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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 April 3, 1999
Commission file number 1-11793
THE DIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
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)
</TABLE>
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 May 14, 1999 was 103,076,628.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE DIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000 omitted, except share data)
<TABLE>
<CAPTION>
(Unaudited)
April 3, December 31,
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,341 $ 12,405
Receivables, less allowance of $6,369 and $7,378 47,718 56,477
Inventories 167,009 155,441
Deferred income taxes 11,985 13,156
Other current assets 6,937 1,634
----------- -----------
Total current assets 238,990 239,113
Property and equipment, net 280,867 281,302
Deferred income taxes 74,144 82,227
Intangibles, net 536,529 545,999
Other assets 27,001 26,734
----------- -----------
$ 1,157,531 $ 1,175,375
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 104,444 $ 123,911
Short-term borrowings 9,142 10,389
Income taxes payable 4,416 9,685
Other current liabilities 90,799 106,663
----------- -----------
Total current liabilities 208,801 250,648
Long-term debt 291,392 280,223
Pension and other benefits 245,480 245,981
Other liabilities 6,871 8,298
----------- -----------
Total liabilities 752,544 785,150
----------- -----------
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, 104,570,866 and 104,355,018 shares issued 1,046 1,044
Additional capital 468,737 450,767
Retained income 122,995 105,011
Accumulated other comprehensive income (8,586) (8,949)
Employee benefits (134,068) (129,111)
Treasury stock, 1,751,534 and 1,176,082 shares held (45,137) (28,537)
----------- -----------
Total stockholders' equity 404,987 390,225
----------- -----------
$ 1,157,531 $ 1,175,375
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME
(000 omitted, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
------------------------
April 3, April 4,
1999 1998
-------- ---------
<S> <C> <C>
Net sales $398,948 $ 335,022
-------- ---------
Costs and expenses:
Cost of products sold 202,383 176,506
Selling, general and administrative expenses 147,570 117,962
-------- ---------
349,953 294,468
-------- ---------
Operating income 48,995 40,554
Interest and other expenses 8,358 4,754
-------- ---------
Income before income taxes 40,637 35,800
Income taxes 14,751 12,889
-------- ---------
NET INCOME $ 25,886 $ 22,911
======== =========
NET INCOME PER SHARE - BASIC $ 0.26 $ 0.23
======== =========
NET INCOME PER SHARE - DILUTED $ 0.26 $ 0.23
======== =========
Weighted average basic shares outstanding 98,780 97,898
Weighted average equivalent shares 2,088 2,126
-------- ---------
Weighted average diluted shares outstanding 100,868 100,024
======== =========
NET INCOME $ 25,886 $ 22,911
Other comprehensive income net of tax:
Foreign currency translation adjustment 234 39
Minimum pension liability adjustment 129 (17)
-------- ---------
Other comprehensive income 363 22
-------- ---------
COMPREHENSIVE INCOME $ 26,249 $ 22,933
======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
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THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(000 omitted)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
------------------------
April 3, April 4,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 25,886 $ 22,911
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 10,482 7,953
Deferred income taxes 9,254 (387)
Change in operating assets and liabilities:
Receivables 8,759 3,270
Inventories (11,568) (7,142)
Trade accounts payable (19,467) (28,651)
Other assets and liabilities, net (22,868) (5,503)
-------- --------
Net cash provided (used) by operating activities 478 (7,549)
-------- --------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Capital expenditures (7,829) (6,646)
Purchase price adjustment related to net worth adjustment 6,046
Proceeds from sale of product lines and other non-operating assets 10,053
-------- --------
Net cash provided (used) by investing activities (1,783) 3,407
-------- --------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Net change in long-term borrowings 11,169 (8,130)
Common stock purchased for treasury (16,185) (4,501)
Net change in short-term bank loans (1,247) 292
Dividends paid on common stock (7,902) (7,846)
Cash proceeds from stock options 8,406 6,408
Net change in receivables sold 15,700
-------- --------
Net cash provided (used) by financing activities (5,759) 1,923
-------- --------
Net decrease in cash and cash equivalents (7,064) (2,219)
Cash and cash equivalents, beginning of year 12,405 10,089
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,341 $ 7,870
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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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
December 31, 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
April 3, 1999, the results of operations and cash flows for the quarters ended
April 3, 1999 and April 4, 1998 have been included. Interim results of
operations are not necessarily indicative of the results of operations for the
full year.
