UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 4, 1998
Commission file number 1-11793
THE DIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 51-0374887
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15501 NORTH DIAL BOULEVARD
SCOTTSDALE, ARIZONA 85260-1619
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (602) 754-3425
Indicate by check mark whether the registrant (1) has filed all Exchange Act
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- -----------
The number of shares of Common Stock, $.01 par value, outstanding as the close
of business on May 15, 1998 was 102,570,209.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE DIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000 omitted)
(Unaudited)
<S> <C> <C>
April 4, January 3,
1998 1998
---------- -----------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 7,870 $ 10,089
Receivables, less allowance of $7,032 and $6,841. . . 31,856 60,448
Inventories . . . . . . . . . . . . . . . . . . . . . 129,771 124,058
Deferred income taxes . . . . . . . . . . . . . . . . 24,815 25,185
Other current assets. . . . . . . . . . . . . . . . . 738 7,174
---------- -----------
Total current assets . . . . . . . . . . . . . . . 195,050 226,954
Property and equipment, net . . . . . . . . . . . . . . 255,721 260,928
Deferred income taxes . . . . . . . . . . . . . . . . . 64,324 63,567
Intangibles . . . . . . . . . . . . . . . . . . . . . . 328,264 331,482
Other assets. . . . . . . . . . . . . . . . . . . . . . 11,230 921
---------- -----------
$ 854,589 $ 883,852
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . $ 73,584 $ 102,235
Short-term borrowings . . . . . . . . . . . . . . . . 8,792 8,500
Income taxes payable. . . . . . . . . . . . . . . . . 25,649 14,581
Other current liabilities . . . . . . . . . . . . . . 95,130 113,435
---------- -----------
Total current liabilities. . . . . . . . . . . . . 203,155 238,751
Long-term debt. . . . . . . . . . . . . . . . . . . . . 76,269 84,399
Pension and other employee benefits . . . . . . . . . . 231,336 231,634
Other liabilities . . . . . . . . . . . . . . . . . . . 5,637 9,022
Total liabilities. . . . . . . . . . . . . . . . . 516,397 563,806
---------- -----------
Shareholders' Equity
Common stock, $.01 par value, 300,000,000 shares
authorized, 102,775,954 and 102,725,481 shares issued 1,028 1,027
Additional capital. . . . . . . . . . . . . . . . . . 403,662 393,947
Retained earnings . . . . . . . . . . . . . . . . . . 48,957 33,892
Unearned employee benefits. . . . . . . . . . . . . . (109,035) (107,372)
Treasury stock, 311,124 and 101,040 shares held . . . (6,420) (1,448)
---------- -----------
Total shareholders' equity . . . . . . . . . . . . 338,192 320,046
---------- -----------
$ 854,589 $ 883,852
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(000 omitted, except per share data)
(Unaudited)
Quarter Ended
---------------
April 4, March 29,
1998 1997
----------- -----------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $ 335,022 $ 316,242
----------- -----------
Costs and expenses:
Cost of products sold. . . . . . . . . . . . 176,506 169,290
Selling, general and administrative expenses 117,962 110,295
----------- -----------
294,468 279,585
----------- -----------
Operating income. . . . . . . . . . . . . . . . 40,554 36,657
Interest and other expenses . . . . . . . . . . 4,754 7,666
----------- -----------
Income before income taxes. . . . . . . . . . . 35,800 28,991
Income taxes. . . . . . . . . . . . . . . . . . 12,889 10,668
----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . $ 22,911 $ 18,323
=========== ===========
NET INCOME PER SHARE -- BASIC . . . . . . . . . $ 0.23 $ 0.20
=========== ===========
NET INCOME PER SHARE -- DILUTED . . . . . . . . $ 0.23 $ 0.20
Weighted average basic shares outstanding . . . 97,898 89,877
Weighted average equivalent shares . . . . 2,126 2,066
----------- -----------
Weighted average diluted shares outstanding . . 100,024 91,943
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(000 omitted)
(Unaudited)
<S> <C> <C>
Three Months Ended
April 4, March 29,
1998 1997
---------- -----------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 22,911 $ 18,323
