2001
- -------------------------------
Total Company: Sales for the quarter ended June 30, 2002, were $2.02 billion, an
increase of 5% versus the same quarter of the prior year. The impact of exchange
was less than 1% on reported sales for the quarter. The impact of volume/mix
increased sales by 7%, while unfavorable pricing reduced sales by 2%,due to
higher year-over-year sales promotion spending at Duracell and Oral Care.
Blades and Razors: Sales of blades and razors increased 10% and profits
increased 19%, compared with the second quarter of last year. Excluding
unmatched blade destocking activity in 2001, sales were up 7%. The ongoing
worldwide success of our premium systems business--Mach3 and Venus--drove sales
gains in North America, Europe and the AMEE markets. In addition, the new Mach3
Turbo drove strong sales gains in North America. Profit and margin increased in
the quarter, due mainly to product mix shift towards the Mach3 franchise
globally, favorable blade versus razor mix, and strong sales growth that was
able to leverage the flat overheads. These gains more than offset higher
advertising behind our new and established products.
Personal Care: Sales for the quarter increased by 1%,as compared with the prior
year. The North America, Europe and AMEE markets drove growth. This was
partially offset by lower sales in Latin America, where the struggling economy
in Argentina and increased competitive pressures in Colombia continued to affect
volumes and pricing in this region. In North America, there was strong consumer
acceptance of our new PowerStripe deodorants and antiperspirants, as well as
Gillette Series shave preps and the re-staged Satin Care line. Profit for the
quarter fell 55%, due to a substantial increase in advertising expenses to
support new product launches and brand franchise-building activities.
PAGE 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Duracell: Sales of Duracell for the quarter decreased 2% versus those of a year
ago. Unit volume gains in most regions were more than offset by higher
year-on-year promotional expenditures, the ongoing shift in product mix from
Ultra to CopperTop, an adverse shift in pack size mix, and a retail channel
shift in sales towards mass merchandisers and club stores. Despite the sales
decline, profit from operations grew by 12% versus a year ago, reflecting
manufacturing cost-savings initiatives and overhead containment activities.
Oral Care: Oral Care sales were 8% above those of 2001, driven by growth in both
the manual and power toothbrush segments. New product introductions in North
America, the Oral-B Stages line of children's manual toothbrushes, and sustained
gains of the 3D Excel rechargeable power toothbrush, drove sales growth. In
addition, strong growth was realized in Asia, due to strong rechargeable gains,
and in AMEE markets, particularly Russia, from the entry-level Exceed, Vision
and Classic manual toothbrushes. Profit from operations grew 11% from a year
ago, at a higher pace than sales, reflecting lower manufacturing costs, offset
partially by increased marketing spending to support the new product launches.
Braun: Sales of Braun rose 5% above those of the previous year. Sales were
helped by favorable European currency, but strong electric shaver performances
from the mid-priced Flex400 CC shaver launch in North America and the Flex XP
and Syncro shavers in Japan were the main drivers. In Europe and AMEE, sales of
household appliances continued to benefit from the bankruptcy and related
product line rationalization of a competitor in these regions. Favorable product
mix and cost-savings initiatives were offset by significantly higher advertising
spending behind new products and by the impact of the Yen on margins in Japan,
resulting in a decrease in profits of 8% versus prior year.
Six Months 2002 versus 2001
- ---------------------------
Total Company: Sales for the six months ended June 30, 2002, were $3.76 billion,
an increase of 6% versus the same period last year. Unfavorable foreign exchange
reduced net sales by 1%. Excluding the effect of exchange, sales increased 7%,
attributable to 8% favorable volume/mix and unfavorable pricing of 1%.
Blades and Razors: Sales of blades and razors increased 11%, and profits
increased 22% compared with the first six months of last year. Without the
unfavorable effect of exchange, sales increased 13%. Sales growth in North
America, Europe and the AMEE markets was driven by the success of premium
shaving systems. In North America, blade and razor sales posted strong gains,
reflecting the excellent performance of the new Mach3Turbo. Sales growth was
also due to favorable comparisons with 2001, when sales were below consumption
due to our destocking activities. Profit grew at a higher pace than sales, due
to favorable product mix and flat overheads, which more than offset higher
advertising expenses.
