EX-13 11 b41814gcex13.txt PORTIONS OF 2001 ANNUAL REPORT Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations The Gillette Company and Subsidiary Companies RESULTS OF OPERATIONS Net Sales Net sales in 2001 were $8.96 billion, 3% below those of 2000. Excluding the adverse effect of exchange, 3%, sales were level with those of the prior year. The level sales were attributable to favorable pricing of 1%, offset by negative volume/mix of 1%, which included the significant unfavorable impact of trade inventory reductions. Net sales in 2000 were $9.22 billion, 2% above those of 1999. Excluding the adverse effect of exchange, 5%, and the divestiture of the White Rain hair care line, 1%, sales climbed 8%. The 8% sales growth was attributable to favorable volume/mix of 6% and pricing of 2%. An analysis of sales by business segment follows.
% increase/(decrease) --------------------- Years ended December 31, 2001 2000 1999 01/00 00/99 -------------------------- --------- --------- --------- --------- --------- (millions) Blades & Razors $3,416 $3,394 $3,143 1 8 Personal Care 877 960 1,041 (9) (8) Duracell 2,365 2,567 2,709 (8) (5) Oral Care 1,270 1,204 1,114 6 8 Braun 1,033 1,100 1,067 (6) 3 -------------------------- ------ ------ ------ ---- --- $8,961 $9,225 $9,074 (3) 2 -------------------------- ------ ------ ------ ---- ---
See Notes to Consolidated Financial Statements for segment data. Sales of blades and razors were 1% higher than those of the prior year. Without the adverse effect of exchange, sales grew 4%. Strong shipments of the new Gillette for Women Venus shaving system in North America and Europe offset the lower volumes that resulted from the Company's program to reduce trade inventories of blades. This trade inventory reduction will enhance the comparison of 2002 sales with those of 2001. In 2000, sales of blades and razors were 8% higher than those of the previous year, due primarily to strong sales of the Mach3 shaving system in North America, Europe and Latin America, including the successful launch of the Mach3 system in Brazil. Personal care sales were 9% below those of 2000, but would have been 5% below that year's level without the negative effect of exchange and the divestiture of White Rain hair care products in April 2000. Sales declined in shave preparations, as well as in antiperspirants/deodorants. In 2000, personal care sales decreased 8% from those of the prior year, due primarily to the divestiture of the White Rain brand. Sales of Duracell products fell 8% from those of 2000. Excluding the adverse effect of exchange, sales were 6% lower than in the prior year. The sales decline reflected the Company's efforts to reduce trade inventory levels and a change in mix, as the proportion of CopperTop battery sales increased versus those of the premium- priced Duracell Ultra brand. The new CopperTop battery, which replaced the former Copper & Black design, was introduced in the U.S. in June, backed by a comprehensive advertising and promotional campaign. In 2000, sales of Duracell products declined 5%, as a substantial increase in sales of Duracell Ultra batteries was more than offset by much lower sales of both Copper & Black and non-Duracell branded batteries. Contributing to the lower sales were increased competition faced by the Copper & Black brand in North America and the depreciation of the Euro. Oral care sales were 6% above those of 2000, reflecting gains in all geographies, but would have been 9% higher than that year's level without the impact of unfavorable exchange. Strong gains in power oral care products more than offset lower sales of manual oral care products. The new Braun Oral-B battery-powered toothbrush started its rollout in the U.S. and Europe during the year, and initial trade and consumer response was encouraging. In 2000, sales of oral care products were 8% above those of 1999. This sales growth was paced by Latin America, where economic conditions improved and the rollout of the premium CrossAction toothbrush 17 to the region's largest markets was completed. In North America, sales growth also reflected new product activity, including the third-quarter launch of the Oral-B Advantage Plus toothbrush. Sales of Braun products were 6% below those of the previous year. Excluding the impact of exchange, Braun sales were 2% lower than in the prior year, reflecting reduced product offerings within non-shaving categories. In 2000, Braun sales rose 3% from those of 1999. Sales advances were achieved across all geographies except Europe, where growth was restrained by the depreciation of the Euro. Particularly noteworthy were sales of the Braun Syncro electric shaver, which drove gains in Germany and Japan. The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for 12% of sales in 2001. These sales occurred primarily in the United States and were across all product segments. Gross Profit Gross profit was $5.55 billion in 2001, $5.76 billion in 2000 and $5.59 billion in 1999. As a percent of sales, gross profit was 62.0% in 2001, compared with 62.4% in 2000 and 61.6% in 1999. In 2001, the margin decline was mainly due to lower Duracell and blade and razor margins. Duracell gross profit margin declined, due to a higher proportion of lower margin CopperTop battery sales. Margin for blades and razors also decreased, reflecting the greater proportion of razor sales resulting from the launch of the new Gillette for Women Venus shaving system. Braun and oral care showed improved gross profit margin, reflecting manufacturing efficiencies and favorable product mix, while personal care showed little change in gross profit margin. In 2000, margin improvement was due to favorable sales mix and improved manufacturing efficiencies. Selling, General and Administrative Expenses Selling, general and administrative expenses amounted to 43.3% of net sales, compared with 39.8% and 38.6% in 2000 and 1999, respectively. In absolute terms, these expenses increased 6% in 2001 and 5% in 2000. In 2001, $576 million was spent on advertising, including sampling, and $1,196 million on sales promotion, for a total of $1,772 million, an increase of 1% over the 2000 spending level. This spending compares with 2000 amounts of $539 million, $1,215 million and $1,754 million, respectively. In 1999, these amounts were $513 million, $1,016 million and $1,529 million, respectively. The 7% rise in advertising spending in 2001 was in line with our objective to increase our advertising investment levels. Total direct marketing expenses in 2001 represented 19.8% of sales, compared with 19.0% and 16.8% in 2000 and 1999, respectively. In 2001, other marketing and administrative expenses were 10% above those of the prior year, due to continued substantial investment behind our merchandising activity. Other marketing and administrative expenses declined 3% in 2000, reflecting a full year of benefits from the September 1998 reorganization and realignment program. Profit from Operations Profit from operations was $1.50 billion in 2001, compared with $1.51 billion in 2000 and $2.09 billion in 1999. Before restructuring and asset impairment charges of $172 million in 2001 and $572 million in 2000, profit from operations was $1.67 billion in 2001 and $2.08 billion in 2000. Excluding the restructuring and asset impairment charges in 2001 and 2000, profit from operations in 2001 represented 18.6% of sales, compared with 22.6% in 2000 and 23.0% in 1999. Operating profits in 2001 were 20% below those of 2000, due to lower net sales, higher advertising spending and other marketing and administrative expenses. Operating profits in 2000 were virtually unchanged from those of 1999, as improved gross profit margin and cost savings from other operating expenses were offset by significant increases in marketing expenses. In 1999, the Company incurred $61 million of incremental expenses related to the reorganization and realignment program, primarily for equipment and employee relocation and training. These expenses were not included as part of the original reserve, due to the requirements of the accounting standards. In addition, a gain of $22 million on the sale of land and a building was recognized in 1999. 18 An analysis of operating profit by business segment follows. The 2001 and 2000 restructuring and asset impairment charges are included in Corporate/Other.
%increase/(decrease) ------------------ Years ended December 31, 2001 2000 1999 01/00 00/99 -------------------------- --------- --------- --------- ------- -------- (millions) Blades & Razors $1,141 $1,272 $1,144 (10) 11 Personal Care 68 100 93 (32) 8 Duracell 217 456 608 (52) (25) Oral Care 240 226 224 6 1 Braun 98 94 60 4 56 -------------------------- ------ ------ ------ --- --- 1,764 2,148 2,129 (18) 1 Corporate/Other (266) (636) (42) -------------------------- ------ ------ ------ $1,498 $1,512 $2,087 -------------------------- ------ ------ ------
See Notes to Consolidated Financial Statements for segment data. Blade and razor profits were 10% lower in 2001, due to lower gross profit margin, increased advertising support and higher administrative costs. In 2000, blade and razor profits were 11% higher than those of the year before, due primarily to the sales growth of the Mach3 shaving system in North America, Europe and Latin America. Personal care profits were 32% lower than those of the prior year, due to lower sales and increased administrative costs. In 2000, personal care profits were 8% above those of the previous year. Duracell profit from operations was 52% below that of the year before, the result of lower sales, greater advertising support and increased overhead costs. In 2000, Duracell profit from operations was 25% lower than in 1999, reflecting both lower sales and increased marketing spending. Oral care profit from operations was 6% above that of 2000, due primarily to increased sales and higher gross profit margin. Direct marketing support was level with that of the prior year, and overhead expenses were higher. In 2000, oral care profit from operations was 1% above that of the previous year, as higher sales were offset by increased marketing expenses to support new product launches. Braun profit from operations was 4% higher than in 2000, reflecting improved gross profit margin. Spending rates for marketing expenses and overheads were in line with those of the prior year. In 2000, Braun profit from operations was 56% higher than in 1999, reflecting sales growth, improved mix and lower overhead expenses. Nonoperating Charges/Income Net interest expense amounted to $141 million in 2001, $218 million in 2000 and $129 million in 1999. Net interest expense fell in 2001, because of lower interest rates and reduced borrowings. Net interest expense rose in 2000, due to increased borrowings to fund the share repurchase program and higher interest rates. A net exchange loss of $3 million in 2001, which compared with a net exchange gain of $8 million in 2000 and a loss of $35 million in 1999, was due primarily to subsidiaries in highly inflationary countries. Translation adjustments resulting from currency fluctuations of net foreign investments in non-highly inflationary countries are accumulated in a separate section of stockholders' equity, as noted on page 33. In 2001, the unfavorable translation adjustment was $93 million, compared with unfavorable translation adjustments of $249 million in 2000 and $205 million in 1999, reflecting significant exchange rate movements. Taxes and Income from Continuing Operations The effective tax rate was 32.2% in 2001, compared with rates of 36.3% in 2000 and 34.8% in 1999. The effective tax rate decreased in 2001, due primarily to the nondeductibility of certain asset impairment charges in 2000. Excluding the impact of the restructuring and asset impairment charges in both 2001 and 2000, the tax rate declined to 31% in 2001 from 32.8% in 2000. 19 Income from continuing operations was $910 million in 2001, compared with $821 million in 2000 and $1,248 million in 1999. Fully diluted net income per common share from continuing operations was $.86 in 2001, compared with $.77 and $1.13 in 2000 and 1999, respectively. Excluding the restructuring and asset impairment charges in 2001 and 2000, income from continuing operations was $1,045 million in 2001, compared with $1,251 million in 2000 and $1,248 million in 1999. Fully diluted net income per common share from continuing operations was $.99 in 2001, compared with $1.18 and $1.13 in 2000 and 1999, respectively. Financial Condition The Company's financial condition strengthened during 2001. Cash provided by operations is the Company's primary source of funds to finance operating needs and capital expenditures and to pay dividends. During 2001, the Company generated $2.09 billion in cash from operations, a 31% increase over 2000. The increase reflected improvements in working capital, principally from accounts receivable collections. The strong working capital performance allowed the Company to reduce net debt (total debt net of associated swaps, less cash and cash equivalents) by $1.13 billion during 2001. Net debt at December 31, 2001, was $3.32 billion, compared with $4.45 billion and $4.53 billion at December 31, 2000 and 1999, respectively. As a component of net debt, cash and cash equivalents increased $885 million in 2001 to $947 million and were invested primarily in highly liquid deposits and marketable securities of institutions with high credit quality. Cash from operating activities of $1.60 billion in 2000 compared with $1.43 billion in 1999. An additional source of cash in 2000 was the sale of the Stationery Products business for $528 million. The market value of outstanding Gillette equity was $35 billion at the end of 2001, compared with $38 billion at the end of 2000. The Company's book equity position was $2.14 billion at the end of 2001, compared with $1.92 billion at the end of 2000 and $3.06 billion at the end of 1999. The decrease in book equity in 2000 was due primarily to the Gillette share repurchase program. Capital spending decreased to $624 million in 2001, compared with $793 million in 2000 and $889 million in 1999. Spending in all three years reflected substantial investments in blades and razors, as well as in the Duracell segment. Share repurchase funding in 2001, net of proceeds received from the sale of put options on Company stock, amounted to $3 million, compared with $921 million in 2000 and $1,949 million in 1999. The Company's long-term credit ratings of AA- from Standard & Poor's and Aa3 from Moody's and commercial paper ratings of A1+ from Standard & Poor's and P1 from Moody's provide a high degree of flexibility in obtaining funds. To support its commercial paper program, the Company entered into a $1.65 billion, 364-day revolving bank credit agreement on October 16, 2001, that replaced the $1.4 billion revolving bank credit agreement that expired in October 2001 and the $550 million revolving bank credit agreement that was due to expire in December 2001. The Company plans to renew the credit facility in 2002 and does not foresee any problems in doing so. The revolving bank credit agreement requires an earnings-to-interest-expense ratio above 6.5X at each quarter end for the four quarters then ended. At December 31, 2001, the interest coverage ratio, at 10.3X, was well above the required ratio. The Company believes it has sufficient alternative sources of higher cost funding available to replace its commercial paper program, if necessary. At year-end 2001, there was $1.98 billion outstanding under the Company's commercial paper program, compared with $2.04 billion at the end of 2000 and $2.41 billion at the end of 1999. On September 26, 2001, the Company issued a $200 million U.S.-denominated 5.25% Euro note due December 2006. The Company subsequently repurchased $75 million of the Euro note on October 12, 2001, and on October 18, 2001, reissued a $75 million floating rate Euro note, due January 2003. The repurchase had no impact on earnings. On December 5, 2001, the Company issued a $250 million U.S.-denominated 3.75% note due December 2004. The proceeds from the debt issuances were used to reduce commercial paper borrowing. During 2000, the Company issued Euro-denominated notes for $228 million, due December 2002, and entered into a $264 million Euro-denominated debt obligation, with redemption rights in December 2001. Through its strong brands, leading market positions and improving financial condition, Gillette will continue to have capital available for growth through both internally generated funds and significant credit 20 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 contractual obligations payable or maturing in the following years.
