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UNITED STATES
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 Quarterly Period ended March 31, 2003 Commission File Number 1-922
THE GILLETTE COMPANY
(Exact name of registrant as specified in its charter)
Incorporated in Delaware 04-1366970
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Prudential Tower Building, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 421-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class
Common Stock, $1.00 par value
Shares Outstanding April 30, 2003 . . . . . . . . . . . . . . . 1,021,167,877
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
March 31
------------------
2003 2002
---- ----
Net Sales .......................................... $ 1,971 $ 1,732
Cost of Sales ...................................... 778 694
------- -------
Gross Profit ..................................... 1,193 1,038
Selling, General and Administrative Expenses ....... 813 710
------- -------
Profit from Operations ........................... 380 328
Nonoperating Charges (Income):
Interest income .................................. (3) (5)
Interest expense ................................. 14 20
Exchange ......................................... 2 (6)
Other charges - net .............................. (9) (4)
------- -------
4 5
------- -------
Income before Income Taxes ......................... 376 323
Income Taxes ....................................... 113 100
------- -------
Net Income ....................................... $ 263 $ 223
======= =======
Net Income per Common Share:
Basic ............................................ $ .25 $ .21
======= =======
Assuming Full Dilution ........................... $ .25 $ .21
======= =======
Dividends per Common Share:
Declared ......................................... $ - $ -
Paid ............................................. $ .1625 $ .1625
Weighted average number of common shares outstanding
Basic ............................................ 1,035 1,056
Assuming full dilution ........................... 1,037 1,060
See Accompanying Notes to Consolidated Financial Statements.
PAGE 2
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Millions)
(Unaudited)
March 31, December 31, March 31,
2003 2002 2002
------------ ------------ -----------
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents .............................. $ 510 $ 801 $ 865
Trade receivables, less allowances, March 2003, $75;
December 2002, $73; March 2002, $62 .................. 1,036 1,202 1,201
Other receivables ...................................... 291 311 284
Inventories
Raw materials and supplies .......................... 104 115 127
Work in process ..................................... 208 191 259
Finished goods ...................................... 754 622 757
------- ------- -------
Total Inventories ................................. 1,066 928 1,143
------- ------- -------
Deferred income taxes .................................. 356 380 562
Other current assets ................................... 231 175 193
------- ------- -------
Total Current Assets .............................. 3,490 3,797 4,248
------- ------- -------
Property, Plant and Equipment, at cost ................... 6,458 6,429 6,031
Less accumulated depreciation ............................ (2,985) (2,864) (2,553)
------- ------- -------
Net Property, Plant and Equipment ................. 3,473 3,565 3,478
------- ------- -------
Goodwill ................................................. 961 962 931
Intangible Assets, less accumulated amortization ......... 395 400 413
Other Assets ............................................. 1,128 1,139 758
------- ------- -------
$ 9,447 $ 9,863 $ 9,828
======= ======= =======
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)
(Unaudited)
March 31, December 31, March 31,
2003 2002 2002
------------ ------------ ------------
(Unaudited) (Unaudited)
Current Liabilities:
Loans payable .................................... $ 824 $ 673 $ 1,978
Current portion of long-term debt ................ 153 527 546
Accounts payable ................................. 523 581 465
Accrued liabilities .............................. 1,454 1,303 1,157
Dividends payable ................................ - 170 -
Income taxes ..................................... 315 234 356
-------- -------- --------
Total Current Liabilities ..................... 3,269 3,488 4,502
-------- -------- --------
Long-Term Debt ..................................... 2,753 2,457 1,649
Deferred Income Taxes .............................. 595 692 541
Other Long-Term Liabilities ........................ 863 920 731
Minority Interest .................................. 48 46 39
Stockholders' Equity:
Common stock, par value $1.00 per share:
Authorized 2,320 shares
Issued: March 2003, 1,371 shares;
Dec. 2002, 1,370 shares;
March 2002, 1,369 shares ............... 1,371 1,370 1,369
Additional paid-in capital ....................... 1,206 1,197 1,136
Earnings reinvested in the business .............. 6,871 6,608 6,300
Accumulated other comprehensive loss ............. (1,430) (1,523) (1,474)
Treasury stock, at cost: March 2003, 350 shares;
Dec. 2002, 326 shares; and March 2002, 312 shares (6,099) (5,392) (4,965)
-------- -------- --------
Total Stockholders' Equity ............... 1,919 2,260 2,366
-------- -------- --------
$ 9,447 $ 9,863 $ 9,828
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
(Unaudited)
Three Months Ended
March 31
------------------
2003 2002
