<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 3, 1998
Commission file number 1-11793
THE DIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 51-0374887
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15501 NORTH DIAL BOULEVARD
SCOTTSDALE, ARIZONA 85260-1619
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (602) 754-3425
Indicate by check mark whether the registrant (1) has filed all Exchange Act
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- -----------
The number of shares of Common Stock, $.01 par value, outstanding as the close
of business on November 16, 1998 was 103,211,803.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE DIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000 omitted)
<TABLE>
<CAPTION>
(Unaudited)
October 3, January 3,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,235 $ 10,089
Receivables, less allowance of $7,928 and $6,841 49,987 60,448
Inventories 172,841 124,058
Deferred income taxes 29,323 25,185
Other current assets 2,696 7,174
----------- -----------
Total current assets 260,082 226,954
Property and equipment, net 266,727 260,928
Deferred income taxes 95,769 63,567
Intangibles, net 532,416 331,482
Other assets 19,857 921
----------- -----------
$ 1,174,851 $ 883,852
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 112,949 $ 102,235
Short-term borrowings 7,627 8,500
Income taxes payable 34,432 14,581
Other current liabilities 96,670 113,435
----------- -----------
Total current liabilities 251,678 238,751
Long-term debt 300,182 84,399
Pension and other benefits 235,141 231,634
Other liabilities 7,565 9,022
----------- -----------
Total liabilities 794,566 563,806
----------- -----------
Stockholders' Equity
Preferred stock, $.01 par value, 10,000,000 shares __ __
authorized; no shares issued and outstanding
Common stock, $.01 par value, 300,000,000 shares
authorized, 103,533,270 and 102,725,481 shares issued 1,035 1,027
Additional capital 400,186 393,947
Retained income 85,546 33,892
Unearned employee benefits (94,224) (107,372)
Treasury stock, 559,779 and 101,040 shares held (12,258) (1,448)
----------- -----------
Total stockholders' equity 380,285 320,046
----------- -----------
$ 1,174,851 $ 883,852
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 3
THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(000 omitted, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
---------------------------
October 3, September 27,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $383,909 $334,290
-------- --------
Costs and expenses:
Cost of products sold 195,450 173,723
Selling, general and administrative expenses 141,315 119,582
-------- --------
336,765 293,305
-------- --------
Operating income 47,144 40,985
Interest and other expenses 5,512 6,392
-------- --------
Income before income taxes 41,632 34,593
Income taxes 14,904 12,241
-------- --------
NET INCOME $ 26,728 $ 22,352
======== ========
NET INCOME PER SHARE -- BASIC $ 0.27 $ 0.25
======== ========
NET INCOME PER SHARE -- DILUTED $ 0.27 $ 0.24
======== ========
Weighted average basic shares outstanding 98,562 90,998
Weighted average equivalent shares 1,733 1,874
-------- --------
Weighted average diluted shares outstanding 100,295 92,872
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(000 omitted, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
------------------------------
October 3, September 27,
1998 1997
-------------- ------------
<S> <C> <C>
Net sales $1,085,730 $ 999,800
---------- ----------
Costs and expenses:
Cost of products sold 557,818 526,050
Selling, general and administrative expenses 395,463 356,051
---------- ----------
953,281 882,101
---------- ----------
Operating income 132,449 117,699
Interest and other expenses 14,897 21,191
---------- ----------
Income before income taxes 117,552 96,508
Income taxes 42,306 35,451
---------- ----------
NET INCOME $ 75,246 $ 61,057
========== ==========
NET INCOME PER SHARE -- BASIC $ 0.77 $ 0.68
========== ==========
NET INCOME PER SHARE -- DILUTED $ 0.75 $ 0.66
========== ==========
Weighted average basic shares outstanding 98,217 90,327
Weighted average equivalent shares 2,204 2,164
---------- ----------
Weighted average diluted shares outstanding 100,421 92,491
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(000 omitted)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
---------------------------
October 3, September 27,
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 75,246 $ 61,057
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 25,990 23,107
Deferred income taxes (102) 13,940
Change in operating assets and liabilities:
Receivables (14,139) 2,624
Inventories (7,877) 23,133
Trade accounts payable (8,522) (23,142)
Other assets and liabilities, net (9,085) 19,076
--------- ---------
Net cash provided by operating activities 61,511 119,795
--------- ---------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Capital expenditures (27,348) (29,713)
Acquisition of business, net of cash acquired (270,763) (25,135)
Proceeds from sale of assets 10,053 35,080
--------- ---------
Net cash used by investing activities (288,058) (19,768)
--------- ---------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Net proceeds from issuance of senior notes 192,377
Net change in long-term borrowings 17,882 (82,913)
Common stock purchased for treasury (10,231)
Net change in short-term bank loans (873)
Dividends paid on common stock (23,592) (21,710)
Cash proceeds from stock options 15,030 8,128
Net change in receivables sold 31,100 (8,800)
--------- ---------
Net cash provided (used) by financing activities 221,693 (105,295)
--------- ---------
Net decrease in cash and cash equivalents (4,854) (5,268)
Cash and cash equivalents, beginning of year 10,089 14,102
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,235 $ 8,834
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PREPARATION
The Consolidated Financial Statements of The Dial Corporation ("the Company")
include the accounts for the Company and all of its subsidiaries. This
information should be read in conjunction with the financial statements set
forth in The Dial Corporation Annual Report to Stockholders for the year ended
January 3, 1998.
