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, 2000 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, 2000 . . . . . . . . . . . . . . . . . 1,052,802,479
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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
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales .......................................... $ 2,249 $ 2,205 $ 4,156 $ 4,001
Cost of Sales ...................................... 809 823 1,497 1,455
------- ------- ------- -------
Gross Profit ................................... 1,440 1,382 2,659 2,546
Selling, General and Administrative Expenses ....... 941 905 1,718 1,623
------- ------- ------- -------
Profit from Operations ......................... 499 477 941 923
Nonoperating Charges (Income):
Interest income .................................. (2) (1) (3) (3)
Interest expense ................................. 56 24 105 52
Exchange ......................................... (4) 7 4 16
Other charges - net .............................. 5 3 2 3
------- ------- ------- -------
55 33 108 68
------- ------- ------- -------
Income from Continuing Operations before Income Taxes 444 444 833 855
Income Taxes ....................................... 148 154 277 297
------- ------- ------- -------
Income from Continuing Operations .................. 296 290 556 558
Loss on Disposal of Discontined Operations, net of tax (428) - (428) -
Income (Loss) from Discontinued Operations, net of tax 1 10 (1) 11
------- ------- ------- -------
Net Income (Loss) .................................. $ (131) $ 300 $ 127 $ 569
======= ======= ======= =======
Net Income (Loss) per Common Share, basic
Continuing Operations........................... $ .28 $ .26 $ .53 $ .50
Disposal of Discontinued Operations............. (.41) - (.41) -
Discontinued Operations ........................ - .01 - .01
------- ------- ------- -------
Net Income (Loss) .............................. $ (.13) $ .27 $ .12 $ .51
======= ======= ======= =======
Net Income (Loss) per Common Share,
assuming full dilution
Continuing Operations .......................... $ .28 $ .25 $ .52 $ .49
Disposal of Discontinued Operations............. (.41) - (.40) -
Discontinued Operations ........................ - .01 - .01
------- ------- ------- -------
Net Income (Loss) .............................. $ (.13) $ .26 $ .12 $ .50
======= ======= ======= =======
Dividends per Common Share
Declared ....................................... $ - $ .1475 $ .1625 $ .1475
Paid ........................................... $ .1625 $ .1475 $ .3100 $ .2750
Weighted average number of common shares outstanding
Basic .......................................... 1,050 1,101 1,054 1,103
Assuming full dilution ......................... 1,058 1,124 1,067 1,127
</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)
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................... $ 43 $ 80
Trade receivables, less allowances 2000, $57;
1999, $74 ........................................ 1,729 2,208
Other receivables .................................. 289 319
Inventories:
Raw materials and supplies ...................... 179 190
Work in process ................................. 269 182
Finished goods .................................. 1,081 1,020
------- -------
Total Inventories ......................... 1,529 1,392
Deferred income taxes .............................. 399 309
Other current assets ............................... 254 315
Net assets of discontinued operations .............. 843 1,174
------- -------
Total Current Assets ...................... 5,086 5,797
------- -------
Property, Plant and Equipment, at cost ............. 5,927 5,762
Less accumulated depreciation .................... 2,396 2,295
------- -------
Net Property, Plant and Equipment ............ 3,531 3,467
------- -------
Intangible Assets, less accumulated amortization ... 1,852 1,897
Other Assets ....................................... 692 625
------- -------
$11,161 $11,786
======= =======
</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, except per share amount)
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Loans payable .................................... $ 2,355 $ 1,440
Current portion of long-term debt ................ 360 358
Accounts payable ................................. 446 513