---- ----
Operating Activities
Net income ..................................... $ 263 $ 223
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 138 120
Deferred income taxes ........................ 6 (13)
Other ........................................ 10 (3)
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures:
Accounts receivable ........................ 200 283
Inventories ................................ (129) (145)
Accounts payable and accrued liabilities ... 81 (21)
Other working capital items ................ 32 54
Other noncurrent assets and liabilities .... (66) (238)
----- -----
Net cash provided by operating activities 535 260
----- -----
Investing Activities
Additions to property, plant and equipment ..... (48) (78)
Disposals of property, plant and equipment ..... 11 11
Other .......................................... - (1)
----- -----
Net cash used in investing activities .... (37) (68)
----- -----
Financing Activities
Purchase of treasury stock ..................... (706) -
Proceeds from exercise of stock option and
purchase plans ............................ 10 8
Proceeds from long-term debt ................... 301 350
Repayment of long-term debt .................... (382) (197)
Increase/(Decrease) in loans payable ........... 152 (256)
Dividends paid ................................. (170) (172)
Settlements of debt-related derivative contracts 5 10
----- -----
Net cash used in financing activities .... (790) (257)
----- -----
Effect of Exchange Rate Changes on Cash ............ 1 (1)
Net Cash Used in Discontinued Operations ........... - (16)
----- -----
Decrease in Cash and Cash Equivalents .............. (291) (82)
Cash and Cash Equivalents at Beginning of Period ... 801 947
----- -----
Cash and Cash Equivalents at End of Period ......... $ 510 $ 865
===== =====
Supplemental disclosure of cash paid for:
Interest ....................................... $ 20 $ 22
Income taxes ................................... $ 28 $ 23
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
March 31
------------------
2003 2002
---- ----
Net Income, as reported $ 263 $ 223
Other Comprehensive Income (Loss),
net of tax:
Foreign Currency Translation 91 (40)
Cash Flow Hedges 2 3
----- -----
Comprehensive Income $ 356 $ 186
===== =====
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, 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)
------ ------ ------ -------
Balance December 31, 2002 $(1,332) $(186) $ (5) $(1,523)
Change in period 2 - 3 5
Income tax benefit (expense) 89 - (1) 88
------ ------ ------ -------
Balance March 31, 2003 $ (1,241) $ (186) $ (3) $(1,430)
====== ====== ====== =======
The change in accumulated foreign currency translation adjustment for the
quarter ended March 31, 2003, was a $91 million gain. This gain is primarily the
result of the recognition of deferred taxes on the foreign currency translation
adjustment for those non-U.S. subsidiaries that are included in the Company's
U.S. tax return. Loss for the quarter ended March 31, 2002, was $40 million,
with Argentina and the United Kingdom accounting for most of the loss.
See Accompanying Notes to Consolidated Financial Statements.
PAGE 6
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting Comments
- -------------------
Reference is made to the registrant's 2002 Annual Report to Shareholders, which
contains, at pages 32 through 54, 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, 2002.
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 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."
The Company accounts for its stock option 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 under Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," to record expense for stock option compensation.
Three Months
Ended March 31,
2003 2002
---- ----
(Millions, except per share amounts)
- ------------------------------------
Net income, as reported $ 263 $ 223
Less: Compensation expense for option
awards determined by the fair-
value-based method, net of
related tax effects (26) (27)
------ ------
Pro forma net income $ 237 $ 196
====== ======
Net income per common share
Basic
As reported $ .25 $ .21
Pro forma .23 .19
Assuming full dilution
As reported $ .25 $ .21
Pro forma .23 .19
PAGE 7
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting Pronouncements
- -------------------------
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 did not have any impact
on the Company's consolidated financial statements.
In June 2002, the Financial Accounting Standards Board (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
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, the Company records such costs at fair value when incurred. Adoption
of SFAS 146 did not have any impact on the Company's financial statements. The
Company continues 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."
PAGE 8
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In December 2002, the 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 APB No. 25 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 were effective for financial statements ending after December 15,
2002. There were no disclosures required of the Company in these consolidated
financial statements for the quarter ended March 31, 2003. The adoption of this
interpretation did not have any impact on the Company's 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
adoption of this interpretation did not have any impact on the Company's
financial statements, as the Company does not have any VIE's.
