SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 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 June 30, 1999 . . . . . . . . . . . . . . 1,085,001,932
<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 Six Months Ended
June 30 June 30
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales .......................................... $ 2,414 $ 2,325 $ 4,353 $ 4,350
Cost of Sales ...................................... 912 882 1,605 1,665
------- ------- ------- -------
Gross Profit ................................... 1,502 1,443 2,748 2,685
Selling, General and Administrative Expenses ....... 1,010 848 1,809 1,656
------- ------- ------- -------
Profit from Operations ......................... 492 595 939 1,029
Nonoperating Charges (Income):
Interest income .................................. (1) (2) (3) (3)
Interest expense ................................. 24 17 52 34
Exchange ......................................... 6 7 15 13
Other charges - net .............................. 4 (2) 4 (4)
------- ------- ------- -------
33 20 68 40
------- ------- ------- -------
Income before Income Taxes ..................... 459 575 871 989
Income Taxes ....................................... 159 203 302 349
------- ------- ------- -------
Net Income ..................................... $ 300 $ 372 $ 569 $ 640
======= ======= ======= =======
Net Income per common share
Basic .......................................... $ .27 $ .33 $ .51 $ .57
Assuming full dilution ......................... $ .26 $ .33 $ .50 $ .56
Dividends per common share
Declared ....................................... $ .1475 $ .1275 $ .1475 $ .1275
Paid ........................................... $ .1475 $ .1275 $ .2750 $ .2350
Weighted average number of common shares outstanding
Basic .......................................... 1,101 1,124 1,103 1,123
Assuming full dilution ......................... 1,124 1,154 1,127 1,153
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<TABLE>
PAGE 2
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Millions of dollars)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................... $ 63 $ 102
Trade receivables,less allowances 1999-$58; 1998-$79 2,262 2,622
Other receivables .................................. 311 321
Inventories:
Raw materials and supplies ...................... 212 244
Work in process ................................. 266 232
Finished goods .................................. 1,306 1,119
------- -------
Total Inventories ......................... 1,784 1,595
Deferred income taxes .............................. 503 517
Other current assets ............................... 319 283
------- -------
Total Current Assets ...................... 5,242 5,440
------- -------
Property, Plant and Equipment, at cost ............... 5,621 5,705
Less accumulated depreciation ..................... 2,203 2,233
------- -------
Net Property, Plant and Equipment ............ 3,418 3,472
------- -------
Intangible Assets, less accumulated amortization ..... 2,378 2,448
Other Assets ......................................... 545 542
------- -------
$11,583 $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>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Loans payable .................................... $ 844 $ 981
Current portion of long-term debt ................ 64 9
Accounts payable ................................. 509 606
Accrued liabilities .............................. 1,271 1,423
Dividends payable ................................ - 141
Income taxes ..................................... 365 318
-------- --------
Total Current Liabilities ..................... 3,053 3,478
-------- --------
Long-Term Debt ..................................... 3,259 2,256
Deferred Income Taxes .............................. 433 411
Other Long-Term Liabilities ........................ 859 898
Minority Interest .................................. 37 39
Contingent Redemption Value of Common Stock
Put Options ...................................... 366 277
Stockholders' Equity:
8.0% Cumulative Series C ESOP Convertible
Preferred, without par value, issued: 1999,
145,156 shares; 1998, 148,627 shares ........... 88 90
Unearned ESOP compensation ....................... (7) (10)
Common stock, par value $1.00 per share:
Authorized 2,320,000,000 shares
Issued: 1999, 1,362,150,261 shares;
1998, 1,357,913,938 shares ............. 1,362 1,358
Additional paid-in capital ....................... 648 621
Earnings reinvested in the business .............. 5,932 5,529
Accumulated other comprehensive income ........... (1,095) (873)
Treasury stock, at cost: 1999, 277,148,329 shares;
l998, 252,507,187 shares ............... (3,352) (2,172)
-------- --------
Total Stockholders' Equity ............... 3,576 4,543
-------- --------
$ 11,583 $ 11,902
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
(Unaudited)
<CAPTION> Six Months Ended
June 30
-----------------
1999 1998
---- ----
<S> <C> <C>
Operating Activities
