14
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 2, 1999
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 (480) 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 12, 1999 was 105,375,827.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE DIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000 omitted, except share data)
(Unaudited)
October 2, December 31,
<S> <C> <C>
1999 1998
------------ --------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 7,920 $ 12,405
Receivables, less allowance of $6,653 and $7,378. . . . 81,744 56,477
Inventories . . . . . . . . . . . . . . . . . . . . . . 175,775 155,441
Deferred income taxes . . . . . . . . . . . . . . . . . 15,870 13,156
Other current assets. . . . . . . . . . . . . . . . . . 5,629 1,634
------------ --------------
Total current assets . . . . . . . . . . . . . . . . 286,938 239,113
Property and equipment, net . . . . . . . . . . . . . . . 288,912 281,302
Deferred income taxes . . . . . . . . . . . . . . . . . . 76,608 82,227
Intangibles, net. . . . . . . . . . . . . . . . . . . . . 530,033 545,999
Other assets. . . . . . . . . . . . . . . . . . . . . . . 34,854 26,734
------------ --------------
$ 1,217,345 $ 1,175,375
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . $ 121,009 $ 123,911
Short-term borrowings . . . . . . . . . . . . . . . . . 56,889 10,389
Income taxes payable. . . . . . . . . . . . . . . . . . 28,157 9,685
Other current liabilities . . . . . . . . . . . . . . . 98,183 106,663
------------ --------------
Total current liabilities. . . . . . . . . . . . . . 304,238 250,648
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 239,246 280,223
Pension and other benefits. . . . . . . . . . . . . . . . 240,554 245,981
Other liabilities . . . . . . . . . . . . . . . . . . . . 6,873 8,298
------------ --------------
Total liabilities. . . . . . . . . . . . . . . . . . 790,911 785,150
------------ --------------
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; 105,334,715 and 104,355,018 shares issued 1,053 1,044
Additional capital. . . . . . . . . . . . . . . . . . . 452,076 450,767
Retained income . . . . . . . . . . . . . . . . . . . . 167,441 105,011
Accumulated other comprehensive income. . . . . . . . . (8,449) (8,949)
Unearned employee benefits. . . . . . . . . . . . . . . (101,614) (129,111)
Treasury stock, 2,968,512 and 1,176,082 shares held . . (84,073) (28,537)
------------ --------------
Total stockholders' equity . . . . . . . . . . . . . 426,434 390,225
------------ --------------
$ 1,217,345 $ 1,175,375
============ ==============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME
(000 omitted, except per share data)
(Unaudited)
Quarter Ended
---------------
October 2, October 3,
1999 1998
--------------- ------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $ 437,055 $ 383,909
--------------- ------------
Costs and expenses:
Cost of products sold. . . . . . . . . . . . 220,094 195,450
Selling, general and administrative expenses 161,346 141,315
--------------- ------------
381,440 336,765
--------------- ------------
Operating income. . . . . . . . . . . . . . . . 55,615 47,144
Interest and other expenses . . . . . . . . . . 8,004 5,512
Earnings (Loss) of Joint Venture. . . . . . . . (390)
--------------- ------------
Income before income taxes. . . . . . . . . . . 47,221 41,632
Income taxes. . . . . . . . . . . . . . . . . . 16,472 14,904
--------------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . $ 30,749 $ 26,728
=============== ============
NET INCOME PER SHARE -- BASIC . . . . . . . . . $ 0.31 $ 0.27
=============== ============
NET INCOME PER SHARE -- DILUTED . . . . . . . . $ 0.31 $ 0.27
=============== ============
Weighted average basic shares outstanding . . . 98,347 98,562
Weighted average equivalent shares . . . . 1,783 1,733
--------------- ------------
Weighted average diluted shares outstanding . . 100,130 100,295
=============== ============
NET INCOME. . . . . . . . . . . . . . . . . . . $ 30,749 $ 26,728
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustment. . (14) (533)
--------------- ------------
COMPREHENSIVE INCOME. . . . . . . . . . . . . . $ 30,735 $ 26,195
=============== ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME
(000 omitted, except per share data)
(Unaudited)
Nine Months Ended
-------------------
October 2, October 3,
1999 1998
------------------- ------------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . $ 1,266,315 $ 1,085,730
------------------- ------------
Costs and expenses:
Cost of products sold . . . . . . . . . . . . 633,728 557,818
Selling, general and administrative expenses. 473,479 395,463