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization. . . . . . . . . . . . . 7,953 7,613
Deferred income taxes. . . . . . . . . . . . . . . . . (387) 7,864
Change in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . 3,270 10,736
Inventories . . . . . . . . . . . . . . . . . . . . . (7,142) 11,039
Trade accounts payable. . . . . . . . . . . . . . . . (28,651) (26,619)
Other assets and liabilities, net . . . . . . . . . . (5,503) (7,842)
---------- -----------
Net cash provided (used) by operating activities . . . . (7,549) 21,114
---------- -----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . (6,646) (6,795)
Proceeds from sale of product lines
and other non-operating assets 10,053
---------- -----------
Net cash provided (used) by investing activities . . . . 3,407 (6,795)
---------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Net payments on long-term borrowings . . . . . . . . . . . (8,130) (10,833)
Common stock purchased for treasury. . . . . . . . . . . . (4,501)
Net change in short-term bank loans. . . . . . . . . . . . 292
Dividends paid on common stock . . . . . . . . . . . . . . (7,846) (7,220)
Cash proceeds from stock options . . . . . . . . . . . . . 6,408 3,504
Net change in receivables sold . . . . . . . . . . . . . . 15,700 (8,200)
---------- -----------
Net cash provided (used) by financing activities . . . . . 1,923 (22,749)
---------- -----------
Net (decrease) in cash and cash equivalents. . . . . . . . (2,219) (8,430)
Cash and cash equivalents, beginning of year . . . . . . . 10,089 14,102
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . $ 7,870 $ 5,672
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
THE DIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PREPARATION
The Consolidated Financial Statements of The Dial Corporation ("the Company")
include the accounts for the Company and all of its subsidiaries. This
information should be read in conjunction with the financial statements set
forth in The Dial Corporation Annual Report to Stockholders for the year ended
January 3, 1998.
Accounting policies utilized in the preparation of the financial information
herein presented are the same as set forth in the Company's annual financial
statements except as modified for interim accounting policies which are within
the guidelines set forth in Accounting Principles Board Opinion No. 28, "Interim
Financial Reporting." The interim consolidated financial statements are
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position as of
April 4, 1998 and the results of operations and its cash flows for the quarters
ended April 4, 1998 and March 29, 1997 have been included. Interim results of
operations are not necessarily indicative of the results of operations for the
full year.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"),
which is effective for financial statements for both interim and annual periods
ending after December 15, 1997. This new standard requires dual presentation of
"basic" and "diluted" earnings per share ("EPS") on the face of the statement of
operations and requires a reconciliation of the numerators and denominators of
basic and diluted EPS calculations. Basic net income per share is computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted net income per common share is computed by dividing
net income by the weighted average number of common shares outstanding during
the period after giving effect to stock options considered to be dilutive common
stock equivalents. Shares held by the Employee Equity Trust (the "Trust") are
not considered outstanding for net income per share calculations until the
shares are released from the Trust.
At April 4, 1998, there were 102,775,954 shares of common stock issued and
97,935,512 shares outstanding. At April 4, 1998 and March 29, 1997, a total of
4,529,318 and 5,670,818, respectively, of the issued shares were held by the
Trust.
At April 4, 1998 and March 29, 1997, a total of 311,124 and 65,879,
respectively, shares were held in treasury by the Company. The shares held in
treasury at April 4, 1998 includes 187,935 shares purchased by the Company as
part of a small shareholder selling/repurchasing program initiated during the
first quarter of 1998.