2003, 2005, 2007 At December 31, 2001, 2002 2004 2006 and beyond Total -------------------------------------------- -------- --------- ------- ------------ --------- (millions) Long-term debt, including current portion $ 420 $ 993 $625 $ - $2,038 Loans payable 2,235 - - - 2,235 Operating leases 94 139 100 131 464 -------------------------------------------- ------ ------ ---- ---- ------ $2,749 $1,132 $725 $131 $4,737
The Company has no material contingent commitments. The Company has no material "off balance sheet" liabilities or nonconsolidated Special Purpose Entities. Market Risk The Company is subject to market risks, such as changes in currency and interest rates that arise from normal business operations. The Company regularly assesses these risks and has established business strategies to provide natural offsets, supplemented by the use of derivative financial instruments, to protect against the adverse effects of these and other market risks. To manage the impact of currency changes on foreign-denominated profits, the Company primarily uses product sourcing and pricing strategies, supplemented by purchases of foreign currency options when considered appropriate. The Company uses foreign-denominated debt and forward contracts to hedge the impact of currency changes on its net foreign investments, normally in currencies with low interest rates. The Company uses primarily floating rate debt in order to match interest costs to the impact of inflation on earnings. The Company manages its mix of fixed and floating rate debt by entering into interest rate swaps and forward rate agreements. Most of the Company's transactional exchange exposure is managed through centralized cash management. The Company hedges net residual transactional exchange exposures primarily through forward contracts. More detailed information about the strategies, policies and use of derivative financial instruments is provided in the financial instruments and risk management activities note. The Company has established clear policies, procedures and internal controls governing the use of derivative financial instruments and does not use them for trading, investment or other speculative purposes. Financial instrument positions are monitored using a value-at-risk model. Value at risk is estimated for each instrument based on historical volatility of market rates and a 95% confidence level. Based on the Company's overall evaluation of its market risk exposures from all of its financial instruments at December 31, 2001 and 2000, a near-term change in market rates would not materially affect the consolidated financial position, results of operations or cash flows of the Company. Restructuring and Asset Impairments On December 18, 2000, the Company announced a restructuring program and impaired 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 activity under the program continued throughout 2001. Specific program activities included consolidating management functions; reducing factory 21 locations, in part through outsourcing production of low-volume noncore products; streamlining the supply chain via warehouse consolidation and other actions; and downsizing and centralizing corporate functions. These actions included the planned closure of eight factories and 13 distribution centers during 2001. Pretax cash outlays for the restructuring program were estimated at approximately $235 million. Cash severance payments will extend beyond 2001, due to the severance payment deferral options available to terminated employees. At December 31, 2001, remaining cash outlays were $79 million, which will occur primarily in 2002. Pretax savings from the program were $45 million in 2001 and will be approximately $135 million in 2002. The noncash charges for the restructuring program were approximately $125 million for the write-down to disposal value of factories and distribution centers, as well as the write-off of manufacturing, distribution and office equipment assets. Revenue-generating activities continued until the affected facilities ceased operations. Buildings were sold, and equipment was disposed of through either sale or abandonment. The extent of the impairment was based on discounted cash flow analyses for the operating period up until closure and included an estimate of residual value. Under the direction of the new Chief Executive Officer, the Company adopted a new strategy in 2001 for the Personal Care segment that included establishing a separate Personal Care Global Business Management unit as part of the Company's reemphasis on the category. This change in strategy also led to the decision not to close one major factory dedicated to personal care manufacturing, resulting in a pretax reduction in the 2000 restructuring provision of approximately $33 million. Minor modifications were also made to certain other programs, including the decision not to close two small factories. In addition, the Company recorded a pretax recovery of approximately $22 million, reflecting better than anticipated results relating to the closing of certain other facilities. During the fourth quarter of 2001, the Company recorded a charge of $63 million associated with planned new actions: the withdrawal from several minor noncore businesses and the cessation of operations in one factory in the Duracell segment. The factory closure, based on a study that revealed excess worldwide capacity, will result in the reduction of 170 employees. Once the closure is completed, annual pretax savings will be approximately $5 million. In the fourth quarter of 2001, in connection with a decision to exit battery brands in certain international markets, the Company announced a noncash impairment charge relating to the write-down of goodwill, other intangibles and related long-lived assets. This resulted in a fourth-quarter 2001 pretax charge to operations of $164 million. The businesses covered represent regional battery products that do not carry the Duracell brand. The value of the impaired assets was determined based on discounted cash flow analyses for future operating periods. As a result of the three actions taken in the fourth quarter of 2001, the Company recorded a pretax charge of $172 million ($135 million after taxes, or $.13 in net income per common share, fully diluted). Additional details are provided on pages 39-41 in the Notes to Consolidated Financial Statements. CRITICAL ACCOUNTING POLICIES Restructuring The Company estimates its restructuring liability for the exit plans developed by senior management by accumulating detailed estimates of costs from each of the affected geographic locations. This includes the estimated costs of employee severance and related benefits, impairment of property and equipment, contract termination payments for leases, distributor arrangements and other contractual obligations, and any other qualifying exit costs related to the exit plan. These estimated costs are grouped by specific projects within the overall exit plan and are then monitored on a monthly basis by corporate finance personnel, as well as by finance personnel at each affected geographic location. Changes in estimates for individual locations are evaluated periodically to determine if a change in estimate is required for the overall restructuring program. Changes in estimates occurred during 2001 for the 2000 restructuring program, as discussed above under "Restructuring and Asset Impairments." The primary reason for the changes was a strategic redirection of the Company's Personal Care unit that resulted in a pretax reduction of $33 million in the 2000 reserve. In 22 addition, the Company recorded a pretax recovery of approximately $22 million, reflecting better than anticipated results in other projects within the 2000 restructuring program. Promotional Expense The Company enters into promotional arrangements, primarily with its retail customers, many of which require periodic payments based on estimated total-year purchases of Gillette products. Therefore, the Company is required to estimate these future purchases on a routine basis in order to properly account for these payments. In addition, the Company routinely commits to one-time promotional programs with customers that require the Company to estimate the ultimate cost of each promotional program and accrue that cost until paid. The Company tracks its commitments for promotional programs and, using experience gained over many years, records an accrual at the end of each period for the earned, but unpaid, costs of promotional programs. Based on this experience, all promotional accruals fairly represent future requirements. Impairment and Amortization The Company recorded impairment charges for goodwill and other long-lived assets in 2000 and 2001. These charges related to discrete product lines for which estimated discounted future operating cash flows indicated that the assets were not recoverable. The preparation of discounted future operating cash flow analyses requires significant management judgment with respect to revenue and expense growth rates, changes in working capital use and selection of an appropriate discount rate. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease the impairment charge. The Company adopted Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. As a result, compared with 2001, annual amortization expense will be $34 million lower in 2002 and in future years. Pension Expense The Company's calculation of pension expense uses discount and other rate assumptions. Pension plan expense is principally the sum of interest and service cost on the plan, less expected return on plan assets. The expected return on plan assets is calculated by applying an assumed rate of return to the fair value of plan assets. If plan assets decline, the expected return on plan assets for the next year also declines, increasing pension expense. At December 31, 2001, the fair value of plan assets decreased to $1.6 billion from $1.9 billion at December 31, 2000, chiefly due to the poor performance of the equity markets, adding approximately $45 million to 2002 pension expense. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS See pages 32 and 33 in Notes to Consolidated Financial Statements for a complete description of the effect of recent accounting pronouncements. RESPONSIBILITY FOR FINANCIAL STATEMENTS The Company is responsible for the objectivity and integrity of the accompanying consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The financial statements of necessity include the Company's estimates and judgments relating to matters not concluded by year-end. Financial information contained elsewhere in the 2001 Annual Report is consistent with that included in the financial statements. The Company maintains a system of internal accounting controls that includes careful selection and development of employees, division of duties, and written accounting and operating policies and procedures augmented by a continuing internal audit program. Although there are inherent limitations to the effectiveness of any system of accounting controls, the Company believes that its system provides reasonable, but not absolute, assurance that its assets are safeguarded from unauthorized use or disposition and that its accounting records are sufficiently reliable to permit the preparation of financial statements that conform in all material respects with accounting principles generally accepted in the United States. 