Founded in 1901, The Gillette Company is the world leader in male grooming products, a category that includes blades and razors, shaving preparations and electric shavers. Gillette also holds the number one position worldwide in selected female grooming products, such as wet shaving products and hair epilation devices. The Company is the world”s top seller of writing instruments and correction products, toothbrushes and oral care appliances. In addition, the Company is the world leader in alkaline batteries.
Gillette manufacturing operations are conducted at 38 facilities in 19 countries, and products are distributed through wholesalers, retailers, and agents in over 200 countries and territories.
The company”s statements of cash flows for the years 2001-2003 follow. Then the relevant portion of Management”s Discussion and Analysis of the statement of cash flows is provided. Consolidated statement of cash flows (millions of dollars)
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Years ended 2003,2002, 2001 December31 |
2003 |
2002 |
2001 |
|
Operating activities |
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Income from continuing operations |
$ 832 |
$1,248 |
$1,073 |
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Adjustments to reconcile net income to net |
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provided by operating activities: |
572 |
— |
440 |
|
Provision of restructuring and asset impairment |
535 |
464 |
421 |
|
Depreciation and amortization |
5 |
-7 |
-46 |
|
Other |
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Changes in assets and liabilities, excluding |
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effects from acquisition and divestitures: |
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Accounts receivable |
-100 |
48) |
-442 |
|
Inventories |
149 |
140) |
-62 |
|
Accounts payable and accrued liabilities |
-45 |
65 |
72 |
|
Other working capital items |
-136 |
97 |
-104 |
|
Other noncurrent assets and liabilities |
-197 |
252) |
-142 |
|
Funding German pension plans |
— |
— |
-252 |
|
Net cash provided by operating activities |
$ 1,604 |
$1,427 |
$ 958 |
|
Investing activities |
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Additions to property, plant and equipment |
$ (793) |
$ (889) |
$ (952) |
|
Disposals of property, plant and equipment |
41 |
124 |
65 |
|
Acquisitions of businesses, less cash acquired |
— |
— |
-91 |
|
Sale of businesses |
539 |
— |
200 |
|
Other |
-1 |
2 |
5 |
|
Net cash used in investing act |
$(214) |
$ (763) |
$ (773) |
|
Financing activities |
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Purchase of treasury stock |
$ (944) |
$(2,021) |
$(1,066) |
|
Proceeds from sale of put options |
23 |
72 |
56 |
|
Proceeds from exercise of stock options and |
36 |
149 |
126 |
|
purchase plans |
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Proceeds from long-term debt |
494 |
1,105 |
500 |
|
Repayment of long-term debt |
-365 |
— |
-12 |
|
Increase (decrease) in loans payable |
-385 |
484 |
708 |
|
Dividends paid |
-671 |
-626 |
-552 |
|
Settlements of debt-related derivative contracts |
279 |
42 |
9 |
|
Net cash used in financing activities |
$ (1,553) |
$ (795) |
$ (231) |
|
Effect of exchange rate changes on cash |
$ (5) |
$ (2) |
$ (2) |
|
Net cash provided by discontinued operations |
130 |
111 |
45 |
|
Decrease in cash and cash equivalents |
$ (18) |
$ (22) |
$ (3) |
|
Cash and cash equivalents at beginning of |
80 |
102 |
105 |
|
Cash and cash equivalents at end of year |
$ 62 |
$ 80 |
$ 102 |
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Supplemental disclosure of cash paid for: |
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Interest |
$ 243 |
$ 126 |
$ 120 |
|
Income taxes |
$ 480 |
$ 457 |
$ 473 |
|
Noncash investing and financing activities: |
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Acquisition of businesses |
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Fair value of assets acquired |
$— |
$— |
$ 100 |
|
Cash paid |
— |
— |
91 |
|
Liabilities assumed |
$ — |
$ —- |
$ 9 |
Management”s discussion and analysis –
Financial*
Financial condition
The Company”s financial condition continued to be strong in 2003. Net debt (total debt net of associated swaps, less cash and cash equivalents) decreased USD 82 million during 2003, despite additional spending under the Company”s share repurchase program, due to improved cash flow from operations, proceeds from the sale of the Stationery Products business and the favorable exchange impact on foreign currency debt. Net debt at 2003 December 31, amounted to USD 4.45 billion, compared with USD 4.53 billion and USD 3.18 billion at 2002 December 31 and 2001, respectively. The market value of Gillette equity was USD 38 billion at the end of 2003, compared with USD 43 billion at the end of 2002. The Company”s book equity position amounted to USD 1.92 billion at the end of 2003, compared with
USD 3.06 billion at the end of 2002 and USD 4.54 billion at the end of 2001. The decreases in book equity in 2003 and 2002 were due primarily to the Gillette share repurchase program, as well as to the effect of foreign currency translation.