<PAGE>
NOTE B. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
April 4, January 3,
1998 1998
--------- -----------
<S> <C> <C>
(000 omitted)
Raw materials and supplies. $ 35,526 $ 36,938
Work in process . . . . . . 8,561 9,373
Finished goods. . . . . . . 85,684 77,747
--------- -----------
$ 129,771 $ 124,058
========= ===========
</TABLE>
NOTE C. INCOME TAXES
Reconciliations between the statutory federal income tax rate of 35% and the
Company's consolidated effective income tax rate for the three months ended
April 4, 1998 and March 29, 1998 are as follows:
<TABLE>
<CAPTION>
April 4, March 29,
1998 1997
--------- ----------
<S> <C> <C>
Federal statutory rate . . . . . . . 35.0% 35.0%
Nondeductible goodwill amortization. 0.3 0.4
FSC exclusion. . . . . . . . . . . . (0.4) (0.7)
State income taxes . . . . . . . . . 4.0 4.0
Other, net (benefit) . . . . . . . . (2.9) (1.9)
Effective income tax rate. . . . . . 36.0% 36.8%
========= ==========
</TABLE>
NOTE D. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires that enterprises classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
income and additional capital in the shareholders' equity section of the balance
sheet. The Company's annual comprehensive income is not expected to be
materially different from its net income. Comprehensive income for the quarters
ended April 4, 1998 and March 29, 1997 was $22,881,000 and $18,263,000,
respectively. The difference between net income and comprehensive income
consists primarily of increases in the Company's additional minimum pension
liability.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE FIRST QUARTER OF 1998 WITH THE FIRST QUARTER OF 1997
Net sales increased $18.8 million, or 6%, to $335.0 million in the first quarter
of 1998 from $316.2 million in the first quarter of 1997. The first quarter of
1997 included approximately $23.0 million in sales from brands that were
divested in the third quarter of 1997.
Sales of products in the DIAL, PUREX, RENUZIT and ARMOUR franchises accounted
for 26%, 30%, 11% and 16% respectively, of the Company's total net sales in the
first quarter of 1998 compared to 25%, 29% 11% and 17%, respectively, for the
first quarter of 1997. Compared to the first quarter of 1997, Dial sales
increased 12%, Purex sales increased 7%, and Renuzit sales increased 3% during
the first quarter of 1998. Armour sales were relatively flat during the same
period. Net sales in international markets increased approximately $26.0
million, or nearly 200%, to $41.2 million in the first quarter of 1998.
International sales, exclusive of the acquisitions in Argentina, increased $5.1
million, or 33%, to $19.6 million in the first quarter of 1998 from $14.7
million in the first quarter of 1997.
Gross profit margin increased .8% to 47.3% in the first quarter of 1998 from
46.5% in the first quarter of 1997. The increase resulted primarily from
increased manufacturing efficiencies, offset in part by the Company's
Argentinean operations which have a lower margin than the corporate average.
Selling, general and administrative expenses for the first quarter of 1998
increased $7.7 million, or 7%, to $117.9 million from $110.2 million in the
first quarter of 1997. The increase was primarily due to higher trade expense
supporting new product launches and detergent merchandising initiatives to
support the Dial franchise.
Operating income in the first quarter of 1998 increased $3.9 million, or 10.6%,
to $40.6 million from $36.7 million during the first quarter of 1997. The
increase was primarily due to increased sales and continued cost reduction
programs.
Interest and other expenses decreased $2.9 million, or 38%, to $4.8 million for
the first quarter of 1998 compared to $7.7 million in the first quarter of 1997.
The decrease resulted primarily from lower debt, down approximately $182.0
million from the first quarter of 1997.
Net income increased $4.6 million, or 25%, to $22.9 million in the first quarter
of 1998 from $18.3 million in the first quarter of 1997. The increase was
primarily due to increased sales and gross profit margin improvements.
The effective tax rate for the first quarter of 1998 declined slightly to 36%
from 36.8% for the first quarter of 1997. The decrease resulted primarily from
the benefits associated with Foreign Sales Corporation sales and foreign tax
holidays.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash from operations of $7.5 million during the first quarter
of 1998 compared to cash generated of $21.1 million for the same period of time
in 1997. The decrease was attributable primarily to annual incentive plan
payouts and higher inventory levels in support of new product introductions.
Capital expenditures for the first quarter of 1998 were $6.6 million versus $6.8
million for the comparable period in 1997. Capital spending in 1998 is expected
to approximate $50.0 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.