23 KPMG LLP, independent auditors, are engaged by the Board of Directors to render an independent opinion regarding the fair presentation in the financial statements of the Company's financial condition and operating results. Their report appears on page 25. Their examination was made in accordance with auditing standards generally accepted in the United States and included a review of the system of internal accounting controls to the extent they considered necessary to determine the audit procedures required to support their opinion. The Audit Committee of the Board of Directors is composed solely of independent directors, as defined by the New York Stock Exchange. The Committee meets periodically and privately with the independent auditors, internal auditors and financial officers of the Company, as it deems necessary, to review the quality of the financial reporting of the Company, the internal accounting controls and the scope and results of audit examinations. The Committee also reviews compliance with the Company's policies relating to proper accounting and financial reporting systems and the independence of the independent auditors. In addition, the Committee is responsible for recommending the appointment of the Company's independent auditors by the Board of Directors. FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENT Certain statements that the Company 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, the Company'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 the Company's expectations and projections. Investors are cautioned not to place undue reliance on any forward-looking statements. The Company assumes no obligation to update any forward-looking statements. The Company 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, the Company include, but are not limited to, the following: (a) the pattern of the Company's sales, including variations in sales volume within periods; (b) the acceptance by the Company's customers and consumers of new products and line extensions; (c) the mix of products sold; (d) the Company's ability to control its internal costs and the cost of raw materials; (e) the prices of the Company's products and the response of the Company, its customers and competitors to changes in prices; (f) technological advances by the Company and/or its competitors; (g) new patents granted to the Company and/or its competitors; (h) changes in exchange rates in one or more of the Company's geographic markets; (i) changes in accounting policies; or (j) the impact of general economic conditions in the United States and in other countries in which the Company currently does business. Please refer to the Cautionary Statement contained in the Company's most recent Annual Report on Form 10-K, and under Item 5, Other Information, in the Company's most recent Quarterly Report on Form 10-Q, for a more detailed explanation of the inherent limitations in such forward-looking statements. 24 Independent Auditors' Report The Gillette Company and Subsidiary Companies [KPMG LOGO] The Stockholders and Board of Directors of The Gillette Company We have audited the accompanying consolidated balance sheet of The Gillette Company and subsidiary companies as of December 31, 2001 and 2000, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Gillette Company and subsidiary companies as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP KPMG LLP Boston, Massachusetts February 11, 2002 25 Consolidated Statement of Income The Gillette Company and Subsidiary Companies
Years Ended December 31, 2001 2000 1999 ---------------------------------------------------------- ------------ ------------- ------------ (millions, except per share amounts) Net Sales $ 8,961 $ 9,225 $ 9,074 Cost of Sales 3,407 3,469 3,486 ------------------------------------------------------------- ------- ------- ------- Gross Profit 5,554 5,756 5,588 Selling, General and Administrative Expenses 3,884 3,672 3,501 Restructuring and Asset Impairment Charges 172 572 -- ------------------------------------------------------------- ------- ------- ------- Profit from Operations 1,498 1,512 2,087 Nonoperating Charges (Income) Interest income (4) (5) (7) Interest expense 145 223 136 Other charges - net 15 6 46 ------------------------------------------------------------- ------- ------- ------- 156 224 175 ------------------------------------------------------------- ------- ------- ------- Income from Continuing Operations before Income Taxes 1,342 1,288 1,912 Income Taxes 432 467 664 ------------------------------------------------------------- ------- ------- ------- Income from Continuing Operations 910 821 1,248 Loss on Disposal of Discontinued Operations, net of tax -- (428) -- Income (Loss) from Discontinued Operations, net of tax -- (1) 12 ------------------------------------------------------------- ------- ------- ------- Net Income $ 910 $ 392 $ 1,260 ------------------------------------------------------------- ------- ------- ------- Net Income (Loss) per Common Share, basic Continuing Operations $ .86 $ .78 $ 1.14 Disposal of Discontinued Operations -- (.41) -- Discontinued Operations -- -- .01 ------------------------------------------------------------- ------- ------- ------- Net Income $ .86 $ .37 $ 1.15 ------------------------------------------------------------- ------- ------- ------- Net Income (Loss) per Common Share, assuming full dilution Continuing Operations $ .86 $ .77 $ 1.13 Disposal of Discontinued Operations -- (.40) -- Discontinued Operations -- -- .01 ------------------------------------------------------------- ------- ------- ------- Net Income $ .86 $ .37 $ 1.14 ------------------------------------------------------------- ------- ------- ------- Weighted average number of common shares outstanding Basic 1,055 1,054 1,089 Assuming full dilution 1,058 1,063 1,111 ------------------------------------------------------------- ------- ------- -------
See accompanying Notes to Consolidated Financial Statements 26 Consolidated Balance Sheet The Gillette Company and Subsidiary Companies
At December 31, 2001 2000 ----------------------------------------------------------------------- -------- -------- (millions, except per share amount) Assets Current Assets Cash and cash equivalents $ 947 $ 62 Trade receivables, less allowances: 2001 - $69; 2000 - $81 1,473 2,128 Other receivables 313 378 Inventories 1,011 1,162 Deferred income taxes 481 566 Other current assets 207 197 Net assets of discontinued operations 23 189 -------- -------- Total Current Assets 4,455 4,682 -------- -------- Property, Plant and Equipment, at cost less accumulated depreciation 3,548 3,550 Intangible Assets, less accumulated amortization 1,353 1,574 Other Assets 613 596 -------- -------- $ 9,969 $ 10,402 -------- -------- Liabilities and Stockholders' Equity Current Liabilities Loans payable $ 2,235 $ 2,195 Current portion of long-term debt 428 631 Accounts payable and accrued liabilities 1,880 2,346 Income taxes 295 299 -------- -------- Total Current Liabilities 4,838 5,471 -------- -------- Long-Term Debt 1,654 1,650 Deferred Income Taxes 459 450 Other Long-Term Liabilities 805 767 Minority Interest 42 41 Contingent Redemption Value of Common Stock Put Options 34 99 Stockholders' Equity Common stock, par value $1 per share Authorized: 2,320 shares Issued: 2001 - 1,368 shares; 2000 - 1,365 shares 1,368 1,365 Additional paid-in capital 1,094 973 Earnings reinvested in the business 6,077 5,853 Accumulated other comprehensive loss (1,437) (1,314) Treasury stock, at cost: 2001 - 312 shares; 2000 - 312 shares (4,965) (4,953) -------- -------- Total Stockholders' Equity 2,137 1,924 -------- -------- $ 9,969 $ 10,402 -------- --------
See accompanying Notes to Consolidated Financial Statements. 27 Consolidated Statement of Cash Flows The Gillette Company and Subsidiary Companies
Years Ended December 31, 2001 2000 1999 ----------- -------------- ------------- (millions) Operating Activities Income from continuing operations $ 910 $ 821 $ 1,248 Adjustments to reconcile income to net cash provided by operating activities: Provision for restructuring and asset impairment 172 572 -- Depreciation and amortization 509 535 464 Other (18) 5 (7) Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Accounts receivable 622 (100) (48) Inventories 101 149 (140) Accounts payable and accrued liabilities (191) (45) 65 Other working capital items 6 (136) 97 Other noncurrent assets and liabilities (19) (197) (252) ------- ------- ------- Net cash provided by operating activities 2,092 1,604 1,427 ------- ------- ------- Investing Activities Additions to property, plant and equipment (624) (793) (889) Disposals of property, plant and equipment 59 41 124 Sale of businesses -- 539 -- Other 1 (1) 2 ------- ------- ------- Net cash used in investing activities (564) (214) (763) ------- ------- ------- Financing Activities Purchase of treasury stock (12) (944) (2,021) Proceeds from sale of put options 9 23 72 Proceeds from exercise of stock option and purchase plans 53 36 149 Proceeds from long-term debt 525 494 1,105 Repayment of long-term debt (684) (365) -- Increase (decrease) in loans payable 56 (385) 484 Dividends paid (686) (671) (626) Settlements of debt-related derivative contracts 4 279 42 ------- ------- ------- Net cash used in financing activities (735) (1,533) (795) ------- ------- ------- Effect of Exchange Rate Changes on Cash (1) (5) (2) Net Cash Provided by Discontinued Operations 93 130 111 ------- ------- ------- Increase (Decrease) in Cash and Cash Equivalents 885 (18) (22) Cash and Cash Equivalents at Beginning of Year 62 80 102 ------- ------- ------- Cash and Cash Equivalents at End of Year $ 947 $ 62 $ 80 ------- ------- ------- Supplemental disclosure of cash paid for: Interest $ 154 $ 243 $ 126 Income taxes $ 232 $ 480 $ 457 ------- ------- -------
See accompanying Notes to Consolidated Financial Statements 28 Consolidated Statement of Stockholders' Equity The Gillette Company and Subsidiary Companies
Unearned Additional Preferred ESOP Common Paid-in (millions, except per share amounts) Stock Compensation Stock Capital ----------- -------------- -------- ------------ Balance at December 31, 1998 $ 90 $ (10) $ 1,358 $ 621 Net income -- -- -- -- Foreign currency translation -- -- -- -- Pension adjustment -- -- -- -- ------- ------- ------- ------- Other comprehensive loss -- -- -- -- ------- ------- ------- ------- Comprehensive income Dividends declared (per share $.59) -- -- -- -- Stock option and purchase plans (5.7 shares) -- -- 6 139 Conversion of Series C ESOP preferred stock (.6 shares) (5) -- -- (2) Purchase of Gillette treasury stock (46.8 shares) -- -- -- -- Proceeds from sale of put options -- -- -- 72 Contingent liability of put options -- -- -- (82) Earned ESOP compensation -- 6 -- -- ------- ------- ------- ------- Balance at December 31, 1999 85 (4) 1,364 748 ------- ------- ------- ------- Net income -- -- -- -- Foreign currency translation -- -- -- -- Pension adjustment -- -- -- -- ------- ------- ------- ------- Other comprehensive loss -- -- -- -- ------- ------- ------- ------- Comprehensive income Dividends declared (per share $.65) -- -- -- -- Stock option and purchase plans (1.8 shares) -- -- 1 34 Conversion of Series C ESOP preferred stock (11.3 shares) (85) -- -- (92) Purchase of Gillette treasury stock (24.5 shares) -- -- -- -- Proceeds from sale of put options -- -- -- 23 Contingent liability of put options -- -- -- 260 Earned ESOP compensation -- 4 -- -- ------- ------- ------- ------- Balance at December 31, 2000 -- -- 1,365 973 ------- ------- ------- ------- Net income -- -- -- -- Foreign currency translation -- -- -- -- Pension adjustment -- -- -- -- Cash flow hedges -- -- -- -- ------- ------- ------- ------- Other comprehensive loss -- -- -- -- ------- ------- ------- ------- Comprehensive income Dividends declared (per share $.65) -- -- -- -- Stock option and purchase plans (2.4 shares) -- -- 3 47 Purchase of Gillette treasury stock (0.4 shares) -- -- -- -- Proceeds from sale of put options -- -- -- 9 Contingent liability of put options -- -- -- 65 ------- ------- ------- ------- Balance at December 31, 2001 $ -- $ -- $ 1,368 $ 1,094 ------- ------- ------- -------
