-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TKHOgRy6dwSG53c29qmjBFn6cwIdEQNhjUZq7/fKiBSWXa5ADLy3stXtzxYFwx7e XaG+HZ+3b6VpRDvROz987A== 0000041499-03-000054.txt : 20030805 0000041499-03-000054.hdr.sgml : 20030805 20030805080622 ACCESSION NUMBER: 0000041499-03-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GILLETTE CO CENTRAL INDEX KEY: 0000041499 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 041366970 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00922 FILM NUMBER: 03822235 BUSINESS ADDRESS: STREET 1: PRUDENTIAL TOWER BLDG STREET 2: SUITE 4800 CITY: BOSTON STATE: MA ZIP: 02199 BUSINESS PHONE: 6174217000 MAIL ADDRESS: STREET 1: PRUDENTIAL TOWER BLDG STREET 2: SUITE 4800 CITY: BOSTON STATE: MA ZIP: 02199 FORMER COMPANY: FORMER CONFORMED NAME: GILLETTE SAFETY RAZOR CO DATE OF NAME CHANGE: 19660911 10-Q 1 f10q_063003-tgc.txt FORM 10-Q 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 June 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 July 31, 2003 . . . . . . . . . . . . . . . .1,020,182,696 PAGE 1 PART I. FINANCIAL INFORMATION THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF INCOME (Millions, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------ ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net Sales .......................................... $ 2,254 $ 2,024 $ 4,225 $ 3,756 Cost of Sales ...................................... 870 798 1,648 1,492 ------- ------- ------- ------- Gross Profit ..................................... 1,384 1,226 2,577 2,264 Selling, General and Administrative Expenses ....... 879 807 1,692 1,517 Restructuring - Gain on Sale of Vaniqa ............. - (30) - (30) ------- ------- ------- ------- Profit from Operations ........................... 505 449 885 777 Nonoperating Charges (Income): Interest income .................................. (3) (6) (6) (11) Interest expense ................................. 16 24 30 44 Exchange ......................................... 3 (2) 5 (8) Other charges - net .............................. 6 8 (3) 4 ------- ------- ------- ------- 22 24 26 29 ------- ------- ------- ------- Income before Income Taxes ......................... 483 425 859 748 Income Taxes ....................................... 145 132 258 232 ------- ------- ------- ------- Net Income ....................................... $ 338 $ 293 $ 601 $ 516 ======= ======= ======= ======= Net Income per Common Share: Basic ............................................ $ .33 $ .28 $ .58 $ .49 ======= ======= ======= ======= Assuming Full Dilution ........................... $ .33 $ .28 $ .58 $ .49 ======= ======= ======= ======= Dividends per Common Share: Declared ......................................... $ .3250 $ .3250 $ .3250 $ .3250 Paid ............................................. $ .1625 $ .1625 $ .3250 $ .3250 Weighted average number of common shares outstanding Basic ............................................ 1,021 1,057 1,029 1,056 Assuming full dilution ........................... 1,023 1,062 1,031 1,061
See Accompanying Notes to Consolidated Financial Statements. PAGE 2 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET ASSETS (Millions)
June 30, December 31, June 30, 2003 2002 2002 ------------ ------------ ----------- (Unaudited) (Unaudited) Current Assets: Cash and cash equivalents .............................. $ 614 $ 801 $ 980 Trade receivables, less allowances, June 2003, $55; December 2002, $73; June 2002, $61 ................... 1,135 1,202 1,210 Other receivables ...................................... 395 311 296 Inventories Raw materials and supplies .......................... 116 115 133 Work in process ..................................... 221 191 277 Finished goods ...................................... 822 622 800 ------- ------- ------- Total Inventories ................................. 1,159 928 1,210 ------- ------- ------- Deferred income taxes .................................. 314 380 507 Other current assets ................................... 292 175 294 ------- ------- ------- Total Current Assets .............................. 3,909 3,797 4,497 ------- ------- ------- Property, Plant and Equipment, at cost ................... 6,684 6,429 6,303 Less accumulated depreciation ............................ (3,175) (2,864) (2,756) ------- ------- ------- Net Property, Plant and Equipment ................. 3,509 3,565 3,547 ------- ------- ------- Goodwill ................................................. 975 962 954 Intangible Assets, less accumulated amortization ......... 392 400 409 Other Assets ............................................. 1,096 1,139 814 ------- ------- ------- $ 9,881 $ 9,863 $10,221 ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements. PAGE 3 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY (Millions, except per share amount)
