10-Q 1 f10q_093002-tgc.txt FORM 10-Q 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, 2002 Commission File Number 1-922 THE GILLETTE COMPANY (Exact name of registrant as specified in its charter) Incorporated in Delaware 04-1366970 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Prudential Tower Building, Boston, Massachusetts 02199 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 421-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ Indicate 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, 2002 .. . . . . . . . . . . . . . .1,054,979,520 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 30 September 30 ------------------ ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net Sales .......................................... $ 2,168 $ 2,123 $ 5,924 $ 5,666 Cost of Sales ...................................... 882 922 2,374 2,317 ------- ------- ------- ------- Gross Profit ..................................... 1,286 1,201 3,550 3,349 Selling, General and Administrative Expenses ....... 764 728 2,281 2,182 Restructuring - Gain on Sale of Vaniqa ............. - - (30) - ------- ------- ------- ------- Profit from Operations ........................... 522 473 1,299 1,167 Nonoperating Charges (Income): Interest income .................................. (7) (1) (18) (3) Interest expense ................................. 21 34 65 119 Exchange ......................................... (9) 6 (17) 13 Other charges - net .............................. 4 5 8 9 ------- ------- ------- ------- 9 44 38 138 ------- ------- ------- ------- Income before Income Taxes ......................... 513 429 1,261 1,029 Income Taxes ....................................... 159 133 391 319 ------- ------- ------- ------- Net Income ....................................... $ 354 $ 296 $ 870 $ 710 ======= ======= ======= ======= Adjusted Net Income, assuming the adoption of SFAS 142 for 2001 ............................. $ 354 $ 302 $ 870 $ 727 ======= ======= ======= ======= Net Income per Common Share: Basic ............................................ $ .33 $ .28 $ .82 $ .67 ======= ======= ======= ======= Assuming Full Dilution ........................... $ .33 $ .28 $ .82 $ .67 ======= ======= ======= ======= Adjusted Net Income per Common Share: Basic ............................................ $ .33 $ .28 $ .82 $ .69 ======= ======= ======= ======= Assuming Full Dilution ........................... $ .33 $ .28 $ .82 $ .69 ======= ======= ======= ======= Dividends per Common Share: Declared ......................................... $ - $ .1625 $ .3250 $ .3250 Paid ............................................. $ .1625 $ .1625 $ .4875 $ .4875 Weighted average number of common shares outstanding Basic ............................................ 1,058 1,055 1,057 1,055 Assuming full dilution ........................... 1,060 1,058 1,061 1,058
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, 2002 2001 2001 ------------ ------------ ------------ (Unaudited) (Unaudited) Current Assets: Cash and cash equivalents .............................. $ 981 $ 947 $ 68 Trade receivables, less allowances, September 2002, $61; December 2001, $69; September 2001, $62 .............. 1,220 1,473 1,499 Other receivables ...................................... 282 313 304 Inventories Raw materials and supplies .......................... 113 130 145 Work in process ..................................... 246 183 215 Finished goods ...................................... 821 698 954 ------- ------- ------- Total Inventories ................................. 1,180 1,011 1,314 ------- ------- ------- Deferred income taxes .................................. 491 481 578 Other current assets ................................... 251 207 200 Net assets of discontinued operations................... - 23 28 ------- ------- ------- Total Current Assets .............................. 4,405 4,455 3,991 ------- ------- ------- Property, Plant and Equipment, at cost ................... 6,304 6,005 5,991 Less accumulated depreciation ............................ (2,809) (2,457) (2,454) ------- ------- ------- Net Property, Plant and Equipment ................. 3,495 3,548 3,537 ------- ------- ------- Goodwill ................................................. 952 935 1,051 Intangible Assets, less accumulated amortization ......... 400 418 480 Other Assets ............................................. 766 613 618 ------- ------- ------- $10,018 $ 9,969 $ 9,677 ======= ======= =======
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, 2002 2001 2001 ------------ ------------ ------------ (Unaudited) (Unaudited) Current Liabilities: Loans payable .................................... $ 1,176 $ 2,235 $ 1,808 Current portion of long-term debt ................ 755 428 565 Accounts payable ................................. 519 401 353 Accrued liabilities .............................. 1,238 1,307 1,306 Dividends payable ................................ - 172 - Income taxes ..................................... 345 295 416 -------- -------- -------- Total Current Liabilities ..................... 4,033 4,838 4,448 -------- -------- -------- Long-Term Debt ..................................... 1,852 1,654 1,669 Deferred Income Taxes .............................. 591 459 449 Other Long-Term Liabilities ........................ 713 805 715 Minority Interest .................................. 44 42 44 Contingent Redemption Value of Common Stock Put Options ...................................... 241 34 99 Stockholders' Equity: Common stock, par value $1.00 per share: Authorized 2,320 shares Issued: Sept. 2002, 1,370 shares; Dec. 2001, 1,368 shares; Sept. 2001, 1,367 shares ............... 1,370 1,368 1,367 Additional paid-in capital ....................... 931 1,094 1,013 Earnings reinvested in the business .............. 6,604 6,077 6,220 Accumulated other comprehensive loss ............. (1,396) (1,437) (1,382) Treasury stock, at cost: Sept. 2002, Dec. and Sept. 2001, 312 shares ................. (4,965) (4,965) (4,965) -------- -------- -------- Total Stockholders' Equity ............... 2,544 2,137 2,253 -------- -------- -------- $10,018 $ 9,969 $ 9,677 ======== ======== ========
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 ------------------ 2002 2001 ---- ---- Operating Activities Net income ..................................... $ 870 $ 710 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................ 371 359 Other ........................................ 12 (9) Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Accounts receivable ........................ 323 637 Inventories ................................ (146) (183) Accounts payable and accrued liabilities ... 82 (235) Other working capital items ................ (97) (39) Other noncurrent assets and liabilities .... 5 (60) ----- ----- Net cash provided by operating activities 1,420 1,180 ----- ----- Investing Activities Additions to property, plant and equipment ..... (278) (449) Disposals of property, plant and equipment ..... 31 84 Other .......................................... 1 1 ----- ----- Net cash used in investing activities .... (246) (364) ----- ----- Financing Activities Purchase of treasury stock - (12) Proceeds from sale of put options .............. 15 8 Proceeds from exercise of stock option and purchase plans ............................ 31 33 Proceeds from long-term debt ................... 619 200 Repayment of long-term debt .................... (197) (256) Decrease in loans payable ...................... (1,061) (372) Dividends paid ................................. (515) (514) Settlements of debt-related derivative contracts (8) 6 ----- ----- Net cash used in financing activities .... (1,116) (907) ----- ----- Effect of Exchange Rate Changes on Cash ............ 2 (2) Net Cash Provided (Used) by Discontinued Operations. (26) 99 ----- ----- Increase in Cash and Cash Equivalents .............. 34 6 Cash and Cash Equivalents at Beginning of Period ... 947 62 ----- ----- Cash and Cash Equivalents at End of Period ......... $ 981 $ 68 ===== ===== Supplemental disclosure of cash paid for: Interest ....................................... $ 66 $ 135 Income taxes ................................... $218 $ 153