Accounting policies utilized in the preparation of the financial information
herein presented are the same as set forth in the Company's annual financial
statements except as modified for interim accounting policies which are within
the guidelines set forth in Accounting Principles Board Opinion No. 28, "Interim
Financial Reporting." The interim consolidated financial statements are
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position as of
October 3, 1998, the results of operations for the quarters and nine months
ended October 3, 1998 and September 27, 1997, and the cash flows for the nine
months ended October 3, 1998 and September 27, 1997 have been included. Interim
results of operations are not necessarily indicative of the results of
operations for the full year.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"),
which is effective for financial statements for both interim and annual periods
ending after December 15, 1997. This new standard requires dual presentation of
"basic" and "diluted" earnings per share ("EPS") on the face of the statement of
operations and requires a reconciliation of the numerators and denominators of
basic and diluted EPS calculations. Basic net income per share is computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period after giving effect to stock options considered to be dilutive common
stock equivalents. Shares held by the Employee Equity Trust (the "Trust") are
not considered outstanding for net income per share calculations until the
shares are released from the Trust.
At October 3, 1998, there were 103,533,270 shares of common stock issued and
98,477,706 shares outstanding. At October 3, 1998 and September 27, 1997, a
total of 4,495,785 and 5,191,425, respectively, of the issued shares were held
by the Trust.
At October 3, 1998 and September 27, 1997, a total of 559,779 and 91,011,
respectively, shares were held in treasury by the Company. The shares held in
treasury at October 3, 1998 include 218,668 shares purchased by the Company as
part of a small shareholder selling/repurchasing program initiated during the
first quarter of 1998 and 222,515 shares purchased by the Company as a result of
a stock repurchase program initiated during the third quarter of 1998.
6
<PAGE> 7
NOTE B. ACQUISITION OF BUSINESS
On July 1, 1998, the Company acquired The Freeman Cosmetic Corporation
("Freeman"), a California corporation, a manufacturer and marketer of natural
skin care, hair care, bath and body, and foot care products. The Statement of
Consolidated Operations presented for the quarter and nine months ended October
3, 1998 includes the operations of Freeman for the third quarter ended October
3, 1998.
Assets acquired, liabilities assumed and net cash paid for Freeman are shown in
the table below.
<TABLE>
<CAPTION>
(000 omitted)
---------------
<S> <C>
Accounts receivable, net $ 7,651
Inventories 6,875
Property and equipment, net 2,062
Intangibles 83,661
Other assets 320
Liabilities assumed (16,806)
--------
Net cash paid $ 83,763
========
</TABLE>
On September 14, 1998, the Company acquired Sarah Michaels, Inc. ("Sarah
Michaels"), a manufacturer and marketer of specialty bath and body care
products. The operating results of Sarah Michaels for the period from September
14, 1998 to October 3, 1998 are not material and have not been included in the
Statement of Consolidated Operations presented for the quarter and nine months
ended October 3, 1998.
Assets acquired, liabilities assumed and net cash paid for Sarah Michaels are
shown in the table below.
<TABLE>
<CAPTION>
(000 omitted)
---------------
<S> <C>
Accounts receivable, net $ 8,470
Inventories 37,460
Property and equipment, net 2,567
Deferred income taxes 30,776
Intangibles 119,991
Other assets 71
Liabilities assumed (12,335)
---------
Net cash paid $ 187,000
=========
</TABLE>
These acquisitions were accounted for as purchases. The purchase price for each
acquisition, including acquisition costs, was allocated to the net tangible and
intangible assets acquired based on estimated fair values at the date of
acquisition. The difference between the purchase price and the related fair
value of net assets acquired represents goodwill, which is being amortized on a
7
<PAGE> 8
straight-line basis over periods not exceeding 40 years. The fair value of
trademarks and other intangible assets acquired is amortized over their
estimated useful lives.
The Company continues to analyze certain information required to complete the
allocation of the purchase price of the acquisitions of Freeman and Sarah
Michaels and adjustments to the allocations have been made from time to time
based upon this analysis. Further adjustments may be made as a result of the
Company's ongoing analysis.
The following unaudited pro forma combined condensed financial information for
the first nine months of 1998 and 1997 includes the results of operations for
the Company and assumes the Freeman and Sarah Michaels acquisitions were
consummated at the beginning of each period presented, along with adjustments
which give effect to events that are directly attributable to the transaction
and are expected to have a continuing impact. The unaudited proforma combined
condensed financial information does not give any effect to any potential cost
savings which may arise from the consolidation of the Freeman and Sarah Michaels
acquisitions with the Company.
The unaudited pro forma combined condensed financial information does not
purport to represent the results of operations that would have actually resulted
had the purchases occurred on the indicated dates, nor should it be taken as
indicative of future results of operations.
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
October 3, September 27,
1998 1997
--------------- --------------
(000 omitted, except per share data)
<S> <C> <C>
Net sales $1,141,499 $1,076,524
Operating income 130,922 119,018
Net income 67,137 53,943
Earnings per share - diluted $ 0.67 $ 0.58
</TABLE>
On September 24, 1997 the Company acquired Nuevo Federal, a leading manufacturer
and marketer of personal care and household products in Argentina, for a
purchase price of approximately $35 million. Of this amount, $25.1 million was
paid in cash with the remainder of the purchase price comprised of future
payments contingent on the completion of certain transactions. The Statement of
Consolidated Operations presented for the quarter and nine months ended
September 27, 1997 does not include the operations of Nuevo Federal.
Net cash paid, assets acquired and debt and other liabilities assumed are shown
in the table below.
