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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 1-5439
DEL LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-1953103
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
178 EAB Plaza, Uniondale, New York 11556
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 844-2020
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES (X) NO ( )
The number of shares of Common Stock, $1 par value, outstanding as of
May 14, 1998 was 7,597,483.
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DEL LABORATORIES, INC. AND SUBSIDIARIES
Index
Part I. FINANCIAL INFORMATION
Page No.
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Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Earnings for the
three months ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 11
SIGNATURES 12
All other schedules and compliance information called for by the instructions to
Form 10-Q have been omitted since the required information is not present or not
present in amounts sufficient to require submission.
2
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(In thousands except for share and per share data)
<TABLE>
<CAPTION>
March 31 December 31
Assets 1998 1997
------ ----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,272 $ 14,979
Accounts receivable-less allowance for doubtful
accounts of $1,300 and $1,300, respectively 36,474 30,708
Inventories 53,477 47,687
Deferred income taxes 2,127 2,127
Prepaid expenses and other current assets 1,532 1,858
----------- -----------
Total current assets 101,882 97,359
Property, plant and equipment, net 36,615 36,392
Intangibles arising from acquisitions, net 8,056 8,144
Other assets 8,083 7,419
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Total assets $ 154,636 $ 149,314
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Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 485 $ 496
Accounts payable 24,207 28,501
Accrued liabilities 19,951 13,968
Income taxes payable 2,035 818
----------- -----------
Total current liabilities 46,678 43,783
Long-term pension liability, less current portion 5,801 5,801
Deferred income taxes, net 1,321 1,321
Long-term debt, less current portion 43,814 43,879
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Total liabilities 97,614 94,784
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Shareholders' equity:
Preferred stock $.01 par value, authorized
1,000,000 shares; no shares issued - -
Common stock $1 par value, authorized
10,000,000 shares; issued 10,000,000 shares 10,000 10,000
Additional paid-in capital 1,058 699
Accumulated other comprehensive income (844) (819)
Retained earnings 74,173 71,188
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84,387 81,068
Less: Treasury stock, at cost, 2,383,959 shares
and 3,070,954 shares, respectively (25,961) (24,991)
Receivables for stock options exercised (1,404) (1,547)
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Total shareholders' equity 57,022 54,530
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Total liabilities and shareholders' equity $ 154,636 $ 149,314
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The accompanying notes are an integral part of the consolidated condensed financial statements.
</TABLE>
3
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DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands except for per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31 March 31
1998 1997
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Restated
(Note 6)
<S> <C> <C>
Net sales $ 65,416 $ 54,215
Cost of goods sold 25,438 21,386
Selling and administrative expenses 33,566 30,238
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Operating income 6,412 2,591
Interest expense 1,024 950
Interest income (123) (128)
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Interest expense, net 901 822
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Earnings before income taxes 5,511 1,769
Income taxes 2,260 708
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Net earnings $ 3,251 $ 1,061
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---------- ----------
Earnings per common share
Basic $ 0.43 $ 0.14
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Diluted $ 0.39 $ 0.13
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Weighted average common shares outstanding
Basic 7,628,000 7,517,000
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Diluted 8,280,000 8,079,000
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Dividends per common share $ 0.035 $ 0.026
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The accompanying notes are an integral part of the consolidated condensed financial statements.
</TABLE>
4
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DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1998 1997
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Restated
(Note 6)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,251 $ 1,061
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,543 1,396
Provision for doubtful accounts 50 52
Other non-cash operating items 114 282
Changes in operating assets and liabilities:
Accounts receivable (5,816) 3,089
Inventories (5,790) (4,704)
Prepaid expenses and other current assets 326 284
Other assets and other liabilities (664) (283)
Accounts payable (4,094) 586
Accrued liabilities 5,984 660
Income taxes 1,473 347
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Net cash provided by (used in) operating
activities (3,623) 2,770
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Cash flows used in investing activities:
Property, plant and equipment additions (1,678) (1,341)
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Net cash used in investing activities (1,678) (1,341)
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Cash flows used in financing activities:
Principal payments of long-term debt (76) -
Acquisition of treasury stock (899) (355)
Dividends paid (466) (343)
Other financing activities 34 14
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Net cash used in financing activities (1,407) (684)
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Effect of exchange rate changes on cash 1 (2)
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Net increase(decrease) in cash and cash equivalents (6,707) 743
Cash and cash equivalents at beginning of year 14,979 14,516
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Cash and cash equivalents at end of period $ 8,272 $ 15,259
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The accompanying notes are an integral part of the consolidated condensed financial statements.