------------------- ------------
1,107,207 953,281
------------------- ------------
Operating income . . . . . . . . . . . . . . . . 159,108 132,449
Interest and other expenses. . . . . . . . . . . 24,651 14,897
Earnings (Loss) of Joint Venture . . . . . . . . (390)
------------------- -----------
Income before income taxes . . . . . . . . . . . 134,067 117,552
Income taxes . . . . . . . . . . . . . . . . . . 47,999 42,306
------------------- ------------
NET INCOME. . . . . . . . . . . . . . . . . . . $ 86,068 $ 75,246
=================== ============
NET INCOME PER SHARE -- BASIC. . . . . . . . . . $ 0.87 $ 0.77
=================== ============
NET INCOME PER SHARE -- DILUTED. . . . . . . . . $ 0.86 $ 0.75
================== ============
Weighted average basic shares outstanding. . . . 98,570 98,217
Weighted average equivalent shares. . . . . 2,074 2,204
------------------- ------------
Weighted average diluted shares outstanding. . . 100,644 100,421
=================== ============
NET INCOME . . . . . . . . . . . . . . . . . . . $ 86,068 $ 75,246
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustment . . 371 (666)
Minimum pension liability adjustment. . . . 129 (17)
------------------ ------------
Other comprehensive income (loss). . . . . . . . 500 (683)
------------------- ------------
COMPREHENSIVE INCOME . . . . . . . . . . . . . . $ 86,568 $ 74,563
=================== ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(000 omitted)
(Unaudited)
Nine Months Ended
-------------------
October 2, October 3,
1999 1998
------------------- ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . $ 86,068 $ 75,246
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization . . . . . . . . . . 31,915 25,990
Deferred income taxes . . . . . . . . . . . . . . 2,906 (102)
Change in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . (50,242) (14,139)
Inventories. . . . . . . . . . . . . . . . . . . (20,334) (7,877)
Trade accounts payable . . . . . . . . . . . . . (2,902) (8,522)
Other assets and liabilities, net. . . . . . . . 14,848 (9,085)
------------------- ------------
Net cash provided by operating activities . . . . . 62,259 61,511
------------------- ------------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . (34,508) (27,348)
Acquisition of business, net of cash acquired . . . (1,954) (270,763)
Proceeds from sale of assets. . . . . . . 10,053
------------------- ------------
Net cash used by investing activities . . . . . . . (36,462) (288,058)
------------------- ------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Net change in long-term borrowings. . . . . . . . . (40,977) 210,259
Common stock purchased for treasury . . . . . . . . (53,821) (10,231)
Net change in short-term bank loans . . . . . . . . 46,500 (873)
Dividends paid on common stock. . . . . . . . . . . (23,636) (23,592)
Cash proceeds from stock options. . . . . . . . . . 16,677 15,030
Net change in receivables sold. . . . . . . . . . . 24,975 31,100
------------------- ------------
Net cash provided (used) by financing activities. . (30,282) 221,693
------------------- ------------
Net decrease in cash and cash equivalents . . . . . (4,485) (4,854)
Cash and cash equivalents, beginning of year. . . . 12,405 10,089
------------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . . . $ 7,920 $ 5,235
=================== ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
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
October 2, 1999, the results of operations and cash flows for the quarters and
nine months ended October 2, 1999 and October 3, 1998 have been included.
Interim results of operations are not necessarily indicative of the results of
operations for the full year.
At October 2, 1999, there were 105,334,715 shares of common stock issued and
98,426,532 shares outstanding. At October 2, 1999 and October 3, 1998, a total
of 3,939,671 and 4,495,785, respectively, of the issued shares were held by the
Employee Equity Trust. At October 2, 1999 and October 3, 1998, a total of
2,968,512 and 559,779, respectively, shares were held in treasury by the
Company. The shares held in treasury at October 2, 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
2,558,350 shares valued at $74.9 million as part of the Company's stock
repurchase program.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires all derivatives to be recorded on the balance
sheet at fair value and provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company
is studying the application of this new Statement. This Statement shall be
effective for annual periods beginning after June 15, 2000.