At April 3, 1999, there were 104,570,866 shares of common stock issued and
98,879,661 shares outstanding. At April 3, 1999 and April 4, 1998, a total of
3,939,671 and 4,529,318, respectively, of the issued shares were held by the
Trust. At April 3, 1999 and April 4, 1998, a total of 1,751,534 and 311,124,
respectively, shares were held in treasury by the Company. The shares held in
treasury at April 3, 1999 include 218,725 shares valued at $5.2 million
purchased by the Company as part of a small shareholder selling/repurchasing
program executed during the first half of 1998 and 1,380,400 shares valued at
$37.3 million as part of the Company's stock repurchase program.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" ("SFAS No. 130") which was adopted in 1998.
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 stockholders' equity section of the balance sheet.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131") which was adopted in 1998. SFAS No. 131 establishes standards for the
way that public enterprises report selected information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for disclosures about products and services, geographical areas and
major customers. See Note F to the Consolidated Financial Statements for
additional information concerning the Company's segments of an enterprise
disclosures.
NOTE B. ACQUISITION OF BUSINESS AND JOINT VENTURE
On April 20, 1999, the Company and Henkel KGaA ("Henkel") reached agreement to
establish a joint venture to develop and market a range of enhanced laundry
products in North America. The joint venture company, Dial/Henkel LLC ("the
Joint Venture"), will be 50%-owned by the Company and 50%-owned by Henkel and
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currently is expected to have products in the market by the end of 1999. The
Company will account for its interest in the Joint Venture using the equity
method.
On September 14, 1998, the Company acquired Sarah Michaels, Inc. ("Sarah
Michaels"), a manufacturer and marketer of specialty bath and body care products
for a cash purchase price of $187.0 million. The Sarah Michaels acquisition has
been accounted for under the purchase method of accounting. At April 3, 1999,
$5.0 million remains in escrow pending final valuation of certain assets and
liabilities.
On July 1, 1998, the Company acquired The Freeman Cosmetic Corporation
("Freeman"), a manufacturer and marketer of natural skin care, hair care, bath,
body and foot care products for a cash purchase price of approximately $78.0
million. The cash purchase price for Freeman reflects a $6.0 million reduction
as a result of a net worth adjustment received by the Company in January 1999
and is reflected as "Cash Provided by Investing Activities" in the "Statement of
Consolidated Cash Flows" for the quarter ended April 3, 1999.
The Company continues to gather and analyze certain information required to
complete the allocation of the purchase price of the acquisitions of Freeman and
Sarah Michaels. Further adjustments to the allocation of the purchase price may
arise as a result of the finalization of the ongoing study.
The following unaudited pro forma combined condensed financial information for
the first quarter of 1998 includes the results of operations for the Company and
assumes the acquisition of Sarah Michaels and Freeman were consummated at the
beginning of 1998 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 pro forma combined condensed financial information does
not give any effect to any potential cost savings which may arise from the
consolidation of the acquisitions with the Company. The first quarter of 1999
includes the operations of both Freeman and Sarah Michaels.
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.
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<CAPTION>
April 3, 1999 April 4, 1998
------------- -------------
(000 omitted, except per share data)
<S> <C> <C>
Net sales $398,948 $355,825
Operating income 48,995 40,840
Net income 25,886 21,451
Earnings per share - diluted $ 0.26 $ 0.21
</TABLE>
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NOTE C. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
April 3, December 31,
1999 1998
-------- ------------
(000 omitted)
<S> <C> <C>
Raw materials and supplies $ 46,891 $ 55,791
Work in process 6,871 7,855
Finished goods 113,247 91,795
-------- --------
$167,009 $155,441
======== ========
</TABLE>
NOTE D. DEBT
Short-term debt at April 3, 1999 consisted of a $9,142,000 bank loan to the
Company's Argentinean subsidiary, Nuevo Federal. The loan is denominated in
Argentinean Pesos, bears interest at the bank's short-term rate (9% to 11% at
April 3, 1999) and reprices monthly. The loan is subject to call by the bank at
the end of each month.