8
<PAGE> 9
<TABLE>
<CAPTION>
Sept. 27,
1997
---------------
(000 omitted)
<S> <C>
Accounts receivables, net $ 22,773
Inventories 9,085
Property and equipment, net 21,107
Intangibles 22,194
Other assets 1,332
Liabilities assumed (51,356)
--------
Net cash paid $ 25,135
========
</TABLE>
NOTE C. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
----------- ----------
(000 omitted)
<S> <C> <C>
Raw materials and supplies $ 39,141 $ 36,938
Work in process 9,303 9,373
Finished goods 124,397 77,747
-------- --------
$172,841 $124,058
======== ========
</TABLE>
NOTE D. DEBT
At October 3, 1998 and January 3, 1998, the Company classified as long-term debt
$100.2 million and $84.1 million, respectively, of short term borrowings
supported by the Company's long-term, revolving credit agreement.
On September 23, 1998, the Company issued $200,000,000 of 6-1/2% Senior Notes
due 2008. The Indenture governing these Senior Notes imposes restrictions on the
Company with respect to, among other things, its ability to redeem the Senior
Notes, place liens on certain properties and to enter into certain sale and
leaseback transactions.
9
<PAGE> 10
NOTE E. INCOME TAXES
Reconciliation between the statutory federal income tax rate of 35% and the
Company's consolidated effective income tax rate for the nine months ended
October 3, 1998 and September 27, 1997 is as follows:
<TABLE>
<CAPTION>
October 3, September 27,
1998 1997
---------- -------------
<S> <C> <C>
Federal statutory rate 35.0% 35.0%
Nondeductible goodwill amortization 0.2 0.3
FSC exclusion (0.6) (0.5)
State income taxes 3.7 3.9
Other, net (2.3) (2.0)
---- ----
Effective income tax rate 36.0% 36.7%
==== ====
</TABLE>
NOTE F. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires that enterprises classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
income and additional capital in the shareholders' equity section of the balance
sheet. The Company's annual comprehensive income is not expected to be
materially different from its net income. Comprehensive income for the quarters
and nine months ended October 3, 1998 and September 27, 1997 was $26,387,000 and
$22,253,000 and $74,777,000 and $60,603,000, respectively. The difference
between net income and comprehensive income consists primarily of increases in
the Company's additional minimum pension liability and cumulative translation
adjustments.
10
<PAGE> 11
NOTE G. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for the
Company's 1998 annual report. The Company currently is evaluating the impact of
implementing the provisions of SFAS 131.
NOTE H. DISPOSITION OF ASSETS
In the third quarter of 1997, the Company sold to Church & Dwight Co., Inc. for
approximately $30 million the following brands and related inventories: Brillo
soap pads and related products, Parsons ammonia, Bo Peep ammonia, Sno Bol toilet
bowl cleaner, Cameo metal cleaner and Rain Drops water softener. The Company's
London, Ohio plant, where Brillo is manufactured, was also part of the sale. In
addition, the Company sold its Bruce floor care product trademark and its Magic
Sizing/Starch brand and related inventories to other third parties.
The Company realized a gain of approximately $16 million from the sale of the
non-core businesses. This gain was offset by $16 million in various
non-recurring operating charges, comprised principally of $9.5 million in
expenses from the write-off of capitalized package design costs which were
determined in the third quarter of 1997 to be impaired and $4.5 million in
expenses associated with sales returns of discontinued products.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THIRD QUARTER OF 1998 WITH THE THIRD QUARTER OF 1997
Net sales increased $49.6 million, or 14.8%, to $383.9 million in the third
quarter of 1998 from $334.3 million in the third quarter of 1997. The third
quarter of 1997 included $10.3 million of sales from brands that were divested
in the third quarter of 1997. The third quarter of 1998 includes the operations
of The Freeman Cosmetic Corporation ("Freeman") which was acquired by the
Company on July 1, 1998. The operating results of Sarah Michaels Inc. ("Sarah
Michaels") from September 14, 1998, the date on which the Company acquired Sarah
Michaels, to October 3, 1998 are not material and are not included in the
results of operations for the third quarter.
Sales of products in the DIAL(R), PUREX(R), RENUZIT(R) and Armour(R) franchises
accounted for 26%, 27%, 12% and 16%, respectively, of the Company's total net
sales in the third quarter of 1998 compared to 26%, 29%, 12% and 19%,
respectively, for the third quarter of 1997. Compared to the third quarter of
1997, Dial sales increased 15%, Purex sales increased 7%, and Renuzit sales
increased 22% during the third quarter of 1998. The increase in Renuzit sales
resulted primarily from increased sales of air fresheners and candles. During
the same period Armour sales remained relatively flat. Net sales in
international markets increased approximately $20.1 million, or 102%, to $39.9
million in the third quarter of 1998 primarily as a result of the inclusion of
sales from the Company's acquisitions in Argentina. International sales,
exclusive of the acquisitions in Argentina, increased approximately $1.0
million, or 4%, to $20.6 million in the third quarter of 1998 from $19.8 million
in the third quarter of 1997.
Gross profit margin increased 1.1% to 49.1% in the third quarter of 1998 from
48.0% in the third quarter of 1997. The increase resulted primarily from
significantly improved manufacturing efficiencies and, to a lesser extent,
favorable sales mix of higher margin personal washing products.
Selling, general and administrative expenses for the third quarter of 1998
increased $21.7 million, or 18.1%, to $141.3 million from $119.6 million in the
third quarter of 1997. The increase was primarily due to higher marketing
expense to support business-merchandising initiatives, new product launches and
Dial brand advertising.