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"), is 50%-owned by the Company and 50%-owned by Henkel
Corporation, the U. S. subsidiary of Henkel. The Company accounts for its
interest in the Joint Venture using the equity method.
On August 4, 1999, the Joint Venture completed the purchase of the Custom
Cleaner home dry cleaning business of Creative Products Resources, Inc. The
Joint Venture began selling Custom Cleaner products in the third quarter.
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 October 2, 1999,
$5.0 million remains in escrow pending final valuation of certain acquired
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.
The following unaudited pro forma combined condensed financial information for
the third quarter and first nine months 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 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>
Quarter ended Nine Months ended
October 3, 1998 October 3, 1998
---------------- ------------------
<S> <C> <C>
(000 omitted, except per share data)
Net sales. . . . . . . . . . . . . . . $ 395,465 $ 1,141,499
Operating income . . . . . . . . . . . 47,855 130,922
Net income . . . . . . . . . . . . . . 24,365 67,137
Earnings per share - diluted . . . . . $ 0.24 $ 0.67
</TABLE>
NOTE C. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
October 2, December 31,
1999 1998
----------- -------------
<S> <C> <C>
(000 omitted)
Raw materials and supplies. $ 60,796 $ 55,791
Work in process . . . . . . 10,529 7,855
Finished goods. . . . . . . 104,450 91,795
----------- -------------
$ 175,775 $ 155,441
=========== =============
</TABLE>
NOTE D. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
. October 2, December 31,
. 1999 1998
----------- -------------
<S> <C> <C>
(000 omitted)
Short-term bank borrowings, with maturities
between one and seven days, with interest
rates between 5.5% and 5.6%.. . . . . . . . .. . . $ 45,500 -
Argentina bank loan with interest at the bank's
short-term rate (11% at Oct. 2, 1999), repricing
monthly, subject to call by the bank at the end
of each month 11,389 10,389
----------- -------------
Total short-term debt. . . . . . . . . . . . . $ 56,889 $ 10,389
=========== =============
</TABLE>
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
October 2, December 31,
1999 1998
----------- -------------
<S> <C> <C>
(000 omitted)
200 million 6.5% Senior Notes due 2008, net
of issue discount. . . . . . . . . . . . . . . . . $ 198,097 $ 197,938
Short-term bank borrowings supported by the
long-term revolving Credit Agreement, with
interest rates at December 31, 1998 ranging
from 5.5% to 6% - 81,619
Commercial paper supported by the long-term
revolving Credit Agreement, interest rate
at 5.7% at October 2, 1999. . . . . . . . . . . . 40,149 -
Arizona Department of Commerce loan due 2006. . . . 1,000 666
----------- -------------
Total long-term debt. . . . . .. . . . . . . . . . . $ 239,246 $ 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 June 1999, the Company established a $350 million commercial paper program
which allows the Company to access the commercial paper market for short-term
borrowing needs. The commercial paper program is supported by the Company's
Credit Agreement. Accordingly, borrowings under the commercial paper program are
classified by the Company as long-term debt.
At October 2, 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
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.
In addition, from time to time, the Company makes use of short-term bank
borrowings. The borrowings are unsecured and generally have maturities between
1 and 30 days and bear interest at LIBOR plus appropriate spreads. The banks
that provide the borrowings do so on an uncommitted basis.
Beginning in the third quarter of 1999, short-term bank borrowings, previously
classified as long-term debt because they were supported by the Credit
Agreement, are being classified as short-term debt because the Credit Agreement
is being used to support the Company's commercial paper program.
