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 Quarter Ended September 30, 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 October 31, 2003 . . . . . . . . . . . . . . . 1,011,720,627
PAGE 1
PART I. FINANCIAL INFORMATION
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(Millions, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September September 30
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales .......................................... $ 2,405 $ 2,168 $ 6,630 $ 5,924
Cost of Sales ...................................... 935 882 2,583 2,374
------- ------- ------- -------
Gross Profit ..................................... 1,470 1,286 4,047 3,550
Selling, General and Administrative Expenses ....... 866 764 2,558 2,281
Restructuring - Gain on Sale of Vaniqa ............. - - - (30)
------- ------- ------- -------
Profit from Operations ........................... 604 522 1,489 1,299
Nonoperating Charges (Income):
Interest income .................................. (2) (7) (8) (18)
Interest expense ................................. 13 21 43 65
Exchange ......................................... (7) (9) (2) (17)
Other charges - net .............................. 7 4 4 8
------- ------- ------- -------
11 9 37 38
------- ------- ------- -------
Income before Income Taxes ......................... 593 513 1,452 1,261
Income Taxes ....................................... 177 159 435 391
------- ------- ------- -------
Net Income ....................................... $ 416 $ 354 $ 1,017 $ 870
======= ======= ======= =======
Net Income per Common Share:
Basic ............................................ $ .41 $ .33 $ .99 $ .82
======= ======= ======= =======
Assuming Full Dilution ........................... $ .41 $ .33 $ .99 $ .82
======= ======= ======= =======
Dividends per Common Share:
Declared ......................................... $ - $ - $ .3250 $ .3250
Paid ............................................. $.1625 $ .1625 $ .4875 $ .4875
Weighted average number of common shares outstanding
Basic ............................................ 1,017 1,058 1,025 1,057
Assuming full dilution ........................... 1,019 1,060 1,027 1,061
See Accompanying Notes to Consolidated Financial Statements.
PAGE 2
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Millions)
September 30, December 31, September 30,
2003 2002 2002
------------ ------------ -----------
(Unaudited) (Unaudited)
Current Assets:
Cash and cash equivalents .............................. $ 845 $ 801 $ 981
Trade receivables, less allowances, Sept. 2003, $61;
December 2002, $73; Sept. 2002, $61 .................. 1,249 1,202 1,220
Other receivables ...................................... 350 311 282
Inventories
Raw materials and supplies .......................... 115 115 113
Work in process ..................................... 206 191 246
Finished goods ...................................... 856 622 821
------- ------- -------
Total Inventories ................................. 1,177 928 1,180
------- ------- -------
Deferred income taxes .................................. 333 380 491
Other current assets ................................... 271 175 251
------- ------- -------
Total Current Assets .............................. 4,225 3,797 4,405
------- ------- -------
Property, Plant and Equipment, at cost ................... 6,761 6,429 6,304
Less accumulated depreciation ............................ (3,253) (2,864) (2,809)
------- ------- -------
Net Property, Plant and Equipment ................. 3,508 3,565 3,495
------- ------- -------
Goodwill ................................................. 996 962 952
Intangible Assets, less accumulated amortization ......... 514 400 400
Other Assets ............................................. 1,044 1,139 766
------- ------- -------
$10,287 $ 9,863 $10,018
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
PAGE 3
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(Millions, except per share amount)
September 30, December 31, September 30,
2003 2002 2002
------------ ------------ ------------
(Unaudited) (Unaudited)
Current Liabilities:
Loans payable .................................... $ 732 $ 673 $ 1,176
Current portion of long-term debt ................ 432 527 755
Accounts payable ................................. 515 581 519
Accrued liabilities .............................. 1,793 1,303 1,238
Dividends payable ................................ - 170 -
Income taxes ..................................... 223 234 345
-------- -------- --------
Total Current Liabilities ..................... 3,695 3,488 4,033
-------- -------- --------
Long-Term Debt ..................................... 2,715 2,457 1,852
Deferred Income Taxes .............................. 709 692 591
Other Long-Term Liabilities ........................ 898 920 713
Minority Interest .................................. 71 46 44
Contingent Redemption Value of
Common Stock Put Options ......................... - - 241
Stockholders' Equity:
Common stock, par value $1.00 per share:
Authorized 2,320 shares
Issued: Sept. 2003, 1,373 shares;
Dec. 2002, 1,370 shares;
Sept. 2002, 1,370 shares ............... 1,373 1,370 1,370