The Company received approximately $10.0 million from the disposition of assets
during the first quarter of 1998, the majority of which resulted from two sales.
The Toss 'n Soft brand and related inventories were sold to Church & Dwight Co,
Inc. for approximately $5.3 million. In addition, a non-operating manufacturing
property was sold for $4.0 million to a third party. No gain or loss was
realized on either of the transactions.
The Company's financing plan includes the sale of accounts receivable to
accelerate cash flow. Accounts receivable sold but not yet collected under this
plan at April 4, 1998 and March 29, 1997 were $74.6 million and $66.7 million,
respectively. Under the terms of the plan, the Company retains the risk of
credit loss on the receivables sold.
The Company is also party to a $350.0 million revolving credit agreement (the
"Credit Agreement") with various banks. The Credit Agreement, which will
terminate on August 15, 2002, unless extended, contains certain covenants which
impose limitations on the Company with respect to, among other things, its
ability to place liens on property, its ability to merge, consolidate or
transfer substantially all its assets, its minimum net worth and the incurrence
of certain indebtedness. The Company had $350.0 million available under the
Credit Agreement at April 4, 1998. The Company, from time to time, makes
short-term bank borrowings that are supported by the Credit Agreement. As of
April 4, 1998, The Company had $75.6 million aggregate principal amount of
such short-term borrowings outstanding. The bank borrowings are classified
as long-term debt because they are supported by the long-term Credit
agreement.
At April 4, 1998 and March 29, 1997, a total of 311,124 and 65,879,
respectively, shares were held in treasury by The Company. The shares held at
April 4, 1998 includes 187,935 shares valued at $4.5 million purchased by the
Company as part of a small shareholder selling/repurchasing program initiated
during the first quarter of 1998.
In August 1997, the Company moved its corporate headquarters from the Viad Tower
to office space in Scottsdale, Arizona. The Company has approximately eight
years remaining on the lease for the Viad Tower space, which commits the Company
to payments of approximately $2.7 million annually through 2006. The Company is
actively marketing the space for sublease.
As of April 4, 1998, The Company had approximately $89.1 million in net deferred
tax benefits. The realization of such benefits will require average annual
taxable income of approximately $16.5 million over the next 15 years. The
Company's average income before income taxes over the last three years was
approximately $43.1 million.
In the second or third quarter of 1998, the Company intends to complete a $100.0
million offering of Senior Notes to take advantage of favorable long-term
interest rates. The net proceeds of this debt financing will be used for the
repayment of indebtness that bears short-term interest rates, general corporate
purposes and possible acquisitions.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
11. Statement Re: Computation of Per Share Earnings.
27. Financial Data Schedule
99. Private Securities Litigation Reform Act of 1995 Safe Harbor
Coverage Statement for Forward-Looking Statements
(B) A Current Report on Form 8-K was filed on May 4, 1998,
relating to the Company's first quarter financial results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Dial Corporation
(Registrant)
May 18, 1998
\s\ Susan J. Riley
- -----------------------------------------------------------------
Susan J. Riley
Senior Vice President and Chief Financial Officer
(Chief Accounting Officer and Authorized Officer)
THE DIAL CORPORATION
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
(000 omitted)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic:
Net Income $22,911 $18,323
======= =======
Weighted average basic shares outstanding 97,898 89,877
Net income per share - basic $0.23 $0.20
===== ======
Diluted:
Net Income $22,911 $18,323
======= =======
Weighted average basic shares outstanding 97,898 89,877
Weighted average equivalent shares 2,126 2,066
----- ------
Weighted average diluted shares outstanding 100,024 91,943
======= ======
Net income per share - diluted $0.23 $0.20
===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DIAL CORPORATION'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
APRIL 4, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> APR-04-1998
<CASH> 7,870
<SECURITIES> 0
<RECEIVABLES> 38,888
<ALLOWANCES> (7,032)
<INVENTORY> 129,771
<CURRENT-ASSETS> 195,050
<PP&E> 255,721
<DEPRECIATION> 6,251
<TOTAL-ASSETS> 854,589
<CURRENT-LIABILITIES> 203,155
<BONDS> 0
0
0
<COMMON> 1,028
<OTHER-SE> 337,164
<TOTAL-LIABILITY-AND-EQUITY> 854,589
<SALES> 335,022
<TOTAL-REVENUES> 335,022
<CGS> 176,506
<TOTAL-COSTS> 294,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,754
<INCOME-PRETAX> 35,800
<INCOME-TAX> 12,889
<INCOME-CONTINUING> 22,911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,911
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
CJL025.DOC
THE DIAL CORPORATION
EXHIBIT 99
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe-harbor to protect companies from securities law
liability in connection with forward-looking statements. The Dial Corporation
(the "Company") intends to qualify both its written and oral forward-looking
statements for protection under the PSLRA.