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 ------------------ ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net Income, as reported $ 354 $ 296 $ 870 $ 710 Other Comprehensive Income (Loss), net of tax: Foreign Currency Translation 32 21 39 (58) Cash Flow Hedges - (3) 2 (10) ----- ----- ----- ----- Comprehensive Income $ 386 $ 314 $ 911 $ 642 ===== ===== ===== ===== Adjusted Comprehensive Income, assuming the adoption of SFAS 142 for 2001 $ 386 $ 320 $ 911 $ 659 ===== ===== ===== ===== Accumulated Other Comprehensive Loss ------------------------------------ The accumulated balances for the components of Other Comprehensive Loss are: Accumulated Foreign Other Currency Pension Cash Flow Comprehensive Translation Adjustment Hedges Loss ----------- ---------- ----------- ------------- Balance December 31, 2000 $(1,280) $ (34) $ - $(1,314) Change in period 19 - (7) 12 Income tax benefit (expense) (62) - 2 (60) ------ ------ ------ ------- Balance March 31, 2001 $(1,323) $ (34) $ (5) $(1,362) Change in period (16) - (4) (20) Income tax benefit (expense) (20) - 2 (18) ------ ------ ------ ------- Balance June 30, 2001 $(1,359) $ (34) $ (7) $(1,400) Change in period (2) - (4) (6) Income tax benefit (expense) 23 - 1 24 ------ ------ ------ ------- Balance September 30, 2001 $(1,338) $ (34) $ (10) $(1,382) ====== ====== ====== ======= 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) ====== ====== ====== =======
The change in accumulated foreign currency translation adjustments for the quarters ending September 30, 2002 and 2001, were gains, net of tax, of $32 million and $21 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 Accounting Comments ------------------- Reference is made to the registrant's 2001 Annual Report to Stockholders, which contains, at pages 26 through 50, the audited consolidated financial statements and the notes thereto, which are incorporated by reference into the registrant's Annual Report on Form 10-K for the year ended December 31, 2001. With respect to the financial information for the interim periods included in this report, which is unaudited, the management of the Company believes that all adjustments necessary for a fair presentation of the results for such interim periods have been included. Financial statements of subsidiaries outside the U.S., other than those operating in highly inflationary environments, are measured using the local currency as the functional currency. Adjustments from translating these financial statements into U.S. dollars are accumulated in the equity section of the balance sheet under the caption, "Accumulated Other Comprehensive Gain or Loss." For subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Therefore, exchange gains and losses for these subsidiaries are included with all other transactional exchange gains and losses in the Consolidated Statement of Income under the caption, "Exchange." Prior-year financial statements have been reclassified to conform to the 2002 presentations. Accounting Pronouncements ------------------------- In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." In November 2001, the issues discussed in EITF 00-25 were codified with related issues into EITF 01-9, "Accounting for Consideration Given By a Vendor To a Customer (Including a Reseller of the Vendor's Products)." This issue addresses the income statement classification of slotting fees, cooperative advertising arrangements and buydowns. The consensus requires that certain customer promotional payments that were previously classified as marketing expenses be classified as a reduction of revenue. The Company adopted the consensus on January 1, 2002. The adoption of EITF 00-25 resulted in the following reclassifications in the three months ended September 30, 2001, income statement: net sales, gross profit and selling, general and administrative expenses were reduced by $238 million. The adoption of EITF 00-25 resulted in the following reclassifications in the nine months ended September 30, 2001, income statement: net sales, gross profit and selling, general and administrative expenses were reduced by $576 million. The adoption of EITF 00-25 had no impact on profit from operations, net income or earnings per share. PAGE 7 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In July 2001, Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," was issued. The Company adopted the provisions of SFAS 142 on January 1, 2002. SFAS 142 requires that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment, at least annually, in accordance with the new impairment testing provisions of SFAS 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." During the first quarter of 2002, the Company completed its evaluation of the carrying amounts of goodwill and other intangible assets, and noted that certain goodwill and indefinite-lived intangible assets were inadvertently excluded from the Company's disclosures of goodwill and indefinite-lived intangible assets in the "Effect of Recent Accounting Pronouncements" footnote in the consolidated financial statements for the year ended December 31, 2001. Unamortized goodwill at December 31, 2001, was $935 million. Unamortized other intangible assets with indefinite lives at December 31, 2001, was $313 million. The net impact of the adoption of SFAS 142 is a reduction of annual amortization expense of $34 million. No impairment losses were recognized due to the change in accounting principle. Intangible Assets (Millions) ----------------------------
Weighted Average September 30, 2002 December 31, 2001 September 30, 2001 Amortization ---------------------- ---------------------- ---------------------- Period Carrying Accumulated Carrying Accumulated Carrying Accumulated (Years) Amount Amortization Amount Amortization Amount Amortization ------------ -------- ------------ -------- ------------ -------- ------------ Amortized Intangible Assets Patents 6 $ 103 $ 50 $ 103 $ 38 $ 175 $ 46 Trademarks 6 11 2 11 1 11 1 Software 5 11 9 16 7 16 7 Endorsements - 61 61 61 61 61 61 Other 23 12 3 12 3 12 2 ----- ----- ----- ----- ----- ----- Total 7 $ 198 $ 125 $ 203 $ 110 $ 275 $ 117 ===== ===== ===== ===== ===== ===== Unamortized Intangible Assets Trademarks $ 315 $ 313 $ 316 Pension 12 12 6 Aggregate Amortization Expense: For the Three Months ended September 30, 2002 $ 5 September 30, 2001 $ 14 For the Nine Months ended September 30, 2002 $ 15 September 30, 2001 $ 42 Estimated Amortization Expense: For the Years ended December 31, 2002 $ 20 2003 $ 19 2004 $ 18 2005 $ 5 2006 $ 5 2007 $ 2
PAGE 8 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total Goodwill by segment follows.