<PAGE>
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 2, 1999 and October 3, 1998 is as follows:
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
----------- -----------
<S> <C> <C>
Federal statutory rate. . . 35.0% 35.0%
Goodwill amortization . . . 0.8 0.2
Foreign Sales Corp. benefit (0.5) (0.6)
State income taxes. . . . . 3.3 3.7
Utilization of capital loss (0.5) -
International operations. . (1.9) (0.7)
Other, net. . . . . . . . . (0.4) (1.6)
----------- -----------
Effective income tax rate . 35.8% 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 for the third quarter and first nine months 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
----------- ------------- ---------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(000 omitted)
NET SALES:
Quarter ended:
October 2, 1999. . $ 378,273 $ 16,704 $ 394,977 $ 42,078 $ 437,055 $ 437,055
October 3, 1998. . 326,216 17,797 344,013 39,896 383,909 383,909
Nine months ended:
October 2, 1999. . 1,082,465 52,081 1,134,546 131,769 1,266,315 1,266,315
October 3, 1998. . 914,565 52,103 966,668 118,561 1,085,229 $ 501 1,085,730
OPERATING INCOME:
Quarter ended:
October 2, 1999. . 47,776 3,583 51,359 4,256 55,615 55,615
October 3, 1998. . 40,445 2,944 43,389 3,697 47,086 58 47,144
Nine months ended:
October 2, 1999. . 137,389 8,563 143,952 13,156 159,108 159,108
October 3, 1998. . 117,669 6,299 123,969 8,481 132,449 132,449
ASSETS AT:
October 2, 1999. . 1,066,558 8,798 1,075,356 141,989 1,217,345 1,217,345
December 31, 1998. 1,034,425 10,005 1,044,430 130,945 1,175,375 1,175,375
</TABLE>
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 for approximately $5.3 million and a non-operating
manufacturing property was sold for $4.0 million. No gain or loss was realized
on the transactions.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THIRD QUARTER OF 1999 WITH THE THIRD QUARTER OF 1998
Net sales increased $53.1 million, or 13.8%, to $437.1 million in the third
quarter of 1999 from $383.9 million in the third quarter of 1998. This increase
resulted from strong growth in the DIAL(R), PUREX(R), RENUZIT(R) and ARMOUR(R)
franchises which grew at 8%, 9%, 12% and 8%, respectively, as well as a
contribution from Sarah Michaels. The Purex franchise instituted a price
increase beginning in January of 1999. Sales net of the Purex price increase
improved 12.3% for the quarter.
Domestic Branded net sales increased $52.3 million, or 16.0%, to $378.3 million
in the third quarter of 1999 from $326.0 million in the third quarter of 1998.
The increase in net sales resulted primarily from sales growth in Dial, Purex,
Renuzit and Armour and the inclusion of the Sarah Michaels acquisition.
Domestic Branded sales net of the Purex price increase improved 14.2% for the
quarter.
International net sales increased $2.2 million, or 5.5%, to $42.1 million from
$39.9 million in the third quarter of 1998 primarily as a result of increased
sales in Argentina.
Commercial Markets and Other net sales decreased $1.3 million, or 7.2%, to $16.7
million in the third quarter of 1999 from $18.0 million in the third quarter of
1998, primarily from a decline in sales of hotel amenities.
Gross profit margin increased .6 points to 49.7% in the third quarter of 1999
from 49.1% in the third quarter of 1998 resulting primarily from the Purex
price increase, continuing improvement in manufacturing efficiencies in the
manufacturing facilities and favorable raw material prices. These improvements
were partially mitigated by sales of Sarah Michaels gift baskets, which have
lower gross margins, and a selling price and trade promotion reduction in
the Armour franchise. Gross profit margin net of the Purex price increase was
48.9% for the third quarter of 1999.
Selling, general and administrative expenses for the third quarter of 1999
increased $20.0 million, or 14.2%, to $161.3 million from $141.3 million in the
third 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 and to amortization of goodwill and
incremental administrative expenses associated with the acquisition of Freeman
and Sarah Michaels.
Operating income in the third quarter of 1999 increased $8.5 million, or 18.0%,
to $55.6 million from $47.1 million during the third quarter of 1998. The
increase was primarily due to increased sales and gross margin improvements
partially offset by trade spending for slotting and feature price protection.
Interest and other expense increased $2.5 million, or 45.2%, to $8.0 million for
the third quarter of 1999 compared to $5.5 million in the third 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 third quarter of
1999 was 34.9%, down from 35.8% for the third quarter of 1998. The decrease was
primarily due to lower state and foreign taxes and the utilization of a capital
loss, offset in part by nondeductible goodwill related to the Sarah Michaels
acquisition.