June 30, December 31, June 30, 2003 2002 2002 ------------ ------------ ------------ (Unaudited) (Unaudited) Current Liabilities: Loans payable .................................... $ 364 $ 673 $ 1,903 Current portion of long-term debt ................ 584 527 606 Accounts payable ................................. 549 581 532 Accrued liabilities .............................. 1,646 1,303 1,188 Dividends payable ................................ 166 170 172 Income taxes ..................................... 232 234 392 -------- -------- -------- Total Current Liabilities ..................... 3,541 3,488 4,793 -------- -------- -------- Long-Term Debt ..................................... 2,740 2,457 1,724 Deferred Income Taxes .............................. 625 692 571 Other Long-Term Liabilities ........................ 887 920 713 Minority Interest .................................. 42 46 42 Stockholders' Equity: Common stock, par value $1.00 per share: Authorized 2,320 shares Issued: June 2003, 1,372 shares; Dec. 2002, 1,370 shares; June 2002, 1,370 shares ................ 1,372 1,370 1,370 Additional paid-in capital ....................... 1,233 1,197 1,151 Earnings reinvested in the business .............. 6,877 6,608 6,250 Accumulated other comprehensive loss ............. (1,257) (1,523) (1,428) Treasury stock, at cost: June 2003, 352 shares; Dec. 2002, 326 shares; and June 2002, 312 shares (6,179) (5,392) (4,965) -------- -------- -------- Total Stockholders' Equity ............... 2,046 2,260 2,378 -------- -------- -------- $ 9,881 $ 9,863 $ 10,221 ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements. PAGE 4 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Millions) (Unaudited)
Six Months Ended June 30 ------------------ 2003 2002 ---- ---- Operating Activities Net income ..................................... $ 601 $ 516 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................ 278 244 Deferred income taxes ........................ 39 52 Other ........................................ 11 7 Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Trade and other accounts receivable ........ 59 334 Inventories ................................ (188) (160) Accounts payable and accrued liabilities ... 227 25 Other working capital items ................ (68) (133) Other noncurrent assets and liabilities .... 45 (185) ----- ----- Net cash provided by operating activities 1,004 700 ----- ----- Investing Activities Additions to property, plant and equipment ..... (132) (175) Disposals of property, plant and equipment ..... 23 21 ----- ----- Net cash used in investing activities .... (109) (154) ----- ----- Financing Activities Purchase of treasury stock ..................... (786) - Proceeds from exercise of stock option and purchase plans ............................ 37 23 Proceeds from long-term debt ................... 684 350 Repayment of long-term debt .................... (382) (197) Decrease in loans payable ...................... (311) (333) Dividends paid ................................. (335) (343) Settlements of debt-related derivative contracts 7 9 ----- ----- Net cash used in financing activities .... (1,086) (491) ----- ----- Effect of Exchange Rate Changes on Cash ............ 4 - Net Cash Used in Discontinued Operations ........... - (22) ----- ----- Increase (Decrease) in Cash and Cash Equivalents ... (187) 33 Cash and Cash Equivalents at Beginning of Period ... 801 947 ----- ----- Cash and Cash Equivalents at End of Period ......... $ 614 $ 980 ===== ===== Supplemental disclosure of cash paid for: Interest ....................................... $ 29 $ 50 Income taxes ................................... $ 212 $ 149
See Accompanying Notes to Consolidated Financial Statements. PAGE 5 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Millions) (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net Income, as reported $ 338 $ 293 $ 601 $ 516 Other Comprehensive Income (Loss), net of tax: Foreign Currency Translation 171 47 262 7 Cash Flow Hedges 2 (1) 4 2 ----- ----- ----- ----- Comprehensive Income $ 511 $ 339 $ 867 $ 525 ===== ===== ===== =====
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) ====== ====== ====== ====== 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) ====== ====== ====== ======
The change in accumulated foreign currency translation adjustment for the quarter ended June 30, 2003, was a $171 million gain, net of tax. The gains were primarily in Europe and Brazil. The gain for the quarter ended June 30, 2002, net of tax, was $47 million, with gains in Europe largely offset by losses in Latin America. 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 Six Months Ended June 30, Ended June 30, 2003 2002 2003 2002 ---- ---- ---- ---- (Millions, except per share amounts) - ------------------------------------ Net income, as reported $ 338 $ 293 $ 601 $ 516 Less: Compensation expense for option awards determined by the fair- value-based method, net of related tax effects (25) (27) (50) (54) ------ ------ ------ ------ Pro forma net income $ 313 $ 266 $ 551 $ 462 ====== ====== ====== ====== Net income per common share Basic As reported $ .33 $ .28 $ .58 $ .49 Pro forma .31 .25 .54 .44 Assuming full dilution As reported $ .33 $ .28 $ .58 $ .49 Pro forma .31 .25 .54 .44 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 is not expected to 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 to 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 will account for new or modified arrangements based on this guidance, which could result in the recognition of operating or capital leases under SFAS No. 13. PAGE 8 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Goodwill and Intangible Assets - ------------------------------ Total goodwill by segment follows.