To qualify oral forward-looking statements for protection under the PSLRA,
a readily available written document must identify important factors that could
cause actual results to differ materially from those in the forward-looking
statements. The Company provides the following information in connection with
its continuing effort to qualify forward-looking statements for the safe harbor
protection of the PSLRA.
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, the Company undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to projections
over time.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's future results and financial condition are dependent upon the
Company's ability to successfully develop, manufacture and market consumer
products. Inherent in this process are a number of factors that the Company
must successfully manage to achieve favorable future operating results and
financial condition. Potential risks and uncertainties that could affect the
Company's future operating results and financial condition include, but are not
limited to, the factors discussed below.
INTENSE COMPETITION IN THE CONSUMER PRODUCTS INDUSTRY
The consumer products industry, particularly its detergent, personal care
and air freshener categories, is intensely competitive. Several of the
Company's most significant competitors, including The Procter & Gamble Company,
Lever Brothers Co. (a division of Unilever plc), and Colgate-Palmolive Company,
have greater financial resources than the Company and may be willing to commit
significant resources to protecting their own market shares or to capturing
market share from the Company. As a result, the Company may need to incur
greater costs than previously incurred for trade and consumer promotions and
advertising to preserve or improve market share and to introduce and establish
new products and line extensions. At the same time, the Company may need to
undertake additional production-related costs-cutting measures to enable it to
respond to competitors' price cuts and marketing efforts without reducing the
Company's margins. There can be no assurance that the Company will be able to
make such additional expenditures or implement such cost-cutting measures or
that if made or implemented they will be effective.
CONSUMER PRICING PRESSURES
Consumer products, particularly those that are value-priced, are subject to
significant price competition. From time to time, the Company may need to
engage in price-cutting initiatives for some of its products to respond to
competitive and consumer pressures. The failure of the Company's sales volumes
to grow sufficiently to improve overall revenues and income as a result of a
competitive price reduction could have a material adverse effect on the
financial performance of the Company.
TRADE CUSTOMER PRICING PRESSURES; COMPETITIVE RETAIL ENVIRONMENT
The Company faces pricing pressures from its trade customers. Because of
the competitive retail environment, retailers have increasingly sought to reduce
inventory levels and obtain pricing concessions from vendors. In addition,
because consumer products companies, including the Company, have historically
offered end-of-quarter discounts to achieve quarterly sales goals, trade
customers have been inclined to delay inventory restocking until quarter-end.
Since August 1996, the Company has reduced end-of-quarter discounts to retailers
and has changed its sales incentive structure to emphasize not only quarterly
review targets but also trade spending management and other personal performance
targets. The reduction in discounts has not had and the Company believes it
will not have a material adverse effect on sales although there can be no
assurance in that regard. The Company is also subject to the risk that
high-volume customers could seek alternative pricing concessions or better trade
terms. The Company's performance is also dependent upon the general health of
the retail environmental 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 35% of net sales in 1997.
Wal-Mart Stores Inc. (and its affiliate, SAM's Club) ("Wal-Mart") was the
Company's largest customer, accounting for 17% of the Company's net sales in
1997. The loss of, or a substantial decrease in the volume of purchases by,
Wal-Mart or any of the Company's other top customers could have a material
adverse effect on the Company's results of operations.