</TABLE>
5
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DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
-------------------------------------------
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. Interim results are not necessarily
indicative of results for a full year.
A summary of the Company's significant accounting policies is
presented in its 1997 Annual Report to Shareholders. Users of
financial information produced for interim periods are encouraged to
refer to the footnotes contained in the Annual Report to Shareholders
when reviewing interim financial results.
In the opinion of management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows of Del
Laboratories, Inc. for interim periods.
On February 6, 1998, the Company's Board of Directors approved a
four-for-three common stock split distributed in the form of a stock
dividend. As a result, 1,908,377 shares were issued on March 10, 1998
to shareholders of record on February 20, 1998, of which 692,891
shares represented treasury stock of the Company. Accordingly, the
effect of the four-for-three stock split has been reflected on the
consolidated balance sheet as of December 31, 1997. All references to
number of shares and per share amounts have been restated, including
those contained in Note 6. In connection with the stock dividend,
treasury stock was reduced by $7,430,359, with a corresponding
reduction in retained earnings of $2,498,406 and a reduction in
additional paid-in-capital of $6,147,439.
Certain reclassifications were made to prior year amounts to
conform with the 1998 presentation.
2. Inventory
---------
Classification of inventories at March 31, 1998 and December 31, 1997
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Raw Materials $ 29,210 $ 22,563
Work In Process 4,722 4,326
Finished Goods 19,545 20,798
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$ 53,477 $ 47,687
-------- --------
-------- --------
</TABLE>
3. Earnings Per Share
------------------
Earnings per share is computed in accordance with the provisions of
SFAS No. 128, "Earnings per Share", which became effective for the
Company as of December 31, 1997. As required by SFAS No. 128,
earnings per share for all prior periods presented (including those
in Note 6) have been restated. Basic earnings per share is computed
by dividing income available to common shareholders (which for the
Company equals its recorded net income) by the weighted average
number of common shares outstanding during the period. For the
periods ended March 31, 1998 and 1997, the weighted average number
of common shares outstanding was 7,628,000 and 7,517,000,
respectively. Such shares outstanding exclude the weighted average
number of unallocated shares of common stock held by the Company's
employee stock ownership plan which totaled 507,000 and 513,000 for
the periods ended March 31, 1998 and 1997, respectively. Diluted
earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock, such as
stock options, were exercised, converted into common stock or
otherwise resulted in the issuance of common stock. For the
periods ended March 31, 1998 and 1997, the weighted average number
of shares of diluted common stock outstanding was 8,280,000 and
8,079,000, respectively.
4. New Accounting Pronouncements
-----------------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This Statement requires that all items recognized under accounting
standards as components of comprehensive income be reported
6
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in an annual financial statement that is displayed with the same
prominence as other annual financial statements. Other comprehensive
income may include foreign currency translation adjustments, minimum
pension liability adjustments and unrealized gains and losses on
marketable securities classified as available-for-sale. The Company's
only item of other comprehensive income is foreign currency
translation adjustments. Annual financial statements for prior periods
will be reclassified, as required. The Company's total comprehensive
income was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31
1998 1997
-------- -------
<S> <C> <C>
Net earnings $ 3,251 $ 1,061
Foreign currency translation adjustment 25 (141)
-------- -------
Total comprehensive income $ 3,276 $ 920
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</TABLE>
5. Subsequent Event
----------------
On May 12, 1998, the Company acquired the intellectual property
rights and inventory of the Cornsilk brand of facial make-up for
approximately $12.0 million in cash. The purchase price was financed
by utilizing existing cash and unused short-term credit facilities.
