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, 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 November 3, 2000 . . . . . . . . . . . . . . . 1,053,298,014
<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
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales .......................................... $ 2,321 $ 2,354 $ 6,477 $ 6,355
Cost of Sales ...................................... 852 878 2,349 2,333
------- ------- ------- -------
Gross Profit ................................... 1,469 1,476 4,128 4,022
Selling, General and Administrative Expenses ....... 894 882 2,612 2,505
------- ------- ------- -------
Profit from Operations ......................... 575 594 1,516 1,517
Nonoperating Charges (Income):
Interest income .................................. (2) (1) (5) (4)
Interest expense ................................. 61 38 166 90
Exchange ......................................... (9) 10 (5) 25
Other charges - net .............................. 1 2 3 6
------- ------- ------- -------
51 49 159 117
------- ------- ------- -------
Income from Continuing Operations before Income Taxes 524 545 1,357 1,400
Income Taxes ....................................... 174 190 451 487
------- ------- ------- -------
Income from Continuing Operations .................. 350 355 906 913
Loss on Disposal of Discontinued Operations, net of tax - - (428) -
Income (Loss) from Discontinued Operations, net of tax - (3) (1) 8
------- ------- ------- -------
Net Income ......................................... $ 350 $ 352 $ 477 $ 921
======= ======= ======= =======
Net Income (Loss) per Common Share, basic
Continuing Operations .......................... $ .33 $ .33 $ .86 $ .83
Disposal of Discontinued Operations............. - - (.41) -
Discontinued Operations ........................ - - - .01
------- ------- ------- -------
Net Income ..................................... $ .33 $ .33 $ .45 $ .84
======= ======= ======= =======
Net Income (Loss) per Common Share,
assuming full dilution
Continuing Operations .......................... $ .33 $ .32 $ .85 $ .81
Disposal of Discontinued Operations............. - - (.40) -
Discontinued Operations ........................ - - - .01
------- ------- ------- -------
Net Income ..................................... $ .33 $ .32 $ .45 $ .82
======= ======= ======= =======
Dividends per Common Share
Declared ....................................... $ .1625 $ .1475 $ .3250 $ .2950
Paid ........................................... $ .1625 $ .1475 $ .4725 $ .4225
Weighted average number of common shares outstanding
Basic .......................................... 1,053 1,080 1,054 1,096
Assuming full dilution ......................... 1,058 1,101 1,064 1,119
</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)
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................... $ 84 $ 80
Trade receivables, less allowances 2000, $55;
1999, $74 ........................................ 1,781 2,208
Other receivables .................................. 303 319
Inventories:
Raw materials and supplies ...................... 153 190
Work in process ................................. 246 182
Finished goods .................................. 992 1,020
------- -------
Total Inventories ......................... 1,391 1,392
Deferred income taxes .............................. 382 309
Other current assets ............................... 353 315
Net assets of Discontinued Operations .............. 781 1,174
------- -------
Total Current Assets ...................... 5,075 5,797
------- -------
Property, Plant and Equipment, at cost ............. 5,903 5,762
Less accumulated depreciation .................... 2,399 2,295
------- -------
Net Property, Plant and Equipment ............ 3,504 3,467
------- -------
Intangible Assets, less accumulated amortization ... 1,821 1,897
Other Assets ....................................... 669 625
------- -------
$11,069 $11,786
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
PAGE 3
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(Millions, except per share amount)
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Loans payable .................................... $ 1,653 $ 1,440
Current portion of long-term debt ................ 560 358
Accounts payable ................................. 350 513
Accrued liabilities .............................. 1,420 1,479
Dividends payable ................................ - 157
Income taxes ..................................... 296 233
-------- --------
Total Current Liabilities ..................... 4,279 4,180
-------- --------
Long-Term Debt ..................................... 3,031 2,931
Deferred Income Taxes .............................. 461 423
Other Long-Term Liabilities ........................ 760 795
Minority Interest .................................. 40 38
Contingent Redemption Value of Common Stock
Put Options ...................................... 123 359
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 ....................... 928 748
Earnings reinvested in the business .............. 6,281 6,147
Accumulated other comprehensive income ........... (1,246) (1,061)
Treasury stock, at cost: 2000, 312 shares;
l999, 299 shares ....................... (4,953) (4,219)
-------- --------
Total Stockholders' Equity ..................... 2,375 3,060