PRICE VOLATILITY OF RAW MATERIALS; SINGLE SOURCE SUPPLIER
While the Company believes that is may, in certain circumstances, be able
to respond to price increases for certain raw materials by increasing sales
prices, rapid increases in the prices of such raw materials could have a
material adverse impact on financial results. For example, tallow (a key
ingredient in Dial bar soaps) has experienced price fluctuations within the
range of $0.16 and $0.28 per pound from January 1, 1995 to April 4, 1998.
Recently, the price of tallow has been trading near the lower end of this
historical range. Because the majority of the competitors' soap products use
considerably less tallow in their bar soap products, the Company may not be able
to increase the prices of its Dial bar soaps in response to increases in tallow
prices. In addition, the antibacterial agent, Triclosan, which is the active
ingredient used in Liquid Dial products, is sourced from a single supplier.
Although the Company has an adequate supply of Triclosan for its current and
foreseeable needs, a significant disruption in this supply could have a
short-term material adverse impact on the Company's financial results. The
Company seeks to mitigate the risk by entering into contracts to provide up to
six-month supplies of tallow, Triclosan and packaging materials. Long-term
hedging opportunities against price increases for these items are generally not
available.
DEPENDENCE ON DOMESTIC MARKETS; RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
While a number of the Company's competitors have diversified their revenues
to include a strong international component, the Company is currently dependent
primarily on sales generated in the U.S. (92% of sales in 1997). With respect
to a number of the Company's most significant product categories, including
detergents and bar soaps, the U.S. markets are mature and characterized by high
household penetration. The Company's unit sales growth in these domestic
markets will depend on increasing usage by consumers and capturing market share
from competitors. There can be no assurance that the Company will succeed in
implementing its strategies to achieve such domestic growth.
To reduce its dependence on domestic revenues, the Company has adopted a
strategy to further penetrate international markets. In implementing this
strategy, the Company faces barriers to entry and the risk of competition from
local and other companies that already have established global businesses, risks
generally associated with conducting business internationally, including
exposure to currency fluctuations, limitations on foreign investment,
import/export controls, nationalization, unstable governments and legal systems
and the additional expense and risks inherent in operating in geographically and
culturally diverse locations. Because the Company plans to develop its
international business through acquisitions as well as joint ventures,
co-packaging arrangements and/or other alliances, the Company may also be
subject to risks associated with such acquisitions, ventures, arrangement and
alliances, including those relating to the marriage of different corporate
cultures and shared decision-making. In addition, because the Company's current
international distribution capabilities are extremely limited, the Company will
also need to acquire a distribution network or enter into alliances with
existing distributors before it can effectively conduct operations in new
markets. There can be no assurance that the Company will succeed in increasing
its international business in a profitable manner, and a failure to expand this
business may have a material adverse effect on the Company.
The Company has a significant number of registered foreign trademarks as
well as pending foreign trademark applications. There can be an assurance that
the Company will successfully register any foreign trademark for which
applications are currently pending or that such trademarks, once registered,
together with any existing registered foreign trademarks, will be protected in
the foreign markets in which they are used.
ADVERSE PUBLICITY; PRODUCT RECALL
Certain news broadcasts by major U.S. television and radio networks have
focused on the use of antibacterial agents to kill germs on various surfaces.
Triclosan, the active ingredient in Liquid Dial, has also been a focus of these
broadcasts. Although none of the broadcasts disputed that Triclosan kills germs
on the skin, some third party experts did question whether it provides any
additional protection beyond that provided by non-antibacterial soap products.
Although the Company has test results that it believes prove that Triclosan
provides consumers with additional protection in limiting exposure to
bacterial-related diseases, there can be no assurance the adverse publicity
stemming from these broadcasts will not adversely affect the Company's sales of
its antibacterial soap products and its results of operations.
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.