Operating income in the third quarter of 1998 increased $6.1 million, or 14.9%,
to $47.1 million from $41.0 million during the third quarter of 1997. The
increase was primarily due to increased sales and gross margin improvements.
Interest and other expense decreased $900,000, or 14.1%, to $5.5 million for the
third quarter of 1998 compared to $6.4 million in the third quarter of 1997
primarily as a result of lower interest rates.
The Company's consolidated effective income tax rate for the third quarter of
1998 increased to approximately 35.8%, from 35.4% for the third quarter of 1997.
12
<PAGE> 13
Net income increased $4.3 million, or 19.2%, to $26.7 million in the third
quarter of 1998 from $22.4 million in the third quarter of 1997. The increase
was primarily due to increased sales and gross margin improvements.
COMPARISON OF THE FIRST NINE MONTHS OF 1998 WITH THE FIRST NINE MONTHS OF 1997
Net sales increased $85.9 million, or 8.5%, to $1,085.7 million in the first
nine months of 1998 from $999.8 million in the first nine months of 1997. The
first nine months of 1997 included $51.7 million of sales from brands that were
divested in the third quarter of 1997. The first nine months of 1998 includes
only three months of Freeman which was acquired on July 1, 1998, but does not
include the operations of Sarah Michaels which was acquired on September 14,
1998.
Sales of products in the DIAL(R), PUREX(R), RENUZIT(R) and Armour(R) franchises
accounted for 27%, 28%, 11% and 16%, respectively, of the Company's total net
sales in the first nine months of 1998 compared to 26%, 29%, 11% and 18%,
respectively, for the first nine months of 1997. Compared to the first nine
months of 1997, Dial sales increased 13%, Purex sales increased 7%, and Renuzit
sales increased 9% during the first nine months of 1998. During the same period
Armour sales decreased 2%. Net sales in international markets increased $69.8
million, or 132%, to $122.8 million in the first nine months of 1998 primarily
as a result of the inclusion of sales from the Company's acquisitions in
Argentina. International sales, exclusive of the acquisitions in Argentina,
increased $8.4 million, or 15.8%, to $61.4 million in the first nine months of
1998 from $53.0 million in the first nine months of 1997.
Gross profit margin increased 1.2% to 48.6% in the first nine months of 1998
from 47.4% in the first nine months of 1997. The increase resulted primarily
from improved manufacturing efficiencies and, to a lesser extent, favorable
sales mix of higher margin personal washing products.
Selling, general and administrative expenses for the nine months of 1998
increased $39.4 million, or 11.1%, to $395.5 million from $356.1 million in the
first nine months of 1997. The increase was primarily due to higher marketing
expense to support business-merchandising initiatives, new product launches and
Dial brand advertising.
Operating income in the first nine months of 1998 increased $14.7 million, or
12.5%, to $132.4 million from $117.7 million during the first nine months of
1997. The increase was primarily due to increased sales and gross margin
improvements.
Interest and other expense decreased $6.3 million, or 29.7%, to $14.9 million
for the first nine months of 1998 compared to $21.2 million in the first nine
months of 1997. The increase was primarily the result of lower average
borrowings outstanding during the period, down $97 million from the first nine
months of 1997.
The Company's consolidated effective income tax rate for the first nine months
of 1998 decreased to 36.0%, from 36.7% for the first nine months of 1997. The
decrease resulted primarily from the benefits associated with Foreign Sales
Corporation sales and foreign tax holidays.
13
<PAGE> 14
Net income increased $14.1 million, or 23.1%, to $75.2 million in the first nine
months of 1998 from $61.1 million in the first nine months of 1997. The increase
was primarily due to increased sales and gross margin improvements.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $61.5 million during the first
nine months of 1998 compared to cash generated of $119.8 million for the same
period in 1997. The decrease of $56.8 million resulted primarily from an
increase in inventories and receivables in support of the growth in the
Company's business during the first nine months of 1998 versus a decline of
inventories and receivables and the utilization of deferred tax benefits in the
first nine months of 1997.
Capital expenditures for the first nine months of 1998 were $27.3 million versus
$29.7 million for the comparable period in 1997. Capital spending in 1998 is
expected to approximate $45 million and will be concentrated primarily on
equipment and information systems that are expected to reduce manufacturing,
logistic and administrative costs and brings the Company into compliance with
the year 2000 issue. However, such plans are dependent on the availability of
funds, as well as identification of projects with sufficient returns. As a
result, there can be no assurance as to the quantity and the type of capital
spending in the future.
On July 1, 1998, the Company acquired Freeman for $83.8 million, which was
financed through short-term borrowings supported by the Company's long-term
credit agreement. The Freeman acquisition added approximately $14.5 million to
current assets, $16.8 million to current liabilities and $83.7 million to
goodwill.
On September 14, 1998, the Company acquired Sarah Michaels for $187 million,
which was financed through short-term borrowings supported by the Company's
long-term credit agreement. The Sarah Michaels acquisition added approximately
$45.9 million to current assets, $12.3 million to current liabilities and
$120.0 million to goodwill.
On September 23, 1998, the Company completed a $200 million public offering of
6-1/2% Senior Notes due 2008. The proceeds of the debt financing were used to
repay outstanding bank borrowings used for the acquisitions of Freeman and Sarah
Michaels. The Indenture governing these Senior Notes imposes restrictions on the
Company with respect to, among other things, its ability redeem the Senior
Notes, to place liens on certain properties and to enter into certain sale and
leaseback transactions.