-------- --------
$ 11,069 $ 11,786
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
(Unaudited)
<CAPTION> Nine Months Ended
September 30
-----------------
2000 1999
---- ----
<S> <C> <C>
Operating Activities
Income from Continuing Operations ............. $ 906 $ 913
Adjustments to reconcile income to net
cash provided by operating activities:
Depreciation and amortization ............... 355 335
Other ....................................... - 5
Changes in assets and liabilities, net of
effects from acquisitions and divestitures
of businesses:
Accounts receivable ....................... 299 26
Inventories ............................... (54) (313)
Accounts payable and accrued liabilities .. (386) (86)
Other working capital items ............... 34 (50)
Other noncurrent assets and liabilities ... (115) (12)
----- -----
Net cash provided by operating activities 1,039 818
----- -----
Investing Activities
Additions to property, plant and equipment .... (563) (594)
Disposals of property, plant and equipment .... 65 122
Other ......................................... 15 1
----- -----
Net cash used in investing activities .... (483) (471)
----- -----
Financing Activities
Purchase of treasury stock .................... (944) (1,518)
Proceeds from sale of put options ............. 17 49
Proceeds from exercise of stock option and
purchase plans ........................... 21 89
Proceeds from long-term debt .................. 492 1,106
Decrease in long-term debt .................... (56) -
Increase in loans payable ..................... 210 219
Dividends paid ................................ (500) (467)
Settlements of debt-related derivative contracts 138 40
----- -----
Net cash used in financing
activities ............................. (622) (482)
----- -----
Effect of Exchange Rate Changes on Cash ........... (5) (2)
Net Cash Provided by Discontinued Operations ...... 75 95
----- -----
Increase/(Decrease) in Cash and Cash Equivalents .. 4 (42)
Cash and Cash Equivalents at Beginning of Year .... 80 102
----- -----
Cash and Cash Equivalents at End of Quarter ....... $ 84 $ 60
===== =====
Supplemental disclosure of cash paid for:
Interest ...................................... $ 190 $ 77
Income taxes .................................. $ 351 $ 340
</TABLE>
This statement of cash flows is prepared in accordance with SFAS 95.
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 Nine Months Ended
September 30 September 30
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Net Income $ 350 $ 352 $ 477 $ 921
Other Comprehensive Income, net of tax:
Foreign Currency Translation (61) 19 (185) (203)
---- ---- ---- ----
Comprehensive Income $ 289 $ 371 $ 292 $ 718
==== ==== ==== ====
Comprehensive Income includes activities from both continuing and discontinued
operations. Foreign currency translation is after unfavorable tax effects of $62
million and $15 million for three months in 2000 and 1999, and of $94 million
and $103 million for nine months in 2000 and 1999, respectively.
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)
Change in period 19 - 19
------ ------ ------
Balance September 30, 1999 $(1,029) $ (47) $ (1,076)
====== ====== ======
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)
Change in period (61) - (61)
------ ------ ------
Balance September 30, 2000 $(1,216) $ (30) $ (1,246)
====== ====== ======
</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 Nine Months Ended
September 30 September 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income from Continuing Operations ..... $ 350 $ 355 $ 906 $ 913
Less: Preferred stock dividends ...... - 1 1 3
------ ------ ------ ------
Income, from Continuing Operations,
basic 350 354 905 910
Effect of dilutive securities:
Convertible preferred stock ....... - 2 2 4
------ ------ ------ ------
Income from Continuing Operations,
assuming full dilution .............. 350 356 907 914
------ ------ ------ ------
Loss on Disposal of Discontinued Operations - - (428) -
Income from Discontinued Operations - (3) (1) 8
------ ------ ------ ------
Net Income, assuming full dilution .... $ 350 $ 353 $ 478 $ 922
====== ====== ====== ======
Common shares, basic .................. 1,053 1,080 1,054 1,096
Effect of dilutive securities:
Convertible preferred stock ....... - 12 4 12
Stock options ..................... 5 9 6 11
------ ------ ------ ------
Common shares, assuming full dilution 1,058 1,101 1,064 1,119
====== ====== ====== ======
Net Income (Loss) per Common Share,
basic
Continuing Operations ............. $ .33 $ .33 $ .86 $ .83
Disposal of Discontinued Operations - - (.41) -
Discontinued Operations ........... - - - .01
------ ------ ------ ------
Net Income ........................ $ .33 $ .33 $ .45 $ .84
====== ====== ====== ======
Net Income (Loss) per Common Share,
assuming full dilution
Continuing Operations ............. $ .33 $ .32 $ .85 $ .81
Disposal of Discontinued Operations - - (.40) -
Discontinued Operations ........... - - - .01
------ ------ ------ ------
Net Income ........................ $ .33 $ .32 $ .45 $ .82
====== ====== ====== ======
For the periods ended September 30, 2000 and 1999, 45 million and 30 million
shares of common stock issuable under stock options, respectively, were not
included in the calculation of fully diluted EPS because their effects would
have been antidilutive.