Accrued liabilities .............................. 1,419 1,488
Dividends payable ................................ - 157
Income taxes ..................................... 125 224
-------- --------
Total Current Liabilities ..................... 4,705 4,180
-------- --------
Long-Term Debt ..................................... 2,818 2,931
Deferred Income Taxes .............................. 468 423
Other Long-Term Liabilities ........................ 765 795
Minority Interest .................................. 36 38
Contingent Redemption Value of Common Stock
Put Options ...................................... 68 359
Stockholders' Equity:
8.0% Cumulative Series C ESOP Convertible
Preferred, without par value, issued:
1999, .1 shares .............................. - 85
Unearned ESOP compensation ....................... - (4)
Common stock, par value $1.00 per share:
Authorized 2,320 shares
Issued: 2000, 1,365 shares; 1999, 1,364 shares . 1,365 1,364
Additional paid-in capital ....................... 972 748
Earnings reinvested in the business .............. 6,102 6,147
Accumulated other comprehensive income ........... (1,185) (1,061)
Treasury stock, at cost: 2000, 312 shares;
l999, 299 shares ....................... (4,953) (4,219)
-------- --------
Total Stockholders' Equity ..................... 2,301 3,060
-------- --------
$ 11,161 $ 11,786
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
(Unaudited)
<CAPTION> Six Months Ended
June 30
-----------------
2000 1999
---- ----
<S> <C> <C>
Operating Activities
Income from continuing operations ............. $ 556 $ 558
Adjustments to reconcile income to net
cash provided by operating activities:
Depreciation and amortization ............... 234 210
Other ....................................... 4 4
Changes in assets and liabilities, net of
effects from acquisitions and divestitures
of businesses:
Accounts receivable ....................... 435 282
Inventories ............................... (187) (250)
Accounts payable and accrued liabilities .. (345) (243)
Other working capital items ............... (97) (32)
Other noncurrent assets and liabilities ... (74) (49)
----- -----
Net cash provided by operating activities 526 480
----- -----
Investing Activities
Additions to property, plant and equipment .... (388) (366)
Disposals of property, plant and equipment .... 60 72
Other ......................................... 15 1
----- -----
Net cash used in investing activities .... (313) (293)
----- -----
Financing Activities
Purchase of treasury stock .................... (944) (1,133)
Proceeds from sale of put options ............. 13 38
Proceeds from exercise of stock option and
purchase plans ........................... 13 80
Proceeds from long-term debt .................. - 1,103
Decrease in long-term debt .................... (56) -
Increase (Decrease) in loans payable .......... 912 (110)
Dividends paid ................................ (329) (306)
Settlements of debt-related derivative contracts 106 48
----- -----
Net cash used in financing
activities ............................. (285) (280)
----- -----
Effect of Exchange Rate Changes on Cash ........... (3) (2)
Net Cash Provided by Discontinued Operations ...... 38 56
----- -----
Decrease in Cash and Cash Equivalents ............. (37) (39)
Cash and Cash Equivalents at Beginning of Year .... 80 102
----- -----
Cash and Cash Equivalents at End of Quarter ....... $ 43 $ 63
===== =====
Supplemental disclosure of cash paid for:
Interest ...................................... $ 109 $ 33
Income taxes .................................. $ 286 $ 202
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
PAGE 5
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Millions)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Net Income (Loss) $(131) $ 300 $ 127 $ 569
Other Comprehensive Income, net of tax:
Foreign Currency Translation (111) (86) (124) (222)
---- ---- ---- ----
Comprehensive Income (Loss) $(242) $ 214 $ 3 $ 347
==== ==== ==== ====
Comprehensive Income (Loss) includes activities from both continuing and
discontinued operations. Foreign currency translation is after unfavorable tax
effects of $34 million for three months in 1999, and of $32 million and $88
million for six months in 2000 and 1999, respectively. There was no tax effect
for three months in 2000.
