SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999 Commission File Number 1-922
THE GILLETTE COMPANY
(Exact name of registrant as specified in its charter)
Incorporated in Delaware 04-1366970
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Prudential Tower Building, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 421-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class
Common Stock, $1.00 par value
Shares Outstanding September 30, 1999 . . . . . . . . . . . . . . 1,072,657,610
<PAGE>
<TABLE>
PAGE 1
PART I. FINANCIAL INFORMATION
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(Millions, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales .......................................... $ 2,509 $ 2,531 $ 6,862 $ 6,881
Cost of Sales ...................................... 946 974 2,551 2,639
------- ------- ------- -------
Gross Profit ................................... 1,563 1,557 4,311 4,242
Selling, General and Administrative Expenses ....... 973 982 2,782 2,638
Reorganization/Realignment Expense ................. - 535 - 535
------- ------- ------- -------
Profit from Operations ......................... 590 40 1,529 1,069
Nonoperating Charges (Income):
Interest income .................................. (1) (3) (4) (6)
Interest expense ................................. 38 27 90 61
Exchange ......................................... 10 5 25 18
Other charges - net .............................. 2 2 6 (2)
------- ------- ------- -------
49 31 117 71
------- ------- ------- -------
Income before Income Taxes ..................... 541 9 1,412 998
Income Taxes ....................................... 189 3 491 352
------- ------- ------- -------
Net Income ..................................... $ 352 $ 6 $ 921 $ 646
======= ======= ======= =======
Net Income per common share
Basic .......................................... $ .33 $ - $ .84 $ .57
Assuming full dilution ......................... $ .32 $ - $ .82 $ .56
Dividends per common share
Declared ....................................... $ .1475 $ .1275 $ .2950 $ .2550
Paid ........................................... $ .1475 $ .1275 $ .4225 $ .3625
Weighted average number of common shares outstanding
Basic .......................................... 1,080 1,116 1,096 1,120
Assuming full dilution ......................... 1,101 1,143 1,119 1,149
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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PAGE 2
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Millions of dollars)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................... $ 60 $ 102
Trade receivables, less allowances 1999-$62; 1998-$79 2,400 2,622
Other receivables .................................. 306 321
Inventories:
Raw materials and supplies ...................... 236 244
Work in process ................................. 244 232
Finished goods .................................. 1,380 1,119
------- -------
Total Inventories ......................... 1,860 1,595
Deferred income taxes .............................. 475 517
Other current assets ............................... 344 283
------- -------
Total Current Assets ...................... 5,445 5,440
------- -------
Property, Plant and Equipment, at cost ............... 5,790 5,705
Less accumulated depreciation ..................... 2,275 2,233
------- -------
Net Property, Plant and Equipment ............ 3,515 3,472
------- -------
Intangible Assets, less accumulated amortization ..... 2,375 2,448
Other Assets ......................................... 579 542
------- -------
$11,914 $11,902
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<TABLE>
PAGE 3
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(Millions of dollars)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Loans payable .................................... $ 1,175 $ 981
Current portion of long-term debt ................ 64 9
Accounts payable ................................. 548 606
Accrued liabilities .............................. 1,496 1,423
Dividends payable ................................ - 141
Income taxes ..................................... 369 318
-------- --------
Total Current Liabilities ..................... 3,652 3,478
-------- --------
Long-Term Debt ..................................... 3,270 2,256
Deferred Income Taxes .............................. 458 411
Other Long-Term Liabilities ........................ 864 898
Minority Interest .................................. 37 39
Contingent Redemption Value of Common Stock
Put Options ...................................... 163 277
Stockholders' Equity:
8.0% Cumulative Series C ESOP Convertible
Preferred, without par value, issued: 1999,
143,723 shares; 1998, 148,627 shares ........... 87 90
Unearned ESOP compensation ....................... (7) (10)
Common stock, par value $1.00 per share:
Authorized 2,320,000,000 shares
Issued: 1999, 1,362,586,063 shares;
1998, 1,357,913,938 shares ............. 1,363 1,358
Additional paid-in capital ....................... 867 621
Earnings reinvested in the business .............. 6,124 5,529
Accumulated other comprehensive income ........... (1,076) (873)
Treasury stock, at cost: 1999, 289,928,453 shares;
l998, 252,507,187 shares ............... (3,888) (2,172)
-------- --------
Total Stockholders' Equity ............... 3,470 4,543
-------- --------
$ 11,914 $ 11,902