The Company received approximately $10.0 million from the disposition of assets
during the first nine months of 1998, the majority of which resulted from two
sales. The Toss 'n Soft brand and related inventories were sold to Church &
Dwight Co, Inc. for approximately $5.3 million. In addition, a non-operating
manufacturing property was sold for $4.0 million to a third party. No gain or
loss was realized on either of the transactions.
The Company's financing plan includes the sale of accounts receivable to
accelerate cash flow. Accounts receivable sold but not yet collected under this
plan at October 3, 1998 and September 27, 1997 were $90.0 million and $66.1
million, respectively. Under the terms of the plan, the Company retains the risk
of credit loss on the receivables sold.
14
<PAGE> 15
The Company is also party to a $350 million revolving credit agreement (the
"Credit Agreement") with various banks. The Credit Agreement, which will
terminate on August 15, 2002, unless extended, contains certain covenants which
impose limitations on the Company with respect to, among other things, its
ability to place liens on property, its ability to merge, consolidate or
transfer substantially all its assets, its minimum net worth and the incurrence
of certain indebtedness. The Company had $350 million available under the Credit
Agreement at October 3, 1998. The Company, from time to time, makes short-term
bank borrowings that are supported by the Credit Agreement. As of October 3,
1998, the Company had $101.6 million aggregate principal amount of such
short-term borrowings outstanding. The bank borrowings are classified as
long-term debt because they are supported by the long-term Credit Agreement.
As part of its business strategy, the Company routinely reviews and evaluates
the acquisition of domestic and international companies that market products
that are similar to the Company's product offerings. The Company may seek
additional debt and/or equity financing as necessary to fund any potential
acquisitions.
At October 3, 1998 and September 27, 1997, a total of 559,779 and 91,011,
respectively, shares were held in treasury by the Company. The shares held at
October 3, 1998 include 218,668 shares valued at $5.2 million purchased by the
Company as part of a small shareholder selling/repurchasing program initiated
during the first quarter of 1998 and 222,515 shares valued at $5.0 million as
part of the Company's stock repurchase program initiated during the third
quarter of 1998. The Company is authorized to repurchase up to $75 million of
its common shares.
In August 1997, the Company moved its corporate headquarters from the Viad Tower
to office space in Scottsdale, Arizona. The Company has approximately eight
years remaining on the lease for the Viad Tower space, which commits the Company
to payments of approximately $2.7 million annually through 2006. The Company has
subleased a portion of this space and is actively marketing the remaining space
for sublease.
As of October 3, 1998, The Company had approximately $125.1 million in net
deferred tax benefits. The realization of such benefits will require average
annual taxable income of approximately $23.1 million over the next 15 years. The
Company's average income before income taxes over the last three years was
approximately $43.1 million.
YEAR 2000 COMPLIANCE
Overview
Many existing computer systems and software products, including several used by
the Company, are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, the Company's date critical functions related to the year 2000 and
beyond, such as sales, distribution, manufacturing, purchasing, inventory
control, trade promotion management, planning and replenishment, facilities and
financial systems may be materially adversely affected unless computer systems
and embedded microchips in manufacturing equipment are or become year 2000
compliant. In addition, certain of the Company's business activities may be
materially adversely affected if critical business partners, including
customers, vendors, suppliers, brokers and others, experience disruptions in
service as a result of year 2000 problems.
15
<PAGE> 16
The Company currently believes that the year 2000 issue will not pose
significant operational problems for the Company. However, if all year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to year 2000 problems that are identified,
there can be no assurance that the year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, suppliers, brokers or others.
Additionally, there can be no assurance that the year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations.
The Company continues to implement changes that it believes are necessary to
assure accurate date recognition and data processing with respect to the year
2000. Activities have been organized into four specific areas: information
systems applications, information technology infrastructure, embedded systems
and business partners.
Information Systems Applications
The Company's year 2000 efforts include identifying information systems
applications (e.g. payroll, order entry, etc.) requiring remediation, assessing
what is required to remediate those applications, remediating them to be ready
for the year 2000 by either modifying or replacing them and testing them for
year 2000 readiness. The Company has completed the identification and assessment
of the application systems that it believes are critical to maintaining
operations. These systems are in the process of being replaced or upgraded to
year 2000 compliant versions. The Company currently believes that these efforts
will be completed by mid-1999. The various projects that are underway currently
are ahead of or are meeting their respective milestone dates for completion.
Information Technology Infrastructure
The Company is also following the same approach as described above for its
information technology infrastructure. This includes the computer and
communications hardware and related operating system software on which the
information systems applications are operated. This equipment is in the process
of being replaced or upgraded to year 2000 compliant versions. The Company
believes that these efforts will be completed by mid-1999. The various projects
that are underway currently are ahead of or are meeting their respective
milestone dates for completion.
Embedded Systems
The Company is also following the same approach as described above for its
embedded systems. These embedded systems include, among other things,
manufacturing equipment with embedded microchips that may fail as a result of
year 2000 date problems. The Company has identified and completed an assessment
of the embedded systems it believes are critical, and currently believes that
such systems will be remediated and tested by mid-1999.
16
<PAGE> 17
Business Partners
The Company is communicating with its critical business partners (customers,
vendors, suppliers, brokers, etc.) to assess their readiness and to consider the
potential impact on the Company if these business partners experience
significant year 2000 problems. The Company has identified those entities that
it believes are critical to its operations, and is assessing and attempting to
mitigate its risks with respect to the failure of these entities to be year 2000
compliant by developing a contingency plan. The Company has and currently is
assessing its risk in this area. The Company currently plans to complete its
work in this area by April 1999 and also plans to continue monitoring certain
business partners after that date for year 2000 issues.