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
----------- ---------- -------------
<S> <C> <C> <C>
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)
====== ====== ======
Balance December 31, 1999 $(1,031) $ (30) $ (1,061)
Change in period (13) - (13)
------ ------ ------
Balance March 31, 2000 (1,044) (30) (1,074)
Change in period (111) - (111)
------ ------ ------
Balance June 30, 2000 $(1,155) $ (30) $ (1,185)
====== ====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
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
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income from continuing operations ..... $ 296 $ 290 $ 556 $ 558
Less: Preferred stock dividends ...... - 1 1 2
------ ------ ------ ------
Income, from continuing operations,
basic 296 289 555 556
Effect of dilutive securities:
Convertible preferred stock ....... - 1 1 2
------ ------ ------ ------
Income from continuing operations,
assuming full dilution .............. 296 290 556 558
------ ------ ------ ------
Loss on disposal of discontinued operations (428) - (428) -
Income (Loss) from discontinued operations 1 10 (1) 11
------- ------- ------- -------
Net Income (Loss), assuming full dilution $ (131) $ 300 $ 127 $ 569
======= ======= ======= =======
Common shares, basic .................. 1,050 1,101 1,054 1,103
Effect of dilutive securities:
Convertible preferred stock ....... - 12 6 12
Stock options ..................... 8 11 7 12
------ ------ ------ ------
Common shares, assuming full dilution 1,058 1,124 1,067 1,127
====== ====== ====== ======
Net Income (Loss) per Common Share,
basic
Continuing Operations ............. $ .28 $ .26 $ .53 $ .50
Disposal of Discontinued Operations ( .41) - (.41) -
Discontinued Operations ........... - .01 - .01
------ ------ ------ ------
Net Income (Loss) ................. $ (.13) $ .27 $ .12 $ .51
====== ====== ====== ======
Net Income (Loss) per Common Share,
assuming full dilution
Continuing Operations ............. $ .28 $ .25 $ .52 $ .49
Disposal of Discontinued Operations (.41) - (.40) -
Discontinued Operations ........... - .01 - .01
------ ------ ------ ------
Net Income (Loss) ................. $ (.13) $ .26 $ .12 $ .50
====== ====== ====== ======
</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 1999 Annual Report to stockholders, which
contains, at pages 19 through 34, 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, 1999.
For interim reporting purposes, advertising expenses are charged to operations
as a percentage of sales, based on estimated sales and related advertising
expense for the full year. On an annual basis, advertising costs are expensed in
the year incurred.
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 2000
presentations.
Accounting Pronouncements
-------------------------
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. The
Company will adopt SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, on
January 1, 2001. Although the Company continues to review the effect of the
implementation of SFAS No. 133, the Company does not currently believe its
adoption will have a material impact on its financial position or overall trends
in results of operations and does not believe adoption will result in
significant changes to its financial risk management practices. However, the
impact of adoption of SFAS No. 133 on the Company's results of operations is
dependent upon the fair values of the Company's derivatives and related
financial instruments at the date of adoption and could result in more
pronounced quarterly fluctuations in other income and expense.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, (SAB 101) "Revenue Recognition." An amendment in June 2000
delayed the effective date until the fourth quarter of 2000. The adoption of SAB
101 will not have a material impact on the consolidated financial statements.
In May of 2000, the Financial Accounting Standards Board's Emerging Issue Task
Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for Certain
Sales Incentives". This Issue addresses the recognition, measurement, and income
statement classification for various types of sales incentives including:
discounts, coupons, rebates and free products. The Company will adopt this
consensus in the third quarter of 2000. The impact of this consensus on the
Company's consolidated financial statements is still being evaluated.
Reorganization and Realignment
------------------------------
The program was essentially completed during the quarter ended March 31, 2000.
From the inception of the plan through March 31, 2000, total program spending
was $535 million. Spending for employee-related expenses included $209 million
for severance and $134 million for other benefits. Asset impairment costs
included $148 million for property, plant and equipment and $13 million for
other assets. Distributor buyout costs were $31 million.
<PAGE>
PAGE 8
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued Operations
-----------------------
The Company has completed its review of the Stationery Products segment and has
made the decision to divest the business. It is estimated that the sale will
result in an after-tax loss of $428 million (net of a tax benefit of $90
million) or $.41 net income per common share in the second quarter, fully
diluted. The net loss includes the book loss on the transaction, estimates for
the operating profit of the segment through the expected disposal date and other
costs directly associated with the decision to divest, including post
divestiture reorganization costs.
The Stationery Products segment is accounted for as a discontinued operation,
and accordingly, amounts in the financial statements and related notes, for all
periods shown, have been restated to reflect discontinued operations accounting.