Other Total Earnings Treasury Comprehensive Stockholders' (millions, except per share amounts) Reinvested Stock Income Equity ------------ ------------ --------------- -------------- Balance at December 31, 1998 $ 5,529 $(2,172) $ (873) $ 4,543 Net income 1,260 -- -- 1,260 Foreign currency translation -- -- (205) (205) Pension adjustment -- -- 17 17 ------- ------- ------- ------- Other comprehensive loss -- -- (188) (188) ------- ------- ------- ------- Comprehensive income 1,072 ------- Dividends declared (per share $.59) (642) -- -- (642) Stock option and purchase plans (5.7 shares) -- -- -- 145 Conversion of Series C ESOP preferred stock (.6 shares) -- 7 -- -- Purchase of Gillette treasury stock (46.8 shares) -- (2,054) -- (2,054) Proceeds from sale of put options -- -- -- 72 Contingent liability of put options -- -- -- (82) Earned ESOP compensation -- -- -- 6 ------- ------- ------- ------- Balance at December 31, 1999 6,147 (4,219) (1,061) 3,060 ------- ------- ------- ------- Net income 392 -- -- 392 Foreign currency translation -- -- (249) (249) Pension adjustment -- -- (4) (4) ------- ------- ------- ------- Other comprehensive loss -- -- (253) (253) ------- ------- ------- ------- Comprehensive income 139 ------- Dividends declared (per share $.65) (686) -- -- (686) Stock option and purchase plans (1.8 shares) -- -- -- 35 Conversion of Series C ESOP preferred stock (11.3 shares) -- 177 -- -- Purchase of Gillette treasury stock (24.5 shares) -- (911) -- (911) Proceeds from sale of put options -- -- -- 23 Contingent liability of put options -- -- -- 260 Earned ESOP compensation -- -- -- 4 ------- ------- ------- ------- Balance at December 31, 2000 5,853 (4,953) (1,314) 1,924 ------- ------- ------- ------- Net income 910 -- -- 910 Foreign currency translation -- -- (93) (93) Pension adjustment -- -- (22) (22) Cash flow hedges -- -- (8) (8) ------- ------- ------- ------- Other comprehensive loss -- -- (123) (123) ------- ------- ------- ------- Comprehensive income 787 ------- Dividends declared (per share $.65) (686) -- -- (686) Stock option and purchase plans (2.4 shares) -- -- -- 50 Purchase of Gillette treasury stock (0.4 shares) -- (12) -- (12) Proceeds from sale of put options -- -- -- 9 Contingent liability of put options -- -- -- 65 ------- ------- ------- ------- Balance at December 31, 2001 $ 6,077 $(4,965) $(1,437) $ 2,137 ------- ------- ------- -------
See accompanying Notes to Consolidated Financial Statements. 29 Notes to Consolidated Financial Statements The Gillette Company and Subsidiary Companies NATURE OF OPERATIONS The Gillette Company is a global consumer products firm, with manufacturing operations conducted at 34 facilities in 15 countries. Products are distributed through wholesalers, retailers and agents in over 200 countries and territories. Gillette is the world leader in male grooming, a category that includes blades, razors and shaving preparations, and also in selected female grooming products, such as wet shaving products and hair epilation devices. The Company is the world's top seller of alkaline batteries and manual and power toothbrushes. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions are eliminated. The Stationery Products segment is reported as a discontinued operation, as discussed further on pages 38 and 39. Cash and Cash Equivalents Cash and cash equivalents include cash, time deposits and marketable securities that are highly liquid and have maturities of three months or less at the date of purchase. Revenue Recognition Revenue from product sales is recognized when the goods are shipped and title passes to the customer, provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is deemed probable. Shipping and Handling Costs Shipping and handling costs of $165 million in 2001, $152 million in 2000 and $154 million in 1999 are included in selling, general and administrative expenses. Inventories Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out (FIFO) basis. Intangible Assets For the years presented in this report, goodwill is amortized on the straight-line method, generally over a period of 40 years. Other intangible assets, consisting primarily of trademarks, trade names, patents and other similar items, are amortized on the straight-line method over a period of 10 to 40 years, predominantly 40 years. Accounting for goodwill and other intangible assets is changing in 2002, as described further on pages 32 and 33. Impairment of Goodwill and Long-Lived Assets The Company continually assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. Intangible assets and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of intangible assets and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the goodwill, intangible asset or other long-lived asset exceeds the related estimated fair value. Estimated fair value is based on discounted future operating cash flows or appraised values, depending on the nature of the asset. The Company determines the discount rate for this analysis based on the 30 expected internal rate of return for the related business and does not allocate interest charges to the asset or asset group being measured. Considerable judgment is required to estimate discounted future operating cash flows. Depreciation Depreciation is computed primarily on a straight-line basis over the estimated useful lives of assets: buildings and building equipment, five to 40 years; machinery and equipment, three to 20 years. Advertising Advertising costs are expensed in the year incurred. Advertising was $576 million in 2001, compared with $539 million in 2000 and $513 million in 1999. For interim reporting purposes, advertising expenses are charged to operations as a percentage of sales, based on estimated sales and related advertising expense for the full year. Research and Development Research and development costs, included in selling, general and administrative expenses, amounted to $187 million in 2001, $179 million in 2000 and $201 million in 1999. Financial Instruments Cash and cash equivalents, trade receivables, long-term investments, accounts payable, loans payable and all derivative instruments are carried at fair value. The fair values of cash equivalents, trade receivables, accounts payable and loans payable approximate cost. The fair value of long-term investments is based on quoted market prices. The estimated fair values of derivative instruments are calculated based on market rates. These values represent the estimated amounts the Company would receive or pay to terminate agreements, taking into consideration current market rates and the current creditworthiness of the counterparties. The fair value of long-term debt, including the current portion, is estimated based on rates currently offered to the Company for debt of the same remaining maturities. Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. The Company reinvests unremitted earnings of foreign operations and, accordingly, does not provide for Federal income taxes that could result from the remittance of such earnings. These unremitted earnings amounted to $3.0 billion and $3.5 billion at December 31, 2001 and 2000, respectively. Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Net Income per Common Share Basic net income per common share is calculated by dividing net income less dividends on preferred stock, net of tax benefits, by the weighted average number of common shares outstanding. The calculation of fully diluted net income per common share assumes conversion of preferred stock and stock options into common stock, and also adjusts net income for the effect of converting the preferred stock to common stock. At December 31, 2001, 2000 and 1999, 44 million, 33 million and 35 million shares of common stock issuable under stock options, respectively, were not included in the calculation of fully diluted earnings per share because their effects would have been antidilutive. There were no preferred shares outstanding in 2001. 31 Income from continuing operations and shares used to compute net income per share, basic and assuming full dilution, are reconciled below.
Years ended December 31, 2001 2000 1999 ------- -------- --------- (millions) Income from Continuing Operations $ 910 $ 821 $1,248 Less: Preferred stock dividends - 1 4 ------ ------ ------ Income from Continuing Operations, basic 910 820 1,244 Effect of dilutive securities: Convertible preferred stock - 2 5 ------ ------ ------ Income from Continuing Operations, assuming full dilution $ 910 $ 822 $1,249 ------ ------ ------ Common shares, basic 1,055 1,054 1,089 Effect of dilutive securities: Convertible preferred stock - 3 12 Stock options 3 6 10 ------ ------ ------ Common shares, assuming full dilution 1,058 1,063 1,111
Reclassification of Prior Years Prior-year financial statements have been reclassified to conform to the 2001 presentations. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS In May 2000, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement and income statement classification for various types of sales incentives, including discounts, coupons, rebates and free products. The Company adopted the consensus in the first quarter of 2001. The adoption of EITF 00-14 resulted in the following reclassifications in the 2000 income statement: net sales were reduced by $70 million; cost of sales was increased by $51 million; and selling, general and administrative expenses were decreased by $121 million. For 1999, net sales were reduced by $80 million; cost of sales was increased by $58 million; and selling, general and administrative expenses were decreased by $138 million. The above reclassifications had no impact on profit from operations, net income or earnings per share. In January 2001, the EITF reached a consensus on Issue No. 00-22, "Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future." This issue requires that certain volume rebates to customers be classified as a reduction of revenue. The consensus was effective for the first quarter of 2001, and its impact on the consolidated financial statements was not material. 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." This issue addresses the income statement classification of slotting fees, cooperative advertising arrangements and buydowns. The Company adopted this consensus in the first quarter of 2002. If this standard had been adopted at December 31, 2001, including required retroactive application to prior periods, net sales would have been reduced by $877 million in 2001, $915 million in 2000 and $750 million in 1999. Selling, general and administrative expenses would have been reduced by the same amounts in each year. The above reclassifications would have had no impact on profit from operations, net income or earnings per share. 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, effective 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. Unamortized goodwill at December 31, 2001, was $751 million. Unamortized other intangible assets with indefinite lives at December 31, 2001, was $122 million. Annual amortization expense related to 32 goodwill and other intangible assets with indefinite lives was $34 million in 2001 and $33 million in 2000 and 1999. The Company has determined that no transitional impairment losses will be recognized due to the change in accounting principle. 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 will 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 in the first quarter of 2002. Its adoption will not have a material impact on the Company's financial statements. ACCUMULATED OTHER COMPREHENSIVE LOSS An analysis of accumulated other comprehensive loss follows.