Additional paid-in capital ....................... 1,243 1,197 931
Earnings reinvested in the business .............. 7,292 6,608 6,604
Accumulated other comprehensive loss ............. (1,248) (1,523) (1,396)
Treasury stock, at cost: Sept. 2003, 361 shares;
Dec. 2002, 326 shares; and Sept. 2002, 312 shares (6,461) (5,392) (4,965)
-------- -------- --------
Total Stockholders' Equity ............... 2,199 2,260 2,544
-------- -------- --------
$ 10,287 $ 9,863 $ 10,018
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
(Unaudited)
Nine Months Ended
September 30
------------------
2003 2002
---- ----
Operating Activities
Net income ..................................... $1,017 $ 870
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 430 371
Deferred income taxes ........................ 70 99
Other ........................................ 3 12
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures:
Trade and other accounts receivable ........ 5 323
Inventories ................................ (179) (146)
Accounts payable and accrued liabilities ... 263 82
Other working capital items ................ (17) (60)
Other noncurrent assets and liabilities .... 110 (131)
----- -----
Net cash provided by operating activities 1,702 1,420
----- -----
Investing Activities
Additions to property, plant and equipment ..... (218) (278)
Acquisition of business, net of cash acquired .. (161) -
Disposals of property, plant and equipment ..... 28 31
Other .......................................... 3 1
----- -----
Net cash used in investing activities .... (348) (246)
----- -----
Financing Activities
Purchase of treasury stock ..................... (1,069) -
Proceeds from sale of put options ............. - 15
Proceeds from exercise of stock option and
purchase plans ............................ 48 31
Proceeds from long-term debt ................... 684 619
Repayment of long-term debt .................... (534) (197)
Increase (Decrease) in loans payable ........... 51 (1,061)
Dividends paid ................................. (501) (515)
Settlements of debt-related derivative contracts 6 (8)
----- -----
Net cash used in financing activities .... (1,315) (1,116)
----- -----
Effect of Exchange Rate Changes on Cash ............ 5 2
Net Cash Used in Discontinued Operations ........... - (26)
----- -----
Increase in Cash and Cash Equivalents .............. 44 34
Cash and Cash Equivalents at Beginning of Period ... 801 947
----- -----
Cash and Cash Equivalents at End of Period ......... $ 845 $ 981
===== =====
Supplemental disclosure of cash paid for:
Interest ....................................... $ 45 $ 66
Income taxes ................................... $ 359 $ 218
See Accompanying Notes to Consolidated Financial Statements.
PAGE 5
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net Income, as reported $ 416 $ 354 $1,017 $ 870
Other Comprehensive Income,
net of tax:
Foreign Currency Translation 8 32 270 39
Cash Flow Hedges 1 - 5 2
----- ----- ------ -----
Comprehensive Income $ 425 $ 386 $1,292 $ 911
===== ===== ====== =====
Accumulated Other Comprehensive Loss
------------------------------------
The balances for the components of Accumulated 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)
Change in period 172 - (2) 170
Income tax benefit (expense) (125) - 1 (124)
------ ------ ------ ------
Balance June 30, 2002 $(1,366) $ (56) (6) $(1,428)
Change in period (37) - - (37)
Income tax benefit (expense) 69 - - 69
------ ------ ------ ------
Balance September 30, 2002 $(1,334) $ (56) $ (6) $(1,396)
====== ====== ====== ======
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)
Change in period 185 - 3 188
Income tax benefit (expense) (14) - (1) (15)
------ ------ ------ ------
Balance June 30, 2003 $(1,070) (186) (1) (1,257)
Change in period 9 - 2 11
Income tax benefit (expense) (1) - (1) (2)
------ ------ ------ ------
Balance September 30, 2003 $(1,062) $ (186) $ - $(1,248)
====== ====== ====== ======
The change in accumulated foreign currency translation adjustment for the
quarters ended September 30, 2003, and 2002, were gains, net of tax, of $8
million and $32 million, respectively. The gains in both quarters were due to
strengthening European currencies, offset by weakening Latin American
currencies, versus the U.S. dollar.
See Accompanying Notes to Consolidated Financial Statements.
PAGE 6
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Nine Months
Ended Sept. 30, Ended Sept. 30,
2003 2002 2003 2002
---- ---- ---- ----
(Millions, except per share amounts)
------------------------------------
Net income, as reported $ 416 $ 354 $1,017 $ 870
Less: Compensation expense for option
awards determined by the fair-
value-based method, net of
related tax effects (25) (29) (76) (83)
------ ------ ------ ------
Pro forma net income $ 391 $ 325 $ 941 $ 787
====== ====== ====== ======
Net income per common share
Basic
As reported $ .41 $ .33 $ .99 $ .82
Pro forma .38 .31 .92 .74
Assuming full dilution
As reported $ .41 $ .33 $ .99 $ .82
Pro forma .38 .31 .92 .74
The fair value of each option grant for the Company's plans is estimated on the
date of the grant using the Black-Scholes option pricing model.