Contingency Plan
A contingency plan is in the process of being developed for dealing with the
most reasonably likely worst case scenario, and the Company believes that its
contingency plan will be finalized by mid-1999. The Company currently believes
that the most reasonably likely worst case scenario for the Company involves the
failure to timely complete the replacement or upgrade of critical information
systems applications combined with the failure of embedded microchip technology
at the Company's manufacturing facilities and the failure of critical business
partners to be year 2000 compliant. The Company currently believes that the most
reasonably likely worst case scenario would result in increased costs due to
remediation efforts and additional staffing to support business activities, as
well as difficulties in procuring raw materials and meeting customer demand for
the Company's products, all of which could have a material adverse effect on the
Company and its results of operations.
Costs
The Company is using both internal and external resources to meet the timetable
established for completion of its year 2000 efforts. The Company currently
expects to incur costs of approximately $1.3 million in 1998 and $2.0 million in
1999. In addition, the Company is expected to incur $10.8 million in 1998 and
$14.0 million in 1999 in capital for the upgrade of its information technology
systems. These expenditures will address year 2000 compliance and are expected
to provide the Company with improved efficiencies and cost savings.
The costs of the Company's year 2000 identification, assessment, remediation and
testing efforts and the dates on which the Company believes it will complete
such efforts are based upon management's best estimates, which were derived
using numerous assumptions regarding future events, including the continued
availability of certain resources, third-party remediation plans, and other
factors. There can be no assurance that these estimates will prove to be
accurate, and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in year 2000 issues, the ability to identify, assess, remediate and test all
relevant computer codes and embedded technology, and similar uncertainties. In
addition, variability of definitions of "compliance with year 2000" and the
myriad of different products and services, and combinations thereof, sold by the
Company may lead to claims whose impact on the Company is not currently
estimable. No assurance can be given that the aggregate cost of defending and
resolving such claims, if any, will not materially adversely affect the
Company's results of operations. Although some of the Company's agreements with
manufacturers and others from whom it purchases products for resale contain
provisions requiring such parties to indemnify the Company under some
circumstances, there can be no assurance that such
17
<PAGE> 18
idemnification arrangements will cover all the Company's liabilities and costs
related to claims by third parties related to the year 2000 issue.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27. Financial Data Schedule.
99. Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements.
(B) Current Reports on Form 8-K were filed on (i) July 30, 1998 relating
to the Company's second quarter results, (ii) August 13, 1998 relating
to the Company's $75 million stock repurchase program, (iii) September
21, 1998 relating to the Company's acquisition of Sarah Michaels, and
(iv) October 27, 1998 relating to the Company's third quarter
financial results.
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 Dial Corporation
(Registrant)
November 17, 1998
\s\ Susan J. Riley
- - ----------------------------------------------------
Senior Vice President and Chief Financial Officer
(Chief Accounting Officer and Authorized Officer)
18
<PAGE> 19
EXHIBIT INDEX
Exhibits
27. Financial Data Schedule.
99. Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-03-1998
<CASH> 5,235
<SECURITIES> 0
<RECEIVABLES> 49,987
<ALLOWANCES> (7,928)
<INVENTORY> 172,841
<CURRENT-ASSETS> 260,082
<PP&E> 266,727
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<OTHER-SE> 379,250
<TOTAL-LIABILITY-AND-EQUITY> 1,174,851
<SALES> 1,085,730
<TOTAL-REVENUES> 1,085,730
<CGS> 557,818
<TOTAL-COSTS> 953,281
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<PAGE> 1
EXHIBIT 99
THE DIAL CORPORATION
EXHIBIT 99
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe-harbor to protect companies from securities law
liability in connection with forward-looking statements. The Dial Corporation
(the "Company") intends to qualify both its written and oral forward-looking
statements for protection under the PSLRA.
To qualify oral forward-looking statements for protection under the PSLRA,
a readily available written document must identify important factors that could
cause actual results to differ materially from those in the forward-looking
statements. The Company provides the following information in connection with
its continuing effort to qualify forward-looking statements for the safe harbor
protection of the PSLRA.
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, the Company undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to projections
over time.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's future results and financial condition are dependent upon
the Company's ability to successfully develop, manufacture and market consumer
products. Inherent in this process are a number of factors that the Company must
successfully manage to achieve favorable future operating results and financial
condition. Potential risks and uncertainties that could affect the Company's
future operating results and financial condition include, but are not limited
to, the factors discussed below.
<PAGE> 2
INTENSE COMPETITION IN THE CONSUMER PRODUCTS INDUSTRY
The consumer products industry, particularly its detergent, personal care
and air freshener categories, is intensely competitive. Several of the Company's
most significant competitors, including The Procter & Gamble Company, Lever
Brothers Co. (a division of Unilever plc), and Colgate-Palmolive Company, have
greater financial resources than the Company and may be willing to commit
significant resources to protecting their own market shares or to capturing
market share from the Company. As a result, the Company may need to incur
greater costs than previously incurred for trade and consumer promotions and
advertising to preserve or improve market share and to introduce and establish
new products and line extensions. At the same time, the Company may need to
undertake additional production-related costs-cutting measures to enable it to
respond to competitors' price cuts and marketing efforts without reducing the
Company's margins. There can be no assurance that the Company will be able to
make such additional expenditures or implement such cost-cutting measures or
that if made or implemented they will be effective.
CONSUMER PRICING PRESSURES
Consumer products, particularly those that are value-priced, are subject
to significant price competition. From time to time, the Company may need to
engage in price-cutting initiatives for some of its products to respond to
competitive and consumer pressures. The failure of the Company's sales volumes
to grow sufficiently to improve overall revenues and income as a result of a
competitive price reduction could have a material adverse effect on the
financial performance of the Company.