Accumulated Foreign Cash Other Currency Pension Flow Comprehensive Translation Adjustment Hedges Loss ------------- ------------ -------- -------------- (millions) Balance at December 31, 1998 $ (826) $ (47) $ -- $ (873) Change in period (79) 17 -- (62) Income tax expense (126) -- -- (126) ------------------------------- ------- ------- ------- ------- Balance at December 31, 1999 (1,031) (30) -- (1,061) ------------------------------- ------- ------- ------- ------- Change in period (216) (4) -- (220) Income tax expense (33) -- -- (33) ------------------------------- ------- ------- ------- ------- Balance at December 31, 2000 (1,280) (34) -- (1,314) ------------------------------- ------- ------- ------- ------- Change in period (48) (53) (13) (114) Income tax benefit (expense) (45) 31 5 (9) ------------------------------- ------- ------- ------- ------- Balance at December 31, 2001 $(1,373) $ (56) $ (8) $(1,437) ------------------------------- ------- ------- ------- -------
Net exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries, except those in highly inflationary economies, are accumulated in a separate section of stockholders' equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term investment nature and transactions designated as hedges of net foreign investments. The changes in accumulated foreign currency translation adjustment in 2001 were losses of $93 million, primarily from currency devaluation in Argentina and Brazil. Losses in 2000 were $249 million, with the United Kingdom accounting for $115 million. Losses in 1999 were $205 million, with Brazil accounting for approximately half of the losses. Included in other charges in the Consolidated Statement of Income are a net exchange loss of $3 million in 2001, a net exchange gain of $8 million in 2000 and a net exchange loss of $35 million in 1999. 33 SUPPLEMENTAL BALANCE SHEET INFORMATION Receivables Reserves
Years Ended December 31, 2001 2000 1999 ------ ------ ----- (millions) Balance at beginning of year $81 $74 $79 Additions, charged to profit and loss 30 63 50 Deductions, losses charged to reserves 42 56 55 --- --- --- Balance at end of year $69 $81 $74
Inventories
At December 31, 2001 2000 --------- --------- (millions) Raw materials and supplies $ 130 $ 153 Work in process 183 194 Finished goods 698 815 ------ ------ $1,011 $1,162
Property, Plant and Equipment
At December 31, 2001 2000 -------- -------- (millions) Land $ 56 $ 62 Buildings 809 743 Machinery and equipment 5,140 5,061 ------ ------ 6,005 5,866 Less accumulated depreciation 2,457 2,316 ------ ------ $3,548 $3,550
Interest on funds used to finance construction of significant additions to tangible property and equipment is capitalized and recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. During 2001, 2000 and 1999, interest cost was capitalized in the amounts of $11 million, $23 million and $13 million, respectively. Intangible Assets
At December 31, 2001 2000 --------- ------- (millions) Goodwill ($44 million not subject to amortization) $1,170 $1,294 Other intangible assets 1,113 1,155 ------ ------ 2,283 2,449 Less accumulated amortization 930 875 ------ ------ $1,353 $1,574
34 Accounts Payable and Accrued Liabilities
At December 31, 2001 2000 --------- --------- (millions) Accounts payable $ 401 $ 402 Advertising and sales promotion 438 527 Payroll and payroll taxes 183 143 Other taxes 76 97 Dividends payable on common stock 172 171 Restructuring reserve 112 240 Miscellaneous 498 766 ------ ------ $1,880 $2,346
Other Long-Term Liabilities
At December 31, 2001 2000 --------- --------- (millions) Pensions $ 259 $ 206 Postretirement medical 283 291 Deferred compensation 182 215 Miscellaneous 81 55 ------ ------ $ 805 $ 767
DEBT Loans Payable
At December 31, 2001 2000 ------- --------- (millions) U.S. dollar Commercial Paper (2.1% and 6.6%) $1,975 $1,452 Euro Commercial Paper (5.0%) - 586 Payable to banks (2.2% and 5.4%) 260 157 ------ ------ $2,235 $2,195
35 Long-Term Debt
At December 31, 2001 2000 -------- -------- (millions) 5.25% Notes due 2006 $ 130 $ -- 5.00% Notes due 2006 308 300 5.75% Notes due 2005 213 200 3.75% Notes due 2004 252 -- 3.25% Euro notes due 2004 264 283 2.23% Euro obligation due 2003 252 374 6.25% Notes due 2003 158 150 Floating rate notes due 2003 75 -- 5.25% Euro notes due 2002 230 236 1.53% Euro obligation due 2002 199 259 5.75% Notes due 2001 -- 200 2.61% Synthetic Euro obligation due 2001 -- 277 Other, multicurrency borrowings 1 2 Current portion of long-term debt (428) (631) ------- ------- Long-term debt $ 1,654 $ 1,650
The Company's commercial paper program is supported by its revolving credit facility and other sources of liquidity. The Company has a $1.65 billion revolving bank credit agreement, which expires in October 2002, that supports up to $2.2 billion in commercial paper issuances. Under the agreement, the Company has the option to borrow at various interest rates, including the prime rate, and is required to pay a facility fee of .04% per annum. At year-end 2001 and 2000, there were no borrowings under such agreements. Other unused lines of credit amounted to $183 million at December 31, 2001. Long-term weighted average interest rates were 2.6% and 4.3% as of December 31, 2001 and 2000, respectively, after giving effect to interest rate hedging instruments. Aggregate maturities of total long-term debt, excluding market value adjustments, for the five years subsequent to December 31, 2001, are $420 million in 2002, $477 million in 2003, $516 million in 2004, $200 million in 2005 and $425 million in 2006. 36 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES The estimated fair values of the Company's financial instruments are summarized below.
At December 31, 2001 2000 ------------ --------------------------- Carrying Amount/ Carrying Fair Fair Value Amount Value ------------ ------------- ------------- (millions) Long-term investments $ 176 $ 186 $ 187 Long-term debt, including current portion (2,082) (2,281) (2,308) Derivative instruments Currency forwards hedging net investments 9 (37) (37) Interest rate swaps 49 9 18 Forward rate agreements (5) -- -- Commodity swaps (3) -- (2) Other currency forwards and swaps Assets 12 28 30 Liabilities (8) (5) (8) Equity contracts 5 7 7
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires that all derivative instruments be reported on the balance sheet at fair value. The cumulative effect of adopting SFAS 133 as of January 1, 2001, was not material to the Company's consolidated financial statements. The Company is subject to market risks, such as changes in currency and interest rates that arise from normal business operations. The Company regularly assesses these risks and has established business strategies to provide natural offsets, supplemented by the use of derivative financial instruments to protect against the adverse effects of these and other market risks. The Company has established clear policies, procedures and internal controls governing the use of derivatives and does not use them for trading, investment or other speculative purposes. The Company uses derivative contracts to efficiently structure its debt in the desired currencies and mix of fixed to floating interest rates. Forward contracts effectively convert U.S. dollar commercial paper borrowings into non-U.S. dollar obligations, primarily in currencies with low interest rates. At December 31, 2001, the Company had forward contracts with fair values of $9 million recorded in assets and no direct non-U.S. dollar borrowings designated as hedges of the currency changes on the Company's foreign net investments. Currency effects of the net investment hedges are reflected as a component of foreign currency translation adjustments in accumulated other comprehensive loss and produced a $53 million aftertax gain for the year ended December 31, 2001. Interest effects of these hedges are reported in interest expense. The Company uses primarily floating rate debt in order to match interest costs to the impact of inflation on earnings. The Company manages its mix of fixed to floating rate debt by entering into interest rate swaps and forward rate agreements. At December 31, 2001, the Company had interest rate swaps with a fair value of $49 million recorded in assets designated as fair value hedges, effectively converting certain fixed rate debt into variable rate debt. The terms of the swaps match the terms of the underlying debt. The fair values of both the swaps and the debt are recorded as equal and offsetting gains and losses in interest expense. As these hedges are 100% effective, there is no current impact on earnings due to hedge ineffectiveness. At December 31, 2001, the Company had forward rate agreements with fair values of $5 million recorded in liabilities designated as cash flow hedges, effectively fixing certain variable interest payments. Aftertax net losses of $9 million ($14 million pretax) were deferred in other comprehensive loss during the year ended December 31, 2001. Remaining pretax deferred amounts of $6 million will be reclassified into interest expense over the next 15 months in the period during which the hedged variable interest payments are recognized. Ineffective amounts had no impact on earnings for the year ended December 31, 2001. 37 The Company also enters into commodity swaps to fix the price of certain forecasted purchases of raw material used in the manufacturing process. At December 31, 2001, the Company had swaps with fair values of $3 million recorded as liabilities designated as cash flow hedges. Changes in fair values are included in other comprehensive loss to the extent effective and are reclassified into cost of sales in the period during which the hedged transaction affects earnings. Total aftertax losses deferred in other comprehensive loss during the year ended December 31, 2001, including the cumulative effect of change in accounting principle upon adoption of SFAS 133, was $6 million ($9 million pretax). Remaining pretax deferred amounts of $6 million will be reclassified into earnings over the next 15 months. Ineffective amounts had no impact on earnings for the year ended December 31, 2001. Most of the Company's transactional exchange exposure is managed through centralized cash management. The Company hedges net residual transactional exchange exposures, principally intercompany balances, through forward contracts and currency swaps that are recorded at their net fair value of $4 million at December 31, 2001. Changes in fair value are recorded in nonoperating charges and offset gains and losses resulting from the underlying exposures. The Company also uses derivatives to hedge equity-linked employee compensation. The Company fixes the cost of certain employee compensation expenses linked to its stock price by entering into equity swap and option contracts. These contracts are recorded in assets at their fair value of $5 million at December 31, 2001. Changes in fair value are recorded in profit from operations and offset the changes in the value of the underlying liabilities. The equity put options associated with the share repurchase program are described separately in the Share Repurchase Program note. Several major international financial institutions are counterparties to the Company's financial instruments. It is Company practice to monitor the financial standing of the counterparties and to limit the amount of exposure with any one institution. The Company may be exposed to credit loss in the event of nonperformance by the counterparties to these contracts, but does not anticipate such nonperformance. With respect to trade receivables, concentration of credit risk is limited, due to the diverse geographic areas covered by Gillette operations. Using the best information available, including that related to recent developments, the Company has provided an allowance for doubtful accounts based on estimated bad debt loss. COMMITMENTS AND CONTINGENCIES Minimum rental commitments under noncancellable operating leases, primarily for office and warehouse facilities, are $94 million in 2002, $73 million in 2003, $66 million in 2004, $51 million in 2005, $49 million in 2006 and $131 million for years thereafter. Rental expense amounted to $121 million in 2001, $113 million in 2000 and $100 million in 1999. The Company is subject to legal proceedings and claims arising out of its businesses that cover a wide range of matters, including antitrust and trade regulation, contracts, advertising, environmental issues, product liability, patent and trademark matters and taxes. Management, after review and consultation with counsel, considers that any liability from all of these pending legal proceedings and claims would not materially affect the consolidated financial position, results of operations or liquidity of the Company. DISCONTINUED OPERATIONS On December 29, 2000, the sale of the Stationery Products business was finalized. The sale resulted in a loss of $429 million (net of a tax benefit of $102 million), or $.40 in net income per common share, fully diluted. The net loss included the book loss on the transaction, the operating loss of the segment in 2000 and other costs directly associated with the decision to divest, including postdivestiture reorganization costs. The Stationery Products segment is accounted for as a discontinued operation. Accordingly, its net assets and liabilities have been segregated from continuing operations in the accompanying consolidated balance sheet, and its operating results are segregated and reported as discontinued operations in the accompanying 38 consolidated statements of income and cash flows, and related notes. For the periods ended December 31, the results follow.
Years Ended December 31, 2001 2000 1999 ------ ---------- --------- (millions) Net sales -- $ 691 $ 743 Income (loss) before income taxes -- (8) 18 Income taxes (benefit) -- (3) 6 -- ----- ----- Income (loss) from discontinued operations -- $ (5) $ 12
The assets identified as part of the disposition of the Stationery Products business are recorded as Net Assets of Discontinued Operations; the cash flow of the business is reported as Net Cash Provided by Discontinued Operations; and the results of operations of the segment are reported as Income (Loss) from Discontinued Operations, net of tax. Net Assets of Discontinued Operations follows.