September 30, Decemeber 31, September 30, Net Carrying Amount 2002 2001 2001 ------------ ------------ ------------ Blades & Razors $ 140 $ 140 $ 140 Personal Care - - - Duracell 563 550 660 Oral Care 173 172 174 Braun 76 73 77 ------ ----- ------ Total $ 952 $ 935 $1,051 ====== ===== ====== The change between the December 31, 2001, and September 30, 2002, balances is mainly due to the impact of foreign currency translation.
PAGE 9 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present a reconciliation of net income, earnings per share and comprehensive income, as reported, to adjusted amounts which include the impact of the adoption of SFAS 142 for all periods presented. Goodwill and Intangible Assets - Adoption of SFAS 142 (millions, except per share amounts) -----------------------------------------------------
Three Months Ended Nine Months Ended September 30 September 30 ------------------- ------------------- 2002 2001 2002 2001 ------ ------ ------ ------ Net Income ---------- Net income, as reported $ 354 $ 296 $ 870 $ 710 Add: Goodwill amortization, net of tax 6 17 Add: Trademark amortization, net of tax 2 6 Less: Amortization from change in useful (2) (6) lives, net of tax ----- ----- ----- ----- Adjusted net income $ 354 $ 302 $ 870 $ 727 ===== ===== ===== ===== Net Income Per Common Share --------------------------- Basic, as reported $ .33 $ .28 $ .82 $ .67 Add: Goodwill amortization, net of tax - .02 Add: Trademark amortization, net of tax - - Less: Amortization from change in useful - - lives, net of tax ----- ----- ----- ----- Basic, adjusted $ .33 $ .28 $ .82 $ .69 ===== ===== ===== ===== Assuming full dilution, as reported $ .33 $ .28 $ .82 $ .67 Add: Goodwill amortization, net of tax - .02 Add: Trademark amortization, net of tax - - Less: Amortization from change in useful - - lives, net of tax ----- ----- ----- ----- Assuming full dilution, adjusted $ .33 $ .28 $ .82 $ .69 ===== ===== ===== ===== Comprehensive Income -------------------- Comprehensive income, as reported $ 386 $ 314 $ 911 $ 642 Add: Goodwill amortization, net of tax 6 17 Add: Trademark amortization, net of tax 2 6 Less: Amortization from change in useful (2) (6) lives, net of tax ----- ----- ----- ----- Adjusted comprehensive income $ 386 $ 320 $ 911 $ 659 ===== ===== ===== =====
PAGE 10 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company plans to adopt the provisions of SFAS 143 on January 1, 2003, and does not expect the adoption to have a material impact on its financial statements. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued. It provides new guidance that modifies the existing guidance in SFAS 121 and in APB Opinion No. 30. Goodwill will still be evaluated for impairment under SFAS 142. The Company adopted SFAS 144 on January 1, 2002. Its adoption did not have any impact on the Company's financial statements. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued. SFAS 145 rescinds SFAS 4 and SFAS 64 related to classification of gains and losses on debt extinguishment such that most debt extinguishment gains and losses will no longer be classified as extraordinary. SFAS 145 also amends SFAS 13 with respect to sales-leaseback transactions. The Company adopted the provisions of SFAS 145 effective April 1, 2002, and the adoption had no impact on the Company's reported results of operations or financial position. In June 2002, the FASB issued SFAS 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 statement is effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. Management is in the process of evaluating the impact of this statement and does not believe that its adoption will have a material impact on the financial statements. Advertising ----------- The advertising expense detailed below is included in selling, general and administrative expenses.
Three Months Ended Nine Months Ended September 30 September 30 ------------------ ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net Sales $ 2,168 $ 2,123 $ 5,924 $ 5,666 Advertising 160 160 456 422 % Net Sales 7.4% 7.5% 7.7% 7.4%
PAGE 11 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restructuring and Asset Impairments ----------------------------------- On December 18, 2000, the Company announced a restructuring program and impaired certain intangible assets. In accordance with EITF Issue No. 94-3, SFAS 121 and SAB 100, the Company recorded, in the fourth quarter of 2000, a charge to operating expenses of $572 million ($430 million after taxes, or $.41 in net income per common share, fully diluted). The charge for the restructuring program was $360 million, and activity under the program is virtually complete. The majority of the remaining balance is due to the timing of severance and other benefit payments. The charge for impaired intangible assets was $212 million to write down $157 million of acquired goodwill relating to the Thermoscan personal diagnostic appliance brand in the Braun segment and $55 million of acquired goodwill and identifiable intangible assets for certain national battery brands in the Duracell segment. Details of the activity in the 2000 restructuring program follow. The other benefits portion of employee-related expenses, shown below, include fringe benefits, outplacement fees and special termination benefits related to pensions.
2000 Restructuring Program -------------------------- Year to Plan Activity Date Inception Initial Through 2002 Through Balance (Millions) Provision 2001 Activity Sept. 30, 2002 Sept. 30, 2002 --------------------- --------- ----------- -------- -------------- -------------- Employee-related expenses Severance payments $146 $ 90 $ 38 $128 $ 18 Other benefits 67 47 11 58 9 Asset impairments Prop., plant, & equip. 120 120 - 120 - Contractual obligations and other 27 24 3 27 - ---- ---- ---- ---- ---- Total $360 $281 $ 52 $333 $ 27 ==== ==== ==== ==== ==== Employee Reductions 2,700 2,620 139 2,759 -
PAGE 12 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restructuring and Asset Impairments (Continued) ----------------------------------------------- During the fourth quarter of 2001, the Company recorded a charge of $63 million associated with the withdrawal from several noncore businesses and the closing of one factory in the Duracell segment. The factory closure, based on a study that revealed excess worldwide capacity, resulted in the reduction of 170 employees. The factory closure and the majority of employee reductions have been completed. In June 2002, the Company recorded a $30 million pretax gain on the sale of Gillette's rights in the Vaniqa business. Vaniqa, a prescription cream that slows the growth of unwanted facial hair in women, was distributed through a joint venture with Bristol-Myers Squibb. This gain included a recovery of $8 million to the restructuring reserve. Proceeds from the sale were received in June 2002. Details of the activity in the 2001 restructuring program follow.