PAGE 7
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting Pronouncements
-------------------------
In April 2003, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative, amends the definition of an
underlying contract, and clarifies when a derivative contains a financing
component in order to increase the comparability of accounting practices under
SFAS No. 133. The Statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on the
Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. The Statement is effective for financial
instruments entered into or modified after May 31, 2003. The Company adopted
this standard on June 1, 2003. Its adoption did not have any impact on the
financial statements.
In May 2003, the consensus on EITF Issue No. 01-08, "Determining Whether an
Arrangement Contains A Lease," was issued. The guidance in the consensus applies
to the purchase or sale of goods and services under various types of contracts,
including outsourcing arrangements. Based on the criteria in the consensus, both
parties to an arrangement are required to determine whether the arrangement
includes a lease within the scope of SFAS No. 13. The new requirement applies
prospectively to new or modified arrangements for reporting periods beginning
after May 28, 2003. Accordingly, as of July 1, 2003, the Company accounts for
new or modified arrangements based on this guidance. The adoption of this
standard did not have a material impact on the Company's financial statements.
PAGE 8
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill and Intangible Assets
------------------------------
In August, 2003, the Company acquired a majority interest in Fujian Nanping
Nanfu Battery Co., Ltd., a leading battery company in China. The Nanfu business
is reported as part of the Duracell segment. The change between the September
30, 2003, and December 31, 2002, goodwill and intangible balances is due mainly
to the acquisition of Nanfu, and, to a lesser degree, the impact of foreign
currency translation. The Nanfu acquisition resulted in the capitalization of
the Nanfu trademark as an indefinite-lived intangible asset, as well as other
definite-lived intangible assets. The values of these intangibles, as well as
the related goodwill, may be adjusted in future periods as the purchase price
allocation for the acquisition is not final.
Total goodwill by segment follows.
Net Carrying Amount September 30, December 31, September 30,
(Millions) 2003 2002 2002
------------ ------------ ------------
Blades & Razors $ 140 $ 140 $ 140
Duracell 605 571 563
Oral Care 173 173 173
Braun 78 78 76
Personal Care - - -
----- ----- ------
Total $ 996 $ 962 $ 952
===== ===== ======
The detail of intangible assets follows.
Weighted
Average September 30, 2003 December 31, 2002 September 30, 2002
Amortization ---------------------- ---------------------- ----------------------
Period Carrying Accumulated Carrying Accumulated Carrying Accumulated
(Millions) (Years) Amount Amortization Amount Amortization Amount Amortization
------------ -------- ------------ -------- ------------ -------- ------------
Amortized Intangible Assets
Patents 6 $ 101 $ 64 $ 101 $ 53 $ 103 $ 50
Trademarks 6 14 7 13 4 11 2
Software 5 12 10 12 9 11 9
Endorsements - 61 61 61 61 61 61
Other 23 20 3 11 3 12 3
---- ---- ----- ----- ----- -----
Total 7 $ 208 $ 145 $ 198 $ 130 $ 198 $ 125
---- ---- ----- ----- ----- -----
Unamortized Intangible Assets
Trademarks $ 436 $ 317 $ 315
Pension 15 15 12
---- ---- ----- ----- ----- -----
Total $ 659 $ 145 $ 530 $ 130 $ 525 $ 125
---- ---- ----- ----- ----- -----
Intangible Assets, net $ 514 $ 400 $ 400
==== ===== =====
Aggregate Amortization Expense:
For the three months ended
September 30, 2003 $ 4
September 30, 2002 $ 5
For the nine months ended:
September 30, 2003 $ 15
September 30, 2002 $ 15
Estimated Amortization Expense:
For the Years ended
December 31, 2003 $ 21
2004 $ 20
2005 $ 8
2006 $ 5
2007 $ 4
2008 $ 4
PAGE 9
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 Nine Months Ended
(Millions) September 30 September 30
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $ 2,405 $ 2,168 $ 6,630 $ 5,924
Advertising 219 160 572 456
% Net Sales 9.1% 7.4% 8.6% 7.7%
PAGE 10
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Share Repurchase Program
------------------------
The Company has two share repurchase programs. The first program authorizes the
purchase of up to 150 million shares, and the second program authorizes the
purchase of up to 50 million shares in the open market or in privately
negotiated transactions, depending on market conditions and other factors. From
the inception of the first program through December 31, 2002, the Company
repurchased 108.2 million shares in the open market for $4.5 billion. In the
three and nine months ended September 30, 2003, the Company repurchased 8.9
million and 34.8 million shares for $282 million and $1.07 billion,
respectively. There are 7 million shares remaining on the first authorization.
As of September 30, 2003, there has been no activity in the second share
repurchase program.