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<TABLE>
PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
(Unaudited)
<CAPTION> Nine Months Ended
September 30
-----------------
1999 1998
---- ----
<S> <C> <C>
Operating Activities
Net income .................................... $ 921 $ 646
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for reorganization/realignment - 535
Depreciation and amortization ............... 364 347
Other ....................................... 5 (46)
Changes in assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable ....................... 105 (44)
Inventories ............................... (312) (317)
Accounts payable and accrued liabilities .. (86) (220)
Other working capital items ............... (50) (23)
Other noncurrent assets and liabilities ... (12) (197)
Funding of German pension plans............ - (252)
----- -----
Net cash provided by operating activities 935 429
----- -----
Investing Activities
Additions to property, plant and equipment .... (616) (620)
Disposals of property, plant and equipment .... 122 56
Sale of business .............................. - 200
Other ......................................... 1 5
----- -----
Net cash used in investing activities .... (493) (359)
----- -----
Financing Activities
Purchase of treasury stock .................... (1,518) (784)
Proceeds from sale of put options ............. 49 30
Proceeds from exercise of stock option and
purchase plans ........................... 89 69
Increase in long-term debt .................... 1,106 188
Increase in loans payable ..................... 219 836
Dividends paid ................................ (467) (410)
Other ......................................... 40 9
----- -----
Net cash used in financing
activities ............................. (482) (62)
----- -----
Effect of Exchange Rate Changes on Cash ........... (2) -
----- -----
Increase(Decrease) in Cash and Cash Equivalents ... (42) 8
Cash and Cash Equivalents at Beginning of Year .... 102 105
----- -----
Cash and Cash Equivalents at End of Quarter ....... $ 60 $ 113
===== =====
Supplemental disclosure of cash paid for:
Interest ...................................... $ 77 $ 81
Income taxes .................................. $ 340 $ 326
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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PAGE 5
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Millions of dollars)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $ 352 $ 6 $ 921 $ 646
Other Comprehensive Income, net of tax:
Foreign Currency Translation 19 (29) (203) (18)
---- ---- ---- ----
Comprehensive Income $ 371 $ (23) $ 718 $ 628
==== ==== ==== ====
Foreign currency translation is after favorable (unfavorable) tax effects for
three months of $(15) million and nine months of $(103) million in 1999 and for
three months of $32 million and nine months of $33 million in 1998.
Accumulated Other Comprehensive Income
- --------------------------------------
The accumulated balances for the components of Other Comprehensive Income are:
<TABLE>
Accumulated
Foreign Other
Currency Pension Comprehensive
Translation Adjustment Income
----------- ---------- -------------
Balance December 31, 1997 $ (790) $ (20) $ (810)
Change in period 24 - 24
------ ------ ------
Balance March 31, 1998 (766) (20) (786)
Change in period (13) - (13)
------ ------ ------
Balance June 30, 1998 (779) (20) (799)
Change in Period (29) - (29)
------ ------ ------
Balance September 30, 1998 $ (808) $ (20) $ (828)
====== ====== ======
Balance December 31, 1998 $ (826) $ (47) $ (873)
Change in period (136) - (136)
------ ------ ------
Balance March 31, 1999 (962) (47) (1,009)
Change in period (86) - (86)
------ ------ ------
Balance June 30, 1999 (1,048) (47) (1,095)
Change in period 19 - 19
------ ------ ------
Balance September 30, 1999 $(1,029) $ (47) $ (1,076)
====== ====== ======
(/TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
PAGE 6
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(Millions, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income, as reported ............. $ 352 $ 6 $ 921 $ 646
Less: Preferred stock dividends .... 1 1 3 3
------ ------ ------ ------
Net Income, basic ................... $ 351 $ 5 $ 918 $ 643
Effect of dilutive securities:
Convertible preferred stock ..... 2 1 4 4
------ ------ ------ ------
Net Income, assuming full dilution .. $ 353 $ 6 $ 922 $ 647
====== ====== ====== ======
Common shares, basic ................ 1,080 1,116 1,096 1,120
Effect of dilutive securities:
Convertible preferred stock ..... 12 12 12 12
Stock options ................... 9 15 11 17
------ ------ ------ ------
Common shares, assuming full dilution 1,101 1,143 1,119 1,149
====== ====== ====== ======
Net Income per Common Share
Basic ............................. $ .33 $ - $ .84 $ .57
====== ====== ====== ======
Assuming full dilution ............ $ .32 $ - $ .82 $ .56
====== ====== ====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
PAGE 7
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Comments
- -------------------
Reference is made to the registrant's 1998 annual report to stockholders, which
contains, at pages 24 through 40, financial statements and the notes thereto,
which are incorporated by reference in the registrant's Annual Report on Form
10-K for the year ended December 31, 1998.