2001 Restructuring Program -------------------------- Year to Plan Activity Date Inception Initial Through 2002 Through Balance (Millions) Provision 2001 Activity Sept. 30, 2002 Sept. 30, 2002 --------------------- --------- -------- -------- -------------- -------------- Employee-related expenses Severance payments $ 3 $ - $ 2 $ 2 $ 1 Prop., plant, & equipment 23 23 - 23 - Contractual obligations and other 37 7 20* 27* 10 ---- ---- ---- ---- ---- Total $ 63 $ 30 $ 22 $ 52 $ 11 ==== ==== ==== ==== ==== Employee Reductions 170 - 164 164 6
* Includes recovery of $8 million in June 2002. PAGE 13 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Functional Excellence --------------------- In the second quarter of 2002, the Company began actions associated with its Functional Excellence ("FE") initiative. This initiative is focused on reducing overhead costs, while upgrading capabilities, by improving processes and eliminating duplication across functions. Through September 2002, "FE" programs amounting to $48 million have been prepared, approved and executed. The costs related to these programs, primarily severance related, have been recorded as normal operating expenses in selling, general and administrative expenses. PAGE 14 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Share Repurchase Program ------------------------ The Company has a share repurchase program that authorizes the purchase of up to 125 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, 2001, the Company repurchased 94.1 million shares in the open market for $4,096 million. There were no repurchases in the first nine months of 2002. During 2002, the Company has continued to sell equity put options as an enhancement to the repurchase program and collected $15.2 million in premiums during the three months and nine months ended September 30, 2002. These options provide the Company with an additional opportunity to supplement open-market purchases of its common stock if the options expire "in the money" (the option strike price is greater than the closing price for Gillette common stock on the expiration date). In addition, the premiums received are a source of funding for share purchases. The options are exercisable only on the last day of their term. The Company, at its discretion, may elect to settle by paying net cash or by purchasing the shares. The put option prices were based on the market value of the Company's stock at the date of issuance. The redemption value of the outstanding options, which represents the options' price multiplied by the number of shares under option, is presented in the accompanying consolidated balance sheet as "Contingent Redemption Value of Common Stock Put Options", with a value of $241 million. All of the outstanding put options mature in the fourth quarter. At September 30, 2002, the outstanding put options had strike prices which were greater than the closing price for Gillette common stock on September 30, 2002. Those options were, therefore, "in the money." Although the options are not exercisable until a future date, the "in the money" obligation at September 30, 2002 was $10.3 million. PAGE 15 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial Information by Business Segment ----------------------------------------- Net sales, profit (loss) from operations, adjusted profit (loss) from operations for 2001 assuming adoption of SFAS 142 at January 1, 2001, and identifiable assets for each of the Company's business segments are set forth below. There are no material intersegment revenues.
Net Sales -------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------- ------------------- (Millions) 2002 2001 2002 2001 ------ ------ ------ ------ Blades & Razors $ 887 $ 861 $2,541 $2,347 Personal Care 213 214 595 586 Duracell 482 503 1,242 1,284 Oral Care 321 300 861 799 Braun 265 245 685 650 ------ ------ ------ ------ Total $2,168 $2,123 $5,924 $5,666 ====== ====== ====== ====== Profit/(Loss) from Operations Three Months Ended September 30 -------------------------------------------------------- (Millions) 2002 2001 Amortization 2001 As Reported Adjustment As Adjusted ------ ----------- ------------ ----------- Blades & Razors $ 377 $ 332 $ - $ 332 Personal Care 17 28 - 28 Duracell 78 56 8 64 Oral Care 60 68 1 69 Braun 22 25 - 25 ------ ------ ------ ------ Subtotal Reportable Segments 554 509 9 518 All Other (32) (36) - (36) ------ ------ ------ ------ Total $ 522 $ 473 $ 9 $ 482 ====== ====== ====== ====== Profit/(Loss) from Operations Nine Months Ended September 30 -------------------------------------------------------- (Millions) 2002 2001 Amortization 2001 As Reported Adjustment As Adjusted ------ ----------- ------------ ----------- Blades & Razors $ 989 $ 835 $ - $ 835 Personal Care 33 48 - 48 Duracell 123 134 24 158 Oral Care 163 163 3 166 Braun 47 65 - 65 ------ ------ ------ ------ Subtotal Reportable Segments 1,355 1,245 27 1,272 All Other (1) (56) (78) - (78) ------ ------ ------ ------ Total $1,299 $1,167 $ 27 $1,194
(1) Nine months ended September 30, 2002, All Other includes the $30 million pretax gain on the sale of Vaniqa. PAGE 16 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable Assets ------------------------------- Sept. 30, Dec. 31, Sept. 30, (Millions) 2002 2001 2001 -------- ------- -------- Blades & Razors $ 3,149 $ 3,195 $ 3,120 Personal Care 526 515 520 Duracell 2,786 2,932 3,102 Oral Care 1,062 976 948 Braun 1,009 963 1,032 ------- ------- ------- Subtotal Reportable Segments 8,532 8,581 8,722 All Other 1,486 1,365 927 Discontinued Operations - 23 28 ------- ------- ------- Total $10,018 $ 9,969 $ 9,677 ======= ======= =======
PAGE 17 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Computation of net income per common share (Millions, except per share amounts) ------------------------------------------
Three Months Ended Nine Months Ended Sept. 30 September 30 ------------------ ------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Net Income, as reported................. $ 354 $ 296 $ 870 $ 710 ====== ====== ====== ====== Adjusted net income, assuming the adoption of SFAS 142 for 2001 ........ $ 354 $ 302 $ 870 $ 727 ====== ====== ====== ====== Common shares, basic ................... 1,058 1,055 1,057 1,055 Effect of dilutive securities: Stock options ...................... 2 3 4 3 ------ ------ ------ ------ Common shares, assuming full dilution 1,060 1,058 1,061 1,058 ====== ====== ====== ====== Net Income per Common Share: Basic ................................ $ .33 $ .28 $ .82 $ .67 ====== ====== ====== ====== Assuming full dilution ........ $ .33 $ .28 $ .82 $ .67 ====== ====== ====== ====== Adjusted Net Income per Common Share: Basic $ .33 $ .28 $ .82 $ .69 ====== ====== ====== ====== Assuming full dilution $ .33 $ .28 $ .82 $ .69 ====== ====== ====== ======
As of September 30, 2002 and 2001, 56.2 million and 47.3 million shares of common stock issuable under stock options, respectively, were not included in the calculation of fully diluted earnings per share because the option exercise price was above the market price. Therefore, the effect of including these options in the calculation would have been anti-dilutive. PAGE 18 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SFAS 123 Stock Options ---------------------- The Company applies APB 25 and related interpretations in accounting for its stock option plans. In accordance with SFAS 123, the Company provides, on a pro forma basis, the effect on the Company's net income and net income per common share had the Company recorded an expense for the fair value of options granted consistent with SFAS 123. For the years 1997 through 2001, the Company calculated the fair value of the options granted under the plan based on a one-year vesting period, even though the stock option plan was amended, effective April 16, 1997, to provide for vesting in one-third increments over a three-year period. The following tables present the pro forma information as reported and as adjusted.