Net income .................................... $ 569 $ 640
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............... 228 232
Other ....................................... 4 (26)
Changes in assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable ....................... 321 117
Inventories ............................... (238) (376)
Accounts payable and accrued liabilities .. (243) (233)
Other working capital items ............... (32) (21)
Other noncurrent assets and liabilities ... (1) (52)
Funding of German pension plans............ - (252)
----- -----
Net cash provided by operating activities 608 29
----- -----
Investing Activities
Additions to property, plant and equipment .... (390) (412)
Disposals of property, plant and equipment .... 72 37
Sale of Business .............................. - 200
Other ......................................... 1 16
----- -----
Net cash used in investing activities .... (317) (159)
----- -----
Financing Activities
Purchase of treasury stock .................... (1,133) (116)
Proceeds from sale of put options ............. 38 23
Proceeds from exercise of stock option and
purchase plans ........................... 80 53
Increase in long-term debt .................... 1,103 288
Increase(Decrease) in loans payable ........... (110) 119
Dividends paid ................................ (306) (266)
----- -----
Net cash (used in) provided by financing
activities ............................. (328) 101
----- -----
Effect of Exchange Rate Changes on Cash ........... (2) -
----- -----
Increase(Decrease) in Cash and Cash Equivalents ... (39) (29)
Cash and Cash Equivalents at Beginning of Year .... 102 105
----- -----
Cash and Cash Equivalents at End of Quarter ....... $ 63 $ 76
===== =====
Supplemental disclosure of cash paid for:
Interest ...................................... $ 33 $ 53
Income taxes .................................. $ 144 $ 241
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
PAGE 5
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Millions of dollars)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $ 300 $ 372 $ 569 $ 640
Other Comprehensive Income, net of tax:
Foreign Currency Translation (86) (13) (222) 11
--- --- --- ---
Comprehensive Income $ 214 $ 359 $ 347 $ 651
=== === === ===
Foreign currency translation is after favorable (unfavorable) tax effects for
three months of $(34) million in 1999 and $(2) million in 1998 and for six
months of $(88) million in 1999 and $ 1 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)
===== ===== =====
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)
===== ===== =======
(/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 Six Months Ended
June 30 June 30
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income, as reported ............. $ 300 $ 372 $ 569 $ 640
Less: Preferred stock dividends .... 1 1 2 2
------ ------ ------ ------
Net Income, basic ................... $ 299 $ 371 $ 567 $ 638
Effect of dilutive securities:
Convertible preferred stock ..... 1 2 2 3
------ ------ ------ ------
Net Income, assuming full dilution .. $ 300 $ 373 $ 569 $ 641
====== ====== ====== ======
Common shares, basic ................ 1,101 1,124 1,103 1,123
Effect of dilutive securities:
Convertible preferred stock ..... 12 12 12 12
Stock options ................... 11 18 12 18
------ ------ ------ ------
Common shares, assuming full dilution 1,124 1,154 1,127 1,153
====== ====== ====== ======
Net Income per Common Share
Basic ............................. $ .27 $ .33 $ .51 $ .57
====== ====== ====== ======
Assuming full dilution ............ $ .26 $ .33 $ .50 $ .56
====== ====== ====== ======
</TABLE>
See Acccompanying 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 switch to non-hyperinflationary 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.
<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 that would 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. Employee related
expenses, other benefits, shown below, include fringe benefits, outplacement
fees and special termination benefits related to pensions.
Details of the reorganization and realignment charges follow.
Plan
Activity Current Inception
Initial Through Quarter Through
(Millions of dollars) Provision Dec.31,1998 Activity Jun.30,1999 Balance
- --------------------- --------- ----------- -------- ----------- -------
Employee related expenses
Severance payments $305 $ 12 $ 17 $ 38 $267
Other benefits 80 39 9 58 22
Asset impairments
Prop., plant, & equip. 122 122 - 122 -
Other assets 13 13 - 13 -
Distributor buyout costs 15 3 1 11 4
---- ---- ---- ---- ----
Total $535 $189 $ 27 $242 $293
==== ==== ==== ==== ====
The effect of suspending depreciation for impaired assets in the second
quarter was $3 million.
<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 purchase up to 50 million shares 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. From the inception of the program through June
30, 1999, the Company repurchased 47 million shares in the open market for
$2,302 million.