Personal Care: Personal Care sales increased 3% over those of 2001. The
successes of the new PowerStripe deodorants and antiperspirants, new Gillette
Series shave preps and the Satin Care line were partially offset by lower sales
in Latin America. Profit from operations decreased 17%, due to increased
marketing related to new product launches associated with rebuilding the
franchise, which more than offset savings from cost-reduction initiatives.
PAGE 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Duracell: Sales of Duracell for the six months decreased 3% versus those of a
year ago. Excluding exchange, sales were 2% lower. Higher unit shipments were
offset by increased promotional spending, the adverse shift in mix from higher
margin Ultra to CopperTop, an adverse shift in pack size mix and retail channel
shift in sales towards mass merchandisers and club stores. The first-quarter
costs of withdrawing selected hearing aid batteries, along with higher
promotional spending and unfavorable mix shift, contributed to a decline in
profit from operations of 43%, as compared with the prior year.
Oral Care: Oral Care sales were 8% above those of 2001, but would have been 9%
above without the impact of exchange. Sales growth was largely driven by the
success of new product introductions. In addition, strong growth in Asia and
AMEE, particularly in Russia, contributed to the increase in sales. Profit from
operations was 9% above that of the prior year, primarily reflecting sales
performance.
Braun: Sales of Braun increased 4% over those of the prior year, with no impact
from exchange. Strong electric shaver performance drove sales growth. Profit
from operations declined 38%, as compared with the prior year, due to higher
advertising expenses and the impact of the Yen on margin in Japan.
Costs and Expenses
- ------------------
Second Quarter 2002 versus 2001
- -------------------------------
Gross profit for the three months ended June 30, 2002, was $1.22 million, an
increase of 7% versus 2001. Gross profit as a percentage of sales was 60.6%
compared with 59.8% in 2001. This improvement reflects cost savings from the
December 2000 restructuring and our Strategic Sourcing Initiative, and favorable
product mix in the blade and razor business, partially offset by higher
promotional spending and unfavorable product mix at Duracell.
Selling, general and administrative expenses increased by $32 million, or 4%,
versus the prior year. Advertising and sales promotion combined increased 6%
over the prior year, with advertising increasing 10% and sales promotion
decreasing slightly as a percentage of sales due to unmatched Venus launch
activity in 2001. Other selling, general and administrative expenses increased
by 3% over the prior year, mainly due to $31 million in incremental expenses
related to our Functional Excellence initiative. This initiative is focused on
reducing overhead costs, while upgrading capabilities, by improving processes
and eliminating duplication across functions. The total cost of this project is
estimated at $350-$400 million, of which approximately $80 million will be
expensed in 2002, with the balance to be expensed from 2003-2005. Annualized
savings are expected to be $300-$350 million by 2006. The exact flow of costs
and benefits is still being determined, but we estimate that costs will outweigh
benefits until sometime in 2004. The expenses generated by this program are
being, and will continue to be, treated as part of operating expenses.
Profit from operations was $449 million, an increase of 20% from $375 million in
2001. Excluding the gain on the sale of Vaniqa, profit from operations was $419
million, an increase of 12% versus the prior year.
Net interest expense decreased, due to significantly lower rates year-over-year
and our strong cash flow. Exchange and other charges were comparable with the
year before.
The effective tax rate was unchanged at 31%.
Net income of $293 million was 26% above the $232 million in the prior year.
Diluted net income per common share of $.28 was 27% above the $.22 of 2001.
Excluding the gain on the sale of Vaniqa, net income of $272 million was 18%
above the previous year, and diluted net income per common share of $.26
increased 18% over the prior year.
PAGE 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six Months Ended June 30, 2002 versus 2001
- ------------------------------------------
Gross profit for the six months ended June 30, 2002, was $2.26 billion, an
increase of 5% versus 2001. Gross profit as a percentage of sales was 60.3%,
compared with 60.6% in 2001, as manufacturing efficiencies and cost reductions
were more than offset by Duracell's higher year-over-year promotional spending
and unfavorable mix.