Years ended December 31, (millions, except per share amounts) 2001 2000 1999 1998 1997 ------------------------------------ ---- ---- ---- ---- ---- As Reported ----------- Net income As reported $910 $392 $1,260 $1,081 $1,427 Pro forma 792 311 1,114 981 1,339 Net income per common share Basic As reported $.86 $.37 $ 1.15 .96 1.27 Pro forma .75 .29 1.02 .87 1.19 Assuming full dilution As reported .86 .37 1.14 .95 1.24 Pro forma .75 .29 1.01 .86 1.16 As Adjusted ----------- Net income As reported $910 $392 $1,260 $1,081 $1,427 Pro forma 801 282 1,179 1,031 1,410 Net income per common share Basic As reported $.86 $.37 $ 1.15 .96 1.27 Pro forma .76 .27 1.08 .92 1.24 Assuming full dilution As reported .86 .37 1.14 .95 1.24 Pro forma .76 .27 1.06 .90 1.21
PAGE 19 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 2002 versus Third Quarter 2001 -------------------------------------------- Total Company: Sales for the quarter ended September 30, 2002, were $2.17 billion, an increase of 2% versus the same quarter of the prior year. Pricing in the quarter was favorable by 2%, and foreign exchange had no material impact. Blades and Razors: Sales of blades and razors increased 3%, while profit from operations increased 14%, compared with the third quarter of last year. Without the effect of exchange, sales grew 4%. The key drivers to sales growth were strong systems sales worldwide, higher pricing and ongoing trade-up to Mach3 and Venus. In addition, shipments of disposable razors continued to improve during the quarter. The increase in profits was driven by growth in Mach3 and Venus globally, favorable systems versus disposables product mix and savings from our strategic sourcing initiative. These gains more than offset incremental Functional Excellence expenses. In the fourth quarter of 2001, we experienced a pre-price increase buy-in of approximately two weeks supply of blade/razor product in North America in advance of a price increase on select blade/razor product effective January 1, 2002. The buy-in was equivalent to approximately $50 million in sales. This year, we will not have a price increase effective January 1, 2003. Therefore we anticipate no pre-price increase buy-in in the fourth quarter of 2002. However, we have announced to our trade partners in North America that we intend to increase prices on select blade/razor products around February 1, 2003. Personal Care: Personal Care sales in the quarter were 1% below those of 2001, due to lower sales in Latin America, where the struggling economy in Argentina and increased competitive pressures in Colombia continued to affect volumes and pricing. The sales decline also reflected higher trade and consumer spending to support new products in the US. These factors offset underlying unit growth in the North America and AMEE markets. Personal Care profit from operations declined 40%, as increased advertising to support new products more than offset manufacturing efficiencies and savings from our strategic sourcing initiative. Duracell: Sales of Duracell for the quarter decreased 4% versus those of a year ago. Without the effect of exchange, sales fell 5%. Despite strong unit gains in the Europe and AMEE markets, sales declined due to several factors, including lower shipments in North America (share loss as a result of lower promotional spending), the ongoing shift in product mix from Ultra to CopperTop, an adverse shift in pack size mix related to the retail channel shift in sales towards mass merchandisers and club stores, and battery category weakness in Latin America. Profit from operations increased 41% versus the third quarter of the prior year, due primarily to cost savings initiatives. Oral Care: Oral Care sales were 7% above those of 2001. Without the effect of exchange, sales were 6% above those of the prior year. In Manual Oral Care, sales were driven by the successful North American launch of the Oral-B Stages line of children's toothbrushes and the restage of the entry-level "Indicator" brush. Strong growth in Asia and AMEE, particularly in Russia, from our entry level Exceed, Vision and Classic toothbrushes also made a significant contribution. In Power Oral Care, sales growth was driven by the 3D Excel rechargeable power toothbrush in North America, incremental battery market share in both North America and Europe and strong rechargeable gains in Asia plus substantial gains in the battery powered business. Third-quarter profit from operations fell 12%, reflecting incremental expenses related to the write-down of excess real property, mix shift to battery brushes, higher advertising and promotional support behind new products, and unfavorable pricing and higher trade spending in the battery segment. PAGE 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Braun: Sales of Braun in the quarter were 8% above those of the previous year. Excluding exchange, Braun sales were 5% higher than in the prior year. The increase in sales was driven by strong electric shaver performance in the North America, Japan and AMEE markets, which offset weakness in the key German market where conversion to the Euro negatively impacted consumer confidence resulting in market contraction this quarter. Higher advertising spending behind new products, the impact of the Yen on our margins in Japan and Functional Excellence incremental costs more than offset the favorable impact of cost savings initiatives, resulting in a 12% decrease in profit from operations, compared with the prior year. Nine Months 2002 versus Nine Months 2001 ---------------------------------------- Total Company: Sales for the nine months ended September 30, 2002, were $5.92 billion, an increase of 5% versus the same period last year. Volume/mix accounted for the entire increase, while pricing and exchange were immaterial. Blades and Razors: Sales of blades and razors increased 8%, while profit was up 18%, compared with the first nine months of last year. Excluding exchange, sales grew 10%. Sales growth was driven by the success of our premium shaving systems and favorable comparisons to 2001, when we sold below consumption. The increase in profits was driven by growth in Mach3 and Venus globally, favorable systems versus disposables product mix and savings from our strategic sourcing initiative. These gains more than offset incremental Functional Excellence expenses and higher manufacturing costs, due to the strong Euro. In the fourth quarter of 2001, we experienced a pre-price increase buy-in of approximately two weeks supply of blade/razor product in North America in advance of a price increase on select blade/razor product effective January 1, 2002. The buy-in was equivalent to approximately $50 million in sales. This year, we will not have a price increase effective January 1, 2003. Therefore we anticipate no pre-price increase buy-in in the fourth quarter of 2002. However, we have announced to our trade partners in North America that we intend to increase prices on select blade/razor products around February 1, 2003. Personal Care: Personal Care sales were 2% above those of 2001, driven by new product successes that were partially offset by currency devaluations, competitive activity and market contraction in Latin America. Profit from operations declined 31%, due to increased marketing to support new product launches, which more than offset the impact of higher sales and savings from our strategic sourcing initiative. Duracell: Sales of Duracell for the nine months decreased 3% from those of a year ago. Favorable unit shipments were offset by increased promotional spending and an adverse shift