Net Carrying Amount June 30, December 31, June 30, (Millions) 2003 2002 2002 ------------ ------------ ------------ Blades & Razors $ 140 $ 140 $ 142 Duracell 584 571 563 Oral Care 172 173 172 Braun 79 78 77 Personal Care - - - ------ ----- ------ Total $ 975 $ 962 $ 954 ====== ===== ====== The change between the June 30, 2003, December 31, 2002, and June 30, 2002, balances is mainly due to the impact of foreign currency translation.
The detail of intangible assets follows.
Weighted Average June 30, 2003 December 31, 2002 June 30, 2002 Amortization ---------------------- ---------------------- ---------------------- Period Carrying Accumulated Carrying Accumulated Carrying Accumulated (Millions) (Years) Amount Amortization Amount Amortization Amount Amortization ------------ -------- ------------ -------- ------------ -------- ------------ Amortized Intangible Assets Patents 6 $ 101 $ 61 $ 101 $ 53 $ 103 $ 46 Trademarks 6 14 6 13 4 11 2 Software 5 12 10 12 9 16 8 Endorsements - 61 61 61 61 61 61 Other 23 11 3 11 3 12 3 ---- ---- ----- ----- ----- ----- Total 7 $ 199 $ 141 $ 198 $ 130 $ 203 $ 120 ---- ---- ----- ----- ----- ----- Unamortized Intangible Assets Trademarks $ 319 $ 317 $ 314 Pension 15 15 12 ---- ---- ----- ----- ----- ----- Total $ 533 $ 141 $ 530 $ 130 $ 529 $ 120 ==== ==== ===== ===== ===== ===== ---- ----- ----- Intangible Assets, net $ 392 $ 400 $ 409 ==== ===== ===== Aggregate Amortization Expense: For the three months ended June 30, 2003 $ 5 June 30, 2002 $ 5 For the six months ended: June 30, 2003 $ 11 June 30, 2002 $ 10 Estimated Amortization Expense: For the Years ended December 31, 2003 $ 21 2004 $ 19 2005 $ 7 2006 $ 4 2007 $ 3
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 Six Months Ended (Millions) June 30 June 30 ------------------ ------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Net Sales $ 2,254 $ 2,024 $ 4,225 $ 3,756 Advertising 186 159 353 296 % Net Sales 8.2% 7.9% 8.3% 7.9%
PAGE 10 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Share Repurchase Program - ------------------------ The Company has a share repurchase program that authorizes the purchase of up to 150 million shares in the open market or in privately negotiated transactions, depending on market conditions and other factors. From the inception of the program through December 31, 2002, the Company repurchased 108 million shares in the open market for $4.5 billion. In the three months ended March 31, 2003, and June 30, 2003, the Company repurchased 23.5 million and 2.4 million shares for $706 million and $80 million, respectively. 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 Six Months Ended June 30 June 30 --------------------- --------------------- (Millions) 2003 2002 2003 2002 ------ ------ ------ ------ Blades & Razors $1,003 $ 884 $1,896 $1,654 Duracell 432 428 816 760 Oral Care 316 275 611 540 Braun 284 233 499 420 Personal Care 219 204 403 382 ------ ------ ------ ------ Total $2,254 $2,024 $4,225 $3,756 ====== ====== ====== ====== Profit/(Loss) from Operations ---------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 --------------------------- ----------------------- (Millions) 2003 2002 2003 2002 ------ ------ ------ ------ Blades & Razors $ 377 $ 324 $ 708 $ 612 Duracell 54 46 93 45 Oral Care 53 50 102 103 Braun 28 22 21 25 Personal Care 24 5 24 16 ------ ------ ------ ------ Subtotal Reportable Segments 536 447 948 801 All Other (1) (31) 2 (63) (24) ------ ------ ------ ------ Total $ 505 $ 449 $ 885 $ 777 ====== ====== ====== ====== (1) All Other includes the $30 million gain on the sale of Vaniqa in the three and six months ended June 30, 2002.