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 Nine Months Ended
September 30 September 30
--------------------- ---------------------
(Millions) 2003 2002 2003 2002
------ ------ ------ ------
Blades & Razors $1,034 $ 887 $2,930 $2,541
Duracell 514 482 1,330 1,242
Oral Care 328 321 939 861
Braun 293 265 792 685
Personal Care 236 213 639 595
------ ------ ------ ------
Total $2,405 $2,168 $6,630 $5,924
====== ====== ====== ======
Profit/(Loss) from Operations
----------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -----------------------
(Millions) 2003 2002 2003 2002
------ ------ ------ ------
Blades & Razors $ 413 $ 377 $1,121 $ 989
Duracell 106 78 199 123
Oral Care 64 60 166 163
Braun 22 22 43 47
Personal Care 26 17 50 33
------ ------ ------ ------
Subtotal Reportable Segments 631 554 1,579 1,355
All Other (1) (27) (32) (90) (56)
------ ------ ------ ------
Total $ 604 $ 522 $1,489 $1,299
====== ====== ====== ======
(1) All Other includes the $30 million pretax gain on the sale of Vaniqa in the
nine months ended September 30, 2002.
PAGE 11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable Assets
-------------------------------
Sept. 30, Dec. 31, Sept. 30,
(Millions) 2003 2002 2002
--------- ------- ---------
(Unaudited) (Unaudited)
Blades & Razors $ 3,325 $ 3,170 $ 3,149
Duracell 2,841 2,741 2,786
Oral Care 1,221 1,094 1,062
Braun 1,130 1,065 1,009
Personal Care 530 520 526
------- ------- -------
Subtotal Reportable Segments 9,047 8,590 8,532
All Other 1,240 1,273 1,486
------- ------- -------
Total $10,287 $ 9,863 $10,018
======= ======= =======
PAGE 12
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 Nine Months Ended
September 30 September 30
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Income ............................. $ 416 $ 354 $1,017 $ 870
====== ====== ====== ======
Common shares, basic ................... 1,017 1,058 1,025 1,057
Effect of dilutive securities:
Stock options ...................... 2 2 2 4
------ ------ ------ ------
Common shares, assuming full dilution 1,019 1,060 1,027 1,061
====== ====== ====== ======
Net Income per Common Share:
Basic ................................ $ .41 $ .33 $ .99 $ .82
====== ====== ====== ======
Assuming full dilution ........ $ .41 $ .33 $ .99 $ .82
====== ====== ====== ======
As of September 30, 2003 and 2002, 65.5 million and 56.2 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.
PAGE 13
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Functional Excellence
---------------------
In the second quarter of 2002, the Company began actions associated with its
Functional Excellence initiative. This initiative impacts all business segments
and is focused on upgrading capabilities, while reducing overhead costs by
improving processes and eliminating duplication across all functions. Specific
program activities include outsourcing certain information technology functions,
implementing new worldwide technology tools and processes, streamlining customer
management and marketing programs, and consolidating financial functions.
Total pretax charges under the Functional Excellence initiative, including
employee termination benefits and other costs, were $17 million and $48 million
in the three and nine months ended September 30, 2002, $121 million for the full
year 2002, $17 million in the third quarter of 2003, and $103 million in the
first nine months of 2003. Employee-related terminations are intended to be
completed within 12 months of accrual. The employee-related termination benefits
are calculated using the Company's long-standing severance formulas and vary on
a country-by-country basis, depending on local statutory requirements.
Details of the Functional Excellence accrual follow. Other costs include items
such as consulting, lease buyouts and asset write-downs related to Functional
Excellence programs.
Employee-
(Millions) Related Other Total
---------- ------- ----- -----
Accrual Balance December 31, 2002 $86 $6 $92
First Quarter 2003:
Charges 38 6 44
Payments/Uses (44) (2) (46)
---- ---- ----
Accrual Balance March 31, 2003 $80 $10 $90
---- ---- ----
Second Quarter 2003:
Charges 34 8 42
Payments/Uses (34) (6) (40)
---- ---- ----
Accrual Balance June 30, 2003 $80 $12 $92
==== ==== ====
Third Quarter 2003:
Charges 16 1 17
Payments/Uses (16) (7) (23)
---- ---- ----
Accrual Balance September 30, 2003 $80 $ 6 $86
==== ==== ====
Functional Excellence charges in 2003 included $2 million and $15 million, which
were recorded as cost of goods sold, and $15 million and $88 million, which were
recorded as selling, general and administrative expenses, in the three and nine
month periods ended September 30, 2003, respectively.
PAGE 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
---------------------
Results for any interim period, such as those described in the following
analysis, are not necessarily indicative of results for the entire year.