PAGE 9
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill and Intangible Assets
- ------------------------------
Total goodwill by segment follows.
March 31, December 31, March 31,
Net Carrying Amount 2003 2002 2002
(Millions) ------------ ------------ ------------
Blades & Razors $ 140 $ 140 $ 138
Duracell 571 571 548
Oral Care 172 173 172
Braun 78 78 73
Personal Care - - -
------ ----- ------
Total $ 961 $ 962 $ 931
====== ===== ======
The change between the March 31, 2002, and December 31, 2002, balances is mainly
due to the impact of foreign currency translation.
The detail of intangible assets follows:
Weighted
Average March 31, 2003 December 31, 2002 March 31, 2002
Amortization ---------------------- ---------------------- ----------------------
Period Carrying Accumulated Carrying Accumulated Carrying Accumulated
(Millions) (Years) Amount Amortization Amount Amortization Amount Amortization
------------ -------- ------------ -------- ------------ -------- ------------
Amortized Intangible Assets
Patents 6 $ 101 $ 57 $ 101 $ 53 $ 103 $ 42
Trademarks 6 13 5 13 4 11 1
Software 5 13 10 12 9 16 8
Endorsements - 61 61 61 61 61 61
Other 23 11 3 11 3 12 3
---- ---- ----- ----- ----- -----
Total 7 $ 199 $ 136 $ 198 $ 130 $ 203 $ 115
==== ==== ===== ===== ===== =====
Unamortized Intangible Assets
Trademarks $ 317 $ 317 $ 313
Pension 15 15 12
---- ---- ----- ----- ----- -----
Total $ 531 $ 136 $ 530 $ 130 $ 528 $ 115
==== ==== ===== ===== ===== =====
---- ----- -----
Intangible Assets, net $ 395 $ 400 $ 413
==== ===== =====
Aggregate Amortization Expense:
For the Three Months ended
March 31, 2003 $ 6
March 31, 2002 $ 5
Estimated Amortization Expense:
For the Years ended
December 31, 2003 $ 20
2004 $ 19
2005 $ 7
2006 $ 4
2007 $ 3
PAGE 10
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Advertising
- -----------
The advertising expense detailed below is included in selling, general and
administrative expenses.
Three Months Ended
(Millions) March 31
------------------
2003 2002
---- ----
Net Sales $ 1,971 $ 1,732
Advertising 167 136
% Net Sales 8.5% 7.9%
PAGE 11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Share Repurchase Program
- ------------------------
The Company has a share repurchase program 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 the three months ended March 31, 2003, the
Company repurchased 23.5 million shares for $706 million.
PAGE 12
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Information by Business Segment
- -----------------------------------------
Net sales, profit (loss) from operations 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
March 31
----------------------
(Millions) 2003 2002
------ ------
Blades & Razors $ 893 $ 770
Duracell 384 332
Oral Care 295 265
Braun 214 187
Personal Care 185 178
------ ------
Total $1,971 $1,732
====== ======
Profit/(Loss) from Operations
Three Months Ended March 31
----------------------------
(Millions) 2003 2002
------ ------
Blades & Razors $ 331 $ 288
Duracell 39 (1)
Oral Care 49 53
Braun (6) 3
Personal Care - 11
------ ------
Subtotal Reportable Segments 413 354
All Other (33) (26)
------ ------
Total $ 380 $ 328
====== ======
PAGE 13
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Identifiable Assets
-------------------------------
March 31, Dec. 31, March 31,
(Millions) 2003 2002 2002
-------- ------- --------
Blades & Razors $ 3,188 $ 3,170 $ 3,301
Duracell 2,546 2,741 2,738
Oral Care 1,154 1,094 1,015
Braun 1,074 1,065 945
Personal Care 516 520 546
------- ------- -------
Subtotal Reportable Segments 8,478 8,590 8,545
All Other 969 1,273 1,283
------- ------- -------
Total $ 9,447 $ 9,863 $ 9,828
======= ======= =======
PAGE 14
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Computation of net income per common share
(Millions, except per share amounts)
- ------------------------------------------
Three Months Ended
March 31
-------------------
2003 2002
---- ----
Net Income ............................. $ 263 $ 223
====== ======
Common shares, basic ................... 1,035 1,056
Effect of dilutive securities:
Stock options ...................... 2 4
------ ------
Common shares, assuming full dilution 1,037 1,060
====== ======
Net Income per Common Share:
Basic ................................ $ .25 $ .21
====== ======
Assuming full dilution ........ $ .25 $ .21
====== ======
As of March 31, 2003 and 2002, 55.6 million and 32.6 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 accretive.