PAGE 11 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable Assets ------------------------------- June 30, Dec. 31, June 30, (Millions) 2003 2002 2002 --------- ------- --------- (Unaudited) (Unaudited) Blades & Razors $ 3,343 $ 3,170 $ 3,258 Duracell 2,559 2,741 2,782 Oral Care 1,230 1,094 1,057 Braun 1,130 1,065 1,014 Personal Care 539 520 535 ------- ------- ------- Subtotal Reportable Segments 8,801 8,590 8,646 All Other 1,080 1,273 1,575 ------- ------- ------- Total $ 9,881 $ 9,863 $10,221 ======= ======= =======
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 Six Months Ended June 30 June 30 ------------------ ------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Net Income ............................. $ 338 $ 293 $ 601 $ 516 ====== ====== ====== ====== Common shares, basic ................... 1,021 1,057 1,029 1,056 Effect of dilutive securities: Stock options ...................... 2 5 2 5 ------ ------ ------ ------ Common shares, assuming full dilution 1,023 1,062 1,031 1,061 ====== ====== ====== ====== Net Income per Common Share: Basic ................................ $ .33 $ .28 $ .58 $ .49 ====== ====== ====== ====== Assuming full dilution ........ $ .33 $ .28 $ .58 $ .49 ====== ====== ====== ======
As of June 30, 2003 and 2002, 66.0 million and 43.7 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 $31 million in the second quarter of 2002, $121 million for the full year 2002, $44 million in the first quarter of 2003, and $42 million in the second quarter of 2003. Employee terminations are completed within 12 months of accrual. The employee 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 included items such as consulting, lease buyouts and asset write downs related to Functional Excellence programs.
Employee (Millions) Terminations Other Total - ---------- ------- ----- ----- Accrual Balance December 31, 2002 $85.8 $6.3 $92.1 First Quarter 2003: Charges 38.0 6.0 44.0 Payments/Uses (43.6) (2.2) (45.8) ------ ------ ------ Accrual Balance March 31, 2003 80.2 10.1 90.3 ------ ------ ------ Second Quarter 2003: Charges 33.9 7.7 41.6 Payments/Uses (33.7) (5.7) (39.4) ------ ------ ------ Accrual Balance June 30, 2003 $80.4 $12.1 $92.5 ====== ====== ======
Functional Excellence charges in 2003 included $12 million and $13 million which were recorded to cost of goods sold, and $30 million and $73 million which were recorded to selling, general and administrative expenses in the three and six month periods ended June 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. Second Quarter 2003 versus 2002 - ------------------------------- Total Company: Sales for the quarter ended June 30, 2003, were $2.25 billion, an increase of 11% versus the same quarter of the prior year. The impact of exchange was 6%, as the strength of European currencies more than offset unfavorable exchange in Latin America. Volume/mix contributed 5% to sales growth, largely driven by new products. Overall, pricing had no material impact on reported sales, as price increases in Blades and Razors were offset by lower pricing in both Duracell and Oral Care. Profit increased 12% as compared with the prior year, mainly due to favorable product mix in the Blades and Razors business, cost-savings initiatives and manufacturing efficiencies, partially offset by higher year-over-year exchange-driven European-based costs, significantly higher advertising investment, incremental pension expense and higher Functional Excellence charges. 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: Second-quarter sales rose 14% compared with the second quarter of last year. Excluding the impact of exchange, sales increased 8%. Sales growth was driven by the success of Mach3Turbo in North America and Europe, together with the North American launches of the Venus Passion and Venus Spa Collection systems and Sensor3 disposable razors. Second-quarter Blades and Razors profit was up 17%, and margin climbed 100 basis points to 37.6%, reflecting sales performance and continued upgrading to premium systems. These gains were partially offset by a double-digit increase in advertising support. Duracell: Sales of Duracell for the quarter increased 1% versus those of a year ago. Excluding the impact of exchange, sales declined by 4%, as strong alkaline volume gains in Europe and North America were offset by lower pricing due to the North America price-deal realignment program, and lower volumes related to the divestiture of the carbon zinc businesses in South Africa and India. Deep discount pricing programs have recently been announced by competition, which may impact the dynamics of the battery category for the second half of the year. In addition, we expect a reduction in category growth in the United States, due to consumer destocking from first-quarter pantry-loading. Profit from operations grew 20% versus a year ago, reflecting continued manufacturing efficiencies and overhead containment, partially offset by a substantial increase in marketing. The impact of lower pricing as a result of the price-deal realignment