</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 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. In July 2000, the EITF revised
the transition date to correspond with the implementation date for SAB 101.
Therefore, the Company will adopt this consensus in the fourth quarter of 2000,
resulting in equivalent decreases in reported net sales and reported marketing
expenses, with no profit impact.
In July and September 2000, the EITF reached consensuses on Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." This Issue addresses the
income statement classification for shipping and handling fees and costs. The
Company will adopt the consensuses in the fourth quarter of 2000. The adoption
of EITF Issue No. 00-10 will not have a material impact on the consolidated
financial statements. The Company is still evaluating if additional disclosures
necessitated by the consensuses may be required.
<PAGE>
PAGE 8
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued Operations
-----------------------
On August 22, 2000 the Company signed an agreement to sell its stationery
products business. It is estimated that the sale will result in an after-tax
loss of $428 million (net of a tax benefit of $102 million) or $.40 net income
per common share, fully diluted. The transaction was recognized in the second
quarter. The loss on disposal 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, its net assets and liabilities have been segregated from
continuing operations in the accompanying consolidated balance sheet and its
operating results are segregated and reported as discontinued operations in the
accompanying consolidated statements of income and cash flows, and related
notes. For the periods ended September 30, the results of discontinued
operations were as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Millions)
--------
Net Sales ....................... $ 154 $ 155 $ 482 $ 507
====== ====== ====== ======
Income (Loss) before income taxes - (4) (2) 12
Income taxes (benefit) .......... - (1) (1) 4
------ ------ ------ ------
Income (Loss) from Discontinued
Operations, net of tax ........ $ - $ (3) $ (1) $ 8
====== ====== ====== ======
</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 Provided by Discontinued Operations, and the results of
operations of the segment are reported as Income (Loss) from Discontinued
Operations, net of tax. Net assets of Discontinued Operations consisted of the
following:
<TABLE>
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Millions
--------
Net Current Assets $ 383 $ 509
Property, plant and equipment,
less accumulated depreciation 175 200
Other net noncurrent assets and liabilities 223 465
------ ------
Net assets of Discontinued Operations $ 781 $ 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 Nine Months Ended
September 30 September 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales ................ $ 2,321 $ 2,354 $ 6,477 $6,355
Advertising .............. 158 158 415 385
% of Net Sales ........ 6.8% 6.7% 6.4% 6.1%
</TABLE>
Reorganization and Realignment
------------------------------
The program was 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.
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 2000, the Company has
repurchased 25 million shares in the open market for $911 million. There were no
repurchases in the third quarter of 2000. 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 $17 million in premiums
through September 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 put 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 fourth quarter.
At September 30, 2000, there were 4 million put options outstanding, of which 2
million had strike prices which were greater than the closing price for Gillette
common stock on September 30, 2000. Those options were therefore "in the money."
Although the options are not exercisable until a future date, the "in the money"
amount at September 30, 2000 was $7 million.
<PAGE>
PAGE 10
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 had
no impact on fully diluted EPS and closed 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 was unchanged as a result of the redemption.