Net cash provided by operating activities in 2003 was USD 1.60 billion, compared with USD 1.43 billion in 2002 and USD .96 billion in 2001. The current ratio of the
Company was .86 for 2003, compared with ratios of 1.39 for 2002 and 1.40 for 2001.
The decrease in the 2003 current ratio was primarily attributable to the Company”s reclassification of all commercial paper borrowings to short-term debt, due to the
Company”s credit facility agreements expiring within 2001. Capital spending in 2003 amounted to USD 793 million, compared with USD 889 million in 2002 and USD 952 million in 2001. Spending in all three years reflected substantial investments in the blade and razor, Duracell and Braun Products segments.
In 2003, the Company sold the Stationery Products business for USD 528 million.
In 2001, the Company made acquisitions in the Duracell Products segment for USD 100 million and sold the Jafra business for USD 200 million. Share repurchase funding in 2003, net of proceeds received from the sale of put options on Company stock, amounted to USD 921 million, compared with USD 1,949 million in 2002 and USD 1,010 million in 2001.
Strong cash inflows from operations, proceeds from the sale of the Stationery Products business and alternate financing sources enabled the Company to reduce its USD 2.0 billion revolving credit facility in 2003 to USD 1.4 billion, expiring October 2004, and its USD 1.1 billion credit facility, expiring December 2004, to USD 550 million in January 2004. Both facilities are used by the Company to complement its commercial paper program.
In order to increase flexibility in sourcing short-term borrowing, the Company launched a USD 1 billion Euro commercial paper program in 2003. At year-end 2003, there was USD 586 million outstanding under this program and USD 1.45 billion outstanding under the US program, compared with USD 2.41 billion at the end of 2002 and USD 1.66 billion at the end of 2001.
During 2003, the Company issued Euro-denominated notes for USD 228 million, due December 2005, and entered into a USD 264 million Euro-denominated debt obligation, with redemption rights in December 2004. During 2002, the Company issued Euro-denominated notes for USD 343 million, due February 2007, and entered into a USD 325 million Euro-denominated debt obligation, with redemption rights in March 2005, and a USD 437 million Euro-denominated debt obligation, with redemption rights in January 2007. The net proceeds were used to refinance existing short-term debt associated with the Company”s share repurchase program.
During 2003, both Standard & Poor”s and Moody”s maintained the Company”s current credit ratings. Standard & Poor”s rates the Company”s long-term debt at AA, while Moody”s rating is Aa3. The commercial paper rating is A1+ by Standard & Poor”s and P1 by Moody”s.
Gillette will continue to have capital available for growth through both internally generated funds and significant credit resources. The Company has substantial unused lines of credit and access to worldwide financial market sources for funds. Source: The Gillette Company”s 2000 annual report, p. 22.
a. Does the company use the direct or indirect method of calculating net cash provided by operating activities?
b. Determine whether each of the current assets (other than cash) and current liabilities increased or decreased during 2003.
c. How is the company expanding its asset base?
d. How much greater is the total market value of the company”s outstanding shares of common stock than the book equity (stockholders; equity)?
e. What is the likelihood that the company will be able to pay at least the current level of dividends in the future?
f. Do you expect to see purchases of treasury stock increase or decrease in the future?
g. Given the following data, calculate the cash flow per share of common stock ratio, the cash flow margin ratio, and the cash flow liquidity ratio. (Round the net cash provided by operating activities to the nearest million before you calculate the ratios.) How do the ratios compare with the ones for companies illustrated in the chapter?
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(in millions) |
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Average number of shares of common stock |
1,059 |
|
outstanding |
|
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Net sales |
9,295 |
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Cash and marketable securities |
62 |
|
Current liabilities |
5,471 |