On June 17,1999, the Company's Board of Directors authorized an expansion of the
share repurchase program from 50 to 75 million shares. The original 50 million
share repurchase was completed in July 1999. The Company plans to purchase the
additional 25 million shares over the next 12 to 18 months in the open market or
in privately negotiated transactions, depending on market conditions and other
factors.
In 1999, the Company continued to sell equity put options as an enhancement to
its ongoing share repurchase program and earned $42 million in premiums
through June 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 may elect to
settle by paying net cash or by purchasing the shares. To date the Company has
purchased shares upon settlement and it is the intention of the Company 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 June 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 June 30, 1999) related to the written
put options maturing on specific dates during the third quarter of 1999 was
$57 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 identifiable assets for each of the
Company's business segments are set forth below. There are no material
intersegment revenues.
Net Sales
--------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
(Millions of dollars) 1999 1998 1999 1998
------ ------ ------ ------
Blades & Razors $ 824 $ 742 $1,476 $1,326
Toiletries 281 300 506 606
Stationery Products 209 218 352 384
Braun Products 328 344 626 687
Oral-B Products 164 157 309 301
Duracell Products 608 564 1,084 1,046
------ ------ ------ ------
Total $2,414 $2,325 $4,353 $4,350
====== ====== ====== ======
Profit from Operations
--------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
(Millions of dollars) 1999 1998 1999 1998
------ ------ ------ ------
Blades & Razors $ 321 $ 296 $ 587 $ 539
Toiletries 18 28 48 51
Stationery Products 15 34 16 47
Braun Products 14 59 52 98
Oral-B Products 20 28 43 47
Duracell Products 117 130 209 228
------ ------ ------ ------
Sub-total Reportable Segments 505 575 955 1,010
All Other (13) 20 (16) 19
------ ------ ------ ------
Total $ 492 $ 595 $ 939 $1,029
====== ====== ====== ======
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PAGE 11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Identifiable Assets
---------------------------------------------------------------
Jun 30, Mar 31, Dec 31, Jun 30, Mar 31, Dec 31,
(Millions of dollars) 1999 1999 1998 1998 1998 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Blades & Razors $ 3,532 $ 3,347 $ 3,378 $ 3,189 $ 3,009 $ 3,006
Toiletries 770 747 771 794 861 1,004
Stationery Products 1,197 1,211 1,330 1,282 1,269 1,299
Braun Products 1,546 1,574 1,679 1,472 1,397 1,544
Oral-B Products 749 725 680 611 602 622
Duracell Products 3,008 3,014 3,288 3,017 2,926 3,138
------ ------ ------ ------ ------ ------
Sub-total Reportable Segments 10,802 10,618 11,126 10,365 10,064 10,613
All Other 781 841 776 716 628 251
------ ------ ------ ------ ------ ------
Total $11,583 $11,459 $11,902 $11,081 $10,692 $10,864
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
PAGE 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Results for any interim period, such as that described in the following
analysis, are not necessarily indicative of the results for the entire year.
Second Quarter 1999 versus 1998
- ------------------------------
Sales for the quarter ended June 30, 1999, were $2.41 billion, an increase of 4%
versus the same quarter of the prior year. Excluding the adverse effects of
exchange and the divestiture of Jafra Cosmetics International, sales climbed 9%.
Sales in North America were 8% 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
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 14% above those of the prior year, due to the success of the
Mach3 launch, as well as improvement of the battery market in South Korea. Sales
in Western Europe were 4% above those of the previous year, due to blades
and razors, driven by the Mach3 system. Sales in AMEE (Africa, Middle East
and Eastern Europe) were 1% above those of the prior year, as upsides in
battery sales, due to the Geep acquisition in India, and blade and razor sales,
due to the Mach3 launch, were offset by declines in Russia.
Sales and profits of blade and razor products were 11% and 9% higher,
respectively, than those of the prior year, buoyed by sales of the Mach3 shaving
system. One year after the launch of Mach3, sales in North America were 8% above
those of the prior year. Gillette blade dollar share in the United States has
grown 2.7 percentage points, from 66.1% in June 1998 to 68.8% in June 1999,
driven by the June 1998 launch of the Mach3 shaving system. In Western Europe,
where the Mach3 system was launched in September 1998, and sales grew 17%,
Gillette blade dollar share increased 2.0 percentage points to 72.9% from
March/April 1998 to March/April 1999. Profit growth is below sales growth due to
increased marketing expenses to support the Mach3 launch.