The Company intends to refinance the purchase on a long-term basis.
6. Restatement of Prior Period Results
-----------------------------------
The Company has restated previously issued financial results for each
of the first and second quarters of the year ended December 31, 1997.
The first quarter of 1997 was restated to reflect a $7.1 million
reduction in net sales and a $2.2 million ($0.30 per basic share)
reduction in net earnings resulting from shipments of finished
products which should have been recognized in the second quarter of
1997 instead of the first quarter of 1997. There was a
corresponding increase of $7.1 million in net sales and a $2.2
million ($0.30 per basic share) increase in net earings for the
second quarter of 1997. The shift did not impact reported results
for the six months ended June 30, 1997 or the year ended December
31, 1997. The following summarizes the impact of the restatement on
the three months ended March 31 and June 30, 1997:
7
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<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997 June 30,1997
-------------- ------------
<S> <C> <C>
Net sales
As previously reported $61,319 $67,989
As restated 54,215 75,093
Cost of goods sold
As previously reported 23,809 26,719
As restated 21,386 29,142
Selling and administrative expenses
As previously reported 31,196 35,046
As restated 30,238 36,004
Net earnings
As previously reported 3,295 3,193
As restated 1,061 5,427
Earnings per common share - Basic
As previously reported (1) .44 .42
As restated .14 .72
Earnings per common share - Diluted
As previously reported (1) .41 .39
As restated .13 .66
Retained earnings
As previously reported 64,451 67,445
As restated 62,217 67,445
</TABLE>
(1) Restated for February 1998 stock split and FASB No. 128 implementation.
8
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(1) RESULTS OF OPERATIONS
---------------------
Sales
-----
Net sales for the first quarter of 1998 were $65.4 million, 20.7% above the
$54.2 million of sales for the first quarter of 1997.
Net Cosmetics sales were $51.6 million in the 1998 first quarter compared
to $41.5 million in the 1997 first quarter, a 24.3% increase. The
increase in net sales resulted primarily from volume growth in the Sally
Hansen Nails, Sally Hansen Professional Nails and Bleach & Depilatories
brands, as well as the introduction of Colorfast in the first quarter of
1998.
Net Pharmaceutical sales in the first quarter of 1998 were $13.8 million
compared to $12.7 million in the same quarter in 1997, an 8.7% increase.
The increase in net Pharmaceutical sales resulted primarily from volume
growth in the Orajel family of products.
Cost of Sales
-------------
Cost of sales for the first quarter of 1998, as a percentage of net sales,
decreased to 38.9%, as compared with 39.4% in the corresponding period of
1997. The decrease was primarily attributable to improved product mix
within the Sally Hansen nail care and Sally Hansen Professional brands.
Selling and Administrative Expenses
-----------------------------------
Selling and administrative expenses increased by $3.3 million in the first
quarter of 1998 versus the first quarter of 1997. The increase is primarily
attributable to increased advertising and promotional expenses in the first
quarter of 1998.
Net Interest Expense
---------------------
Interest expense, net of interest income, increased from $.8 million in
the 1997 first quarter to $.9 million in the 1998 first quarter due to
imputed interest (non-cash expense) related to the Company's purchase of
land and buildings in North Carolina.
Provision for Income Taxes
--------------------------
The provision for income taxes is based on the Company's expected effective
tax rate for the year, which is 41% in 1998 compared to 40% in the first
quarter of 1997.
Net Earnings
------------
Net earnings for the first quarter of 1998 were $3.3 million compared to
$1.1 million reported for the first quarter of 1997.
9
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(2) LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At March 31, 1998, the Company had cash and cash equivalents of $8.3
million as compared to $15.3 million and $15.0 million at March 31, 1997
and December 31, 1997, respectively.