Subsequent Event
- ----------------
On April 2, 2003, the Company issued $83 million in floating rate notes, due
April 2043. The notes are redeemable at the option of the holder at various
prices on a yearly basis from April 2004 to April 2014 and each third
anniversary thereafter to maturity. The notes are also redeemable at the
Company's option at various prices from April 2033 to maturity.
PAGE 15
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.
First Quarter 2003 versus 2002
- ------------------------------
Total Company: Sales for the quarter ended March 31, 2003, were $1.97 billion,
an increase of 14% versus the same quarter of the prior year. Favorable foreign
exchange in Europe and Asia, partially offset by unfavorable foreign exchange in
Latin America, positively impacted net sales by 5%. Excluding the favorable
effect of exchange, sales increased 9%, mainly due to new products and
volume/mix.
Blades and Razors: Sales of blades and razors increased 16% compared with the
first quarter of last year. Without the favorable impact of exchange, sales grew
12%. The sales growth reflected the strong performance of the Mach3 and Venus
franchises; in particular the success of Mach3Turbo through its European launch
and its continued expansion in the rapidly growing Russian market. Sales also
compared favorably to first-quarter 2002, a period in which the Company shipped
below consumption largely due to pre-price increase purchases in December 2001,
which were not repeated in December 2002. Profit from operations increased 15%
versus the same quarter of the prior year. The favorable increase in profit was
due to higher sales and a positive, continuing shift in product mix to premium
systems, partially offset by increased advertising and unmatched Functional
Excellence expenses. Functional Excellence expenses relate to the Company's
multi-year program to enhance capabilities and reduce costs. Reference page 18
for additional information concerning Functional Excellence.
Duracell: Sales of Duracell increased 16% versus the first quarter of 2002.
Excluding the favorable effect of exchange, sales were 11% above those of a year
ago. The major sales growth contributors were strong consumer demand due to
homeland security concerns, incremental military sales and favorable comparisons
to 2002 which included the dampening effect of a product recall of certain
hearing aid batteries. Moving forward the Company anticipates that this consumer
demand for batteries will moderate during the balance of the year. These
increases were partially offset by lower pricing associated with Duracell's
price deal realignment program in the U.S. and the exit from the Company's
zinc-carbon battery businesses in South Africa and India. Profit from operations
was $39 million, compared to a loss of $1 million in the same prior-year
quarter, reflecting strong volume, favorable exchange and manufacturing
efficiencies, as well as the absence of costs incurred in the first quarter of
2002 for the recall of certain hearing aid batteries. Profit growth was
partially offset by unmatched Functional Excellence expense.
Oral Care: Oral Care sales in the quarter were 11% above those of 2002, or 6%
higher without the impact of favorable exchange. The sales increase was
primarily attributable to the strong sell-in of the new CrossAction Power
battery toothbrush and the CrossAction Vitalizer manual toothbrush in North
America and the continued growth of the manual toothbrush business in North
America and Asia-Pacific, partially offset by more aggressive promotional
activity. Profit from operations decreased 7% from the prior year. The decline
in profit was primarily due to higher advertising expenses in support of new
products, higher European-based production costs due to the strengthening of the
Euro, unmatched Functional Excellence expenses and higher warranty accruals due
in part to extended warranties on electronic appliances sold in Europe.
PAGE 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Braun: Sales of Braun in the first quarter were 15% higher than in the prior
year. Excluding exchange, sales were 3% higher. Strong growth in men's electric
shavers in North America and women's hair epilators in Asia-Pacific, Africa and
the Middle East markets drove the sales increase. This growth was offset
partially by decreased consumer demand in Europe and by unfavorable comparisons
to the first quarter of 2002, a period during which Braun sales were favorably
impacted by the bankruptcy of a key household appliance competitor. Loss from
operations was $6 million, versus a profit of $3 million for the same quarter in
the prior year. Key contributors to the operating loss for the current quarter
were higher European-based manufacturing costs due to the strengthening of the
Euro, unmatched Functional Excellence expenses, and higher warranty accruals due
in part to extended warranties on electronic appliances sold in Europe.