Third Quarter 2003 versus 2002
------------------------------
Total Company: Sales for the quarter ended September 30, 2003, were $2.41
billion, an increase of 11% versus the same quarter of the prior year. The
impact of exchange was 5%, as the strength of European, Australian and Canadian
currencies more than offset unfavorable exchange in Latin America. Volume/mix
contributed 6% to sales growth, driven by new products, strong retailer support
for upcoming fourth-quarter razor programs and increased consumer demand for
batteries related to the North American electrical blackouts and Hurricane
Isabel. The impact of pricing was neutral, as price increases in Blades and
Razors offset lower list prices in Duracell. Profit from operations of $604
million climbed 16% from $522 million in the prior year, and margin increased by
100 basis points, to 25.1%. This improvement was mainly due to favorable product
line mix, cost-savings initiatives, and strong sales growth from new products,
partially offset by higher year-over-year exchange-driven European-based costs
and significantly higher advertising investment.
Blades and Razors: Third-quarter sales rose 17% from the third quarter of last
year. Exchange accounted for 5% of the increase. Sales growth was driven by the
continued success of Mach3Turbo and Venus, increased shipments of the Sensor3
premium disposable, which was launched into Europe and continued to gain share
in North America, and strong trade demand for fourth-quarter consumer programs
that feature the new Mach3Turbo Champion razor. The initial sell-in of those
programs in the third quarter in both North America and Europe is anticipated to
moderate the pace of sales growth in the upcoming fourth quarter. Third-quarter
Blades and Razors profit was up 10%, though margin was down 250 basis points to
40%. The lower margin was driven by a strong double-digit percentage increase in
advertising, sampling and display support. The Company announced that it is
studying a possible realignment of its European Blades and Razors manufacturing
facilities and distribution network to streamline and strengthen its operations.
Duracell: Sales of Duracell for the quarter increased 7% versus those of a year
ago, with currency gains accounting for 4% of the increase. The sales gain was
driven by incremental consumer demand due to electrical blackouts and Hurricane
Isabel in the United States, and the third-quarter 2003 acquisition of the Nanfu
battery company in China. The increase was partially offset by lower pricing due
to the North American price-deal realignment program, and lower volumes related
to the 2002 divestiture of the carbon zinc businesses in South Africa and India.
Profit from operations grew 35%, and margins increased 430 basis points versus a
year ago, reflecting sales growth, continued manufacturing and purchasing
efficiencies and overhead containment, partially offset by a substantial
increase in marketing investment. The impact of lower pricing from the
price-deal realignment was offset by lower promotional activity and the
elimination of free cell giveaways. In August 2003, the Company acquired a
majority interest in Fujian Nanping Nanfu Battery Co., Ltd., a leading battery
company in China. The results of this business were not material to profits for
the quarter.
Oral Care: Oral Care third-quarter sales were 3% above 2002, with a 5% positive
impact from exchange. Sales growth was restrained by softness in the
rechargeable toothbrush segment, chiefly in Germany, and price competition in
the batteries segment. Sales gains were realized on a constant currency basis in
the AMEE (Africa/Middle East/Eastern Europe) and Latin America regions, where
the manual toothbrush business achieved solid growth and battery-powered
toothbrushes were successfully launched. Oral Care profit from operations grew
6% from a year ago, reflecting increased sales from new products, including the
CrossAction Power battery toothbrush, partially offset by higher exchange-driven
European-based manufacturing costs and a double-digit percentage increase in
advertising to support new product launches.
PAGE 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Braun: Sales of Braun rose 11% above the previous year. Currency represented 8%
of the increase. Sales gains were driven by the introduction of the FreeGlider
and Flex XP2 male shavers in North America, the introduction of the
SoftPerfection epilator and the top-of-the-line Activator shaver in Japan and
Europe, and strong sales of household appliances in Russia. These gains helped
offset the effects of a weak economic environment in Europe and competitive
pressures in mid-price shavers in Japan. Favorable mix towards male shavers and
higher priced household appliances were offset by a double-digit percentage
increase in marketing spending to support new product launches and by higher
European-based manufacturing costs due to exchange. This resulted in lower
profits and a 110 basis-point reduction in margin versus a year ago.
Personal Care: Sales for the quarter increased 10%. Exchange impacted sales
favorably by 3%. Growth was primarily driven by shave preparations, and was
achieved in all regions except Latin America. Growth in
antiperspirant/deodorants also contributed to the increase, as PowerStripe
technology was extended throughout the product line in the United States, and
the restaging of the Right Guard brand gained strength in Europe. Profit for the
quarter increased 54% as compared with the prior year, and margins improved by
320 basis points to 11.1%, chiefly due to growth from new products and the
benefit of cost-savings initiatives, partially offset by a double-digit
percentage increase in advertising behind new product and brand restaging
activities.