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. On an annual basis, advertising costs are expensed in
the year incurred.
Effective January 1, 1999, Gillette operations in Mexico have ceased using
hyperinflationary accounting. The functional currency in Mexico is the Peso, and
the change to nonhyperinflationary accounting had no material impact on reported
results.
The Company 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. If
the goodwill amortization cannot be fully recovered, the amount of goodwill
impairment is determined based on projected discounted future operating cash
flows or appraised values, depending on the nature of the asset.
With respect to the financial information for the interim periods included in
this report, which is unaudited, the management of the Company believes that all
adjustments necessary for a fair presentation of the results for such interim
periods have been included.
Prior year financial statements have been reclassified to conform to the 1999
presentations.
Accounting Pronouncements
- -------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company will
adopt SFAS 133 no later than January 1, 2001. Its impact on the consolidated
financial statements is still being evaluated, but it is not expected to be
material.
Advertising
- -----------
The advertising expense detailed below is included in selling, general and
administrative expense.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales ................ $ 2,509 $ 2,531 $ 6,862 $ 6,881
Advertising .............. 163 132 398 349
% of Net Sales ........ 6.5% 5.2% 5.8% 5.1%
<PAGE>
PAGE 8
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reorganization and Realignment
- ------------------------------
On September 28, 1998, the Company announced a reorganization to realign its
worldwide operations. In connection with the reorganization and realignment, and
in accordance with EITF issue 94-3 and SFAS 121, the Company recorded in the
third quarter of 1998 a charge to operating expenses of $535 million ($347
million after taxes, or $.30 in net income per common share, fully diluted). No
material adjustments have been made to the original plan. Spending levels for
specific program activities are above or below original estimates. The net
result is that estimated spending has increased for distributor buyout costs and
decreased for severance payments. Estimated total program spending is unchanged
at $535 million. The change in spending by category is reflected in the
remaining spending column.
Details of the reorganization and realignment charges follow. The other benefits
portion of employee-related expenses, shown below, includes fringe benefits,
outplacement fees and special termination benefits related to pensions.
Plan
Activity Current Inception
Initial Through Quarter Through Remaining
(Millions of dollars) Provision Dec.31,1998 Activity Sept.30,1999 Spending
- --------------------- --------- ----------- -------- ----------- ---------
Employee-related expenses
Severance payments $305 $ 12 $ 25 $ 63 $226
Other benefits 80 39 10 68 12
Asset impairments
Prop., plant, & equip. 122 122 - 122 -
Other assets 13 13 - 13 -
Distributor buyout costs 15 3 6 17 14
---- ---- ---- ---- ----
Total $535 $189 $ 41 $283 $252
==== ==== ==== ==== ====
The effect of suspending depreciation for impaired assets in the third quarter
of 1999 was $2 million.
In accordance with EITF issue 94-3 certain expenses related to the program,
primarily employee and equipment relocation, were not provided for in the
reorganization and realignment reserve. Those expenses are therefore recognized
as incurred, and amounted to $8 million in the third quarter of 1999 and are $12
million through nine months. These charges are included in selling, general and
administrative expenses.
<PAGE>
PAGE 9
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share Repurchase Program
- ------------------------
On September 18, 1997, the Company's Board of Directors authorized a share
repurchase program to buy up to 50 million shares in the open market or in
privately negotiated transactions, depending on market conditions and other
factors. This original repurchase was completed in July 1999. On June 17,1999,
the Company's Board of Directors authorized an expansion of the share repurchase
program from 50 million to 75 million shares, followed by a subsequent expansion
on October 21, 1999, from 75 million to 100 million shares. The Company plans to
purchase the remaining authorized shares over the next 12 to 18 months in the
open market or in privately negotiated transactions, depending on market
conditions and other factors.
The Company did not repurchase any shares in the first quarter of 1999. In the
second quarter of 1999, the Company repurchased 25 million shares in the open
market for $1,183 million. In the third quarter of 1999, the Company repurchased
13 million shares in the open market for $537 million. From the inception of the
program through September 30, 1999, the Company repurchased 60 million shares in
the open market for $2,839 million.
In 1999, the Company continued to sell equity put options as an enhancement to
its ongoing share repurchase program and earned $51 million in premiums through
September 30, 1999. 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.
To date, the Company has purchased shares upon settlement and intends to
continue this practice.