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) 2000 1999 2000 1999
------ ------ ------ ------
Blades & Razors $ 857 $ 834 $2,464 $2,310
Toiletries 255 275 728 781
Duracell Products 615 676 1,667 1,760
Oral-B Products 169 141 488 450
Braun Products 425 428 1,130 1,054
------ ------ ------ ------
Total Continuing Operations $2,321 $2,354 $6,477 $6,355
====== ====== ====== ======
Profit from Operations
--------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
(Millions) 2000 1999 2000 1999
------ ------ ------ ------
Blades & Razors $ 360 $ 347 $ 989 $ 934
Toiletries 23 21 69 69
Duracell Products 124 167 280 376
Oral-B Products 20 20 59 63
Braun Products 61 59 150 111
------ ------ ------ ------
Subtotal Reportable Segments 588 614 1,547 1,553
All Other (13) (20) (31) (36)
------ ------ ------ ------
Total Continuing Operations $ 575 $ 594 $1,516 $1,517
====== ====== ====== ======
<PAGE>
<TABLE>
PAGE 11
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Identifiable Assets
---------------------------------------------------------------
Sept 30, June 30, Dec 31, Sept 30, June 30, Dec 31,
(Millions) 2000 2000 1999 1999 1999 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Blades & Razors $ 3,563 $ 3,596 $ 3,532 $ 3,560 $ 3,532 $ 3,378
Toiletries 639 647 696 774 770 771
Duracell Products 3,145 3,212 3,310 3,160 3,008 3,288
Oral-B Products 643 660 663 698 749 680
Braun Products 1,492 1,515 1,602 1,723 1,546 1,679
------- ------- ------- ------- ------- -------
Subtotal Reportable Segments 9,482 9,630 9,803 9,915 9,605 9,796
All Other 806 688 809 851 783 834
Discontinued Operations 781 843 1,174 1,148 1,195 1,272
------- ------- ------- ------- ------- -------
Total $11,069 $11,161 $11,786 $11,914 $11,583 $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.
Third Quarter 2000 versus 1999
------------------------------
Total Company: Sales for the quarter ended September 30, 2000, were $2.32
billion, a decrease of 1% 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 5%, attributable to volume/mix, 4%, and price, 1%.
Blades & Razors: Sales of blades and razors rose 3%, and profits 4%, due
primarily to strong sales of the Mach3 system in North America and Europe.
Without the adverse effects of exchange, primarily in Europe, sales growth was
8%, with volume/mix contributing 6% and price 2%. In addition to the Mach3
system, volume gains were aided by shipments of the new elastomeric disposable
razor in North America and Latin America.
Toiletries: Toiletries sales were 7% below those of 1999, but would have been 7%
above 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 13% above those of 1999.
Duracell Products: Sales of Duracell products were lower across all geographies,
declining 9%. Excluding the adverse effects of exchange, primarily in Europe,
sales were 6% lower than those of the prior year. In North America, sales were
7% below those of the prior year, reflecting lower share in Copper & Black
alkaline batteries. The Company has corrective actions in place to address the
challenges faced in this highly competitive market. These actions include
aggressive programs to enhance in-store display of batteries as well as a
consumer sampling program. Duracell profit from operations was 26% below that of
the previous year, due to lower sales and higher sales promotion expenses,
primarily in North America.
Oral-B Products: Sales of Oral-B products were 19% above those of 1999, with all
regions registering strong growth. The growth was aided by new products,
particularly the new Oral-B Advantage Plus toothbrush in North America and the
completion of CrossAction's rollout in the largest markets in Latin America.
Profit from operations increased 2% from that of 1999, due primarily to a
significant increase in advertising expenses in the quarter to support new
product launches.
Braun Products: Sales of Braun products were 1% below those of the prior year,
but were up 7% without the impact of unfavorable exchange. Sales increases in
oral care and hair removal were about offset by lower sales of non-core
household appliances. Profit from operations increased 4% versus 1999 despite
flat sales, due to lower overhead expenses and gross profit margin improvement,
partially offset by higher marketing support.
<PAGE>
PAGE 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine Months 2000 versus 1999
------------------------------
Total Company: Sales for the nine months ended September 30, 2000, were $6.48
billion, an increase of 2% 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 7%, attributable to volume/mix, 6%, and price, 1%. Improving
regional economic conditions in Latin America benefited all core product lines.
Blades & Razors: Sales of blades and razors rose 7%, and profits 6%, due
primarily to strong sales of the Mach3 system in North America, Europe and Latin
America. Sales in Latin America were boosted by the successful launch of the
Mach3 system in Brazil. In Europe, sales were aided by a 42% increase in Mach3
cartridge shipments.
Toiletries: Toiletries sales were 7% below those of the prior year, due to the
divestiture of White Rain. Sales of pre- and post-shave products were 7% above
those of the prior year. Profits were unchanged from those of 1999.