Nine Months 2003 versus 2002
----------------------------
Total Company: Sales for the nine months ended September 30, 2003, were $6.63
billion, an increase of 12% versus the same period last year. The impact of
exchange was 5%, and volume/mix contributed 7% to sales growth. Overall, pricing
had no material impact on the period, as price increases in Blades and Razors
were offset by lower prices in Duracell. Profit from operations of $1.49 billion
increased 15% from $1.30 billion in the prior year, and margin increased by 60
basis points to 22.5%. Profit from operations in 2002 included a $30 million
pretax gain on the sale of the Vaniqa business. The profit increase was driven
by strong sales growth from new products, ongoing favorable mix to premium
shaving products, and cost-savings initiatives, which more than offset higher
European-based costs due to exchange, increased advertising investment, and
incremental Functional Excellence and pension expenses. Heightened competitive
activity is expected for the balance of the year in Blades and Razors, which
could have a dampening effect on Gillette's 2003 and 2004 earnings potential
through increased marketing investment and potential share loss. However, this
activity is not expected to inhibit our ability to deliver on our financial
growth targets.
Blades and Razors: Sales rose 15% compared with the first nine months of last
year. The impact of exchange was 5%. Sales growth was driven by the strength of
premium shaving systems and disposables. Profit from operations was up 13% from
the prior year. However, favorable product mix was more than offset by a
double-digit percentage increase in marketing support, resulting in a 60
basis-point decline in margin.
Duracell: Sales of Duracell for the nine months increased 7% versus those of a
year ago, with currency gains accounting for 4% of the increase. Consumer
pantry-loading in North America during the first and third quarters of 2003 was
partially offset by lower pricing from the price-deal realignment initiative in
North America and unmatched 2002 sales related to the divestiture of the carbon
zinc businesses in South Africa and India. Profit year-to-date increased 62% and
margin grew 510 basis points, due to higher sales, solid cost-savings programs
and the absence of first-quarter 2002 costs associated with withdrawing selected
hearing aid batteries. These gains were partially offset by significantly higher
advertising expenses.
PAGE 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Oral Care: Oral Care sales for the nine months were 9% above those of 2002.
Favorable foreign exchange contributed 5% to the increase. Sales growth was
driven by the success of new product introductions in both the manual and power
categories, as well as strong growth in emerging markets. Profit increased 2%
over the prior year, and margin was 120 basis points lower, as higher sales from
new products and improved product mix were more than offset by higher
exchange-driven export costs from Europe, a significant increase in marketing
expenses to launch new products in 2003, and higher warranty-related accruals in
the first quarter of 2003.
Braun: Sales of Braun increased 16% over the prior year, with currency gains
representing 10%. Growth was driven by significant gains in both male and female
electric shavers, as well as strong first-half sales of Thermoscan thermometers,
fueled by concerns over the SARS epidemic. Profit from operations declined 9%,
due to incremental warranty accruals incurred in the first quarter of 2003, and
the impact of exchange on European-based manufacturing costs, which more than
offset benefits from improved product mix, manufacturing efficiencies and strong
sales growth.
Personal Care: Personal Care sales increased 7% over those of 2002. Exchange
contributed 3% to the sales growth. Volume growth was primarily driven by shave
preparations, and to a lesser degree by new product successes in
antiperspirant/deodorants. Profit from operations increased 50%, due to higher
sales and cost-savings initiatives, partially offset by increased marketing
investment for new product launches.
Costs and Expenses
------------------
Third Quarter 2003 versus 2002
------------------------------
Gross profit for the three months ended September 30, 2003, was $1.47 billion,
an increase of 14% versus 2002. Gross profit as a percentage of sales of 61.1%
compared with 59.3% in 2002. This improvement stemmed from favorable product
line mix, cost-savings initiatives and manufacturing efficiencies, particularly
at Duracell, partially offset by higher year-over-year exchange driven
European-based manufacturing costs.
Selling, general and administrative expenses increased $102 million, or 13%,
versus the prior year. Advertising and sales promotion combined increased 29%
over the prior year, with advertising growing to 9.1% of sales, from 7.4% in the
prior year. The increase was driven by our marketing investments, which included
a higher level of sampling year-over-year. Every segment of the Company realized
a double-digit percentage increase in advertising support. Sales promotion was
flat as a percentage of sales, although display support increased due to the
launch of Mach3Turbo Champion in Blades and Razors. Other selling, general and
administrative expenses increased 6% from the prior year, and fell 100 basis
points as a percentage of sales, from 24.5% in the third quarter of 2002 to
23.5% this year. This reduction was achieved despite higher European- based
costs due to exchange.
Net interest expense decreased, due to lower rates year-over-year.
The effective tax rate was 30%, versus 31% the year before. The decrease was
primarily due to favorable changes in the mix of earnings to countries taxed at
rates lower than the U.S. statutory rate.