For the periods ended June 30, the results of discontinued operations were as
follows:
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Millions)
--------
Net Sales ....................... $ 190 $ 209 $ 328 $ 352
Income (Loss) before income taxes 1 15 (2) 16
Income taxes .................... - 5 (1) 5
------ ------ ------ ------
Net income (loss) from operations
of discontinued business ...... $ 1 $ 10 $ (1) $ 11
====== ====== ====== ======
</TABLE>
The assets identified as part of the disposition of Stationery Products are
recorded as Net Assets of Discontinued Operations, the cash flow of the business
is reported as Net Cash Flow from Discontinued Operations, and the results of
operations of the segment are reported as Income (Loss) from Discontinued
Operations, net of tax. Net Assets of Discontinued Operations consisted of the
following:
<TABLE>
June 30, Dec. 31,
2000 1999
----------- -----------
<S> <C> <C>
Millions
--------
Net Current Assets $ 447 $ 509
Property, plant and equipment,
less accumulated depreciation 181 200
Other net noncurrent assets and liabilities 215 465
------ ------
Net assets of discontinued operations $ 843 $ 1,174
====== ======
</TABLE>
<PAGE>
PAGE 9
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising
-----------
The advertising expense detailed below is included in selling, general and
administrative expenses.
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales ................ $ 2,249 $ 2,205 $ 4,156 $4,001
Advertising .............. 141 142 257 227
% of Net Sales ........ 6.3% 6.4% 6.2% 5.7%
</TABLE>
Share Repurchase Program
------------------------
The Company has an ongoing share repurchase program that authorizes the purchase
of up to 125 million shares in the open market or in privately negotiated
transactions, depending on market conditions and other factors. From the
inception of the program through December 31, 1999, the Company repurchased 69
million shares in the open market for $3,173 million. In the first quarter of
2000, the Company repurchased 22 million shares in the open market for $798
million, and in the second quarter of 2000, 3 million shares for $113 million.
The Company plans to purchase the remaining authorized shares in the open market
or in privately negotiated transactions, depending on market conditions and
other factors.
In 2000, the Company continued to sell equity put options as an enhancement to
its ongoing share repurchase program and collected $13 million in premiums
through June 30, 2000. 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." 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 are 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." All of the outstanding put
options mature in the third quarter.
At June 30, 2000, no put options had strike prices that were greater than the
closing price for Gillette common stock on June 30, 2000.
Employee Stock Ownership Plan
-----------------------------
On April 25, 2000, the trustee for the ESOP trust redeemed the Series C
preferred stock, held by the trust, for common stock. The redemption was made by
the trustee in order to receive the common stock dividend, which now provides a
higher return to holders than the preferred stock dividend. The redemption has
no impact on fully diluted EPS and closes the gap between basic and fully
diluted EPS. The preferred shares had a stated cost of $84 million and were
redeemed for common stock held in the Company's treasury with a cost of $174
million. Total stockholders' equity is unchanged as a result of the redemption.
<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 Six Months Ended
June 30 June 30
------------------- -------------------
(Millions) 2000 1999 2000 1999
------ ------ ------ ------
Blades & Razors $ 889 $ 824 $1,607 $1,476
Toiletries 243 281 473 506
Duracell Products 588 608 1,052 1,084
Oral-B Products 164 164 319 309
Braun Products 365 328 705 626
------ ------ ------ ------
Total continuing operations $2,249 $2,205 $4,156 $4,001
====== ====== ====== ======
Discontinued operations $ 190 $ 209 $ 328 $ 352
------ ------ ------ ------
Profit from Operations
--------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
(Millions) 2000 1999 2000 1999
------ ------ ------ ------
Blades & Razors $ 345 $ 321 $ 629 $ 587
Toiletries 17 18 46 48
Duracell Products 94 117 156 209
Oral-B Products 16 20 39 43
Braun Products 34 14 89 52
------ ------ ------ ------
Subtotal Reportable Segments 506 490 959 939
All Other (7) (13) (18) (16)
------ ------ ------ ------
Total continuing operations $ 499 $ 477 $ 941 $ 923
====== ====== ====== ======
Discontinued operations $ 1 $ 15 $ (2) $ 16
------ ------ ------ ------
<PAGE>
<TABLE>
PAGE 11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Identifiable Assets
---------------------------------------------------------------
Jun 30, Mar 31, Dec 31, Jun 30, Mar 31, Dec 31,
(Millions) 2000 2000 1999 1999 1999 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Blades & Razors $ 3,596 $ 3,541 $ 3,532 $ 3,532 $ 3,347 $ 3,378
Toiletries 647 652 696 770 747 771
Duracell Products 3,212 3,086 3,310 3,008 3,014 3,288
Oral-B Products 660 658 663 749 725 680
Braun Products 1,515 1,482 1,602 1,546 1,574 1,679
------- ------- ------- ------- ------- -------
Subtotal Reportable Segments 9,630 9,419 9,803 9,605 9,407 9,796
All Other 688 673 809 783 886 834
Discontinued Operations 843 1,090 1,174 1,195 1,166 1,272
------- ------- ------- ------- ------- -------
Total $11,161 $11,182 $11,786 $11,583 $11,459 $11,902
======= ======= ======= ======= ======= =======
</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 those described in the following
analysis, are not necessarily indicative of results for the entire year.