Net income increased $4.0 million, or 15.0%, to $30.7 million in the third
quarter of 1999 from $26.7 million in the third 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, lower than
expected operating results of both Freeman and Sarah Michaels and a loss
attributable to the Joint Venture.
COMPARISON OF THE FIRST NINE MONTHS OF 1999 WITH THE FIRST NINE MONTHS OF 1998
Net sales increased $180.6 million, or 16.6%, to $1,266.3 million in the first
nine months of 1999 from $1,085.7 million in the first nine months of 1998.
This increase resulted primarily from the inclusion of Sarah Michaels and
Freeman, the Purex price increase and strong growth in the Renuzit and Purex
franchises which grew at 23.9% and 14.6%, respectively. Sales net of the
Purex price increase improved 14.8% for the first nine months.
Domestic Branded net sales increased $168.0 million, or 18.4%, to $1,082.5
million in the first nine months of 1999 from $914.5 million in 1998. The
increase resulted primarily from the inclusion of the Sarah Michaels and Freeman
acquisitions and sales growth in Renuzit, up 23.9%, and Purex, up 14.6%.
Domestic Branded sales net of the Purex price increase improved 16.2% for the
first nine months of 1999 compared to 1998.
International net sales increased $13.2 million, or 11.1%, to $131.8 million
from $118.6 million in the first nine months of 1998 primarily as a result of
increased sales in Argentina and Canada.
Commercial Markets and Other net sales remained relatively flat at $52.1 million
in the first nine months of 1999 compared to $52.2 million in the first nine
months of 1998. The increase in sales of discontinued items was offset by
a decline in sales of hotel amenities and softness in pricing of sulfonate
chemicals, glycerin and fatty acids.
Gross profit margin increased 1.4 points to 50.0% in the first nine months of
1999 from 48.6% in the first nine months of 1998 resulting primarily from the
Purex price increase, continuing improvement in manufacturing efficiencies in
the manufacturing facilities and favorable raw material prices. Gross profit
margin improvements in the first nine months were offset in part by sales of
Sarah Michaels gift baskets and mix skews into larger sizes within both Dial and
Purex, both of which have lower gross margins, as well as a selling price and
trade promotion reduction in the Armour franchise. Gross profit margin net of
the Purex price increase was 49.2% for the first nine months of 1999.
Selling, general and administrative expenses for the first nine months of 1999
increased $78.0 million, or 19.7%, to $473.5 million from $395.5 million in the
first nine months of 1998. The increase was primarily due to higher marketing
expense to support core business-merchandising initiatives, new product
launches, core business advertising, amortization of goodwill and incremental
administrative expense associated with the acquisition of Freeman and Sarah
Michaels.
Operating income in the first nine months of 1999 increased $26.7 million, or
20.1%, to $159.1 million from $132.5 million during the first nine months of
1998. The increase was primarily due to increased sales and gross margin
improvements.
Interest and other expense increased $9.8 million, or 65.5%, to $24.7 million
for the first nine months of 1999 compared to $14.9 million in the first nine
months 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 nine months
of 1999 was 35.8%, down from 36.0% for the first nine months of 1998. The
decrease was due primarily to lower state and foreign taxes and the utilization
of a capital loss offset by nondeductible goodwill related to the Sarah Michaels
acquisition.
Net income increased $10.8 million, or 14.4%, to $86.1 million in the first nine
months of 1999 from $75.2 million in the first nine months 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $62.3 million during the first
nine months of 1999 compared to cash generated of $61.5 million during the same
period in 1998. The increase resulted primarily from improvements in net income
and higher depreciation expense attributable to information technology software.
The increase was partially offset by higher accounts receivable due to strong
shipments of holiday business at the end of the quarter and an increase in
inventories in Sarah Michaels to meet the holiday season demand in the fourth
quarter.
Capital expenditures for the first nine months of 1999 were $34.5 million versus
$27.3 million for the comparable period in 1998. Capital spending in 1999 is
expected to approximate $64 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 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.