Long-term debt consisted of the following:
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<CAPTION>
April 3, December 31,
1999 1998
-------- ------------
(000 omitted)
<S> <C> <C>
$200 million 6.5% Senior Notes due 2008, net of issue discount
$197,991 $197,938
Short-term bank borrowings supported by the long-term revolving Credit
Agreement, with interest rates at April 3, 1999 ranging
from 5.5% to 6% 93,401 82,285
======== ========
Total long-term debt $291,392 $280,223
======== ========
</TABLE>
On September 23, 1998, the Company completed a $200 million public offering of
6.5% 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 to redeem the Senior
Notes, to place liens on certain properties and to enter into certain sale and
leaseback transactions.
In addition, long-term debt consists of short-term bank borrowings classified as
long-term because they are supported by the Company's $350 million long-term,
revolving Credit Agreement. At April 3, 1999, the Company had $350 million
available under the Credit Agreement. Borrowings under the Credit Agreement are
on a revolving basis under commitments available until August 15, 2002. The
interest rate applicable to bank borrowings under the Credit Agreement is, at
the Company's option, indexed to the bank prime rate or the London Interbank
Offering Rate ("LIBOR"), plus appropriate spreads over such indices during the
period of the Credit Agreement. The Agreement also provides for commitment fees.
Such spreads and fees will change moderately should the Company's debt ratings
change.
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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 three months ended
April 3, 1999 and April 4, 1998 is as follows:
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<CAPTION>
April 3, April 4,
1999 1998
------ ------
<S> <C> <C>
Federal statutory rate 35.0% 35.0%
Goodwill amortization 0.8 0.3
Foreign Sales Corp. benefit (0.5) (0.4)
State income taxes 3.3 4.0
Other, net (2.3) (2.9)
------ ------
Effective income tax rate 36.3% 36.0%
====== ======
</TABLE>
NOTE F. SEGMENTS OF AN ENTERPRISE
For organizational, marketing and financial reporting purposes, the Company has
organized into three business segments: (i) Domestic Branded, (ii)
International, and (iii) Commercial Markets and Other. The segments were
identified based on the types of products sold, the customer base and method of
distribution.
Selected information as to the operations of the Company in different business
segments in the first quarters of 1999 and 1998 is set forth below. The
accounting policies and the basis of preparation of the business segments are
the same as those described in Note P to the audited financial statements
included in the Company's 1998 Annual Report to Stockholders.
<TABLE>
<CAPTION>
COMMERCIAL DISCONTINUED
DOMESTIC MARKETS TOTAL TOTAL & DIVESTED
BRANDED AND OTHER DOMESTIC INTERNATIONAL CONTINUING PRODUCTS TOTAL
--------- --------- --------- ------------- ---------- ------------ ---------
(000 omitted)
<S> <C> <C> <C> <C> <C> <C> <C>
FIRST QUARTER
NET SALES:
1999 $339,049 $ 16,157 $355,206 $ 43,742 $ 398,948 $ -- $ 398,948
1998 278,265 17,440 295,705 38,816 334,521 501 335,022
FIRST QUARTER
OPERATING
INCOME:
1999 42,736 2,326 45,062 3,933 48,995 48,995
1998 37,704 1,297 39,001 1,611 40,612 (58) 40,554
ASSETS AT:
April 3, 1999 1,016,282 11,236 1,027,518 130,013 1,157,531 1,157,531
December 31,
1998 1,034,425 10,005 1,044,430 130,945 1,175,375 1,175,375
</TABLE>
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NOTE G. DISPOSITION OF ASSETS
In the first quarter of 1998, the Company received approximately $10.0 million
from the disposition of assets. The PUREX TOSS 'N SOFT(R) 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 the transactions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE FIRST QUARTER OF 1999 WITH THE FIRST QUARTER OF 1998
Net sales increased $63.9 million, or 19.1%, to $398.9 million in the first
quarter of 1999 from $335.0 million in the first quarter of 1998. This increase
resulted from strong growth in the Purex and RENUZIT(R) franchises, which grew
at 20% and 39%, respectively, as well as contributions from Freeman and Sarah
Michaels. The Purex franchise instituted a price increase beginning in January
of 1999. Sales net of the Purex price increase improved 17% for the quarter.