At December 31, 2001 2000 1999 ------ ---------- --------- (millions) Net current assets $ 26 $ 192 $ 509 Property, plant and equipment, less accumulated depreciation 5 6 200 Other net noncurrent assets and liabilities (8) (9) 465 ------ ------ ------ Net assets of discontinued operations $ 23 $ 189 $1,174
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 continued throughout 2001. The restructuring program will significantly improve the Company's operating efficiency, streamline the supply chain and further decrease costs. Specific program activities include consolidating management functions; reducing factory locations, in part through outsourcing production of low-volume noncore products; streamlining the supply chain via warehouse consolidation and other actions; and downsizing and centralizing corporate functions. The program planned the closure of eight factories and 13 distribution centers, affecting all business segments, and a net reduction of approximately 2,700 employees across all business functions, operating units and geographies. The reduction was expected to consist of 1,430 variable manufacturing and distribution employees and 1,270 executive, professional and administrative staff. The program was announced to all employees on December 18, 2000, via the Company's internal website and bulletin boards. The severance programs being used follow the Company's long-standing severance formulas and vary on a country-by-country basis, depending on local statutory requirements and local practices. Employee reductions occurring in 2001 required pretax cash outlays of $128 million. The restructuring program included a write-down of approximately $125 million to the carrying amount of factories, as well as the write-off of manufacturing, distribution and office equipment assets. Revenue-generating activities continued until the affected facilities ceased operations. Thus, these assets were considered assets to be held and used under SFAS 121. Asset disposals were completed in 2001. Buildings were sold, and equipment was disposed of through sale or abandonment. The value of the impaired assets was determined based on discounted cash flow analyses for the operating period up until closure and included an estimate of residual value. 39 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. Under the direction of the new Chief Executive Officer, the Company adopted a new strategy in 2001 for the Personal Care segment that included establishing a separate Personal Care Global Business Management unit as part of the Company's reemphasis on the category. This change in strategy also led to the decision not to close one major factory dedicated to personal care manufacturing, resulting in a pretax reduction in the 2000 reserve provision of approximately $33 million. Minor modifications were also made to certain other programs, including the decision not to close two small factories. In addition, the Company recorded a pretax recovery of approximately $22 million, reflecting better than anticipated results relating to the closing of certain other factories. Details of the activity in the 2000 restructuring program follow. The other benefits portion of employee-related expenses, shown below, includes fringe benefits, outplacement fees and special termination benefits related to pensions. 2000 Restructuring Program
Initial 2000 2001 Reclassi- Reduce Balance Provision Activity Activity fication Provision Dec. 31, 2001 ----------- ---------- ------------ ----------- ----------- -------------- (millions) Employee-related expenses Severance payments $ 146 $ -- $ (93) $ 29 $ (26) $ 56 Other benefits 67 -- (30) (10) (7) 20 Property, plant, and equipment 120 (120) -- -- -- -- Contractual obligations and other 27 -- (5) (19) -- 3 ----- ----- ----- ----- ----- ----- $ 360 $(120) $(128) $ -- $ (33) $ 79
Details of the facility closures and employee reductions for the 2000 restructuring program follow.
Plan Inception Initial 2001 Through Plan Activity Dec. 31, 2001 --------- ---------- --------------- Facility closures Factories 8 5 5 Distribution centers 13 13 13 Employee reductions 2,700 2,620 2,620
During the fourth quarter of 2001, the Company recorded a charge of $63 million associated with planned new actions: 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, will result in the reduction of 170 employees. Once the closure is completed, annual pretax savings will be approximately $5 million. The factory closure and the majority of the employee reductions were completed in January 2002. Details of the activity in the 2001 restructuring program follow. 2001 Restructuring Program
Initial 2001 Balance Provision Activity Dec. 31, 2001 ----------- ---------- -------------- (millions) Employee-related expenses Severance payments $ 3 $ -- $ 3 Property, plant, and equipment 23 (23) -- Contractual obligations and other 37 (7) 30 ---- ---- ---- $ 63 $(30) $ 33
40 In the fourth quarter of 2001, in connection with a decision to exit certain regional battery brands in international markets that do not carry the Duracell brand, the Company announced a noncash impairment charge relating to the write-down of goodwill, other intangibles and related long-lived assets. This resulted in a fourth-quarter 2001 pretax charge to operations of $164 million. The value of the impaired assets was determined based on discounted cash flow analyses for future operating periods. A summary of restructuring and asset impairment charges follows.
Years ended December 31, 2001 2000 1999 -------- ------ ------- (millions) Restructuring provision $ 63 $ 360 $ -- Asset impairments 164 212 -- Changes to 2000 restructuring program (55) -- -- ----- ----- ---- $ 172 $ 572 $ --
INCOME TAXES Income before income taxes and income tax expense are summarized below.
Years ended December 31, 2001 2000 1999 --------- --------- --------- (millions) Income from continuing operations before income taxes United States $ 533 $ 664 $1,116 Foreign 809 624 796 ------ ------ ------ Total income before income taxes $1,342 $1,288 $1,912 ------ ------ ------ Current tax expense Federal $ 107 $ 365 $ 181 Foreign 219 233 244 State 15 25 22 Deferred tax expense Federal 44 (87) 134 Foreign 43 (68) 82 State 4 (1) 1 ------ -------- ------ Total income tax expense $ 432 $ 467 $ 664
The effective tax rate decreased in 2001, due primarily to the nondeductibility of certain asset impairment charges in 2000. Excluding in both years the impact of the restructuring and asset impairment charges, the tax rate declined to 31.0% from 32.8%. The decrease was primarily attributable to the Company's tax management strategies. A reconciliation of the statutory Federal income tax rates to the Company's effective tax rate follows. 41
Years ended December 31, 2001 2000 1999 --------- --------- --------- (percent) Statutory Federal tax rate 35.0 35.0 35.0 Goodwill amortization and asset impairments 1.5 5.0 0.3 Rate differential on foreign income (2.6) (2.9) 2.0 Effect of foreign currency translation (0.2) (0.2) 0.5 State taxes (net of Federal tax benefits) 0.9 1.2 0.8 Benefit of foreign tax credits (3.3) (4.2) (3.5) Other differences 0.9 2.4 (0.3) ----- ----- ----- Effective tax rate 32.2 36.3 34.8
The components of deferred tax assets and deferred tax liabilities are shown below.
At December 31, 2001 2000 ------------------------------- ------------------------------ Deferred Tax Deferred Tax Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities -------------- -------------- -------------- ------------- (millions) Current Advertising and sales promotion $ 37 $ -- $ 21 $ -- Benefit plans 48 -- 60 -- Discontinued operations 41 -- 102 -- Restructuring and asset impairments 97 -- 142 -- Miscellaneous reserves and accruals 67 -- 104 -- Operating loss and credit carryforwards 2 -- 4 -- Other 189 -- 133 -- ---- ---- ---- ---- Total current 481 $ -- 566 $ -- ---- ---- ---- ---- Net current $481 $566 ---- ---- ---- ---- Noncurrent Benefit plans $136 $ -- $126 $ -- Intangibles -- 151 -- 166 Operating loss and credit carryforwards 19 -- 27 -- Property, plant and equipment -- 397 -- 356 Other -- 58 -- 74 ---- ---- ---- ---- Total noncurrent 155 606 153 596 ---- ---- ---- ---- Valuation allowance $ (8) $ (7) ---- ---- ---- ---- Net noncurrent $459 $450 ---- ---- Total Net deferred tax assets/liabilities $ 22 $116 ---- ----
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2001. The valuation allowance at December 31, 2001, related to deferred tax assets in certain foreign jurisdictions for which management believes it is more likely than not that it will not generate sufficient future taxable income in order to realize the deferred tax assets. At December 31, 2001, the Company had net operating loss carryforwards for foreign income tax purposes of $34 million, which are available to offset future taxable income, if any, through 2006. 42 PENSIONS AND OTHER RETIREE BENEFITS The Company has various retirement programs, including defined benefit, defined contribution and other plans, that cover most employees worldwide. Other retiree benefits are health care and life insurance benefits provided to eligible retired employees, principally in the United States. The components of defined benefit expense for continuing operations follow.
Pensions Other Retiree Benefits ----------------------------------- --------------------------------- Years ended December 31, 2001 2000 1999 2001 2000 1999 --------- ----------- ----------- --------- --------- ----------- (millions) Components of net benefit expense: Service cost-benefits earned $ 61 $ 64 $ 67 $ 6 $ 6 $ 6 Interest cost on benefit obligation 130 122 112 18 19 16 Estimated return on assets (166) (171) (159) (4) (4) (4) Net amortization 9 5 13 (5) (7) (7) Plan curtailments and other -- (3) (7) -- -- -- ----- ----- ----- ----- ----- ----- 34 17 26 15 14 11 Other 12 9 9 -- -- -- ----- ----- ----- ----- ----- ----- Net defined benefit expense $ 46 $ 26 $ 35 $ 15 $ 14 $ 11 ----- ----- ----- ----- ----- -----
43 The funded status of the Company's principal defined benefit and other retiree benefit plans and the amounts recognized in the balance sheet follow.
Pension Benefits Other Retiree Benefits --------------------------- ------------------------------ Years ended December 31, 2001 2000 2001 2000 ------------ ------------ ----------- ------------ (millions) Change in benefit obligation: Balance at beginning of year $ 1,961 $ 1,956 $ 259 $ 261 Benefit payments (113) (111) (21) (17) Service and interest costs 191 185 24 24 Amendments 12 26 (14) -- Actuarial (gains) losses (57) 78 135 (7) Plan curtailments (3) (33) -- -- Divestitures -- (71) -- -- Currency translation adjustment (41) (69) (3) (2) ------- ------- ------- ------- Balance at end of year $ 1,950 $ 1,961 $ 380 $ 259 ------- ------- ------- ------- Change in fair value of plan assets: Balance at beginning of year $ 1,878 $ 2,052 $ 40 $ 41 Actual return on plan assets (168) 42 (2) (1) Employer contribution 35 31 -- -- Benefit payments (92) (91) -- -- Divestitures -- (87) -- -- Currency translation adjustment (35) (69) -- -- ------- ------- ------- ------- Balance at end of year $ 1,618 $ 1,878 $ 38 $ 40 ------- ------- ------- ------- Benefit obligations in excess of plan assets $ (332) $ (83) $ (342) $ (219) Unrecognized prior service cost and transition obligation 41 44 2 18 Unrecognized net loss (gain) 399 128 57 (90) Minimum liability adjustment included in: Intangible assets (12) (6) -- -- Stockholders' equity (87) (34) -- -- ------- ------- ------- ------- Net prepaid (accrued) benefit cost $ 9 $ 49 $ (283) $ (291) ------- ------- -------- --------
The values for pension plans with accumulated benefit obligations in excess of plan assets follow.