The 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 September 30, 1999, the "in
the money" obligation (i.e., when the option strike price is greater than the
closing price for Gillette common stock on September 30, 1999) related to the
written put options maturing on specific dates during the fourth quarter of 1999
was $28 million.
<PAGE>
PAGE 10
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Information by Business Segment
- -----------------------------------------
Net sales, profit from operations and assets for each of the Company's business
segments are set forth below. There are no material intersegment revenues.
Net Sales
--------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
(Millions of dollars) 1999 1998 1999 1998
------ ------ ------ ------
Blades & Razors $ 834 $ 768 $2,310 $2,094
Toiletries 275 290 781 896
Stationery Products 155 188 507 572
Braun Products 428 501 1,054 1,188
Oral-B Products 141 143 450 444
Duracell Products 676 641 1,760 1,687
------ ------ ------ ------
Total $2,509 $2,531 $6,862 $6,881
====== ====== ====== ======
Profit/(Loss) from Operations
--------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
(Millions of dollars) 1999 1998 1999 1998
------ ------ ------ ------
Blades & Razors $ 347 $ 281 $ 934 $ 820
Toiletries 21 19 69 70
Stationery Products (4) 11 12 58
Braun Products 59 97 111 195
Oral-B Products 20 15 63 62
Duracell Products 167 134 376 362
------ ------ ------ ------
Sub-total Reportable Segments 610 557 1,565 1,567
Reorganization & Realignment - (535) - (535)
All Other (20) 18 (36) 37
------ ------ ------ ------
Total $ 590 $ 40 $ 1,529 $1,069
====== ====== ====== ======
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PAGE 11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Assets
---------------------------------------------------------------
Sept 30, June 30, Dec 31, Sept 30, June 30, Dec 31,
(Millions of dollars) 1999 1999 1998 1998 1998 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Blades & Razors $ 3,560 $ 3,532 $ 3,378 $ 3,291 $ 3,189 $ 3,006
Toiletries 774 770 771 832 794 1,004
Stationery Products 1,176 1,197 1,330 1,328 1,282 1,299
Braun Products 1,723 1,546 1,679 1,686 1,472 1,544
Oral-B Products 698 749 680 651 611 622
Duracell Products 3,160 3,008 3,288 3,098 3,017 3,138
------- ------- ------- ------- ------- -------
Sub-total Reportable Segments 11,091 10,802 11,126 10,886 10,365 10,613
All Other 823 781 776 581 716 251
------- ------- ------- ------- ------- -------
Total $ 11,914 $11,583 $11,902 $11,467 $11,081 $10,864
======= ======= ======= ======= ======= =======
</TABLE>
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PAGE 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Results for any interim period, such as those described in the following
analysis, are not necessarily indicative of results for the entire year.
Third Quarter 1999 versus 1998
- ------------------------------
Sales for the quarter ended September 30, 1999, were $2.51 billion, a decrease
of 1% versus the same quarter of the prior year. Excluding the adverse effect of
exchange, sales climbed 3%.
Sales in North America matched those of the prior year, as gains from successful
new product launches, including the Mach3 shaving system, Oral-B CrossAction
toothbrush and Duracell Ultra battery, were offset by sales declines in Braun
Products and Stationery Products. Sales in Latin America were 1% below those of
the prior year, reflecting the negative effect of Brazil's recessionary
environment on both volume and exchange rates. Sales in Asia-Pacific were 24%
above those of the prior year, with all product lines and most markets
contributing to the growth. Sales in Western Europe were 10% below those of the
previous year, as favorable volume/mix in blades and razors was more than offset
by unfavorable exchange and weakness in other product lines. Sales in AMEE
(Africa, Middle East and Eastern Europe) were 6% above those of the prior year,
on the strength of increased battery sales, aided by the Geep acquisition in
India, and higher blade and razor sales, due to the launch of the Mach3 system.
Sales of blades and razors rose 9%, and profits 24%, buoyed by the Mach3 shaving
system. Sales in North America were 19% above those of the prior year. Gillette
blade dollar share in the United States grew 1.2 percentage points, from 68.3%
in September 1998 to 69.5% in September 1999, on the continued strength of the
Mach3 shaving system. In Western Europe, where the Mach3 system was launched in
September 1998, Gillette blade dollar share increased 3.6 percentage points to
72.9% from July/August 1998 to July/August 1999. Profit growth exceeds sales
growth, despite higher advertising, due to favorable product mix, improved gross
margins and savings from the reorganization and realignment program.