Domestic Branded net sales increased $60.8 million, or 21.8%, to $339.1 million
in the first quarter of 1999 from $278.3 million in 1998. The increase in net
sales resulted primarily from the inclusion of the Sarah Michaels and Freeman
acquisitions and sales growth in Purex, up 19.6%, and Renuzit, up 39.0%.
Domestic Branded sales net of the Purex price increase improved 19.5% for the
quarter.
International net sales increased $4.9 million, or 12.6%, to $43.7 million from
$38.8 million in the first quarter of 1998 primarily as a result of increased
sales in Argentina and Canada.
Commercial Markets and Other net sales decreased $1.3 million, or 7.3%, to $16.2
million in the first quarter of 1999 from $17.4 million in the first quarter of
1998, primarily as a result of softness in the pricing of sulfonate chemicals,
glycerine and fatty acids.
Gross profit margin increased 2.0% to 49.3% in the first quarter of 1999 from
47.3% in the first quarter of 1998 resulting primarily from the Purex price
increase, continuing improvement in manufacturing efficiencies in the
manufacturing facilities and favorable raw material prices. Gross margin net of
the Purex price increase was 48%, up a full point from the same period last
year.
Selling, general and administrative expenses for the first quarter of 1999
increased $29.6 million, or 25.1%, to $147.6 million from $118.0 million in the
first quarter of 1998. The increase was primarily due to higher marketing
expense to support core business-merchandising initiatives, new product launches
and core business advertising.
Operating income in the first quarter of 1999 increased $8.4 million, or 20.8%,
to $49.0 million from $40.6 million during the first quarter of 1998. The
increase was primarily due to increased sales and gross margin improvements.
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Interest and other expense increased $3.6 million, or 75.8%, to $8.4 million for
the first quarter of 1999 compared to $4.8 million in the first quarter of 1998.
The increase was primarily due to increased debt to fund the Freeman and Sarah
Michaels acquisitions.
The Company's consolidated effective income tax rate for the first quarter of
1999 was 36.3%, up from 36.0% for the first quarter of 1998 primarily due to
nondeductible goodwill related to the Sarah Michaels acquisition.
Net income increased $3.0 million, or 13.0%, to $25.9 million in the first
quarter of 1999 from $22.9 million in the first quarter of 1998. The increase
was primarily due to increased sales and gross margin improvements, offset in
part by higher selling, general and administrative expenses and lower than
expected operating results of Freeman and Sarah Michaels during their
integration into Dial, caused in part by the seasonality of Sarah Michaels'
business, which derives approximately 60% of its annual net sales in the fourth
quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $478,000 during the first quarter
of 1999 compared to cash used of $7.5 million for the same period of time in
1998. This increase resulted primarily from improved management of trade
receivables and trade account payables, partially offset by higher inventory
levels for new products and recent acquisitions.
Capital expenditures for the first quarter of 1999 were $7.8 million versus $6.6
million for the comparable period in 1998. Capital spending in 1999 is expected
to approximate $55 million and will be concentrated primarily on equipment and
information systems that provide opportunities to reduce manufacturing, logistic
and administrative costs and address 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 $78.0 million, which was
financed through short-term borrowings supported by the Company's long-term
Credit Agreement. The acquisition price reflects a $6.0 million reduction in the
purchase price for Freeman as a result of a net worth adjustment received by the
Company in January 1999.
On September 23, 1998, the Company completed a $200 million public offering of
6.5% 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 to 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 1998, the majority of which resulted from two sales. The Purex 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.