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 for approximately $5.3 million and
a non-operating manufacturing property was sold for $4.0 million. 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. During June 1999, the maximum amount of receivables that
could be sold under this plan was increased to $115.0 million. Accounts
receivable sold but not yet collected under this plan at October 2, 1999 and
December 31, 1998 was $115.0 million and 90.0 million, respectively. Under the
terms of the plan, the Company retains the risk of credit loss on the
receivables sold.
In June 1999, the Company established a $350 million commercial paper program
which allows the Company to access the commercial paper market for short-term
borrowing needs. The commercial paper program is supported by the Company's
Credit Agreement. Accordingly, borrowings under the commercial paper program are
classified as long-term debt. At October 2, 1999, the Company had $40.1 million
outstanding in commercial paper, bearing interest at 5.7%.
At October 2, 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
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.
In addition, from time to time, the Company makes use of short-term bank
borrowings. The borrowings are unsecured and generally have maturities between
1 and 30 days and bear interest at LIBOR plus appropriate spreads. The banks
that provide the borrowings do so on an uncommitted basis.
Beginning in the third quarter of 1999, short-term bank borrowings, previously
classified as long-term debt, because they were supported by the Credit
Agreement, are being classified as short-term debt because the Credit Agreement
is being used to support the Company's commercial paper program.
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 2, 1999 and October 3, 1998, a total of 2,968,512 and 559,779,
respectively, shares were held in treasury by The Company. The shares held at
October 2, 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 2,558,350 shares valued at $74.9 million as
part of the Company's stock repurchase program.
At October 2, 1999, the Company had approximately $92.2 million in net deferred
tax benefits. The realization of such benefits will require average annual
taxable income of approximately $17.2 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. 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 76 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. All of
these application systems have been replaced or remediated. 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 76 critical application systems have been
replaced by 38 systems. In most cases, our testing of these 38 application
systems consists of executing them with transaction dates beyond December 31,
1999, as well as running the application system in an environment in which the
system date has been moved forward to a date beyond December 31, 1999.
Generally, our testing is less rigorous for newer applications represented to be
Year 2000 compliant. For example, in selected cases of newer application
systems that are represented by the vendor to be Year 2000 compliant, we have
reviewed the vendors' testing documentation and are testing the application
system with transaction dates beyond December 31, 1999, but will not run the
application system in an environment in which the system date has been moved
forward to a date beyond December 31, 1999. In other cases of newer application
systems that are represented by the vendor to be Year 2000 compliant, we have
reviewed the vendors' testing documentation and have determined that no further
testing is required. We have completed testing or have determined that testing
is not necessary for 32 of the application systems and believe that all 32 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
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). We have completed
replacement or remediation and testing of all critical information technology
applications for our international operations.
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 97% of the critical
infrastructure equipment for our domestic and international operations have been
remediated. We expect to complete remediation of the remaining equipment by the
end of 1999. As mentioned above, our testing is less rigorous for infrastructure
software/hardware represented by the manufacturer to be Year 2000 compliant. We
expect to complete testing of critical infrastructure equipment/software for our
domestic and international operations during the fourth quarter of 1999. We will
continue to monitor manufacturer 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 458 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 458 embedded systems, 451 have been remediated. We have completed testing
of 450 of these 451 embedded systems and believe that we will not experience any
Year 2000 issues with these 450 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 1999. We also have identified and assessed 50 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 418 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 our business
partners. We will however, continue to monitor the Year 2000 readiness of
approximately 150 of these critical business partners and evaluate the readiness
of all new vendors throughout 1999. 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. We have had
discussions concerning Year 2000 readiness with some of our largest customers
and continue 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. Our international facilities have completed an
assessment of the Year 2000 readiness of 233 of their business partners
believed to be critical to maintaining our international operations. 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 have developed contingency plans intended to mitigate possible disruptions in
our business operations that may result from Year 2000 issues. The development
of our contingency plans has focused on five mission critical processes and 20
important processes that are not as time sensitive. The five mission critical
processes include order management, vendor managed inventory, raw material
procurement, treasury functions and payroll processing. Detailed written
contingency plans have been developed for the five mission critical processes.