Sales of Duracell products were 6% above those of the prior year, reflecting
gains in North America. Despite higher marketing expenses supporting the rollout
of Ultra batteries, Duracell profits were 25% above those of the prior year, due
to higher gross margins, favorable factory variances and savings from the
reorganization and realignment program.
Braun sales were 15% below those of 1998, as strong growth in Asia-Pacific was
more than offset by sales declines in North America and Western Europe. Profits
were 39% below those of 1998, the result of lower sales dollars to cover fixed
costs.
Toiletries sales decreased 5% from those of the prior year, due to shortfalls in
North America and Latin America. Profits were 6% above the prior year's level
due to lower sales promotion expenses.
Sales of stationery products were 18% below those of 1998, reflecting weakness
in all geographies except Asia-Pacific. Stationery products incurred a $4
million loss in the quarter, versus an $11 million profit a year ago. Lower
overhead and marketing expenses were insufficient to offset the sales shortfall.
Sales of Oral-B products in the third quarter were 1% below those of the prior
year. Higher sales in North America were more than offset by lower sales in
Latin America, due primarily to Brazil. Profits were 30% above those of the
previous year, due to lower overhead expenses.
<PAGE>
PAGE 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine Months 1999 versus 1998
- ------------------------------
Sales for the nine months ended September 30, 1999, were $6.86 billion,
virtually unchanged from $6.88 billion in the first nine months of 1998.
Excluding the adverse effects of exchange and the divestiture of Jafra Cosmetics
International, sales rose 5%.
Sales in North America were 5% above those of the prior year, due to successful
new product launches, including the Mach3 shaving system, Oral-B CrossAction
toothbrush and Duracell Ultra battery. Sales in Latin America were 5% below
those of the prior year, reflecting the negative effect of Brazil's recessionary
environment on both volume and exchange rates. Sales in Asia-Pacific were 16%
above those of the prior year, due to the success of the Mach3 launch as well as
to improved sales in all other product lines. Sales in Western Europe were 3%
below those of the previous year, as gains in blades and razors, driven by the
Mach3 system, were more than offset by unfavorable exchange, softness in
stationery products and the impact of Germany's weak economy on Braun sales.
Sales in AMEE (Africa, Middle East and Eastern Europe) were 6% below those of
the prior year, due to unfavorable exchange in certain markets and the
continuing weak Russian economy.
Sales and profits of blade and razor products were 10% and 14% higher,
respectively, than those of the prior year, buoyed by sales of the Mach3 system.
Sales in North America, reflecting the steady growth of the Mach3 shaving
system, were 18% above those of the prior year. Mach3 shares continue to grow
steadily in Western Europe, following the September 1998 launch, achieving
shares higher than those of the United States over the equivalent period of
time. With the exception of Brazil, the Mach3 system has now been launched in
all major markets in Latin America, AMEE and Asia-Pacific and is contributing to
improving results in those regions. Profit growth is ahead of sales growth,
despite increased marketing expenses to support the Mach3 launch, due to product
cost savings and lower overhead expenses.
Sales of Duracell products were 4% above those of the prior year, reflecting
sales growth in North America and improved results in AMEE and Asia-Pacific.
Duracell's September year-to-date alkaline dollar share in the U.S. was 50%, up
1.7 share points versus prior year. Duracell profits were also 4% above those of
the prior year, despite higher marketing expenses behind the geographic rollout
of Ultra batteries, due to improved product mix and flat overhead spending
versus prior year.
Braun sales were 11% below those of 1998, due to economic related softness in
Western Europe and AMEE. Profits were $111 million in 1999, compared to $195
million in 1998, primarily the result of lower sales dollars to cover fixed
costs.
Toiletries sales were 13% below those of the prior year, due primarily to the
divestiture of the Jafra business on April 30, 1998. Excluding Jafra, toiletries
sales were 5% below those of the prior year, as growth in North America was
overshadowed by lower sales in Western Europe, AMEE and Latin America markets.
Profits were 2% below those of the prior year, however, excluding Jafra, profits
rose 7% due to unmatched new product launch expenses in 1998.
<PAGE>
PAGE 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales of stationery products were 11% below those of 1998, due to weakness in
all regions except Asia Pacific. Profits were $13 million in 1999, compared with
$59 million in 1998. The decrease was due to lower sales, as well as to
unfavorable factory variances resulting from lower production levels.
Sales of Oral-B products through nine months were 1% above those of the prior
year, driven by the launch of the CrossAction toothbrush in North America, where
sales were up 16%. The gains in North America were offset by weakness in Latin
America, due to the economic situation there. Profits were 2% above those of the
previous year, reflecting the sales gain.