was offset by lower promotional activity and the elimination of free cell giveaways. Oral Care: Oral Care second-quarter sales were 15% above those of 2002, or 8% excluding the impact of exchange. The manual and power toothbrush businesses each grew substantially, due to successful new product introductions (CrossAction Vitalizer and CrossAction Power battery) and the strong performance of entry-priced toothbrushes in emerging markets. Oral Care profit from operations grew 7% from a year ago, reflecting increased sales from new products and improved factory performance, partially offset by the impact of exchange on European-sourced product costs and a double-digit 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 22% above those of the previous year, or 12% excluding the impact of exchange. Double-digit sales growth in North America and Asia was driven by the Thermoscan ear-thermometer business, reflecting concerns over the SARS epidemic. In addition, the new SoftPerfection epilator drove strong growth in AMEE and Southern Europe, while the new Flex XP2 men's electric shaver was successfully introduced in Japan. These gains helped to offset a weak economic environment in Europe that continues to pressure the electric shaving category. Strong sales growth and manufacturing efficiencies, partially offset by the impact of exchange on European manufacturing costs and an increase in advertising, resulted in an increase in profit of 28% versus the prior year. Personal Care: Sales for the quarter increased by 8%, or 3% in constant currency. Growth was driven by strong sales of PowerCaps premium clear gel antiperspirants in North America and by strong European sales of Satin Care female shave gel. Profit for the quarter increased significantly, chiefly due to the benefit of cost-savings initiatives. Six Months 2003 versus 2002 - --------------------------- Total Company: Sales for the six months ended June 30, 2003, were $4.23 billion, an increase of 13% versus the same period last year. Excluding the impact of exchange, sales increased by 7%, attributable mainly to volume/mix. Overall, pricing had no material impact on the period, as price increases in Blades and Razors were more than offset by lower prices in Duracell and Oral Care. Profit increased by 14% compared with the prior year, 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, higher advertising investment, incremental Functional Excellence expenses across all business segments, and incremental pension expense. Blades and Razors: Sales increased 15%, and profit increased 16%, compared with the first six months of last year. Excluding the impact of exchange, sales increased 10%. Sales growth was driven by the strength of premium shaving systems, including the launch of Mach3Turbo in Europe. Profit grew at a higher pace than sales, resulting in a margin increase of 40 basis points to 37.4%, as favorable product mix to our premium systems more than offset a double-digit increase in advertising. Duracell: Sales of Duracell for the six months increased 7% versus those of a year ago. Excluding exchange, sales increased 3%, primarily due to North America consumer pantry-loading in the first quarter of 2003 and volume gains in Europe. This was partially offset by lower pricing from the North America price-deal realignment initiative and unmatched 2002 sales related to the divestiture of the carbon zinc businesses in South Africa and India. Profit year-to-date more than doubled due to higher sales, solid cost-saving 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. Oral Care: Oral Care sales were 13% above those of 2002, or 7% above, excluding the impact of exchange. Sales growth was driven by the success of new product introductions in both the manual and power categories. Profit and margins were lower than those of the prior year, as higher sales from new products and improved factory performance were more than offset by higher European costs, due to exchange, a significant increase in advertising investment and higher warranty-related accruals in the first quarter of 2003. PAGE 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Braun: Sales of Braun increased 19% over those of the prior year, including currency gains amounting to 11 percentage points. Growth was driven by significant gains in both male and female electric shavers, as well as strong sales of Thermoscan, fueled by concerns over the SARS epidemic. Profit from operations declined 13%, due to incremental warranty accruals incurred in the first quarter of 2003, higher advertising support, 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 6% over those of 2002, or 2% on a constant currency basis. New product success with the PowerCaps antiperspirant/deodorant line was partially offset by currency devaluation in Latin America. Profit from operations increased 47%, due to higher sales and cost-savings initiatives, which were partially offset by increased marketing investment for new product launches. Costs and Expenses - ------------------ Second Quarter 2003 