Personal Care: Personal Care sales in the quarter increased 4% over those of a
year ago. Without the favorable effect of exchange, sales increased 1%. Sales
growth from a strong U.S. sell-in of new PowerCaps antiperspirants and
deodorants was offset by Latin American currency devaluations and unfavorable
comparisons to the first-quarter 2002, a period in which reformulated Gillette
Series shave preps were launched. Profit from operations was break-even,
resulting from cost-savings initiatives offset by increased marketing expenses
in support of new products and by unmatched Functional Excellence costs.
Costs and Expenses, First Quarter 2003 Versus First Quarter 2002
- ----------------------------------------------------------------
Gross profit for the quarter was $1.19 billion, an increase of 15% over the same
prior-year quarter. Gross profit as a percentage of sales was 60.5%, compared
with 59.9% in the prior year. Gross margin improvement was attributable to
favorable product mix, lower Duracell product costs and savings from the
Company's Strategic Sourcing Initiative. These increases were offset by higher
European-based manufacturing costs and incremental warranty expenses in the
Braun and Oral Care segments.
Selling, general and administrative expenses increased by $103 million, or 15%,
reflecting increases in advertising, sales promotion and administrative
expenses. Advertising and sales promotion combined grew 17% from the prior year.
Advertising as a percentage of sales increased to 8.5% from 7.9% in 2002.
Increased investment in support of new and established brands and several new
advertising campaigns contributed to the advertising increase. Other operating
expenses increased 14%, primarily due to incremental Functional Excellence
expenditures of $44 million, higher European-based costs resulting from exchange
and higher pension expenses. Excluding the impact of Functional Excellence,
other operating expenses as a percentage of sales decreased to 26.7%, versus 29%
in the first quarter of 2002.
Profit from operations was $380 million, up 16%, versus $328 million a year ago,
and increased as a percentage of sales to 19.3%, versus 18.9% in the prior year.
The increase in profit was driven by strong sales growth, an ongoing favorable
shift in product mix to the Company's premium shaving systems and savings from
the Strategic Sourcing Initiative, but partially offset by higher advertising
investment and the costs associated with the Functional Excellence Initiative.
Net interest expense was lower, reflecting lower rates year over year and a
decrease in average net debt. The net effect of exchange was unfavorable, versus
favorable in the prior year, due primarily to movements in the Argentinean peso.
The effective tax rate was 31.0% for 2002 and 30.0% for the first-quarter of
2003. The decrease is primarily due to favorable changes in the mix of earnings
taxed at rates lower than the U.S. statutory tax rate.
Net income of $263 million was 18% higher than the $223 million in 2002. Net
income per common share of $.25, basic and fully diluted, was 19% above the
$.21, basic and fully diluted, of 2002. The percentage increase in net income
per common share was greater than the percentage increase in net income,
reflecting the Company's share repurchase activities.
PAGE 17
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, stock repurchases and dividend payments.
Free cash flow is defined as cash flow remaining from operations after capital
investments. The Company believes that free cash flow is an important measure of
its liquidity as well as its ability to fund future growth and to provide a
return to shareholders. Free cash flow for the three months ended March 31,
2003, was $498 million compared with $193 million in the same period last year.
A reconciliation of net cash provided by operating activities to free cash flow
follows.
Three months ended
March 31
------------------
(Millions) 2003 2002
- ---------- ---- ----
Net cash provided by operating activities $535 $260
Less: additions to property, plant and equipment (48) (78)
Plus: disposals of property, plant and equipment 11 11
---- ----
Free cash flow $498 $193
Net cash provided by operating activities was $535 million during the three
months ended March 31, 2003, as compared with $260 million during the same
period in 2002. The increase in net cash provided by operating activities in
2003 is due to lower pension funding ($3 million in the first three months of
2003 compared to $196 million in the same period in 2002), continued working
capital improvements, and higher profits.
Reductions in capital spending during the first quarter of 2003 were due
primarily to timing. Capital spending continues to be focused on new products
and cost-reduction projects.
The Company spent $706 million to repurchase 23.5 million shares during the
three months ended March 31, 2003. Free cash flow and cash on hand paid for
nearly all of the $876 million in share repurchases and dividends during the
quarter. Net debt (total debt net of associated swaps, less cash and cash
equivalents) increased by $375 million to $3.1 billion at March 31, 2003, from
$2.7 billion at December 31, 2002, primarily due to the use of cash on hand for
the share repurchases. The Company believes that net debt is an important
indicator of its consolidated debt position.