Selling, general and administrative expenses increased by $63 million, or 4%,
reflecting higher advertising and sales promotion expenses which, combined,
increased by 10%, with advertising up 13% and sales promotion up 6% versus last
year. Other selling, general and administrative expenses were 2% above those of
the prior year. These expenses included a charge of $31 million related to our
Functional Excellence initiative, which was primarily severance related.
Profit from operations was $777 million, up 12%, versus $694 million a year
earlier. Excluding the gain on the sale of Vaniqa, profit from operations was
$747 million, up 8% from 2001.
Net interest expense was lower, due to significantly lower rates and strong cash
flow. The net effect of exchange was favorable, versus unfavorable in the prior
year, due to first-quarter transactional gains in dollar-based assets held by
countries whose currencies deteriorated. In addition, the exchange losses in
2001 as a result of Turkish devaluation were unmatched in 2002.
The effective tax rate was unchanged at 31%.
Net income of $516 million was 25% above the $414 million in 2001. Diluted net
income per common share of $.49 was 26% above the $.39 of 2001. Excluding the
gain on the sale of Vaniqa, net income of $495 million was 20% above the prior
year, and diluted net income per common share of $.47 increased 21% over the
prior year.
PAGE 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
- -------------------
Cash provided by operations is the Company's primary source of funds to finance
operating needs, capital expenditures and dividend payments. During the six
months ended June 30, 2002, the Company generated $700 million in cash from
operations, compared with $672 million in the same period last year, a $28
million improvement, despite unmatched pension funding of $196 million in 2002.
Continued focus on working capital management and lower capital spending
resulted in a net debt reduction of $160 million for the six months. Net debt
(total debt net of associated swaps, less cash and cash equivalents) ended at
$3.16 billion at June 30, 2002, compared with the December 31, 2001, balance of
$3.32 billion.
The Company's 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's commercial paper program is supported by a $1.65 billion, 364-day
revolving bank credit agreement expiring on October 15, 2002, and other sources
of liquidity. The revolving bank credit agreement includes various covenants,
including a covenant that requires an earnings-to-interest-expense ratio above
6.5X at each quarter end for the four quarters then ended. At June 30, 2002, the
interest coverage ratio was 15.3X. The Company believes it has sufficient
alternative sources of higher cost funding available to replace its commercial
paper program, if necessary. At June 30, 2002, there was $1.76 billion
outstanding under the Company's commercial paper program, compared with $1.97
billion at the end of 2001.
On March 6, 2002, the Company issued $350 million U.S. dollar-denominated 4.0%
notes, due June 2005. The proceeds from the debt issuance were used to reduce
commercial paper borrowings. The Company's $1.5 billion shelf registration
statement, which was filed with the Securities and Exchange Commission in the
second quarter of 2002, was declared effective on July 10, 2002. The shelf
registration may be used to issue debt securities from time to time, depending
on prevailing market conditions. It is currently anticipated that the proceeds
from the sale of any debt securities under the shelf registration statement will
be used to repay commercial paper borrowings and replace other maturing debt,
although the proceeds may also be used for other corporate purposes.
PAGE 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Restructuring and Asset Impairments
- -----------------------------------
On December 18, 2000, the Company announced a restructuring program and the
impairment of certain intangible assets. This resulted in a fourth-quarter
charge to operations of $572 million ($430 million after taxes, or $.41 in net
income per common share, fully diluted). The worldwide restructuring of
operations improved the Company's operating efficiency, streamlined the supply
chain and further decreased costs. The program budgeted a net reduction of
approximately 2,700 employees across all business functions, operating units and
geographies. The charge for impaired intangible assets was $212 million to write
down $157 million of acquired goodwill relating to the Thermoscan personal
diagnostic appliance brand in the Braun segment and $55 million of acquired
goodwill and identifiable intangible assets for certain national battery brands
in the Duracell segment.