Net cash used by operating activities was $3.6 million for the three month
period ended March 31, 1998 and net cash provided by operating activities
was $2.8 million for the same period in 1997. Net earnings increased by
$2.2 million while net cash provided by operating activities decreased by
$6.4 million as a result of increases in accounts receivable and
inventories as well as a decrease in accounts payable. Accounts receivable
increased by $5.8 million due to the concentration of sales in the latter
part of the quarter. Inventories increased by $5.8 million as a result of
growth in existing product sales.
Cash used for property, plant and equipment acquisitions was $1.7 million
and $1.3 million in the three month period ended March 31, 1998 and 1997,
respectively.
Net cash used in financing activities was $1.4 million and $.7 million for
the three months ended March 31, 1998 and 1997, respectively. The increase
of $.7 million was due mainly to a $.5 million increase in the acquisition
of treasury stock and to a $.1 million increase in dividends.
As discussed in Note 5 to the financial statements, the Company acquired
the Cornsilk brand of cosmetics on May 12, 1998 for approximately $12.0
million in cash, which was financed by utilizing existing cash and a
short-term credit facility. The Company intends to refinance the
Cornsilk purchase on a long-term basis. Estimated cash flow from
operations and current working capital lines of credit are expected to
be adequate to fund the Company's anticipated working capital
requirements, fixed asset spending, dividend payments and common share
repurchases in the foreseeable future.
Year 2000 Conversion
--------------------
The Company is evaluating the risks and costs associated with the year 2000
conversion. Based on the Company's ongoing evaluation, management currently
believes that the costs to achieve year 2000 compliance will not result in
costs significantly in excess of historical levels of capital expenditures.
The Company intends to communicate with its customers, suppliers, financial
institutions and others with which it does business to ensure that year
2000 issues will be resolved in a timely manner. If necessary modifications
and conversions by those with which the Company does business are not
completed timely, the year 2000 conversion issue may have a material
adverse effect on the Company's consolidated financial position and results
of operations.
Forward - Looking Statements
----------------------------
Management's Discussion and Analysis of the Results of Operations and
Financial Condition and other sections of this Form 10-Q include
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act
of 1934 (the "Exchange Act"). All statements other than statements of
historical information provided herein are forward-looking statements and
may contain information about financial results, economic conditions,
trends and known uncertainties. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, delays in introducing new products or
failure of consumers to accept new products, actions by competitors which
may result in mergers, technology improvement or new product introductions,
the dependence on certain national chain drug stores and mass merchandiser
relationships due to the concentration of sales generated by such chains,
changes in fashion oriented color cosmetics trends, and trends in the
general economy.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis,
judgment, belief or expectation only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date
hereof. In addition to the disclosure contained herein, readers should
carefully review any disclosure of risks and uncertainties contained in
other documents the Company files or has filed from time to time with
the Securities and Exchange Commission pursuant to the Exchange Act.
New Accounting Pronouncements
-----------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS No. 131). SFAS No. 131 established
standards to report information about operating segments and related
discussions about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for the
reporting periods beginning after December 15, 1997. This statement
permits early application and requires restatement of all prior periods.
The Company is currently evaluating the requirements of SFAS No. 131 and
believes that the adoption of the statement will not have a material
impact on previously reported segment information.
10
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The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" (SFAS No. 132). SFAS No. 132 revises
disclosures about pension and other postretirement benefit plans.
Management of the Company does not believe that the implementation of
SFAS No. 132 will have a significant impact on previously reported
information regarding its employee retirement plans.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
11
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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.
DEL LABORATORIES, INC.
-------------------------------
(Registrant)
Date: May 15, 1998 /s/ Dan K. Wassong
- -------------------------- --------------------------------
Dan K. Wassong
Chairman, President and
Chief Executive Officer
Date: May 15, 1998 /s/ Charles H. Abdalian
- -------------------------- --------------------------------
Charles H. Abdalian
Vice President and
Chief Financial Officer
(Principal Accounting Officer)
12