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 March 31, 2003, there was
$729 million outstanding under the Company's commercial paper program, an
increase of $180 million from $549 million at December 31, 2002. The Company has
a 364-day revolving bank credit facility in the amount of $1.1 billion that
expires 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.
During 2002, two shelf registration statements were filed allowing the Company
to offer to the public 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 registration statements 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 the repurchase
of the Company's stock.
PAGE 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the three months ended March 31, 2003, $303 million was issued in public
offerings under these shelf registration statements, consisting of $300 million
2.875% notes, due March 2008, and $3 million issued under the Gillette medium
term note program. All proceeds from these issuances were used to reduce
commercial paper borrowings.At March 31, 2003, a total of $1.67 billion remained
available under these shelf registrations
On April 2, 2003, subsequent to the quarter-end close, the Company publicly
issued an additional $83 million in floating rate notes, due April 2043 under
its shelf registration statements. The notes are redeemable at the option of the
holder at various prices on a yearly basis from April 2004 to April 2014 and
each third anniversary thereafter to maturity. The notes are also redeemable at
the Company's option at various prices from April 2033 to maturity. The proceeds
from this debt issuance were used to reduce commercial paper borrowings.
With its strong brands, leading market positions, strong financial condition and
substantial 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 no material contingent commitments. The Company has no material
"off balance sheet" arrangements and no non-consolidated Variable Interest
Entities.
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. In the three months
ended March 31, 2003, additional expenses of $44 million were recorded.
Additional costs will be recorded through 2005 as programs are 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.
PAGE 19
DISCLOSURE CONTROLS AND PROCEDURES
Item 4.
As of a date within 90 days prior to the filing of this report (the "Evaluation
Date"), the Chief Executive Officer and Chief Financial Officer evaluated the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14), and they have concluded that the Company's disclosure
controls and procedures are effective to bring to their attention material
information relating to the Company for the purposes of this report. In
addition, they have concluded that there have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect those internal controls, including any corrective actions with regard to
significant differences and material weaknesses, subsequent to the Evaluation
Date.
PAGE 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject, from time to time, to legal proceedings and claims arising out
of our business, which 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 our consolidated financial
position, results of operations or liquidity.
Item 5. Other Information
Cautionary Statement
- --------------------
Certain statements that we 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, our strategy for growth, product development and new
product launches, market position and expenditures.
Forward-looking statements are based on current expectations of future events,
but actual results could vary materially from our expectations and projections.
Investors are cautioned not to place undue reliance on any forward-looking
statements. We assume no obligation to update any forward-looking statements. We
caution 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 us, or on our behalf, include
the following, some of which are described in greater detail below:
- - the pattern of our sales, including variations in sales volume within periods;
- - consumer demands and preferences, including the acceptance by our customers
and consumers of new products and line extensions;
- - the mix of products sold;
- - our ability to control our internal costs and the cost of raw materials;
- - competitive factors, including the prices, promotional incentives and trade
terms of our products and our response, as well as those of our customers and
competitors, to changes in these terms;
- - business combinations and divestitures of our competitors and customers;
- - our technological advances and/or those of our competitors;
- - new patents granted to us or our competitors;
- - changes in exchange rates in one or more of our geographic markets;
- - changes in laws and regulations, including trade regulations and tax laws,
governmental actions affecting the manufacturing and sale of our products,
unstable governments and legal systems, and nationalization of industries;
- - changes in accounting policies;
- - acquisition, divestiture or other collaborative activities; or
- - the impact of general political and economic conditions or hostilities in the
United States or in other parts of the world.
PAGE 21
PART II. OTHER INFORMATION
Competitive Environment
- -----------------------
We experience intense competition for sales of our products in most markets. Our
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
our markets, we have major competitors, some of which are larger and more
diversified than we are. Aggressive competition within our markets to preserve,
gain or regain market share, can affect our results in any given period.
Changes in Technology and New Product Introductions
- ---------------------------------------------------
In most product categories in which we compete, there are continuous
technological changes and frequent introductions of new products and line
extensions. Our ability to successfully introduce new products and/or extend
lines of established products will depend on, among other things, our ability to
identify changing consumer tastes and needs, develop new technologies,
differentiate our products and gain market acceptance of new products. We cannot
be certain that we 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; or
- - the development of new battery technologies.