Sales of Duracell products were 8% above those of the prior year, on strength
in the United States. The total alkaline battery dollar market in the United
States grew by 10% from June 1998 to June 1999, with the Duracell share of that
rapidly expanding market growing from 48.2% in June 1998 to 50.2% in June 1999.
Duracell profits were 10% below those of the prior year, reflecting marketing
expenses behind the geographic rollout of Ultra batteries, as well as
unfavorable factory variances due to lower production levels as a result of
lower international shipments.
Braun sales were 4% below those of 1998, due to poor Christmas retail
offtake in the United States which continued to impact North American sales in
the second quarter. Somewhat offsetting the North American results was a return
to sales growth in Europe. Profits were $14 million in 1999, compared to $59
million in 1998, the result of lower sales dollars to cover fixed costs as well
as unfavorable factory variances due to lower production levels.
Toiletries sales were 6% below those of the prior year, due to the
divestiture of the Jafra business on April 30, 1998. Excluding Jafra, toiletries
sales were equal to those of the prior year, as growth in North America was
overshadowed by lower sales in Europe and AMEE markets. Profits were 33% below
the prior year, due to lower sales dollars to cover fixed costs.
<PAGE>
PAGE 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales of stationery products were 4% below those of 1998 due to weakness in
Parker pen sales in all regions. Profits were $15 million in 1999 compared to
$34 million in 1998. The decrease was due to the lower sales as well as the
unfavorable factory variances resulting from lower production levels.
Sales of Oral-B products in the second quarter were 4% above those of the prior
year, driven by the CrossAction toothbrush in North America. Profits were 28%
lower than those of the previous year, due to marketing expenses and start-up
costs associated with the CrossAction toothbrush.
Six Months 1999 versus 1998
- ------------------------------
Sales for the six months ended June 30, 1999, were $4.35 billion, equal to those
of the first six months of 1998. Excluding the adverse effects of exchange and
the divestiture of Jafra Cosmetics International, sales rose 6%.
Sales in North America were 9% 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
8% 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 12% above those of the prior year, due to the success of the
Mach3 launch in Australia and Japan, as well as improvement of the battery
market in South Korea. Sales in Western Europe were 1% above those of the
previous year, as gains in blades and razors, driven by the Mach3 system, were
offset by 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 12% below those of the prior year, due to unfavorable exchange and the poor
Russian economy.
Sales and profits of blade and razor products were 11% and 9% 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, a pattern that is being repeated
in markets around the world. Mach3 shares continue to grow steadily in Western
Europe, following the September 1998 launch. With the exception of Brazil, Mach3
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 below sales growth due to increased marketing expenses to support the Mach3
launch.
Sales of Duracell products were 4% above those of the prior year, on
strength in the United States. Duracell profits were 8% below those of the prior
year, reflecting marketing expenses behind the geographic rollout of Ultra
batteries, as well as unfavorable factory variances due to lower production
volumes as a result of lower international shipments.
Braun sales were 9% below those of 1998, due to poor Christmas retail offtake
in the United States and softness in Western Europe and AMEE. Profits were
$52 million in 1999, compared to $98 million in 1998, primarily the result of
lower sales dollars to cover fixed costs.
Toiletries sales were 16% below those of the prior year, due primarily to
the divestiture of the Jafra business on April 30, 1998. Excluding Jafra,
toiletries sales were 4% 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 5% 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 8% below those of 1998 due to weakness in
Parker pen sales in all regions. Profits were $16 million in 1999 compared to
$47 million in 1998. The decrease was due to the lower sales, as well as the
unfavorable factory variances resulting from lower production levels.
Sales of Oral-B products through six months were 3% above those of the
prior year, driven by the launch of the CrossAction toothbrush in North America.
Profits were 8% lower than those of the previous year, due to marketing expenses
and start-up costs associated with the CrossAction toothbrush.