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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 each of April 3, 1999 and December 31, 1998 was $90.0 million. Under the
terms of the plan, the Company retains the risk of credit loss on the
receivables sold.
The Company is also party to a $350.0 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 $350.0 million available under the
Credit Agreement at April 3, 1999. The Company, from time to time, makes
short-term bank borrowings that are supported by the Credit agreement. At April
3, 1999, the Company had $93.4 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 April 3, 1999 and December 31, 1998, a total of 1,751,534 and 1,176,082,
respectively, shares were held in treasury by The Company. The shares held at
April 3, 1999 include 218,725 shares valued at $5.2 million purchased by the
Company as part of a small shareholder selling/repurchasing program executed
during the first quarter of 1998 and 1,380,400 shares valued at $37.3 million as
part of the Company's stock repurchase program.
At April 3, 1999, the Company had approximately $86.1 million in net deferred
tax benefits. The realization of such benefits will require average annual
taxable income of approximately $15.8 million over the next 15 years. The
Company's average income before income taxes over the last three years was
approximately $112.3 million.
YEAR 2000 COMPLIANCE
OVERVIEW
Many existing computer systems and software products, including several
used by Dial, are coded to accept only two digit entries in the date code field.
Beginning on January 1, 2000, these date code fields will need to accept four
digit entries to distinguish 21st Century dates from 20th Century dates. As a
result, our 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. If we do not properly assess, remediate and test our systems for Year
2000 issues, our operating results, financial condition and relationships with
critical business partners could be materially adversely effected. In addition,
Year 2000 problems experienced by other entities could have a material adverse
impact on our operating results and financial condition.
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In early 1997, Dial established a corporate-wide project team to oversee,
monitor and coordinate our Year 2000 efforts. Our Year 2000 project is organized
into five specific areas: (1) information technology applications, (2)
information technology infrastructure, (3) embedded systems, (4) business
partners and (5) contingency plans.
INFORMATION TECHNOLOGY APPLICATIONS
We have completed our assessment of our information technology
applications and have identified 73 application systems that we believe are
critical to maintaining our domestic operations without disruptions that would
have a material adverse effect on our operating results and financial condition.
Of these 73 application systems, 54 have been remediated. We expect to have the
remaining critical information technology applications for our domestic
operations remediated by July 31, 1999.
Our primary approach to remediation has been to replace non-compliant
application systems with application systems represented by vendors to be
Year 2000 compliant. Through this replacement effort, our 73 critical
application systems are being replaced by 35 systems. Our testing of these 35
application systems consists of executing them with transaction dates beyond
December 31, 1999 or, in the case of newer application systems that are
represented to be Year 2000 compliant, reviewing the vendors' testing procedures
and results to assess Year 2000 compliance. Generally, our testing is less
rigorous for newer applications represented to be Year 2000 compliant. We have
completed testing of 9 of the application systems and believe that all 9 are
Year 2000 compliant. We expect to complete our testing of the remaining
critical information technology applications for our domestic operations by the
end of the third quarter of 1999.
We also have identified and assessed 13 application systems consisting of
52 modules that we believe are critical to maintaining our international
operations (principally in Argentina, Guatemala and Mexico) without disruptions
that would have a material adverse effect on our international operating
results. Of these 13 application systems, 2 have been remediated and 8 others
are expected to be replaced with systems represented to be Year 2000 compliant
by July 31, 1999 in connection with the implementation of new integrated systems
in Argentina and Mexico. We expect that the 3 remaining application systems also
will be replaced with systems represented to be Year 2000 compliant by September
30, 1999. We have not completed any testing of these application systems, but
expect to complete our testing of all critical information technology
applications for our international operations in the fourth quarter of 1999.