Costs and Expenses
- ------------------
Gross profit was $4.31 billion, an increase of 2% versus 1998. Gross profit as a
percentage of sales was 62.8%, compared with 61.6% in 1998. Margin improvement
is due to improved sales mix from increased sales of higher margin blade and
razor products, as well as to the introduction of higher margin Duracell and
Oral-B products.
Selling, general and administrative expenses increased by $144 million, or 5%.
Combined advertising and sales promotion expenses grew 6% due to new product
activity. Other marketing and administrative expenses were 5% above those of the
prior year through nine months, but were 3% below those of a year ago in the
third quarter, reflecting savings from the reorganization and realignment
program. Spending on research and development increased 4%.
Profit from operations was $1,529 million, down 5%, versus $1,604 million a year
earlier, before the 1998 one-time realignment charge. Profit from operations in
1998, including the realignment charge, was $1,069 million.
Net interest expense was higher, due to increased borrowings to fund the share
repurchase program. Net exchange losses also were higher, primarily due to
conditions in Turkey.
Net income of $921 million was 7% below the $993 million in 1998, before
realignment charges. Net income in 1998, including the realignment charge, was
$646 million. Diluted net income per common share of $.82 was 5% below the $.86
of a year earlier, before realignment charges. Diluted net income per common
share in 1998, including the realignment charge, was $.56.
Trade Inventory Reduction Initiative
- ------------------------------------
The Company has announced a program to reduce trade inventories, primarily blade
inventories in Western Europe and to a lesser extent in Latin America, in
response to major changes occurring in the retail trade. As our trade partners
have consolidated and greatly improved their supply chain management, they no
longer need to maintain the inventory levels they once did. Our program involves
a one-time correction that we expect will bring the Company's trade inventories
in line with these new supply chain dynamics. This action should not affect
consumer purchases or our position in the marketplace. In addition, sales of
Braun products and stationery products should be dampened by our decision to
closely monitor and match trade shipments to consumer purchases for the holiday
season. We expect these combined actions to have an unfavorable impact on fourth
quarter sales, profits and earnings per share.
<PAGE>
PAGE 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Product Category Review
- -----------------------
The company is carefully reviewing every product category whose performance has
lagged expectations. The company will look to prune, divest or discontinue any
product category that doesn't clearly demonstrate the potential for acceptable
rates of growth. The product categories currently under review include small
household, hair care and personal diagnostic appliances within the Braun segment
and the PaperMate, Parker, Waterman and Liquid Paper franchises within the
Stationery Products segment.
Reorganization and Realignment
- ------------------------------
On September 28, 1998, the Company announced a reorganization and realignment
program that resulted in a third-quarter charge to operations of $535 million
($347 million after taxes, or $.30 in net income per common share, fully
diluted).
The program will result in the closure of 14 factories, 12 warehouses and 30
office facilities, as well as a reduction of approximately 4,700 employees
across all business segments, geographies and employee groups. Management
believes that appropriate progress is being made in achieving the objectives of
the reorganization and realignment program. Project activity is on track with
the original project plan, and no significant changes have been made to the
plan.
Details of the facility closures and employee reductions follow.
Plan
Current Inception
Initial Quarter Through
Plan Activity September 30, 1999
------- -------- ------------------
Facility Closures
Factories 14 1 4
Warehouses 12 4 8
Office Facilities 30 12 15
Employee reductions 4,700 901 2,172
At September 30, 1999, the carrying value of assets held for sale was $39
million.
Pretax cash outlays were $16 million in 1998 and are estimated to be
approximately $180 million in 1999 and $160 million in 2000. Cash severance
payments will extend beyond the completion of program activities, due to the
severance payment deferral options available to terminated employees. In 1999,
cash expenditures from the program are expected to be greater than the cash
benefits generated. Cash requirements will be funded from operations. In 1999,
approximately 40% of the ongoing annual benefit (estimated pretax rate of $200
million) should be achieved. The program will be completed in the first half of
2000.
Additional reorganization and realignment details are provided in the Notes to
Consolidated Financial Statements.
<PAGE>
PAGE 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
- -------------------
Net cash provided by operating activities for the nine months ended September
30, 1999, amounted to $935 million, compared with $429 million in the same
period last year. A significant portion of this change was due to the funding of
the German pension plans in 1998. Movement in both accounts receivable and
accounts payable compared favorably with that of 1998.