TRADE CUSTOMER PRICING PRESSURES; COMPETITIVE RETAIL ENVIRONMENT
The Company faces pricing pressures from its trade customers. Because of
the competitive retail environment, retailers have increasingly sought to reduce
inventory levels and obtain pricing concessions from vendors. In addition,
because consumer products companies, including the Company, have historically
offered end-of-quarter discounts to achieve quarterly sales goals, trade
customers have been inclined to delay inventory restocking until quarter-end.
Since August 1996, the Company has reduced end-of-quarter discounts to retailers
and has changed its sales incentive structure to emphasize not only quarterly
review targets but also trade spending management and other personal performance
targets. The reduction in discounts has not had and the Company believes it will
not have a material adverse effect on sales although there can be no assurance
in that regard. The Company is also subject to the risk that high-volume
customers could seek alternative pricing concessions or better trade terms. The
Company's performance is also dependent upon the general health of the retail
<PAGE> 3
environmental and could be materially adversely affected by changes therein and
by the financial difficulties of retailers.
DEPENDENCE ON KEY CUSTOMERS
The Company's top ten customers accounted for 35% of net sales in 1997.
Wal-Mart Stores Inc. (and its affiliate, SAM's Club) ("Wal-Mart") was the
Company's largest customer, accounting for 17% of the Company's net sales in
1997. The loss of, or a substantial decrease in the volume of purchases by,
Wal-Mart or any of the Company's other top customers could have a material
adverse effect on the Company's results of operations.
PRICE VOLATILITY OF RAW MATERIALS; SINGLE SOURCE SUPPLIER
While the Company believes that is may, in certain circumstances, be able
to respond to price increases for certain raw materials by increasing sales
prices, rapid increases in the prices of such raw materials could have a
material adverse impact on financial results. For example, tallow (a key
ingredient in Dial bar soaps) has experienced price fluctuations within the
range of $0.16 and $0.28 per pound from January 1, 1995 to October 3, 1998.
Recently, the price of tallow has been trading near the lower end of this
historical range. Because the majority of the competitors' soap products use
considerably less tallow in their bar soap products, the Company may not be able
to increase the prices of its Dial bar soaps in response to increases in tallow
prices. In addition, the antibacterial agent, Triclosan, which is the active
ingredient used in Liquid Dial products, is sourced from a single supplier.
Although the Company has an adequate supply of Triclosan for its current and
foreseeable needs, a significant disruption in this supply could have a
short-term material adverse impact on the Company's financial results. The
Company seeks to mitigate the risk by entering into contracts to provide up to
six-month supplies of tallow, Triclosan and packaging materials. Long-term
hedging opportunities against price increases for these items are generally not
available.
DEPENDENCE ON DOMESTIC MARKETS; RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
While a number of the Company's competitors have diversified their
revenues to include a strong international component, the Company is currently
dependent primarily on sales generated in the U.S. (92% of sales in 1997). With
respect to a number of the Company's most significant product categories,
including detergents and bar soaps, the U.S. markets are mature and
characterized by high household penetration. The Company's unit sales growth in
these domestic markets will depend on increasing usage by consumers and
capturing market share from competitors. There can be no assurance
<PAGE> 4
that the Company will succeed in implementing its strategies to achieve such
domestic growth.
To reduce its dependence on domestic revenues, the Company has adopted a
strategy to further penetrate international markets. In implementing this
strategy, the Company faces barriers to entry and the risk of competition from
local and other companies that already have established global businesses, risks
generally associated with conducting business internationally, including
exposure to currency fluctuations, limitations on foreign investment,
import/export controls, nationalization, unstable governments and legal systems
and the additional expense and risks inherent in operating in geographically and
culturally diverse locations. Because the Company plans to develop its
international business through acquisitions as well as joint ventures,
co-packaging arrangements and/or other alliances, the Company may also be
subject to risks associated with such acquisitions, ventures, arrangement and
alliances, including those relating to the marriage of different corporate
cultures and shared decision-making. In addition, because the Company's current
international distribution capabilities are extremely limited, the Company will
also need to acquire a distribution network or enter into alliances with
existing distributors before it can effectively conduct operations in new
markets. There can be no assurance that the Company will succeed in increasing
its international business in a profitable manner, and a failure to expand this
business may have a material adverse effect on the Company.
The Company has a significant number of registered foreign trademarks as
well as pending foreign trademark applications. There can be an assurance that
the Company will successfully register any foreign trademark for which
applications are currently pending or that such trademarks, once registered,
together with any existing registered foreign trademarks, will be protected in
the foreign markets in which they are used.
ADVERSE PUBLICITY; PRODUCT RECALL
Certain news broadcasts by major U.S. television and radio networks have
focused on the use of antibacterial agents to kill germs on various surfaces.
Triclosan, the active ingredient in Liquid Dial, has also been a focus of these
broadcasts. Although none of the broadcasts disputed that Triclosan kills germs
on the skin, some third party experts did question whether it provides any
additional protection beyond that provided by non-antibacterial soap products.
Although the Company has test results that it believes prove that Triclosan
provides consumers with additional protection in limiting exposure to
bacterial-related diseases, there can be no assurance the adverse publicity
stemming from these broadcasts will not adversely affect the Company's sales of
its antibacterial soap products and its results of operations.