Second Quarter 2000 versus 1999
-------------------------------
Sales for the quarter ended June 30, 2000, were $2.25 billion, an increase of 2%
versus the same quarter of the prior year. Excluding the adverse effects of
exchange and the divestiture of the White Rain hair care line, sales climbed 8%,
attributable to volume/mix and price.
Sales in North America were 4% above those of the prior year, driven by sales
increases of 14% for blades and razors, 52% for Braun, and 5% for Duracell.
Excluding the divestiture of White Rain, sales growth was 7%. Sales in Latin
America were up 10% from those of 1999, as all core product lines contributed to
the growth. Sales in Europe were 3% below those of the previous year, as
favorable volume/mix in blades and razors and in Braun products was more than
offset by unfavorable exchange related to the Euro. Sales in Europe would have
increased 7% without the negative effect of exchange. Sales in the AMEE region
(Africa, Middle East and Eastern Europe) were down 3%, but would have increased
by 6% without the negative effect of exchange. While economies in the region
continued to improve, AMEE's sales performance was negatively affected by our
continued actions to reduce trade receivables in certain key markets. Sales in
the Asia-Pacific region were 4% above those of the prior year, reflecting Braun
strength in Japan, higher sales of blades and razors and favorable exchange.
Sales of blades and razors rose 8%, and profits 7%, due primarily to strong
sales of the Mach3 system in North America, Europe and Latin America. Blade and
razor sales in North America grew by 14%, aided by shipments of the SensorExcel
for Women Fashion line and new elastomer-handle disposable razors. In Europe,
sales grew by 4% versus the prior year, or 15% excluding unfavorable exchange,
with a 45% increase in Mach3 cartridge shipments and continued strong sell-in of
the Sensor Excel for Women Fashion razor.
Toiletries sales were 14% below those of 1999, but would have matched last
year's level without the adverse effects of the divestiture of White Rain and
unfavorable exchange. Sales of pre- and post-shave products were 6% above those
of the prior year. Profits were 9% below those of 1999.
Sales of Duracell products declined 3%. In North America, sales were 5% above
those of the prior year, reflecting strength in Duracell Ultra alkaline
batteries and photo lithium batteries. Sales in Latin America were 13% above
1999, reflecting share gains and economic improvement in several countries.
Sales in Europe were 12% below those of the previous year, due primarily to
depreciation of the Euro. Asia-Pacific battery sales were 24% below those of the
prior year, largely as a result of lower overall battery sales in Korea, as well
as low-priced alkaline competition in China. Duracell profit from operations was
19% below that of the previous year, due to lower sales and increased marketing
support.
Sales of Oral-B products showed little change from those of 1999, with gains in
Latin America offset by lower sales in North America. Sales declined 13% in
North America due to a difficult comparison with 1999, including the pipeline
for the launch of CrossAction. In Latin America, sales were up 38% aided by
improving economic conditions, and European sales were flat due to a 12%
unfavorable impact of exchange. Worldwide CrossAction sales were 36% above those
of 1999, reflecting strong growth in all regions outside of North America.
Profit from operations was 18% below that of 1999, primarily due to country mix
and the impact of the worldwide rollout of CrossAction toothbrushes.