Net debt (loans payable, current portion of long-term debt and long-term debt,
net of associated swaps, less cash and cash equivalents) at September 30, 1999,
amounted to $4.37 billion, compared with $3.18 billion at year-end 1998. The
increase was due primarily to additional long-term debt used to finance the
share repurchase program. The Company's current ratio at September 30, 1999, was
1.49, compared with 1.56 at December 31, 1998, reflecting the impact of higher
current liabilities. The change in our foreign currency translation adjustment
through September 30, 1999 was a $203 million loss, with Brazil accounting for
just over one-half of the loss.
On February 2, 1999, the Company issued a $343 million Euro-denominated debt
obligation due February 2004. On March 26, 1999, the Company entered into a $325
million Euro-denominated debt obligation, which expires in March 2002. On June
30, 1999, the Company entered into a $437 million Euro-denominated debt
obligation, which expires in January 2003. The proceeds were used to fund the
share repurchase program, to reduce commercial paper borrowing and for other
corporate purposes. Based on the Company's intention and ability to maintain its
revolving credit agreements beyond the next 12 months, $1,100 million of
commercial paper borrowing was classified as long-term debt at December 31,
1998, and at September 30, 1999.
<PAGE>
PAGE 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year 2000
- ---------
The Company has undertaken a comprehensive approach to address its potential
exposure to the Year 2000 issue - covering all potentially affected areas
(applications, computers, facilities, manufacturing equipment, suppliers,
customers, etc.) at all locations.
At October 31, 1999, 99% of the affected items identified were determined to be
Year 2000 compliant, or their risks have been minimized to an appropriate level.
Although work continues on a few remaining tasks, no identified material risks
remain.
Gillette has established 180 separate contact points around the world to track
the Year 2000 progress of each of the Company's facilities or organizations. In
the discovery phase of the Year 2000 effort, potentially affected items at all
180 locations were identified. Of the 25,000 total items identified, 7,800 were
internal Information Technology (IT) and non-IT items classified as high impact.
Of those 7,800 high impact items, some work remains for less than 50 items. The
appropriate resources have been made available and we expect all work to be
completed in a timely fashion.
Compliance work covering our production equipment has been completed at all
factories worldwide.
The Company has material third-party relationships with suppliers of raw
materials and with customers and utility providers. Raw materials are readily
available and most can be supplied by a number of alternate vendors.
We purchase raw materials externally and generally have strong relationships
with our vendors, for whom we are a significant source of revenue. For large or
important vendors, we have asked for confirmation of their compliance and
verification that their program also extends to the compliance of their
suppliers. Where initial responses were questionable, we have engaged in
dialogue and followed up with on-site visits, where appropriate. For those very
few vendors who remain questionable, we continue to monitor them closely. If not
confident of their compliance, we will invoke contingency plans as necessary.
For our largest customers (those cumulatively representing 75% of sales for a
country), we have informed them of our progress and inquired of theirs, focusing
on their ability to order, receive and pay for our products. We have completed
testing the electronic interfaces with 85% of our significant North American
customers, and are actively pursuing the scheduling of final testing with the
remaining customers. In addition, some local operations have mailed
informational packages to all customers and/or hosted conferences to raise
awareness, share our progress and assess our customers' efforts.
The Company has an extensive quality assurance program in place, including the
RAP 2000 program (rapid assessment program) carried out by external consultants,
designed to ensure that Year 2000 activities are accomplishing their objectives.
In addition, the Company has reviewed independent external assessments of
infrastructure risk in foreign countries.
<PAGE>
PAGE 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company has completed detailed contingency plans to deal with unexpected
issues, which may occur. These plans include the identification of appropriate
resources and response teams and will be invoked as appropriate. Individual
business managers worldwide are responsible for ensuring that their business
functions continue to operate normally. Company-wide minimum requirements for
contingency plans were developed and distributed. They are being consistently
followed and centrally tracked. While the specifics vary by country, the general
strategies include: increasing the on-hand supply of raw materials and finished
goods, identifying alternate suppliers of raw materials, planning financial
transactions around the December 31 date, employing backup generators, ensuring
key personnel (both business and technical) are physically on-site, backing up
critical systems just before year-end, and identifying alternative methods of
doing business with customers as necessary.
Contingency event management teams are in place at all operating locations. They
are empowered to address any internal or third-party failures by approving
temporary changes in our business processes and policies, should this be
necessary to ensure business continuity.
In addition, Gillette operations depend on infrastructures in over 200 countries
and territories in which the Company operates and, therefore, a failure of any
one of those infrastructures could materially adversely affect its operations.