Costs and Expenses
- ------------------
Gross profit was $2.75 billion, an increase of 2% versus 1998. Gross profit
as a percentage of sales was 63.1%, compared with 61.7% in 1998. Margin
improvement is due to improved sales mix from increased sales of higher margin
blade and razor products, plus the introduction of higher margin new products
from Duracell and Oral-B.
Selling, general and administrative expenses increased by $153 million, or 9%.
Combined advertising and sales promotion expenses were the major contributors to
the increase, as they grew 10% versus the prior year due to new product
activity. Spending on research and development increased 5%.
Profit from operations was $939 million, down 9%, versus $1,029 million a year
earlier.
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 $569 million was 11% below the $640 million in 1998. Diluted net
income per common share of $.50 was 11% below the $.56 of a year earlier.
<PAGE>
PAGE 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 June 30, 1999
------- -------- -------------
Facility Closures
Factories 14 1 3
Warehouses 12 2 4
Office Facilities 30 1 3
Employee reductions 4,700 425 1,271
At June 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 annual benefit should be achieved. The program will be
completed in the first half of 2000 and by the end of the year savings will be
realized at the estimated pretax rate of $200 million annually.
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 six months ended June 30,
1999, amounted to $608 million, compared with $29 million in the same period
last year. A significant portion of this change is due to the funding of the
German pension plans in 1998. Movement in both accounts receivable and
inventories compare favorably to 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 June 30, 1999,
amounted to $4.03 billion, compared with $3.18 billion at year-end 1998. The
increase primarily was due to additional long-term debt used to finance the
share repurchase program. The Company's current ratio at June 30, 1999, was
1.72, compared with 1.56 at December 31, 1998, reflecting the impact of lower
current liabilities.
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 twelve months, $1,100 million of
commercial paper borrowing was classified as long-term debt at December 31,
1998, and at June 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 June 30, 1999, 96% of the affected items identified were determined to be
Year 2000 compliant, or their risks have been minimized to an appropriate level.
The few remaining tasks have been identified and are well understood.
Resources have been assigned and the work is well under way.
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 effort remains
for less than 100 items. There are three information technology system
replacement projects under way in individual foreign countries which will
result in Year 2000 compliance for all remaining items that are considered
significant. These three projects are in phase five (phase six is Year 2000
compliance). Two of the replacements are scheduled for completion in August
1999. The third system replacement, which supports half of our business activity
in one foreign country, is scheduled for completion in October 1999. Although
this project supports only a portion of our business in that country, with
minimal business risk, contingency plans are being developed for this system and
will be enacted if required.
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 52% of our significant North
American customers, are in final testing with 26%, and will complete testing
with the remaining 22% by September 1999. 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 continues to develop detailed contingency plans to deal with
unexpected issues, which may occur. These plans include the identification of
appropriate resources and response teams. Individual business managers worldwide
are responsible to ensure their business functions continue to operate normally.
Company-wide minimum requirements for contingency plans have been developed
and distributed. They are being consistently followed and centrally
tracked. Contingency plans will be finalized by September 1999 and invoked as
appropriate. 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, 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.
We are also in the process of establishing contingency teams at each operating
location that will be 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. Many teams already have been
established. The remaining teams will be in place by September 1999.
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 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.
Spending for the program is budgeted, expensed as incurred and not expected to
be 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
Election of Director
- --------------------
At its meeting held on July 15, 1999, the Board of Directors elected Dennis F.
Hightower to the Board of Directors, effective July 15, 1999.
Cautionary Statement
- --------------------
From time to time, the Company may make statements which 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 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
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.
Item 6(a) Exhibits
Exhibit 27 Financial Data Schedule
Item 6(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated June 22, 1999, which
referred to an announcement by the Company on June 17, 1999. The announcement
stated that the Company expected to report a low single-digit increase in second
quarter sales and about a 20% decrease in earnings per share versus the prior
year, both of which were somewhat below Wall Street's estimates. The Company
also announced that its Board of Directors authorized an expansion of its stock
repurchase program that commenced in September 1997, from 50 to 75 million
shares.
The Company filed a current report on Form 8-K dated April 7, 1999, which
referred to an announcement by the Company on April 5, 1999. The Company
announced that its expected first quarter results would be about one cent below
Wall Street's expectations.
<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)
RONALD V. WATERS
Ronald V. Waters
Vice President, Controller and
Principal Accounting Officer
August 12, 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
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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