At December 31, 2001 2000 -------- -------- (millions) Projected benefit obligation $ 550 $ 513 Accumulated benefit obligation 490 445 Fair value of plan assets 276 277
The weighted average assumptions used in determining related obligations of pension benefit plans are shown below.
At December 31, 2001 2000 1999 -------- -------- -------- (percent) Discount rate 6.8 7.0 6.8 Long-term rate of return on assets 8.6 9.1 9.1 Rate of compensation increases 4.2 4.7 4.7
44 The weighted average assumptions used in determining related obligations of other retiree benefit plans are shown below.
At December 31, 2001 2000 1999 -------- -------- -------- (percent) Discount rate 7.2 7.2 7.5 Long-term rate of return on assets 9.0 10.0 10.0
The assumed health care cost trend rate for 2002 is 12%, decreasing to 5% in 2007. A one percentage point increase in the trend rate would have increased the accumulated postretirement benefit obligation by 14%, and interest and service cost by 21%. A one percentage point decrease in the trend rate would have decreased the accumulated postretirement benefit obligation by 12%, and interest and service cost by 17%. The Employee Stock Ownership Plan (ESOP) was established to assist Gillette employees in financing retiree medical costs. ESOP accounts held by participants reduced the Company's obligations by $139 million and $189 million at December 31, 2001 and 2000, respectively. Account balances are assumed to have an annual yield of 12%. A retiree health benefits account within the Company's principal domestic pension plan also will be used to pay these costs. In addition to the defined benefit and other retiree benefit plans, the Company also sponsors defined contribution plans, primarily covering U.S. employees. The Company's expense for defined contribution plans in 2001, 2000 and 1999 totaled $34 million, $35 million and $36 million, respectively. EMPLOYEE STOCK OWNERSHIP PLAN In 1990, the Company sold to the ESOP 165,872 shares of a new issue of 8% cumulative Series C convertible preferred stock for $100 million, or $602.875 per share. On April 25, 2000, the trustee for the ESOP trust redeemed the Series C preferred stock held by the trust for common stock. The redemption was made by the trustee in order to receive the common stock dividend, which provided a higher return to holders than the preferred stock dividend. The redemption had no impact on fully diluted earnings per share and closed the gap between basic and fully diluted earnings per share. The preferred shares had a stated cost of $84 million and were redeemed for common stock held in the Company's treasury, at a cost of $174 million. Total stockholders' equity did not change as a result of the redemption. In June 2000, all shares were fully allocated to participants and the ESOP loan was fully repaid. No contributions were made during 2001. STOCK COMPENSATION PLANS AND CAPITAL STOCK At December 31, 2001, the Company had stock-based compensation plans described below that included the premerger plans of Duracell. Stock Option Plans Stock option plans authorize the granting of options on shares of the Company's common stock to selected key employees, including officers, and to nonemployee directors, at not less than the fair market value of the stock on the date of grant. Under the stock incentive plans, options to purchase a maximum of 198,800,000 shares may be granted. At December 31, 2001, 39,544,796 shares were available for future grants. Options granted under the plans may be either incentive stock options or nonqualified options. Outstanding options have seven- to 10-year terms. Options granted prior to April 17, 1997, became exercisable one year from the date of grant (except the Duracell options, which became exercisable upon the merger), provided the employee optionee is still employed or the director continues to serve. For options granted to employees after April 16, 1997, one-third of the options become vested on each of the first three anniversaries of the stock option award date. One-quarter of the options awarded to the Chief Executive Officer on his hiring date vested immediately, and the remainder vest in one-third increments annually over a three-year period. The January 19, 2001, options granted to the President/Chief Operating Officer vest one-half on the first anniversary and one-half on the 45 second anniversary of the stock option award date. The plans also permit payment for options exercised in shares of the Company's common stock (except Duracell options). The Company applies APB 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans in its results of operations. Had the Company recorded a charge for the fair value of options granted consistent with SFAS 123, the Company's net income and net income per common share would have been as follows.
Years ended December 31, 2001 2000 1999 --------- --------- ---------- (millions, except per share amounts) Net income As reported $ 910 $ 392 $ 1,260 Pro forma 792 311 1,114 Net income per common share Basic As reported $ .86 $ .37 $ 1.15 Pro forma .75 .29 1.02 Assuming full dilution As reported .86 .37 1.14 Pro forma .75 .29 1.01
The weighted average fair value of options granted was $9.44 in 2001, $10.58 in 2000 and $14.64 in 1999. 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, with the following weighted average assumptions.
Years ended December 31, 2001 2000 1999 ----------- ----------- ------------ Risk-free interest rates 5.4% 6.3% 6.1% Expected option lives 5.5 years 4.9 years 4.7 years Expected volatilities 33.3% 33.4% 30.4% Expected dividend yields 2.2% 2.0% 1.3%
A summary of the status of the Company's stock option plans follows.
Years ended December 31, 2001 2000 1999 ------------------------ ------------------------ ------------------------- Weighted Weighted Weighted Average Average Average Options Exercise Options Exercise Options Exercise (Thousands) Price (Thousands) Price (Thousands) Price ------------- ---------- ------------- ---------- ------------- ----------- Outstanding at beginning of year 58,969 $ 38.76 51,956 $ 39.79 43,659 $ 35.49 Granted 18,127 29.23 11,404 32.04 15,322 45.19 Exercised (2,488) 17.04 (2,071) 17.48 (5,745) 18.94 Cancelled (3,556) 42.31 (2,320) 47.86 (1,280) 51.52 ------ -------- ------ -------- ------ -------- Outstanding at year-end 71,052 $ 36.91 58,969 $ 38.76 51,956 $ 39.79 ------ -------- ------ -------- ------ -------- Options exercisable at year-end 42,242 35,067 26,962
46 The following table summarizes information about fixed stock options outstanding.
At December 31, 2001 ---------------------------------------------------------------------------------------------------------- Range of Exercise Prices Outstanding Exercisable ------------------- ------------------------------------------------------ ------------------------------- Weighted Average At Less Options Remaining Years Weighted Average Options Weighted Average Least Than (Thousands) of Contractual Life Exercise Price (Thousands) Exercise Price ------- ------ ------------- --------------------- ------------------ ------------- ----------------- $ 11 $21 7,403 2.7 $ 17.97 7,403 $ 17.97 21 35 33,161 8.4 30.11 8,800 30.62 35 48 21,500 6.8 45.85 17,114 46.05 50 60 8,988 6.5 56.22 8,925 56.26 --- ------ --- -------- ------ -------- $ 11 $60 71,052 7.1 $ 36.91 42,242 $ 40.07
Share Repurchase Program The Company has a share repurchase program in place 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, 2000, the Company repurchased 94 million shares in the open market for $4,084 million. In 2001, the Company repurchased 400 thousand shares for $12 million. In 2001, the Company continued to sell equity put options as an enhancement to the share repurchase program and earned $9 million in premiums. 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." At December 31, 2001, the outstanding put options had strike prices that were greater than the closing price for Gillette common stock on December 31, 2001. Those options were therefore "in the money." Although the options are not exercisable until a future date, the "in the money" obligation at December 31, 2001, was $1 million. At December 31, 2000, no "in the money" obligations existed on outstanding options. Preferred Stock Purchase Rights At December 31, 2001, the Company had 528 million preferred stock purchase rights outstanding, representing one-half right for each share of common stock outstanding. Each right may be exercised to purchase one ten-thousandth of a share of junior participating preferred stock for $225. The rights will only become exercisable, or separately transferable, on the earlier of the tenth business day after the Company announces that a person has acquired 15% or more, or the tenth business day after a tender offer commences that could result in ownership of more than 15%, of the Company's common stock. If any person acquires 15% or more of the common stock (except in an offer for all common stock that has been approved by the Board of Directors), or in the event of certain mergers or other transactions involving a 15% or more stockholder, each right not owned by that person or related parties will enable its holder to purchase, at the right's exercise price, common stock (or a combination of common stock and other assets) having double that value. In the event of certain merger or asset sale transactions with another party, similar terms would apply to the purchase of that party's common stock. The rights, which have no voting power, expire on December 14, 2005, subject to extension. Upon approval by the Board of Directors, the rights may be redeemed for $.01 each under certain conditions, which may change after any person becomes a 15% stockholder. At December 31, 2001, there were authorized 5 million shares of preferred stock without par value, of which 400 thousand Series A shares were reserved for issuance upon exercise of the rights. No shares were outstanding. 47 OPERATING SEGMENTS AND RELATED INFORMATION The following table presents certain operating segment information.
Blades & Personal Oral All Years ended December 31, Razors Care Duracell Care Braun Other Total ---------- ---------- ---------- --------- --------- --------- --------- (millions) 2001 Net sales $3,416 $ 877 $2,365 $1,270 $1,033 $ -- $ 8,961 Profit from operations 1,141 68 217 240 98 (266) 1,498 Identifiable assets 3,195 515 2,932 976 963 1,388 9,969 Capital expenditures 222 49 162 92 69 30 624 Depreciation 197 26 78 53 53 46 453 2000 Net sales $3,394 $ 960 $2,567 $1,204 $1,100 $ -- $ 9,225 Profit from operations 1,272 100 456 226 94 (636) 1,512 Identifiable assets 3,740 538 3,304 901 1,078 841 10,402 Capital expenditures 477 52 156 45 59 4 793 Depreciation 222 43 59 54 59 30 467 1999 Net sales $3,143 $1,041 $2,709 $1,114 $1,067 $ -- $ 9,074 Profit from operations 1,144 93 608 224 60 (42) 2,087 Identifiable assets 3,532 696 3,310 1,075 1,190 1,983 11,786 Capital expenditures 459 85 145 82 88 30 889 Depreciation 186 29 56 49 57 22 399
Each operating segment is individually managed and has separate financial results that are reviewed by the Company's chief operating decision-maker. Each segment contains closely related products that are unique to the particular segment. The name of the Toiletries segment has been changed to Personal Care, to better reflect the philosophy of segment management. No changes have been made to the products contained in the segment. The Blades & Razors segment consists of blades and razors. The Personal Care segment includes shave preparations, after-shaves and antiperspirants/deodorants. The Duracell segment consists of consumer batteries. Effective January 1, 2001, a new "Oral Care" segment replaced the previous "Oral-B Products" segment. Oral Care contains all manual oral care products previously included under Oral-B Products, plus Braun Oral-B power oral care products previously included in the "Braun Products" segment. The new Braun segment contains all remaining Braun products: male and female hair removal; household and hair care appliances; and personal diagnostic devices, including ear thermometers and blood pressure monitors. Prior-year amounts have been reclassified to reflect the change. Profit from operations is net sales less cost of sales and selling, general and administrative expenses, but is not affected either by nonoperating charges/income or by income taxes. Nonoperating charges/income consists principally of net interest expense and the effect of exchange. In calculating profit from operations for individual operating segments, substantial administrative expenses incurred at the operating level that are common to more than one segment are allocated on a net sales basis. Certain headquarters expenses of an operational nature also are allocated to segments. All intercompany transactions, primarily merchandise transfers, have been eliminated, and intersegment revenues are not significant. 48 The All Other column includes items not allocated to operating segments. Profit from operations includes all unallocated income/expense items, including corporate headquarters expenses, as well as the $172 million and $572 million charges for restructuring and asset impairments in 2001 and 2000, respectively. Identifiable assets includes financial instruments managed by the Corporate Treasury Department, nonqualified benefit trusts, deferred income tax assets and net assets of discontinued operations. Capital expenditures is primarily related to Research and Development initiatives. The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for 12% of sales in 2001. These sales occurred primarily in the United States and were across all product segments. Net sales by geographic area follow.