<PAGE>
PAGE 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales of Braun products were 11% above those of the prior year. Sales increases,
aided by broad-based advertising support in core product categories, were
achieved across all geographies except Europe, where sales were restrained by
the depreciation of the Euro. Sales of the Braun Syncro electric shaver drove
growth in Germany and Japan, while improving economic conditions and increased
distribution led to strong growth in the AMEE region and Latin America. Sales of
Braun oral care were 14% above those of the prior year. Profit from operations
more than doubled, from $14 million in 1999 to $34 million in 2000, reflecting
sales growth, improved mix and lower overhead expenses.
Six Months 2000 versus 1999
------------------------------
Sales for the six months ended June 30, 2000, were $4.16 billion, an increase of
4% versus the same period of the prior year. Excluding the adverse effects of
exchange and the divestiture of the White Rain hair care line, sales climbed 9%,
attributable to volume/mix and, to a lesser degree, price.
Sales in North America were 5% above those of the prior year, driven by sales
increases of 15% for blades and razors, 34% for Braun and 4% for Duracell.
Excluding the divestiture of White Rain, sales growth was 7%. Sales in Latin
America were up 14% from those of 1999, due largely to improving regional
economic conditions that benefited all core product lines. Sales in Europe were
2% below those of the previous year, as favorable volume/mix in blades and
razors and in Braun products was more than offset by unfavorable exchange
related to the Euro. Sales in Europe would have increased 9% without the impact
of unfavorable exchange. Sales in the AMEE region (Africa, Middle East and
Eastern Europe) were up 1%, but would have increased by 15% without the
unfavorable impact of exchange. While economies in the region continued to
improve, AMEE's sales performance was negatively affected by our continued
actions to reduce trade receivables in certain key markets. Sales in the
Asia-Pacific region were 5% above those of the prior year, reflecting Braun
strength in Japan and favorable exchange.
Sales of blades and razors rose 9%, and profits 7%, due primarily to strong
sales of the Mach3 system in North America, Europe and Latin America. Blade and
razor sales in North America grew by 15%, aided by initial shipments of the
SensorExcel for Women Fashion line and new elastomer-handle disposable razors.
Sales in Latin America climbed 16%, reflecting the successful launch of the
Mach3 system in Brazil. In Europe, sales grew by 3% versus the prior year, or
14% excluding unfavorable exchange, with a 49% increase in Mach3 cartridge
shipments and continued sell-in of the Sensor Excel for Women Fashion razor.
Total blade and razor profit grew at a slower rate than sales, due primarily to
a strong increase in marketing expenses.
Toiletries sales were 7% below those of the prior year, due chiefly to the
divestiture of White Rain. Sales of pre- and post-shave products were 8% above
those of the prior year. Profits were 5% below those of 1999.
Sales of Duracell products declined 3%, as a 52% increase in Duracell Ultra was
offset by sharply lower sales of non-Duracell branded batteries. In North
America, sales were 4% above those of the prior year, reflecting strength in
Duracell Ultra alkaline batteries and photo lithium batteries. Sales in Latin
America were 11% above those of 1999, reflecting share gains and economic
improvement in several countries. Sales in Europe were 13% below those of the
previous year, due primarily to depreciation of the Euro. Asia-Pacific battery
sales were 20% below those of the prior year, largely as a result of lower
overall battery sales in Korea, as well as low-priced alkaline competition in
China. Duracell profit from operations was 25% below that of the previous year,
reflecting lower sales and increased marketing support.
Sales of Oral-B products were 4% above those of 1999. In Latin America, sales
were up 32%, assisted by improving economic conditions, and European sales would
have increased 14% without the 11% unfavorable impact of exchange. These gains
were partially offset by lower sales in North America. Profit from operations
was 9% below that of 1999, due to country mix and the impact of the worldwide
rollout of CrossAction toothbrushes.
<PAGE>
PAGE 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales of Braun products were 13% above those of the prior year. Sales increases,
aided by broad-based advertising support in core product categories, were
achieved across all geographies except Europe, where sales were restrained by
the depreciation of the Euro. Sales of the Braun Syncro electric shaver drove
growth in Germany and Japan, while improving economic conditions and increased
distribution led to strong growth in the AMEE region and Latin America. Sales of
Braun oral care were 14% above those of the prior year. Profit from operations
was 71% above that of 1999, reflecting sales growth, improved mix and lower
overhead expenses.