in pack size mix related to the retail channel shift in sales towards mass merchandisers and club stores. The higher promotional spending in the first and second quarters, unfavorable mix shift from Ultra to CopperTop, and the first-quarter 2002 costs of withdrawing selected hearing aid batteries contributed to an 8% decrease in profit from operations, as compared with the prior year. Oral Care: Oral Care sales were 8% above those of 2001, reflecting the success of new product introductions in both the manual and power segments. Profit from operations showed little change from that of the prior year, as sales gains from new products and cost savings were offset by increased marketing spending and incremental expenses related to the write-down of excess real property. Braun: Sales of Braun were 5% above those of the previous year. Sales increased 4% over the prior year without the impact of exchange. Sales growth was driven by the success of our new electric shavers. Profit from operations decreased 28%, as compared with the year-ago period. Higher advertising to support new products and the Yen impact on our margin in Japan offset profit growth from sales advances. PAGE 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Costs and Expenses, Third Quarter 2002 versus Third Quarter 2001 ----------------------------------------------------------------- Gross profit for the quarter ended September 30, 2002, was $1.29 billion, an increase of 7%, compared with the third quarter of 2001. Gross profit as a percentage of sales was 59.3%, compared with 56.6% in 2001. Gross margin improvement was driven by cost savings from the December 2000 restructuring, savings from our strategic sourcing initiative, favorable product mix in our Blade/Razor business, and cost savings and lower trade spending in the Duracell segment. This was partially offset by higher promotional spending and unfavorable product mix in Oral Care. Selling, general and administrative expenses increased by $36 million, or 5%, reflecting higher marketing and administrative expenses. Advertising was marginally up (1%), and sales promotion grew 4% to 3.4% of sales. Other marketing and administrative expenses were 6% above those of the prior year. Excluding the third-quarter provision of $17 million for the Functional Excellence program, other marketing and administrative expenses were 3% above those of the prior year and effectively unchanged year-over-year as a percentage of sales. Profit from operations was $522 million, up 10% versus $473 million a year earlier. The adoption of SFAS 142 resulted in a third-quarter decrease in amortization of approximately $9 million pretax, compared with a year ago. Net interest expense was lower, due to lower interest rates year-over-year and strong cash flow in the quarter. The impact of exchange was a net gain for the third quarter of 2002, compared with a net loss, due to Turkish devaluation, in the third quarter of 2001. The effective tax rate was unchanged at 31%. Net income was $354 million, an increase of 20% from $296 million in 2001. Diluted net income per common share of $.33 was 18% higher than the $.28 in 2001. Given the substantial decline in equity markets to date, the Company estimates that it will incur higher pension costs in 2003. Current pension plan asset levels and estimates of year-end pension liabilities could result in an unfavorable earnings per share impact of approximately $.05 per share in 2003. However, changes in equity markets and long-term interest rates, as well as additional funding prior to year end could all impact this estimate. Costs and Expenses, Nine Months 2002 versus Nine Months 2001 ------------------------------------------------------------ Gross profit for the nine months ended September 30, 2002, was $3.6 billion, an increase of 6% versus 2001. Gross profit as a percentage of sales was 59.9%, compared with 59.1% in 2001. Favorable Blade/Razor mix and savings from our restructuring programs and the strategic sourcing initiative, partially offset by higher year-over-year trade spending and unfavorable product mix shifts in both Duracell and Oral Care, contributed to the gross margin improvement. Selling, general and administrative expenses increased by 3% over 2001. Excluding the $30 million pretax gain on the sale of the Vaniqa business, selling, general and administrative expenses increased 5%, compared with the prior year. Advertising spending was up 8%, driven by higher investment behind both new and established products. Sales promotion increased 5% over the prior year, but was unchanged as a percentage of sales at 3.8%. Other marketing and administrative expenses increased 2%, compared with the prior year, or 4%, excluding the gain on the sale of Vaniqa in the second quarter of 2002. The increase was driven by a year-to-date expense of $48 million related to our Functional Excellence program. Profit from operations was $1.30 billion, up 11% versus $1.17 billion in 2001. Excluding the gain on the sale of Vaniqa, profit from operations was $1.27 billion, an increase of 9% from the prior year. The adoption of SFAS 142 resulted in a year-to-date decrease in amortization of approximately $26 million pretax as compared with the prior year. PAGE 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net interest expense declined, due to significantly lower rates year-over-year and our strong cash flow. Transactional gains in the quarter compared with losses a year ago that arose primarily in Turkey. The effective tax rate was unchanged at 31%. Net income of $870 million was 23% higher than the $710 million in 2001. Excluding the gain on the sale of Vaniqa in the second quarter of 2002, net income was $850 million, an increase of 20% over the previous year. Diluted net income per common share of $.82 was 22% higher than the $.67 in 2001. Excluding the gain on the sale of Vaniqa in the second quarter of 2002, diluted net income per common share of $.80 was 19% above the previous year. Given the substantial decline in equity markets to date, the Company estimates that it will incur higher pension costs in 2003. Current pension plan asset levels and estimates of year-end pension liabilities could result in an unfavorable earnings per share impact of approximately $.05 per share in 2003. However, changes in equity markets and long-term interest rates, as well as additional funding prior to year end could all impact this estimate. Restructuring and Asset Impairments ----------------------------------- On December 18, 2000, the Company announced a restructuring program and the impairment of certain intangible assets. This resulted in a fourth-quarter charge to operations of $572 million ($430 million after taxes, or $.41 in net income per common share, fully diluted). The worldwide restructuring of operations improved the Company's operating efficiency, streamlined the supply chain and further decreased costs. The program budgeted a net reduction of approximately 2,700 employees across all business functions, operating units and geographies. The charge for impaired intangible assets was $212 million to write down $157 million of acquired goodwill relating to the Thermoscan personal diagnostic appliance brand in the Braun segment and $55 million of acquired goodwill and identifiable intangible assets for certain national battery brands in the Duracell segment. The charge for the restructuring program was $360 million, and payments under the program continued throughout the first nine months of 2002. Pretax cash outlays for the restructuring program were estimated at approximately $240 million. Cash severance payments will continue in 2002, due to the severance payment deferral options available to terminated employees. At September 30, 2002, remaining cash outlays were $27 million, which will occur primarily this year. Pretax savings from the program were $31 million in the third quarter of 2002 and $87 million for the nine months ended September 30, 2002. Savings will be approximately $115 million for the year. During the fourth quarter of 2001, the Company recorded a charge of $63 million associated with planned new actions, including the withdrawal from several minor noncore businesses and the cessation of including operations in one factory in the Duracell segment. The factory closure, based on a study that showed excess worldwide capacity, resulted in the reduction of 170 employees. Pretax savings from the program were $2 million in the third quarter of 2002 and $5 million for the nine months ended September 30, 2002. Savings will be approximately $6 million for the year 2002. In the second quarter of 2002, the Company began actions associated with its Functional Excellence initiative. This initiative is focused on reducing overhead costs, while upgrading capabilities, by improving processes and eliminating duplication across functions. The total cost of this project is estimated at $350-$400 million. During 2002, the Company expects that programs related to this initiative will be prepared, approved and executed and that the cost in 2002 will be between $80-$100 million. The balance of the costs will be expensed (when the programs have been prepared, approved and executed) from 2003-2005. Annualized savings are expected to be $300-$350 million by 2006. PAGE 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition ------------------- Cash provided by operations has been the Company's primary source of funds to finance operating needs, capital expenditures and dividend payments. During the nine months ended September 30, 2002, the Company generated $1.42 billion in cash from operations, compared with $1.18 billion in the same period last year, a $240 million improvement, despite unmatched pension funding of $200 million in 2002. Continued focus on working capital management and lower capital spending resulted in a net debt reduction of $630 million for the nine months. Net debt (total debt net of associated swaps, less cash and cash equivalents) ended at $2.69 billion at September 30, 2002, compared with the December 31, 2001, balance of $3.32 billion. 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. At September 30, 2002, there was $1.09 billion outstanding under the Company's commercial paper program, compared with $1.97 billion at the end of 2001. On October 15, 2002, the Company entered into a new 364-day revolving bank credit facility in the amount of $1.1 billion expiring on October 14, 2003. A provision in this agreement gives the Company the option to convert it into a one-year term loan in the amount of up to $1.1 billion. On March 6, 2002, the Company privately placed $350 million 4.0% notes, due June 2005. The proceeds from the debt issuance were used to reduce commercial paper borrowings. On August 21, 2002, the Company exchanged its 4.0% notes due June 2005, which were registered under the Securities Act of 1933 pursuant to a registration statement on Form S-4, for approximately $327 million of the notes that were privately placed on March 6, 2002. A shelf registration statement on Form S-3 filed by the Company with the Securities and Exchange Commission was declared effective on July 10, 2002. Under the registration statement, the Company may issue debt securities in the U.S. of up to $1.5 billion. It is currently anticipated that the proceeds from the sale of any debt securities issued under the shelf registration statement will be used to repay commercial paper borrowings and replace other maturing debt, although the proceeds may also be used for other corporate purposes, including repurchase of the Company's stock. At September 30, 2002, $268 million was issued under this shelf registration statement, consisting of $250 million 4.125% notes, due August 2007, and $18 million in fixed interest notes with various terms and maturities, issued under the Gillette CoreNotes(TM) program. All proceeds from these issuances were used to reduce commercial paper borrowings. On October 1, 2002, the Company issued $500 million 3.5% notes, due October 2007, under its $1.5 billion shelf registration. These notes are redeemable at par, at the Company's option on any interest payment date on or after October 15, 2004. The proceeds from this issuance were also used to reduce commercial paper borrowings. PAGE 24 DISCLOSURE CONTROLS AND PROCEDURES Within 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's CEO and CFO have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) are effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the completion of their evaluation. PAGE 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is subject, from time to time, to legal proceedings and claims arising out of its business that cover a wide range of matters, including antitrust and trade regulation, advertising, product liability, contracts, environmental issues, patent and trademark matters and taxes. Management, after review and consultation with counsel, considers that any liability from all of these legal proceedings and claims would not materially affect the consolidated financial position, results of operations or liquidity of the Company. Item 5. Other Information Cautionary Statement -------------------- Certain statements that Gillette may make from time to time, including statements contained in this report, constitute "forward-looking statements" under the federal securities laws. Forward-looking statements may be identified by words such as "plans," "expects," "believes," "anticipates," "estimates," "projects," "will" and other words of similar meaning used in conjunction with, among other things, discussions of future operations, acquisitions and divestitures, financial performance, Gillette's strategy for growth, product development and new product launches, market position and expenditures. Forward-looking statements are based on current expectations of future events, but actual results could vary materially from Gillette's expectations and projections. Investors are cautioned not to place undue reliance on any forward-looking statements. Gillette assumes no obligation to update any forward-looking statements. Gillette cautions that historical results should not be relied upon as indications of future performance. Factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Gillette include the following, some of which are described in greater detail below: - the pattern of Gillette's sales, including variations in sales volume within periods; - consumer demands and preferences, including the acceptance by Gillette's customers and consumers of new products and line extensions; - the mix of products sold; - Gillette's ability to control its internal costs and the cost of materials and services; - competitive factors, including the prices, promotional incentives and trade terms of Gillette's products and the response of its customers and competitors to changes in these factors; - technological advances by Gillette and/or its competitors; - new patents granted to Gillette and/or its competitors; - changes in exchange rates in one or more of Gillette's geographic markets; - changes in accounting policies; - acquisition and divestiture activities; or - the impact of