Our most significant foreign markets, based on net sales and manufacturing, are,
in alphabetical order, Belgium, Brazil, Canada, France, Germany, Italy, Mexico,
and the United Kingdom. We are not aware of any significant weaknesses in the
infrastructures of these countries. Independent external consultants have
reinforced our conclusions.
Despite this comprehensive approach, the Company cannot be completely sure that
issues will not arise, nor events occur, that could have material adverse
effects on the Company's results of operations or financial condition.
Nevertheless, Gillette is ready, and does not expect a material failure. The
Company's Year 2000 program is designed to minimize the likelihood of any
failure occurring. The most reasonably likely worst-case scenario is that a
short-term disruption will occur with a small number of customers or suppliers,
requiring an appropriate response from the established contingency teams.
Spending for the program is budgeted, expensed as incurred and has not been
material.
<PAGE>
PAGE 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject, from time to time, to legal proceedings and claims
arising out of its business, which cover a wide range of matters, including
antitrust and trade regulation, advertising, product liability, contracts,
environmental issues, patent and trademark matters and taxes. Management, after
review and consultation with counsel, considers that any liability from all of
these legal proceedings and claims would not materially affect the consolidated
financial position, results of operations or liquidity of the Company.
Item 5. Other Information
Cautionary Statement
- --------------------
From time to time, the Company makes statements that constitute or contain
"forward-looking" information as that term is defined within the meaning of the
Federal securities laws. These statements may be identified by such
forward-looking words as "expect," "look," "believe," "anticipate," "may,"
"will," and variations of these words or other forward-looking terminology.
Forward-looking statements made by the Company are not guarantees of future
performance. The Company assumes no obligation to update any forward-looking
information. Actual results may differ materially from those in the
forward-looking statements as the result of risks and uncertainties, including
those listed below.
* the pattern of the Company's sales, including variations in sales volume
within periods, that makes forward-looking statements about sales and
earnings difficult and may result in the variance of actual results from
those contained in statements made at any time prior to the period's
close;
* vigorous competition within the Company's product markets, including
pricing and promotional advertising or other activities, in order to
preserve or gain market share, the timing of which cannot be foreseen by
the Company;
* the Company's reliance on the development of new products and the inherent
risks associated with new product introductions, including uncertainty of
trade and customer acceptance and competitive reaction;
* the costs and effects of unanticipated legal and administrative
proceedings;
* the impacts of unusual items resulting from ongoing evaluations of
business strategies, asset valuations and organizational structure;
<PAGE>
PAGE 20
PART II. OTHER INFORMATION
* a substantial portion of the Company's sales having been made outside the
United States, making forecasting of sales more difficult;
* the impact on sales or earnings of fluctuations in exchange rates in one
or more of the Company's foreign markets;
* the impact of the Year 2000 issue on the Company's order, production,
distribution and financial systems and the systems of its suppliers,
customers and utility providers;
* the possibility of one or more of the global markets in which the Company
competes being impacted by variations in political, economic or other
factors, such as inflation rates, recessionary or expansive trends, tax
changes, legal and regulatory changes or other external factors over which
the Company has no control;
* the effects of rapid technological change on product development and
differentiation, acceptance and costs, including technological advances of
competitors;
* the effects of patents, including possible new patents granted to
competitors or challenges to Company patents and expiration of patents,
that affect competition and product acceptance;
* the ability of the Company to successfully reduce trade inventories to
levels consistent with the changing needs of the more concentrated retail
trade.
Item 6(a) Exhibits
Exhibit 27 Financial Data Schedule
Item 6(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarterly period ended
September 30, 1999.
<PAGE>
PAGE 21
SIGNATURE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE GILLETTE COMPANY
(Registrant)
CHARLES W. CRAMB
Charles W. Cramb
Senior Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
November 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The data reported in this exhibit are based on unaudited statements but include
all adjustments which the company considers necessary for a fair presentation of
results for this period.
</LEGEND>
<CIK> 0000041499
<NAME> THE GILLETTE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 60,000
<SECURITIES> 0
<RECEIVABLES> 2,462,000
<ALLOWANCES> 62,000
<INVENTORY> 1,860,000
<CURRENT-ASSETS> 5,445,000
<PP&E> 5,790,000
<DEPRECIATION> 2,275,000
<TOTAL-ASSETS> 11,914,000
<CURRENT-LIABILITIES> 3,652,000
<BONDS> 3,270,000
0
87,000
<COMMON> 1,363,000
<OTHER-SE> 2,020,000
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<SALES> 6,862,000
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<NET-INCOME> 921,000
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<EPS-DILUTED> .82
</TABLE>