versus 2002 - ------------------------------- Gross profit for the three months ended June 30, 2003, was $1.38 billion, an increase of 13% versus 2002. Gross profit as a percentage of sales of 61.4% compared with 60.6% in 2002. This improvement stemmed from favorable product mix in the Blades and Razors business, cost-savings initiatives and manufacturing efficiencies, particularly at Duracell, partially offset by higher year-over-year exchange-driven European-based manufacturing costs and incremental Functional Excellence costs within Cost of Goods Sold. Selling, general and administrative expenses increased by $72 million, or 9%, versus the prior year. Advertising and sales promotion combined increased 18% over the prior year, with advertising growing to 8.2% of sales from 7.9% in the prior year, as support was increased for new and existing brands with advertising across all businesses. Sales promotion increased slightly as a percentage of sales, chiefly reflecting support for new product activity in Blades and Razors, Oral Care and Personal Care. Other selling, general and administrative expenses increased by 5%, compared with the prior year, but fell 160 basis points as a percentage of sales, from 28.1% in the second quarter of 2002 to 26.5% this year. Higher European-based costs due to exchange, higher Functional Excellence charges and incremental pension expense led to the increase. Profit from operations was $505 million, an increase of 12% from $449 million in 2002. Profit from operations in 2002 included a $30 million pretax gain on the sale of the Vaniqa business. Excluding this gain, profit from operations increased by 21%. Net interest expense decreased, due to significantly lower rates year-over-year. Exchange was a net loss in the quarter, versus a net gain in the prior year. The effective tax rate was 30%, versus 31% in the year before. The decrease is primarily due to favorable changes in the mix of earnings by country taxed at rates lower than the U.S. statutory rate. Net income of $338 million was 15% above the $293 million in the prior year. Diluted net income per common share of $.33 was 18% above the $.28 reported for 2002. Net income for 2002 included a one-time $21 million aftertax gain on the sale of the Vaniqa business, which had a $.02 favorable impact on diluted net income per common share last year. Excluding the impact of Vaniqa, diluted net income per common share increased 27%. The growth in diluted net income per common share was driven by strong operating results, a lower tax rate, and the effect of stock repurchases. PAGE 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six Months Ended June 30, 2003 versus 2002 - ------------------------------------------ Gross profit for the six months ended June 30, 2003, was $2.58 billion, an increase of 14% versus 2002. Gross profit as a percentage of sales of 61.0% compared with 60.3% in 2002. This was due to favorable product mix in Blades and Razors, cost-savings initiatives and manufacturing efficiencies that more than offset higher European-based costs. Selling, general and administrative expenses increased $175 million, or 12%. Advertising and sales promotion expenses combined increased by 17%, with advertising up 19%, to 8.3% of sales from 7.9% in the prior year, and sales promotion up 13% versus last year. Other selling, general and administrative expenses were above those of the prior year, reflecting incremental Functional Excellence expense, incremental pension expense, and higher European-based costs due to the strengthening of the Euro. Profit from operations was $885 million, up 14% versus $777 million a year earlier. Profit from operations in 2002 included a $30 million pretax gain on the sale of the Vaniqa business. Excluding the impact of the Vaniqa gain, profit from operations increased by 18%. Net interest expense decreased due to significantly lower rates. Exchange was a net loss, versus a net gain in the prior year. The effective tax rate was 30%, versus 31% in the prior year. The decrease is primarily due to favorable changes in the mix of earnings by country taxed at rates lower than the U.S. statutory rate. Net income was $601 million, up 16% versus $516 million a year earlier. Diluted net income per common share of $.58 was 18% above $.49 in 2002. Net income in 2002 included a one-time $21 million aftertax gain on the sale of the Vaniqa business that had a $.02 favorable impact on diluted net income per common share. Excluding the impact of the Vaniqa gain, diluted net income per common share increased by 23%. The growth in diluted net income per common share was driven by strong operating results, a lower tax rate, and the effect of 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 six months ended June 30, 2003, was $895 million, compared with $546 million in the same period last year. Free cash flow is defined as cash flow remaining from operations after capital investments. The Company believes that free cash flow is an important measure of its liquidity, as well as its ability to fund future growth and to provide a return to shareholders. A reconciliation of net cash provided by operating activities to free cash flow follows. Six months ended June 30 ------------------ (Millions) 2003 2002 - ---------- ---- ---- Net cash provided by operating activities $1,004 $700 Less: additions to property, plant and equipment (132) (175) Plus: disposals of property, plant and equipment 23 21 ---- ---- Free cash flow $895 $546 ==== ====