general economic conditions in the United States and in other countries in which Gillette currently does business. PAGE 26 PART II. OTHER INFORMATION Competitive Environment ----------------------- Gillette experiences intense competition for sales of its products in most markets. Gillette's products compete with widely advertised, well-known, branded products, as well as private label products, which typically are sold at lower prices. In most of its markets, Gillette has major competitors, some of which are larger and more diversified than Gillette. Competitive activity within Gillette's markets, including advertising, pricing, promotion and new product introductions, and new entrants into these markets, can affect Gillette's results in any given period. Changes in Technology and New Product Introductions --------------------------------------------------- In most product categories in which Gillette competes, there are continuous technological changes and frequent introductions of new products and line extensions. Gillette's ability to successfully introduce new products and/or extend lines of existing products will depend on, among other things, Gillette's ability to identify changing consumer tastes and needs, develop new technology, differentiate its products and gain market acceptance of new products. Gillette cannot be certain that it will successfully achieve these goals. With respect specifically to primary alkaline batteries, category growth could be adversely affected by the following additional factors: - technological or design changes in portable electronic and other devices that use batteries as a power source; - continued improvement in the service life of primary batteries; - improvements in rechargeable battery technology; and - the development of new battery technologies. Intellectual Property --------------------- Gillette relies upon patent, copyright, trademark and trade secret laws in the United States and in other countries to establish and maintain its proprietary rights in technology, products and Gillette's brands. Gillette's intellectual property rights, however, could be challenged, invalidated or circumvented. Gillette does not believe that its products infringe the intellectual property rights of others, but such claims, if they are established, can result in material liabilities or loss of business. Cost-Savings Strategy --------------------- Gillette has implemented a number of programs designed to reduce costs. Such programs will require, among other things, the consolidation and integration of facilities, functions, systems and procedures, all of which present significant management challenges. There can be no assurance that such actions will be accomplished as rapidly as anticipated or that the full extent of expected cost reductions will be achieved. PAGE 27 PART II. OTHER INFORMATION Sales and Operations Outside of the United States ------------------------------------------------- Sales outside of the United States represent a substantial portion of Gillette's business. In addition, Gillette has a number of manufacturing facilities and suppliers located outside of the United States. Accordingly, the following factors could adversely affect operating results in any reporting period: - changes in political or economic conditions; - trade protection measures; - import or export licensing requirements; - the overlap of different tax structures; - unexpected changes in regulatory requirements or tax laws; or - longer payment cycles in certain countries. Gillette is also exposed to foreign currency exchange rate risk to its sales, profits, and assets and liabilities denominated in currencies other than the U.S. dollar. Although Gillette uses instruments to hedge certain foreign currency risks (through foreign currency forward, swap and option contracts and non-U.S. dollar denominated financings) and is implicitly hedged through its foreign manufacturing operations, there can be no assurance that Gillette will be fully protected against foreign currency fluctuations. Retail Environment ------------------ With the growing trend towards retail trade consolidation, especially in developed markets such as the United States and Europe, Gillette is increasingly dependent upon key retailers whose bargaining strength is growing. Accordingly, Gillette faces greater pressure from retail trade customers to provide more favorable trade terms. Gillette can be negatively affected by changes in the policies of its retail trade customers, such as inventory destocking, limitations on access to shelf space and other conditions. Many of Gillette's customers, particularly Gillette's high-volume retail trade customers, have engaged in accelerated efforts to reduce inventory levels and shrinkage and change inventory delivery systems. While Gillette expects the level of trade inventory of its products to decline over time, the speed and magnitude of such reductions, and/or the inability of Gillette to develop satisfactory inventory delivery systems, could adversely affect operating results in any reporting period. PAGE 28 PART II. OTHER INFORMATION Item 6(a) Exhibits Exhibit 10.1 Amendment to Employment Agreement, dated January 19, 2001, between The Gillette Company and James M. Kilts, filed herewith. Exhibit 10.2 $1,100,000,000 364-Day Credit Agreement, dated as of October 15, 2002, among The Gillette Company, JPMorgan Chase Bank, as agent, and a syndicate of domestic and foreign banks, 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 August 6, 2002, a current report on Form 8-K containing two exhibits: the Statements Under Oath of James M. Kilts and Charles W. Cramb Regarding Facts and Circumstances Relating to Exchange Act Filings. (b) The Company filed, on August 6, 2002, a current report on Form 8-K containing four exhibits: the Underwriting Agreement, the First Supplemental Indenture, the Note and the Legal Opinion related to the public offering of the Company's 4.125% Senior Notes due 2007. (c) The Company filed, on August 23, 2002, a current report on Form 8-K containing four exhibits: the Distribution Agreement, the Second Supplemental Indenture, the Form of Note and the Legal Opinion related to public debt that the Company may issue from time to time pursuant to its Medium Term Note Program. (d) The Company filed, on October 1, 2002, a current report on Form 8-K containing four exhibits: the Underwriting Agreement, the Third Supplemental Indenture, the Note and the Legal Opinion related to the public offering of the Company's 3.50% Senior Notes due 2007. PAGE 29 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 6, 2002 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 officer 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 officer 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 officer 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: November 1, 2002 /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 officer 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 officer 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 officer 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: November 1, 2002 /s/ Charles W. Cramb ------------------------------ Charles W. Cramb Senior Vice President, Chief Financial Officer EXHIBIT INDEX Exhibit Number and Description 10.1 Amendment to Employment Agreement, dated January 19, 2001, between The Gillette Company and James M. Kilts. 10.2 $1,100,000,000 364-Day Credit Agreement, dated as of October 15, 2002, 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. 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.