The charge for the restructuring program was $360 million, and payments under
the program continued throughout the first six months of 2002.
Pretax cash outlays for the restructuring program were estimated at
approximately $240 million. Cash severance payments will continue in 2002, due
to the severance payment deferral options available to terminated employees. At
June 30, 2002, remaining cash outlays were $35 million, which will occur
primarily this year. Pretax savings from the program were $31 million in the
second quarter of 2002 and $56 million for the six months ended June 30, 2002.
Savings will be approximately $135 million for the year.
During the fourth quarter of 2001, the Company recorded a charge of $63 million
associated with planned new actions; 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 $2 million in the second quarter of 2002 and $3 million for the six
months ended June 30, 2002. Savings will be approximately $6 million for the
year 2002.
PAGE 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject, from time to time, to legal proceedings and claims
arising out of its business that cover a wide range of matters, including
antitrust and trade regulation, advertising, product liability, contracts,
environmental issues, patent and trademark matters and taxes. Management, after
review and consultation with counsel, considers that any liability from all of
these legal proceedings and claims would not materially affect the consolidated
financial position, results of operations or liquidity of the Company.
Item 4. Vote of Security Holders
At its Annual Meeting on May 16, 2002, the stockholders of The Gillette Company
took the following actions:
1. Elected the following four directors for terms to expire at the 2005 Annual
Meeting of Stockholders, with votes as indicated opposite each director's
name:
For Total % Withheld Total %
----------- ------- ---------- -------
Warren E. Buffett 910,486,722 98.142 17,234,090 1.858
Michael B. Gifford 906,992,507 97.766 20,728,305 2.234
Ray J. Groves 911,631,621 98.266 16,089,191 1.734
Marjorie M. Yang 907,174,332 97.785 20,546,480 2.215
The directors whose term of office as a director continued after the
meeting are Edward F. DeGraan, Wilbur H. Gantz, Dennis F. Hightower,
Herbert H. Jacobi, Nancy J. Karch, James M. Kilts, Jorge Paulo Lemann and
Richard R. Pivirotto.
2. Approved the stockholder proposal to declassify the Board of Directors. The
vote was 427,729,484 for the proposal, 340,089,081 against with 9,107,796
abstentions, and 150,794,451 broker nonvotes.
Item 5. Other Information
Cautionary Statement
- --------------------
Certain statements that Gillette may make from time to time, including
statements contained in this report, constitute "forward-looking statements"
under the federal securities laws. Forward-looking statements may be identified
by words such as "plans," "expects," "believes," "anticipates," "estimates,"
"projects," "will" and other words of similar meaning used in conjunction with,
among other things, discussions of future operations, acquisitions and
divestitures, financial performance, Gillette's strategy for growth, product
development and new product launches, market position and expenditures.
PAGE 24
PART II. OTHER INFORMATION
Forward-looking statements are based on current expectations of future events,
but actual results could vary materially from Gillette's expectations and
projections. Investors are cautioned not to place undue reliance on any
forward-looking statements. Gillette assumes no obligation to update any
forward-looking statements. Gillette cautions that historical results should not
be relied upon as indications of future performance.
Factors that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, Gillette
include the following, some of which are described in greater detail below:
- - the pattern of Gillette's sales, including variations in sales volume within
periods;
- - consumer demands and preferences, including the acceptance by Gillette's
customers and consumers of new products and line extensions;
- - the mix of products sold;
- - Gillette's ability to control its internal costs and the cost of materials
and services;
- - competitive factors, including the prices, promotional incentives and trade
terms of Gillette's products and the response of its customers and competitors
to changes in these factors;
- - technological advances by Gillette and/or its competitors;
- - new patents granted to Gillette and/or its competitors;
- - changes in exchange rates in one or more of Gillette's geographic markets;
- - changes in accounting policies;
- - acquisition and divestiture activities; or
- - the impact of general economic conditions in the United States and in other
countries in which Gillette currently does business.