PAGE 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash provided by operating activities was $1.0 billion during the six months ended June 30, 2003, compared with $700 million during the same period in 2002. The increase in net cash provided by operating activities in 2003 is due primarily to $193 million in lower pension funding and higher profits. Reductions in capital spending during the first half of 2003 were due primarily to timing. Capital spending continues to be focused on new products and cost-reduction projects. The Company spent $786 million to repurchase 26 million shares and paid $335 million in dividends during the six months ended June 30, 2003. Net debt (total debt less cash and cash equivalents) increased by $218 million to $3.1 billion at June 30, 2003, from $2.9 billion at December 31, 2002. The Company believes that net debt is an important consideration in evaluating its liquidity. The Company's investment grade long-term credit ratings of AA- from Standard & Poor's and Aa3 from Moody's and commercial paper ratings of A1+ from Standard & Poor's and P1 from Moody's provide a high degree of flexibility in obtaining funds. The Company has the ability to issue up to $1.47 billion in commercial paper in the U.S. and Euro markets. The Company's commercial paper program is supported by its revolving credit facility and other sources of liquidity, primarily the Company's cash flow from operations. At June 30, 2003, there was $258 million outstanding under the Company's commercial paper program, a decrease of $291 million from $549 million outstanding at December 31, 2002. The reduction in commercial paper reflects the impact of debt issuances, partially offset by maturing debt repayments. The Company has a 364-day revolving bank credit facility in the amount of $1.1 billion that expires on October 14, 2003. Liquidity is enhanced through a provision in this agreement that gives the Company the option to enter into a one-year term loan in the amount of up to $1.1 billion. The Company believes it has sufficient alternative sources of funding available to replace its commercial paper program, if necessary. During 2002, two shelf registration statements were filed allowing the Company to offer to the public up to $2.8 billion in debt securities in the U.S. It is currently anticipated that the proceeds from the sale of any debt securities issued under these shelf registration statements will be used to repay commercial paper borrowings and replace other maturing debt, although the proceeds may also be used for other corporate purposes, including the repurchase of the Company's common stock. During the six months ended June 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 June 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, management 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. PAGE 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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), with $31 million ($20 million after taxes, or $.02 in diluted net income per common share) recorded in the second quarter. In the first and second quarters of 2003, charges of $44 million ($42 million after taxes, or $.04 in diluted net income per common share) and $42 million ($30 million after taxes, or $.03 in diluted net income per common share) were recorded, respectively. Functional Excellence charges in 2003 included $12 million and $13 million which were recorded to cost of goods sold, and $30 million and $73 million which were recorded to selling, general and administrative expenses in the three and six month periods ended June 30, 2003, respectively. It is currently expected that total 2003 Functional Excellence expenses will be in the range of $130-$150 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), have evaluated the Company's disclosure controls and procedures as of June 30, 2003, and they have concluded that these controls and procedures are effective. 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 4. Submission of Matters to a Vote of Security Holders At its Annual Meeting on May 15, 2003, the shareholders of The Gillette Company took the following actions: 1. Elected the following four directors for terms to expire at the 2006 Annual Meeting of Shareholders, with votes as indicated opposite each director's name: For Withheld ----------- ---------- Roger K. Deromedi 855,992,794 37,327,741 Dennis F. Hightower 848,538,082 44,782,453 Herbert H. Jacobi 849,038,534 44,282,001 Nancy J. Karch 818,144,466 75,176,069 The directors whose term of office as a director continued after the meeting are Edward F. DeGraan, Wilbur H. Gantz, Michael B. Gifford, Ray J. Groves, James M. Kilts, Fred H. Langhammer, Jorge Paulo Lemann and Marjorie M. Yang. 2. Approved a shareholder proposal recommending the declassification of the Board of Directors. The vote was 476,154,703 for the proposal and 272,996,469 against, with 12,130,525 abstentions and 132,038,838 broker nonvotes. 