Our contingency plans primarily include implementing backup manual work
processes and stockpiling some raw, packaging and promotional materials. We will
update and revise our contingency plans as necessary through the end of 1999.
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
combined with 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 would
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 $1.3 million in 1999. We also incurred capital costs of $10.8
million in 1998, $12.1 million during the first nine months of 1999 and are
currently expected to incur additional capital costs of $4.0 million during the
fourth quarter of 1999 to upgrade our information technology systems. These
expenditures address Year 2000 compliance and are expected to provide us with
improved efficiencies and cost savings. 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 21, 1999, the Company was served with a complaint filed by the U.S. Equal
Employment Opportunity Commission (the "EEOC") in the U.S. District Court for
the Northern District of Illinois, Eastern Division. This action is entitled
Equal Employment Opportunity Commission v. The Dial Corporation, Civil Action
No. 99 C 3356. The EEOC alleges that the Company has engaged in a pattern and
practice of discrimination against a class of female employees by subjecting
them to sexual or sex-based harassment and failing to take prompt remedial
action after these employees complained about this alleged harassment. The EEOC
is seeking to enjoin the Company from this alleged harassment, to require the
Company to train its managerial employees regarding the requirements of Title
VII of the Civil Rights Act of 1964 and to recover unspecified compensatory and
punitive damages. The Company has denied the EEOC's allegations. This lawsuit
is in the preliminary discovery stage and, as a result, assurances cannot be
given regarding the ultimate outcome of this matter.
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 October 27,
1999, relating to the Company's third quarter
results.
<PAGE>
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 16, 1999
/s/ Susan J. Riley
- ----------------------------------------------------------------
Executive Vice President and Chief Financial Officer
(Chief Accounting Officer and Authorized Officer)
Exhibit Index
Number Description
------ -----------
27. Financial Data Schedule.
99. Private Securities Litigation Reform Act of 1995 Safe
Harbor Compliance Statement for Forward-Looking
Statements.
<TABLE>
<CAPTION>
THE DIAL CORPORATION
FINANCIAL DATA SCHEDULE
1999 10Q
EXHIBIT 27
Period type 9 mos
----------
Fiscal year end 31-Dec-99
----------
Period end 02-Oct-99
----------
<S> <C>
Cash . . . . . . . . . . . . 7,920
Securities . . . . . . . . . 0
Receivables. . . . . . . . . 81,744
Allowances . . . . . . . . . (6,653)
Inventory. . . . . . . . . . 175,775
Current Assets . . . . . . . 286,938
PP&E . . . . . . . . . . . . 288,912
Depreciation . . . . . . . . 22,854
Total Assets . . . . . . . . 1,217,345
Current Liabilities. . . . . 304,238
Bonds. . . . . . . . . . . . 0
Preferred Mandatory. . . . . 0
Preferred. . . . . . . . . . 0
Common . . . . . . . . . . . 1,053
Other SE . . . . . . . . . . 425,381
Total Liabilities and Equity 1,217,345
Sales. . . . . . . . . . . . 1,266,315
Total Revenues . . . . . . . 1,266,315
CGS. . . . . . . . . . . . . 633,728
Total Costs. . . . . . . . . 1,107,207
Other expenses . . . . . . . 0
Loss-provision . . . . . . . 0
Interest expense . . . . . . 24,651
Income- pretax . . . . . . . 134,067
Income tax . . . . . . . . . 47,999
Income continuing. . . . . . 86,068
Discontinued . . . . . . . . 0
Extraordinary. . . . . . . . 0
Changes. . . . . . . . . . . 0
Net income . . . . . . . . . 86,068
EPS Basic. . . . . . . . . . 0.87
EPS Diluted. . . . . . . . . 0.86
</TABLE>
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 is 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.
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 attempted to reduce 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 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 $0.12 and $0.28 per pound from January 1, 1995 to October 2, 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 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
As previously disclosed the Company recently acquired Freeman and Sarah
Michaels. The Company may acquire or make substantial investments in
complementary businesses or products in the future. The Freeman and Sarah
Michaels acquisitions entailed, 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
acquisition or investment. 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.
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
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.
EMPLOYEE TURNOVER
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.
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 October 2, 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.