Intellectual Property
- ---------------------
We rely upon patent, copyright, trademark and trade secret laws in the United
States and in other countries to establish and maintain our proprietary rights
in technology, products and our brands. Our intellectual property rights,
however, could be challenged, invalidated or circumvented. We do not believe
that our 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
- ---------------------
We have implemented and approved a number of programs designed to reduce costs.
Such programs will require, among other things, the consolidation and
integration of facilities, functions, systems and procedures, all of which
present significant management challenges. There can be no assurance that such
actions will be accomplished as rapidly as anticipated or that the full extent
of expected cost reductions will be achieved.
PAGE 22
PART II. OTHER INFORMATION
Sales and Operations Outside of the United States
- -------------------------------------------------
Sales outside of the United States represent a substantial portion of our
business. In addition, we have 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;
- - changes in the mix of earnings taxed at varying rates;
- - unexpected changes in regulatory requirements or tax laws; or
- - longer payment cycles in certain countries.
We are also exposed to foreign currency exchange rate risks with respect to our
sales, profits, and assets and liabilities denominated in currencies other than
the U.S. dollar. Although we use instruments to hedge certain foreign currency
risks (through foreign currency forward, swap and option contracts and non-U.S.
dollar denominated financings) and we are partially hedged through our foreign
manufacturing operations, there can be no assurance that we 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, we are increasingly
dependent upon key retailers whose bargaining strength is growing. Accordingly,
we face greater pressure from retail trade customers to provide more favorable
trade terms.
We can be negatively affected by changes in the policies of our retail trade
customers, such as inventory destocking, limitations on access to shelf space
and other conditions. Many of our customers, particularly our high-volume retail
trade customers, have engaged in accelerated efforts to reduce inventory levels
and shrinkage and to change inventory delivery systems. While we expect the
level of trade inventory of our products to decline over time, the speed and
magnitude of such reductions, and/or our inability to develop satisfactory
inventory delivery systems, could adversely affect operating results in any
reporting period.
Effect of Military Hostilities and Political Activity
- ------------------------------------------------------
Recent military hostilities and the threat of future hostilities, as well as
attendant political activity, have created an atmosphere of economic uncertainty
throughout the world. A disruption in our supply chain, an increase in import or
export costs and/or other macroeconomic effects resulting from military or
political events could adversely affect operating results in any reporting
period.
PAGE 23
PART II. OTHER INFORMATION
Item 6(a) Exhibits
Exhibit 3.1 The Bylaws of The Gillette Company, as amended March 13, 2003,
filed herewith.
Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges, filed herewith.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Item 6(b) Reports on Form 8-K
(a) The Company filed, on January 30, 2003, a current report on Form 8-K
containing one exhibit: a Press Release announcing the Company's financial
results for the full-year and for the fourth-quarter of 2002.
(b) The Company filed, on March 7, 2003, a current report on Form 8-K containing
two exhibits: the Terms Agreement and the Statement of Eligibility of Trustee on
Form T-1 related to the public offering of the Company's 2.875% Senior Note due
2008.
(c) The Company filed, on March 11, 2003, a current report on Form 8-K
containing three exhibits: the Fifth Supplemental Indenture, the Note and the
Legal Opinion related to the public offering of the Company's 2.875% Senior Note
due 2008.
(d) The Company filed, on March 14, 2003, a current report on Form 8-K
containing two exhibits: an Amendment to the Letter Agreement between the
Company and Berkshire Hathaway Inc. and a Press Release announcing changes in
the Company's Board of Directors.
(e) The Company filed, on April 2, 2003, a current report on Form 8-K containing
two exhibits: the Terms Agreement and the Note related to the public offering of
the Company's Floating Rate Notes due 2043.
PAGE 24
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
May 6, 2003
CERTIFICATION
I, James M. Kilts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Gillette Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee of
registrant's Board of Directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 5, 2003
/s/ James M. Kilts
------------------------------
James M. Kilts
Chairman of the Board,
Chief Executive Officer
CERTIFICATION
I, Charles W. Cramb, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Gillette Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee of
registrant's Board of Directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 5, 2003
/s/ Charles W. Cramb
------------------------------
Charles W. Cramb
Senior Vice President,
Chief Financial Officer
EXHIBIT INDEX
Exhibit Number and Description
Exhibit 3.1 The Bylaws of The Gillette Company, as amended March 13, 2003,
filed herewith.
Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges, filed herewith.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.