INFORMATION TECHNOLOGY INFRASTRUCTURE
We have followed the same approach described above for our information
technology infrastructure, which includes computer and communications hardware
and related operating system software on which the information systems
applications operate. This equipment is in the process of being replaced or
upgraded to Year 2000 compliant versions. Approximately 80% of the critical
infrastructure equipment for our domestic operations and approximately 70% of
such equipment for our international operations have been remediated and
operating system software is being tested for Year 2000 compliance. We expect to
complete remediation of our infrastructure equipment by July 31, 1999. We expect
to complete testing of critical infrastructure equipment for our domestic
operations by the end of the third quarter of 1999 and for our international
operations in the fourth quarter of 1999. We will monitor any manufacturer
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revisions of Year 2000 infrastructure compliance statements through the end of
1999 and will reassess the potential impact on infrastructure equipment and
operating systems as necessary.
EMBEDDED SYSTEMS
We have identified 460 embedded systems that we believe are critical to
maintaining our domestic operations without disruptions that would have a
material adverse effect on our operating results and financial condition. Of
these 460 embedded systems, 442 have been remediated. We have completed testing
of 78 of these 442 embedded systems and believe that we will not experience any
Year 2000 issues with these 78 embedded systems. We expect to have all of the
critical embedded systems for our domestic operations remediated and tested, as
necessary, by the end of the third quarter of 1999
We also have identified and assessed 32 embedded systems that we believe
are critical to maintaining our international operations without disruptions
that would have a material adverse effect on our international operating
results. We have completed remediation and testing of all of these embedded
systems.
BUSINESS PARTNERS
During 1998, we sent Year 2000 readiness surveys to 1,906 of our
business partners and received responses from 1,252 of these business partners.
We categorized responses as good, fair or poor based upon the information
submitted by the business partners and our ability to assess their Year 2000
readiness from this information. Of these 1,252 responses, we determined that
913 were good, 126 were fair and 213 were poor. We are continuing to follow up
with those business partners who we believe are critical to maintaining our
domestic operations.
We have identified 445 of our business partners as critical to
maintaining our domestic operations without disruptions that would have a
material adverse effect upon our operating results and financial condition. We
have completed our assessment of the Year 2000 readiness of approximately 82% of
these business partners and expect to complete our assessment of the remaining
critical business partners by June 30, 1999. However, we will continue to
monitor the Year 2000 readiness of approximately 150 of these critical business
partners throughout 1999 in light of these partners' importance to our
operations.
We believe that our business partners present a significant risk of
disruption to our operations due to our limited ability to influence their
actions and to estimate the level and impact of the lack of Year 2000 readiness
throughout our extended supply chain. As part of our contingency plans, we will
identify alternatives to those business partners whom we believe will not be
prepared for Year 2000 problems.
We have had discussions concerning Year 2000 readiness with some of our
largest customers and intend to monitor their Year 2000 readiness statements. We
currently do not have any reason to believe that our largest customers are not
appropriately resolving their Year 2000 issues.
13
<PAGE> 14
Although our international staff is gathering Year 2000 readiness
surveys from business partners that are critical to Dial's international
operations, we currently do not have sufficient information or assurances from
many of these business partners to assess their Year 2000 readiness. We are
continuing to try to assess the Year 2000 readiness of our significant
international business partners and customers and of the countries in which they
operate. We believe that business partners, customers, governmental agencies and
utilities outside the United States are generally less aware of Year 2000 issues
and less willing to provide information concerning their Year 2000 readiness. As
a result, we currently believe that our international business partners and
customers, as well as the countries in which they operate, will be less prepared
for Year 2000 issues than our domestic business partners and customers, and that
this lack of Year 2000 readiness could have a material adverse effect on our
operating results.
CONTINGENCY PLANS
We are developing contingency plans intended to mitigate possible
disruptions in our business operations that may result from Year 2000 issues and
believe that these plans will be substantially completed by the end of the third
quarter of 1999. Our contingency plans may include stockpiling raw, packaging
and promotional materials, increasing inventory levels of finished goods,
adjusting the timing of promotional programs, securing alternate sources of
supply, distribution and warehousing, implementing manual work processes and
hiring additional staff. We will continually update and revise our contingency
plans for our significant business partners and customers as we continue to
assess their Year 2000 readiness. However, judgments regarding contingency plans
- - such as how to develop them and to what extent - are subject to many variables
and uncertainties. As a result, there is no certainty that our contingency plans
will be sufficient to mitigate disruptions to our business resulting from Year
2000 issues and the failure of our contingency plans to mitigate any disruptions
could have a material adverse effect on our operating results and financial
condition.