Years ended December 31, 2001 2000 1999 --------- --------- --------- (millions) Foreign $5,204 $5,510 $5,509 United States 3,757 3,715 3,565 ------ ------ ------ $8,961 $9,225 $9,074
Long-lived assets follow.
At December 31, 2001 2000 1999 -------- -------- --------- (millions) Germany $ 508 $ 519 $ 546 Other Foreign 1,013 1,145 1,178 ------ ------ ------ Total Foreign 1,521 1,664 1,724 United States 2,027 1,886 1,743 ------ ------ ------ $3,548 $3,550 $3,467
49 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Three Months Ended -------------------------------------------------------------------- 2001 March 31 June 30 September 30 December 31 Total Year ------------- ----------- -------------- ------------- ----------- (millions, except per share amounts) Net sales $ 1,763 $ 2,118 $ 2,362 $ 2,718 $ 8,961 Gross profit 1,140 1,346 1,440 1,628 5,554 Profit from operations 319 375 473 331 1,498 Income from continuing operations before income taxes 264 336 429 313 1,342 Net income 182 232 296 200 910 Net income per common share, basic and assuming full dilution (a) .17 .22 .28 .19 .86 Dividends declared per common share -- .16 1/4 .16 1/4 .32 1/2 .65 Dividends paid per common share .16 1/4 .16 1/4 .16 1/4 .16 1/4 .65 Stock price range: High 36.38 31.98 32.08 35.31 36.38 Low 29.50 24.50 26.00 29.00 24.50 2000 Net sales $ 1,889 $ 2,222 $ 2,308 $ 2,806 $ 9,225 Gross profit 1,183 1,392 1,437 1,744 5,756 Profit from operations 442 499 575 (4) 1,512 Income from continuing operations before income taxes 389 444 524 (69) 1,288 Discontinued operations, net of tax (2) (427) -- -- (429) Net income 258 (131) 350 (85) 392 Net income per common share, basic (a) Continuing operations .24 .28 .33 (.08) .78 Discontinued operations -- (.41) -- -- (.41) Net income .24 (.13) .33 (.08) .37 Net income per common share, assuming full dilution (a) Continuing operations .24 .28 .33 (.08) .77 Discontinued operations -- (.41) -- -- (.40) Net income .24 (.13) .33 (.08) .37 Dividends declared per common share .16 1/4 -- .16 1/4 .32 1/2 .65 Dividends paid per common share .14 3/4 .16 1/4 .16 1/4 .16 1/4 .63 1/2 Stock price range: High 43.00 41.69 34.81 37.19 43.00 Low 28.19 30.88 27.19 27.13 27.13
(a) Earnings per common share are computed independently for each of the periods presented and, therefore, may not add up to the total for the year. 50 Historical Financial Summary The Gillette Company and Subsidiary Companies
Years ended December 31, 2001(a) 2000(b) 1999 1998(c) 1997 1996(d) ---------- ---------- ---------- ---------- ---------- --------- (millions, except per share amounts and employees) Summary of Operations Net Sales (e) $ 8,961 9,225 9,074 9,136 9,084 8,735 Profit from Operations (e) $ 1,498 1,512 2,087 1,776 2,168 1,514 Income before Income Taxes Continuing $ 1,342 1,288 1,912 1,656 2,065 1,403 Discontinued $ -- (531) 18 13 156 122 ------- ------- ------ ------- ------- ------- $ 1,342 757 1,930 1,669 2,221 1,525 Net Income Continuing $ 910 821 1,248 1,073 1,327 871 Discontinued $ -- (429) 12 8 100 78 ------- ------- ------ ------- ------- ------- $ 910 392 1,260 1,081 1,427 949 Weighted Average Common Shares Outstanding Basic 1,055 1,054 1,089 1,117 1,118 1,107 Assuming full dilution 1,058 1,063 1,111 1,144 1,148 1,140 Per Common Share Data Net Income per Common Share: Basic Continuing $ .86 .78 1.14 .95 1.18 .78 Discontinued $ -- (.41) .01 .01 .09 .07 ------- ------- ------ ------- ------- ------- $ .86 .37 1.15 .96 1.27 .85 Assuming Full Dilution Continuing $ .86 .77 1.13 .94 1.15 .76 Discontinued $ -- (.40) .01 .01 .09 .07 ------- ------- ------ ------- ------- ------- $ .86 .37 1.14 .95 1.24 .83 Dividends Declared per Common Share: Gillette $ .65 .65 .59 .51 .43 .36 Duracell $ .58 Stock Price, December 31 $ 33.40 36.13 41.19 47.81 50.22 38.88 Balance Sheet Data Net Property, Plant and Equipment (e) $ 3,548 3,550 3,467 3,285 2,918 2,404 Total Assets (e) $ 9,946 10,213 10,612 10,630 9,636 9,171 Long-Term Debt $ 1,654 1,650 2,931 2,256 1,476 1,490 Stockholders' Equity $ 2,137 1,924 3,060 4,543 4,841 4,471 Other Information Net Interest Expense $ 141 218 129 86 69 67 Depreciation and Amortization (e) $ 509 535 464 421 384 347 Capital Expenditures (e) $ 624 793 889 952 933 787 Employees (e) 31,500 35,200 37,600 39,800 40,500 40,400
(a) In 2001, charges for restructuring and asset impairment expenses reduced profit from operations and income before income taxes by $172 million, net income by $135 million and net income per common share, both basic and assuming full dilution, by $.13. (b) In 2000, charges for restructuring and asset impairment expenses reduced profit from operations and income before income taxes by $572 million, net income by $430 million and net income per common share, both basic and assuming full dilution, by $.41. (c) In 1998, a charge for reorganization and realignment expenses reduced profit from operations and income before income taxes by $440 million, net income by $285 million, net income per common share, basic, by $.26, and net income per common share, assuming full dilution, by $.25. (d) In 1996, charges for merger-related costs reduced profit from operations and income before income taxes by $413 million, net income by $283 million, net income per common share, basic, by $.26, and net income per common share, assuming full dilution, by $.25. (e) Represents continuing operations. 51 Corporate and Stockholder Information Stockholder Inquiries Auditors William J. Mostyn III KPMG LLP Secretary Financial Information Investor Inquiries The Gillette Company offers free of charge this Annual Christopher M. Jakubik Report, the Form 10-K Annual Report, quarterly earnings Vice President, Investor Relations reports and other announcements concerning financial results. Media Inquiries Printed copies of these materials may be requested Eric A. Kraus by writing to the Office of the Secretary, by calling toll Vice President, Corporate Communications free (877) 788-4463 from within the United States or by calling (703) 386-1171 from outside the United States. Annual Meeting Financial information also may be reviewed, down- The Annual Meeting of Stockholders will take place loaded or requested in printed form by accessing the on Thursday, May 16, 2002, at the Hotel du Pont, Investors' section of www.gillette.com. Wilmington, Delaware. The meeting will convene at 10 am. InvestLink-Direct Stock Purchase Program Corporate Headquarters InvestLink is a direct stock purchase program sponsored Prudential Tower Building and administered by EquiServe Trust Company, N.A., Boston, Massachusetts 02199 the Company's Transfer Agent. InvestLink provides (617)421-7000 an economical, convenient way to purchase your first Via Internet: www.gillette.com shares or to purchase additional shares of Gillette common stock directly from the Company Program participants Incorporated also may reinvest their cash dividends through InvestLink. State of Delaware Interested individuals may request an investor kit by writing to the Transfer Agent by calling toll-free Common Stock (877)788-4463 from within the United States, by calling Major stock exchanges, New York, Boston, Chicago, (703)386-1171 from outside the United States; or Pacific, Frankfurt by accessing the Investors' section of www.gillette.com. New York Stock Exchange Symbol: G Electronic Proxy Material Distribution The Company is pleased to offer its registered stock- At year-end stockholders numbered 47,400, living in holders and participants in its Employees' Savings Plan all 50 states and more than 50 countries abroad and ESOP the option of receiving proxy material electronically. Registered stockholders and plan participants may authorize Transfer Agent and Registrar electronic delivery or obtain more information at EquiServe Trust Company, N.A. www.econsent.com/g/. P.O. Box 43016 Beneficial stockholders should contact their Providence, Rhode Island 02940-3016 brokerage firms to determine the availability of electronic (781)575-2322 proxy material distribution. By fax: (781)828-8813 Toll-free: (888)218-2841 Hearing impaired: (800)952-9245(TTY/TDD) Via Internet: www.equiserve.com
Directors and Executive Officers DIRECTORS EXECUTIVE DIRECTORS Warren E. Buffett(3),(5) Chairman of the Board and Chairman and Chief Executive Officer, Chief Executive Officer Berkshire Hathaway, Inc. James M. Kilts Edward F. DeGraan President and President Chief Operating Officer Edward F. DeGraan Wilbur H. Gantz(2),(5) Former Chairman and Chief Executive Officer, Senior Vice Presidents PathoGenesis Corporation Charles W. Cramb Finance Michael B. Gifford(1),(4) Former Chairman of the Board, Edward E. Guillet Danka Business Systems PLC Human Resources Carol R. Goldberg(2),(3) Peter Klein President, Strategy and Business Development The Avcar Group, Ltd. Kathy S. Lane Dennis F. Hightower (2),(5) Corporate Information Technology and Applications Retired Chief Executive Officer, Europe Online Networks, S.A. John F. Manfredi Corporate Affairs Herbert H. Jacobi(2),(4) Chairman of the Supervisory Board, Richard K. Willard HSBC Trinkaus & Burkhardt KGaA Legal Vice Presidents James M. Kilts(3) A. Bruce Cleverly Chairman of the Board Global Business Management, Oral Care Henry R. Kravis(1),(3) General Partner, Joseph F. Dooley Kohlberg Kravis Roberts & Co., L.P. Commercial Operations, North America Jorge P. Lemann(1),(4) General Partner, Ernst A. Haberli GP Investimentos Commercial Operations, International Richard R. Pivirotto(2),(5) President, Peter K. Hoffman Richard R. Pivirotto Co., Inc. Global Business Management, Blades and Razors Marjorie M. Yang(1),(4) Chairman and Chief Executive Officer, Mark M. Leckie Esquel Group Global Business Management, Duracell (1)Audit Committee (2)Compensation Committee Claudio E. Ruben (3)Executive Committee Controller (4)Finance Committee (5)Nominating and Corporate Governance Committee Joseph Scalzo Global Business Management, Committee Chair Personal Care