Net income of $416 million was 18% above the $354 million in the prior year.
Diluted net income per common share of $.41 was 24% above the $.33 reported for
2002. The growth in diluted net income per common share outpaced net income
growth due to a reduction in the number of outstanding shares resulting from
stock repurchases.
PAGE 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 2003 versus 2002
------------------------------------------------
Gross profit for the nine months ended September 30, 2003, was $4.05 billion, an
increase of 14% versus 2002. Gross profit as a percentage of sales of 61.0%
compared with 59.9% in 2002. This was due to favorable product mix in Blades and
Razors, cost-savings initiatives and manufacturing efficiencies, which more than
offset higher European-based costs due to exchange.
Selling, general and administrative expenses increased $277 million, or 12%.
Advertising and sales promotion expenses combined increased by 21%, with
advertising up 25% to 8.6% of sales from 7.7% in the prior year, and sales
promotion up 13% versus last year. Other selling, general and administrative
expenses increased 8%, and were down as a percentage of sales, to 26.1% from
27.0% in the prior year. This reduction was achieved through cost-savings
initiatives, offset partially by incremental Functional Excellence and pension
expenses, and higher European-based costs due to the strengthening of the Euro.
Net interest expense decreased due to lower rates in 2003. Exchange gains were
lower than in the prior year.
The effective tax rate was 30%, versus 31% the prior year. The decrease was
primarily due to favorable changes in the mix of earnings to countries taxed at
rates lower than the U.S. statutory rate.
Net income was $1.02 billion, up 17% versus $870 million a year earlier. Diluted
net income per common share of $.99 was 21% above $.82 in 2002. Net income in
2002 included a $21 million after-tax gain on the sale of the Vaniqa business
which had a $.02 favorable impact on diluted net income per common share. The
growth in diluted net income per common share, which outpaced net income growth,
was driven by a reduction in the number of outstanding shares resulting from
stock repurchases.
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 for the nine months ended September 30, 2003, was $1.51 billion,
compared with $1.17 billion in the same period last year. Free cash flow,
defined as cash flow from operations less capital investments, is analyzed by
the Company as a measure of its liquidity, as well as its ability to fund future
growth and to provide a return to shareholders. Free cash flow is not a measure
of the residual cash flow that is available for discretionary expenditures since
the Company has certain non-discretionary obligations such as debt service that
are not deducted from the measure. A reconciliation of free cash flow to the
increase in cash and cash equivalents in accordance with Generally Accepted
Accounting Principles (GAAP) follows.
Nine months ended
September 30
-----------------------------
(Millions) 2003 2002
---------- ------------- -------------
Net cash provided by operating activities $1,702 $1,420
Additions to property, plant and equipment (218) (278)
Disposals of property, plant and equipment 28 31
------ ------
Free cash flow $1,512 $1,173
------ ------
Acquisition of business, net of
cash acquired, and other (158) 1
Net cash used in investing activities $ (348) $ (246)
Net cash used in financing activities $(1,315) $(1,116)
Effect of exchange rate changes on cash 5 2
Net cash used in discontinued operations - (26)
------ ------
Increase in cash and cash equivalents $ 44 $ 34
====== ======
PAGE 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net cash provided by operating activities was $1.70 billion during the nine
months ended September 30, 2003, as compared with $1.42 billion during the same
period in 2002. The increase in net cash provided by operating activities in
2003 was due primarily to $190 million in lower pension funding and higher
profits.
Lower capital spending during the nine months ended September 30, 2003, was due
primarily to timing. Capital spending continued to be focused on new products
and cost-reduction projects.
In August 2003, the Company acquired a majority interest in Fujian Nanping Nanfu
Battery Co., Ltd., a leading battery company in China. The results of this
business are reported as part of the Duracell segment and were not material to
the quarter.
The Company spent $1.07 billion to repurchase 35 million shares and paid $501
million in dividends during the nine months ended September 30, 2003. Total
long-term debt increased by $163 million, to $3.15 billion in September 2003
from $2.98 billion at December 2002. Loans payable increased by $59 million, and
cash and cash equivalents increased by $44 million for the same period.
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 $1.53 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 September 30, 2003, there
was $609 million outstanding under the Company's commercial paper program, an
increase of $60 million from $549 million outstanding at December 31, 2002. The
Company has a revolving bank credit facility in the amount of $1.15 billion, of
which $863 million is available on a 364-day basis and expires on October 12,
2004, and $288 million is available for five years. 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 common stock.