Competitive Environment
- -----------------------
Gillette experiences intense competition for sales of its products in most
markets. Gillette's products compete with widely advertised, well-known, branded
products, as well as private label products, which typically are sold at lower
prices. In most of its markets, Gillette has major competitors, some of which
are larger and more diversified than Gillette. Competitive activity within
Gillette's markets, including advertising, pricing, promotion and new product
introductions, and new entrants into these markets, can affect Gillette's
results in any given period.
Changes in Technology and New Product Introductions
- ---------------------------------------------------
In most product categories in which Gillette competes, there are continuous
technological changes and frequent introductions of new products and line
extensions. Gillette's ability to successfully introduce new products and/or
extend lines of existing products will depend on, among other things, Gillette's
ability to identify changing consumer tastes and needs, develop new technology,
differentiate its products and gain market acceptance of new products. Gillette
cannot be certain that it will successfully achieve these goals.
With respect specifically to primary alkaline batteries, category growth could
be adversely affected by the following additional factors:
- - technological or design changes in portable electronic and other devices that
use batteries as a power source;
- - continued improvement in the service life of primary batteries;
- - improvements in rechargeable battery technology; and
- - the development of new battery technologies.
PAGE 25
PART II. OTHER INFORMATION
Intellectual Property
- ---------------------
Gillette relies upon patent, copyright, trademark and trade secret laws in the
United States and in other countries to establish and maintain its proprietary
rights in technology, products and Gillette's brands. Gillette's intellectual
property rights, however, could be challenged, invalidated or circumvented.
Gillette does not believe that its products infringe the intellectual property
rights of others, but such claims, if they are established, can result in
material liabilities or loss of business.
Cost-Savings Strategy
- ---------------------
Gillette has implemented a number of programs designed to reduce costs. Such
programs will require, among other things, the consolidation and integration of
facilities, functions, systems and procedures, all of which present significant
management challenges. There can be no assurance that such actions will be
accomplished as rapidly as anticipated or that the full extent of expected cost
reductions will be achieved.
Sales and Operations Outside of the United States
- -------------------------------------------------
Sales outside of the United States represent a substantial portion of Gillette's
business. In addition, Gillette has a number of manufacturing facilities and
suppliers located outside of the United States. Accordingly, the following
factors could adversely affect operating results in any reporting period:
- - changes in political or economic conditions;
- - trade protection measures;
- - import or export licensing requirements;
- - the overlap of different tax structures;
- - unexpected changes in regulatory requirements or tax laws; or
- - longer payment cycles in certain countries.
Gillette is also exposed to foreign currency exchange rate risk to its sales,
profits, and assets and liabilities denominated in currencies other than the
U.S. dollar. Although Gillette uses instruments to hedge certain foreign
currency risks (through foreign currency forward, swap and option contracts and
non-U.S. dollar denominated financings) and is implicitly hedged through its
foreign manufacturing operations, there can be no assurance that Gillette will
be fully protected against foreign currency fluctuations.
Retail Environment
- ------------------
With the growing trend towards retail trade consolidation, especially in
developed markets such as the United States and Europe, Gillette is increasingly
dependent upon key retailers whose bargaining strength is growing. Accordingly,
Gillette faces greater pressure from retail trade customers to provide more
favorable trade terms.
Gillette can be negatively affected by changes in the policies of its retail
trade customers, such as inventory destocking, limitations on access to shelf
space and other conditions. Many of Gillette's customers, particularly
Gillette's high-volume retail trade customers, have engaged in accelerated
efforts to reduce inventory levels and shrinkage and change inventory delivery
systems. While Gillette expects the level of trade inventory of its products to
decline over time, the speed and magnitude of such reductions, and/or the
inability of Gillette to develop satisfactory inventory delivery systems, could
adversely affect operating results in any reporting period.
PAGE 26
PART II. OTHER INFORMATION
Item 6(a) Exhibits
Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges, filed herewith.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Item 6(b) Reports on Form 8-K
None.
PAGE 27
SIGNATURE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE GILLETTE COMPANY
(Registrant)
/s/ Claudio E. Ruben
Claudio E. Ruben
Vice President, Controller
and Principal Accounting Officer
August 5, 2002