Costs and Expenses
------------------
Gross profit for the six months ended June 30, 2000 was $2.66 billion, an
increase of 4% versus 1999. Gross profit as a percentage of sales was 64.0%,
compared with 63.6% in 1999. The slight increase in margin was due in part to
favorable sales mix and the positive effect of pricing. Additionally, margin
improvements were realized as a result of savings from the reorganization and
realignment program, partially offset by the effects on costs of lower
production levels resulting from the inventory reduction program.
Selling, general and administrative expenses increased by $95 million, or 6%.
Combined advertising and sales promotion expenses grew 10%, with advertising as
a percent of sales increasing from 5.7% in 1999 to 6.2% in 2000. Other marketing
and administrative expenses were 4% above those of the prior year, in line with
sales growth.
Profit from operations was $941 million, up 2%, from $923 million a year
earlier.
Net interest expense was higher, due to increased borrowings to fund the share
repurchase program and higher interest rates. Net exchange losses and the
effective tax rate were lower.
Income from continuing operations of $556 million was virtually unchanged versus
the $558 million in 1999. Diluted net income per common share from continuing
operations of $.52 was 6% above the $.49 of 1999, benefiting from the lower
number of shares outstanding.
Reorganization and Realignment
------------------------------
The program was essentially completed during the quarter ended March 31, 2000.
The program resulted in the closure of 14 factories, 13 warehouses and 34 office
facilities, as well as a reduction of 4,623 employees across all business
segments, geographies and employee groups.
Discontinued Operations
-----------------------
The Company has made the decision to divest the Stationery Products business
and, therefore, it is accounted for as a discontinued operation. The after-tax
loss on the disposal of the business is estimated at $428 million. Through six
months, the after-tax loss from discontinued operations is $1 million.
For the quarter ended June 30, 2000, net sales of $190 million were 9% below the
net sales of $209 million in the same period last year. Profit from operations
of $1 million compared unfavorably to $15 million in 1999, due to lower sales to
cover stable overhead expenses.
For the six months ended June 30, 2000, net sales of $328 million were 7% below
the net sales of $352 million in the same period last year. Through six months
in 2000, there was a loss from operations of $2 million compared to a profit of
$16 million for the same period in 1999. Lower sales and stable overhead
expenses resulted in the decline in profit from operations.
<PAGE>
PAGE 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Product Category Review
-----------------------
The Company completed its review of the Braun household, hair care and personal
diagnostic appliance businesses. The review determined that these Braun
businesses, as supporting product lines, are instrumental in maintaining and
strengthening strong retail support, brand equity, market position and point of
sale presence in many key geographies. They will be marketed in their redefined
supporting role in those geographies where they add value.
Financial Condition
-------------------
Net cash provided by operating activities for the six months ended June 30,
2000, amounted to $526 million, compared with $480 million in the same period
last year. The movement in both accounts receivable and inventories compared
favorably with that of 1999, reflecting the efforts of our working capital
action plan. Other working capital items compared unfavorably with those of
1999, due primarily to the timing of tax payments.
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, 2000,
amounted to $5.42 billion, compared with $4.53 billion at year-end 1999. The
increase was due to additional debt used to finance the share repurchase
program. The Company's current ratio at June 30, 2000, was 1.08, compared with
1.39 at December 31, 1999, reflecting increased loans payable as a result of the
share repurchase program.
The change in our foreign currency translation adjustment through June 30, 2000
was a loss of $124 million, with the United Kingdom accounting for $74 million
of the loss. Losses through June 30, 1999, were $222 million, with Brazil
accounting for $100 million of the loss.
<PAGE>
PAGE 16
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, which makes forward-looking statements about sales and
earnings difficult and may result in the material 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, 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, potential divestitures, asset valuations and
organizational structure;
* 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 geographic markets;
* the ability of the Company to successfully reduce trade inventories to
levels consistent with the changing needs of the more concentrated retail
trade;
* the ability of the Company to successfully reduce working capital;
<PAGE>
PAGE 17
PART II. OTHER INFORMATION
* 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,
which affect competition and product acceptance;
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 June
30, 2000.
<PAGE>
PAGE 18
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)
MARK N. EDOFF
Mark N. Edoff
Principal Accounting Officer
August 4, 2000