PAGE 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the nine months ended September 30, 2003, $686 million was issued in
public offerings under these shelf registration statements, consisting of $300
million 2.875% notes, due March 2008, $300 million 2.50% notes, due June 2008,
$83 million in floating rate notes, due April 2043, and $3 million issued under
the Gillette medium-term note program. All proceeds from these issuances were
used to reduce commercial paper borrowings. The $83 million floating rate 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 floating rate notes are also redeemable at the Company's option at various
prices from April 2033 to maturity. At September 30, 2003, a total of $1.29
billion remained available under these shelf registrations.
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, which is described in Notes to Consolidated
Financial Statements. The total cost of this project is estimated at $350-$400
million through 2005. Annualized savings from the Functional Excellence
initiative are currently expected to be approximately $300-$350 million by 2006.
During 2002, the Company recorded expenses related to this initiative in the
amount of $121 million ($79 million after taxes, or $.07 in diluted net income
per common share). Charges for the three and nine-month periods ended September
30, 2003 and 2002, follow:
(Millions, except per share amounts) Three Months Ended Nine months Ended
September 30 September 30
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Functional Excellence expense $ 17 $ 17 $103 $ 48
Functional Excellence expense, net of tax $ 14 $ 11 $ 85 $ 30
Impact on diluted net income per share $.01 $.01 $.08 $.03
Third quarter 2003 Functional Excellence charges were recorded to cost of goods
sold in the amount of $2 million and to selling, general and administrative
expense in the amount of $15 million. Of the $103 million in charges through the
first nine months of 2003, $15 million was charged to cost of goods sold and $88
million was charged to selling, general and administrative expense. It is
currently expected that total 2003 Functional Excellence expenses will be
approximately $140 million. Additional costs will be recorded in 2004 and 2005
as programs are developed and approved. These forward-looking cost and savings
numbers contain management estimates that are subject to change over time.
PAGE 20
DISCLOSURE CONTROLS AND PROCEDURES
Item 4. Controls and Procedures
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), has evaluated the effectiveness of the Company's disclosure controls
and procedures as defined in Securities and Exchange Commission ("SEC") Rule
13a-15(e) as of the end of the period covered by this report. Based on that
evaluation, management has concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act is communicated to management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure and is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
There have been no significant changes in internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PAGE 21
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
Shareholder Proposals
---------------------
The Company's 2004 Annual Meeting of Shareholders is scheduled to be held on May
20, 2004. The deadline for submitting shareholder proposals for inclusion in the
Company's proxy statement and form of proxy for that meeting is December 8,
2003.
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.
PAGE 22
PART II. OTHER INFORMATION
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, accounting
standards 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 23
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 24
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 events resulting from military or
political events could adversely affect operating results in any reporting
period.
PAGE 25
PART II. OTHER INFORMATION
Item 6(a) Exhibits
The following exhibits are included herewith:
10.1 Employment Agreement, dated January 19, 2001, between The Gillette Company
and James M. Kilts, as amended through August 6, 2003.
10.2 $862,500,000 364-Day Credit Agreement, dated as of October 14, 2003, among
The Gillette Company, JPMorgan Chase Bank, as agent, and a syndicate of domestic
and foreign banks.
10.3 $287,500,000 5-Year Credit Agreement, dated as of October 14, 2003, among
The Gillette Company, JPMorgan Chase Bank, as agent, and a syndicate of domestic
and foreign banks.
12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).
32 Certification Pursuant to Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code).
Item 6(b) Reports on Form 8-K
The following reports on Form 8-K were filed or furnished to the
Commission:
(a) The Company furnished, on August 5, 2003, a current report on Form 8-K
containing one exhibit: a Press Release announcing the Company's financial
results for the second quarter of 2003.
(b) The Company furnished on August 7, 2003, a current report on Form 8-K
containing two exhibits: the employment agreement between the Company and
James M. Kilts, as amended, and a press release announcing that James M. Kilts,
Chairman and Chief Executive Officer, had extended his employment agreement for
one year.
PAGE 26
SIGNATURE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE GILLETTE COMPANY
(Registrant)
/s/ Claudio E. Ruben
--------------------------------
Claudio E. Ruben
Vice President, Controller
and Principal Accounting Officer
November 4, 2003
EXHIBIT INDEX
Exhibit Number and Description
Exhibit 10.1 Employment Agreement, dated January 19, 2001, between The
Gillette Company and James M. Kilts, as amended through August 6, 2003.
Exhibit 10.2 $862,500,000 364-Day Credit Agreement, dated as of October 14,
2003, among The Gillette Company, JPMorgan Chase Bank, as agent, and a syndicate
of domestic and foreign banks.
Exhibit 10.3 $287,500,000 5-Year Credit Agreement, dated as of October 14,
2003, among The Gillette Company, JPMorgan Chase Bank, as agent, and a syndicate
of domestic and foreign banks.
Exhibit 12 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a).
Exhibit 32 Certification Pursuant to Rule 13a-14(b) and Section 906
of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code).