<PAGE> 5
Because the Company shares the use of the Armour trademark for food
products with ConAgra Inc., the manufacturer of Armour-branded non-canned meat
products, the Company faces the risk that consumer preferences and perceptions
with respect to any of the Company's Armour products may be influenced by
adverse publicity affecting any of the Armour-branded products of ConAgra, Inc.
From time to time, consumer product companies, including Dial, have had to
recall certain products for various reasons, which costs of recall or other
liabilities could be material to such companies. To date, the Company has not
made any product recalls that have been material to the Company's financial
condition. In addition, adverse publicity regarding any such product recall
could have a material adverse effect on the Company.
ENVIRONMENTAL CONCERNS REGARDING DETERGENT COMPOUND
Nonlyphenol ethoxylate ("NPE") is an ingredient used in the Company's
liquid and powder detergent products. Certain environmental and regulatory
groups have raised concerns regarding the toxicity of compounds produced from
NPE as it decomposes and the adverse impact on the reproductive health of
certain aquatic animals, exposed to those compounds. Although to the best of the
Company's knowledge none of the studies undertaken on NPE have demonstrated a
link between the compound and such effect in the environment or in human beings,
there can be no assurance that subsequent studies will in fact demonstrate such
a link or demonstrate other adverse environmental consequences. Current
government regulations do not impose any restrictions on the use of NPE, or
impose any liability on any of the businesses that utilize NPE in the products
they manufacture. The Company believes, however, that a number of governmental
agencies in North America and Europe are discussing formal regulations of NPE in
the environment. The Company is in the process of reformulating its detergents
to eliminate this compound ingredient. The additional expense the Company
expects to incur as a result of this reformulation is not expected to have a
material adverse impact on the Company's financial results. In addition, the
Company believes that it will not incur any significant environmental liability
as a result of the use of NPE in its products.
DEPENDENCE ON KEY PERSONNEL
The operation of the Company requires managerial expertise. Of the
Company's key personnel, only the Chief Executive Officer has an employment
contract with the Company. There can be no assurance that any of the Company's
key employees will remain in the Company's employ. The loss of such key
personnel could have a material adverse effect on the Company's operations.
<PAGE> 6
TURNOVER; EMPLOYEE RELATIONS
Primarily as a result of the restructuring of its business, the Company
discharged approximately 950 salaried and non-salaried employees during 1995 and
1996. In addition, the Company experienced greater aggregate voluntary turnover
of salaried employees in 1996 and 1997 than the industry average. Although the
Company believes that it presently has sufficient staffing, there can be no
assurance that the Company would not be materially adversely affected by any
future significant voluntary turnover of salaried or other employees.
Four of the Company's six plants in the U.S. are unionized. The Company's
contracts with its various unions are scheduled for renegotiation as follows:
(i) Oil, Chemical and Atomic Workers union (covering approximately 100 employees
at the Company's Bristol, Pennsylvania plant) in May 1999; (ii) United Food and
Commercial Workers union (covering approximately 475 employees at the Company's
Aurora, Illinois plant) in August 1999; (iii) the United Food and Commercial
Workers union (covering approximately 500 employees at the Company's Fort
Madison, Iowa plant) in September 1999; and (iv) International Brotherhood of
Teamsters union (covering approximately 325 employees at the Company's St.
Louis, Missouri plant) in July 2001. There can be no assurance that these
contracts can be renegotiated on terms acceptable to the Company. Although the
Company believes that its relations with the employees at its plants are
satisfactory, there can be no assurance that the Company will not face similar
labor disputes in the future or that such disputes will not be material to the
Company.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of environmental and health and safety
laws in each jurisdiction in which it operations. These laws and regulations
pertain to the Company's present and past operations.
Since 1980, the Company has received notices or requests for information
with respect to 27 sites that have been deemed "Superfund" sites under the
federal Comprehensive Environmental Response, Compensation and Liability Act,
five of which are currently active, 14 of which are inactive, and eight of which
have been settled. The Company is also engaged in investigatory and remedial
activities with respect to four closed plants previously operated by the
Company's former parent. As of October 3, 1998, the Company had accrued in its
financial statements approximately $10 million in reserves for expenses relating
to Superfund sites and the clean-up of closed plant sites, which reserves it
believes are adequate.
The Company does not anticipate that the costs to comply with
environmental laws and regulations or the costs related to Superfund sites and
the clean-up of closed
<PAGE> 7
plant sites will have any material adverse effect on the Company's capital
expenditures, earnings or competitive position; however, there can be no
assurance that other developments, such as the emergence of unforeseen claims or
liabilities or the imposition of increasingly stringent laws, regulations and
enforcement policies will not result in material costs in the future.
RISKS OF ACQUISITIONS
As previously disclosed, the Company recently acquired The Freeman
Cosmetic Corporation ("Freeman") and Sarah Michaels, Inc. ("Sarah Michaels").
The Company may acquire or make substantial investments in additional
complementary businesses or products in the future. The Freeman and Sarah
Michaels acquisitions entail, and any future acquisitions or investments would
entail, various risks, including the difficulty of assimilating the operations
and personnel of the acquired businesses or products, the potential disruption
of the Company's ongoing business and, generally, the potential inability of the
Company to obtain the desired financial and strategic benefits from the
acquisitions or investments. These factors could have a material adverse effect
on the Company's financial results. Future acquisitions and investments by the
Company also could result in substantial cash expenditures, potentially dilutive
issuance of equity securities, the incurrence of additional debt and contingent
liabilities, and amortization expenses relating to goodwill and other intangible
assets, which could adversely affect the Company's financial results and
condition. The Company engages from time to time in discussions with respect to
potential acquisitions, some of which may be material.