TURNOVER; EMPLOYEE RELATIONS
Primarily as a result of the restructuring of its business, the Company
discharged approximately 950 salaried and non-salaried employees during 1995 and
1996. In addition, the Company experienced greater aggregate voluntary turnover
of salaried employees in 1996 and 1997 than the industry average. Although the
Company believes that it presently has sufficient staffing, there can be no
assurance that the Company would not be materially adversely affected by any
future significant voluntary turnover of salaried or other employees.
Four of the Company's six plants in the U.S. are unionized. The Company's
contracts with its various unions are scheduled for renegotiation as follows:
(i) International Brotherhood of Teamsters (covering approximately 350 employees
at the Company's St. Louis, Missouri plant) in July 1998; (ii) Oil, Chemical and
Atomic Workers union (covering approximately 100 employees at the Company's
Bristol, Pennsylvania plant) in May 1999; (iii) United Food and Commercial
Workers union (covering approximately 360 employees at the Company's Aurora,
Illinois plant) in August 1999; and (iv) the United Food and Commercial Workers
union (covering approximately 425 employees at the Company's Fort Madison, Iowa
plant) in September 1999. There can be no assurance that these contracts can be
renegotiated on terms acceptable to the Company. In 1993, the Company's St.
Louis, Missouri plant experienced a five-week work stoppage. Although the
Company believes that its relations with the employees at this plant and other
plants are satisfactory, there can be no assurance that the Company will not
face similar labor disputes in the future or that such disputes will not be
material to the Company.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of environmental and health and safety
laws in each jurisdiction in which it operations. These laws and regulations
pertain to the Company's present and past operations.
Since 1980, the Company has received notices or requests for information
with respect to 27 sites that have been deemed "Superfund" sites under the
federal Comprehensive Environmental Response, Compensation and Liability Act,
five of which are currently active, 14 of which are inactive, and eight of which
have been settled. The Company is also engaged in investigatory and remedial
activities with respect to four closed plants previously operated by the
Company's former parent. As of January 3, 1998, the Company has accrued in its
financial statements approximately $10 million in reserves for expenses relating
to Superfund sites and the clean-up of closed plant sites, which reserves it
believes are adequate.
The Company does not anticipate that the costs to comply with environmental
laws and regulations or the costs related to Superfund sites and the clean-up of
closed plant sites will have any material adverse effect on the Company's
capital expenditures, earnings or competitive position; however, there can be no
assurance that other developments, such as the emergence of unforeseen claims or
liabilities or the imposition of increasingly stringent laws, regulations and
enforcement policies will not result in material costs in the future.
RISKS OF POTENTIAL ACQUISITIONS
The Company may acquire or make substantial investments in complementary
businesses or products in the future. Any such acquisition or investment 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.
YEAR 2000 COMPLIANCE
Many existing computer systems and software products, including several
used by the Company, are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates.
As a result, the Company's date critical functions related to the year 2000 and
beyond, such as sales, distribution, manufacturing, purchasing, inventory
control, trade promotion management, planning and replenishment, facilities and
financial systems may be materially adversely affected unless these computer
systems are or become year 2000 compliant.
The Company has begun a comprehensive upgrade of its information systems to
significantly improve operating efficiencies and to identify, correct or
reprogram, and test its systems for year 2000 compliance. In 1997, the Company
incurred costs of $12 million to upgrade its information technology and expects
to spend an additional $40 million over the next two years for such upgrades.
There can be no assurance, however, that the Company's computer systems will be
year 2000 compliant in a timely manner or that the Company will not incur
significant additional expenses pursuing year 2000 compliance. Furthermore,
even if the Company's systems are year 2000 compliant, there can be no assurance
that the Company will not be materially adversely effected by the failure of
others to become year 2000 compliant. For example, the Company may be adversely
affected by the disruption or inaccuracy of data provided to the Company by
non-year 2000 compliant third parties and the failure of the Company's customers
and service providers, such as independent shipping companies, to become year
2000 compliant. There can be no assurance that the year 2000 problem will not
have a material adverse effect on the Company in the future.