We currently believe that the most reasonably likely worst case scenario
involves the potential failure of interfaces to and from our critical
information systems applications and the failure of critical business partners
to be Year 2000 compliant. We believe that the most reasonably likely worst case
scenario would result in a significant increase in our costs due to remediation
efforts and additional staffing to support business activities and perform
manual work processes around critical information systems applications, as well
as difficulties in procuring raw materials and meeting customer demand for our
products. If the most reasonably likely worst case scenario occurs, it could
have a material adverse effect on our operating results and financial condition.
COSTS
We are using both internal and external resources to complete our Year
2000 efforts. We incurred costs of $1.0 million in 1998 and currently are
expected to incur costs of $1.6 million in 1999. We also incurred capital costs
of $10.8 million in 1998 and are currently expected to incur capital costs of
$13.2 million in 1999 to upgrade our information technology systems. These
expenditures will address Year 2000 compliance and are expected to provide us
with improved efficiencies and cost savings.
14
<PAGE> 15
The costs of Dial's Year 2000 identification, assessment, remediation and
testing efforts and the dates on which we believe we 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 is no
certainty 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 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. Although some of our agreements with manufacturers and
other suppliers contain indemnification provisions, we cannot give any assurance
that these indemnification arrangements will cover Dial's liabilities and costs
related to claims by third parties related to Year 2000 issues.
The above section entitled "Year 2000 Compliance," even if incorporated
by reference into other documents or disclosures, is a Year 2000 Readiness
Disclosure as defined under the Year 2000 Information and Disclosure Act of
1998.
15
<PAGE> 16
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) A Current Report on Form 8-K was filed on April 28, 1999,
relating to the Company's first quarter results and the formation
of a joint venture with Henkel KGaA.
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)
May 17, 1999
\s\ Susan J. Riley
- ----------------------------------------------------------------
Senior Vice President and Chief Financial Officer
(Chief Accounting Officer and Authorized Officer)
16
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<PAGE> 1
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. Among the Company's
most significant competitors are large companies, including The Procter & Gamble
Company, Lever Brothers Co. (a division of Unilever plc), and Colgate-Palmolive
Company. These companies 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
environment and could be materially adversely affected by changes therein and by
the financial difficulties of retailers.
DEPENDENCE OF KEY CUSTOMERS
The Company's top ten customers accounted for 40% of net sales in 1998.
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
1998. 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 April 3, 1999.
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. (89% of sales in 1998). 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.
RISKS OF POTENTIAL ACQUISITIONS
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
business 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
<PAGE> 5
Company engages from time to time in discussions with respect to potential
acquisitions, some of which may be material.
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.
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
<PAGE> 6
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.
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 seven plants in the U.S. are unionized. Certain
of the Company's contracts with its various unions are scheduled for
renegotiation in 1999 as follows: (i) Oil, Chemical and Atomic Workers union
(covering approximately 85 employees at the Company's Bristol, Pennsylvania
plant) in May 1999; (ii) United Food and Commercial Workers union (covering
approximately 300 employees at the Company's Aurora, Illinois plant) in August
1999; and (iii) the United Food and Commercial Workers union (covering
approximately 420 employees at the Company's Fort Madison, Iowa plant) in
September 1999. There can be no assurance that these contracts can be
renegotiated on terms acceptable to the Company. In 1998, the Company
successfully renegotiated its contract with the International Brotherhood of
Teamsters (covering approximately 335 employees at the Company's St. Louis,
Missouri plant and Madison County, Illinois distribution center), which now
expires in August 2001. Although the Company believes that its relations with
the employees are satisfactory, there can be no assurance that the Company will
not face labor disputes in the future or that any such disputes will not be
material to the Company.
<PAGE> 7
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 also is engaged in investigatory
and remedial activities with respect to four closed plants previously operated
by the Company's former parent. As of April 3, 1999, the Company has accrued in
its financial statements approximately $3 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 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.