Duracell Products: Sales of Duracell products declined 5%, as a 42% increase in
Duracell Ultra batteries was more than offset by lower sales of both Copper &
Black and non-Duracell branded batteries. Contributing to the lower sales were
increased competition faced by Copper & Black in North America, depreciation of
the Euro and lower overall battery sales in Korea, as well as low-priced
alkaline competition in China. Duracell profit from operations was 26% below
that of the previous year, reflecting lower sales and increased marketing and
related strategic actions in North America designed to aggressively win back
market share, regain growth momentum and profitability.
Oral-B Products: Sales of Oral-B products were 8% above those of 1999. Sales
growth occurred in all geographies; led by Latin America with improving economic
conditions and the completion of CrossAction's rollout in Latin America's
largest markets. New product activity also contributed in North America, where
the new Oral-B Advantage Plus toothbrush was launched in the third quarter.
Profit from operations was 6% below that of 1999, due primarily to increased
marketing expenses to support new product launches.
Braun Products: Sales of Braun products were 7% 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. Profit from operations was 35% above that of 1999, reflecting sales
growth, improved mix and lower overhead expenses.
<PAGE>
PAGE 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Costs and Expenses
------------------
Gross profit for the nine months ended September 30, 2000 was $4.13 billion, an
increase of 3% versus 1999. Gross profit as a percentage of sales was 63.7%,
compared with 63.3% in 1999. The increase in margin was due in part to favorable
sales mix and continued manufacturing efficiencies. Additionally, margin
improvements were realized as a result of savings from the reorganization and
realignment program, favorably impacting our product cost structure.
Selling, general and administrative expenses increased by $107 million, or 4%.
Combined advertising and sales promotion expenses grew 9%, with advertising as a
percent of sales increasing from 6.1% in 1999 to 6.4% in 2000. Other marketing
and administrative expenses were flat with those of the prior year, largely
reflecting reorganization savings, containment of overhead expenses and a weaker
Euro.
Profit from operations was unchanged, amounting to $1.52 billion for the first
nine months of both years.
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 $906 million was virtually level with $913
million in 1999. Diluted income per common share from continuing operations of
$.85 was 5% above the $.81 of 1999, benefiting from the lower number of shares
outstanding as a result of the share repurchase program.
Reorganization and Realignment
------------------------------
The program was 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 signed an agreement to sell 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 nine
months, the after-tax loss from discontinued operations is $1 million.
For the quarter ended September 30, 2000, stationery products net sales of $154
million were virtually unchanged from the net sales of $155 million in the same
period last year. Pre-tax operating profit for the third quarter was nil, which
compares favorably to a loss of $4 million in 1999.
For the nine months ended September 30, 2000, stationery products net sales of
$482 million were 5% below the net sales of $507 million in the same period last
year. Through nine months in 2000, there was a pre-tax operating loss of $2
million compared to a profit of $12 million for the same period in 1999.
<PAGE>
PAGE 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Product Category Review
-----------------------
During the second quarter, 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 nine months ended September
30, 2000, amounted to $1,039 million, compared with $818 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.
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, 2000,
amounted to $5.04 billion, compared with $4.53 billion at year-end 1999. The
increase was due to additional debt used to finance the share repurchase program
partially offset by favorable exchange. The Company's current ratio at September
30, 2000, was 1.19, compared with 1.39 at December 31, 1999, reflecting
increased loans payable as a result of the share repurchase program.
The change in the accumulated foreign currency translation adjustment through
September 30, 2000 was a loss of $185 million, with the United Kingdom
accounting for $106 million of the loss. Losses through September 30, 1999, were
$203 million, with Brazil accounting for just over one-half of the loss.
On August 18, 2000, the Company issued a $228 million Euro-denominated debt
obligation due December 2002; and on September 28, 2000, the Company entered
into a $264 million Euro-denominated debt obligation which expires in December
2001. The proceeds were used to reduce commercial paper borrowing and for other
Corporate purposes.
<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
The Company filed a current report on Form 8-K dated August 25, 2000, referring
to a press release announcing that the Company had entered into a definitive
agreement to sell its stationery products business. The Company also filed a
current report on September 19, 2000, referring to an announcement by the
Company on the previous day of expected third-quarter results. On October 20,
2000, the Company filed a current report referring to a press release on the
previous day announcing that the Board of Directors named Edward F. DeGraan to
be Acting Chief Executive Officer and Richard R. Pivirotto to be non-executive
Chairman of the Board.
<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
November 8, 2000