3. Rejected a shareholder proposal that the Company establish a policy of expensing stock options. The vote was 309,948,512 for the proposal and 430,554,039 against, with 20,777,206 abstentions and 132,040,778 broker nonvotes. Item 5. Other Information Cautionary Statement - -------------------- Certain statements that we may make from time to time, including statements contained in this report, constitute "forward-looking statements" under the federal securities laws. Forward-looking statements may be identified by words such as "plans," "expects," "believes," "anticipates," "estimates," "projects," "will" and other words of similar meaning used in conjunction with, among other things, discussions of future operations, acquisitions and divestitures, financial performance, our strategy for growth, product development and new product launches, market position and expenditures. Forward-looking statements are based on current expectations of future events, but actual results could vary materially from our expectations and projections. Investors are cautioned not to place undue reliance on any forward-looking statements. We assume no obligation to update any forward-looking statements. We caution that historical results should not be relied upon as indications of future performance. 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 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 herein: 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 May 6, 2003, a current report on Form 8-K containing one exhibit: a Press Release announcing the Company's financial results for the first quarter of 2003. (b) The Company filed, on May 27, 2003, a current report on Form 8-K containing two exhibits: the Opinion of Ropes & Gray and the Consent of Ropes & Gray related to the public offering of the Company's 2.50% Senior Note due 2008. 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 August 5, 2003 EXHIBIT INDEX Exhibit Number and Description 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). EX-12 3 ex12_063003-10q.txt EXHIBIT 12 Exhibit 12
The Gillette Company Ratio of Earnings to Fixed Charges Six months Six months Dollars in millions ended ended June 30, 2003 June 30, 2002 2002 2001 2000 1999 1998 --------------- --------------- ----- ----- ----- ----- ----- Earnings: Income from continuing operations before income taxes $ 859 748 1,752 1,342 1,288 1,912 1,656 Interest expense 30 44 84 145 223 136 94 Interest portion of rental expense 22 20 43 31 25 20 17 Amortization of capitalized interest 5 5 10 9 6 5 4 ----- ----- ----- ----- ----- ----- ----- Earnings available for fixed charges $ 916 817 1,889 1,527 1,542 2,073 1,771 ===== ===== ===== ===== ===== ===== ===== Fixed Charges: Interest expense $ 30 44 84 145 223 136 94 Interest capitalized 1 2 4 11 23 13 18 Iterest portion of rental expense 22 20 43 31 25 20 17 ----- ----- ----- ----- ----- ----- ----- Total fixed charges $ 53 66 131 187 271 169 129 ===== ===== ===== ===== ===== ===== ===== Ratio of Earnings to Fixed Charges 17.3 12.4 14.5 8.2 5.7 12.3 13.7 ===== ===== ===== ===== ===== ===== =====
EX-31 4 ex31i_063003-10q.txt EXHIBIT 31.1 CERTIFICATION Exhibit 31.1 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 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 report; 3. Based on my knowledge, the financial statements and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) (Intentionally omitted) (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 5, 2003 /s/ James M. Kilts ------------------------------ James M. Kilts Chairman of the Board and Chief Executive Officer EX-31 5 ex31ii_063003-10q.txt EXHIBIT 31.2 CERTIFICATION Exhibit 31.2 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 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 report; 3. Based on my knowledge, the financial statements and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) (Intentionally omitted) (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 5, 2003 /s/ Charles W. Cramb ------------------------------ Charles W. Cramb Senior Vice President and Chief Financial Officer EX-32 6 ex32_063003-10q.txt EXHIBIT 32 Exhibit 32 THE GILLETTE COMPANY Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of The Gillette Company, a Delaware corporation (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 5, 2003 /s/ James M. Kilts ------------------------------ James M. Kilts Chairman of the Board and Chief Executive Officer Date: August 5, 2003 /s/ Charles W. Cramb ------------------------------ Charles W. Cramb Senior Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to The Gillette Company and will be retained by The Gillette Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----