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UNITED STATES

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 28, 2003

Commission file number 1-11793

THE DIAL CORPORATION

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  ü     No [  ]   

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ü     No [  ]   

The number of shares of Common Stock, $0.01 par value, outstanding as of the close of business on July 26, 2003 was 95,927,268.

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

THE DIAL CORPORATION
CONSOLIDATED BALANCE SHEET

See Notes to Consolidated Financial Statements.

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THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)

See Notes to Consolidated Financial Statements.

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THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)

See Notes to Consolidated Financial Statements.

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THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)

See Notes to Consolidated Financial Statements.

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THE DIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Preparation

The accompanying consolidated financial statements include the accounts of The Dial Corporation and all majority-owned 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, 2002.

On December 23, 2002, we announced the pending sale of our Argentina business. As a result of this pending sale, Argentina’s financial position and historical earnings have been reclassified as a discontinued operation in the accompanying financial statements. The sale of our Argentina business was completed on June 30, 2003. See Note 2 to these consolidated financial statements.

Accounting policies utilized in the preparation of the financial information presented herein are the same as set forth in Dial’s annual financial statements except as modified for interim accounting policies, which are within the guidelines set forth in Accounting Principles Board Opinion (“APB”) No. 28, “Interim Financial Reporting”. The interim consolidated financial statements are unaudited. All adjustments necessary to present fairly the financial position as of June 28, 2003, and the results of operations and cash flows for the quarters and six months ended June 28, 2003 and June 29, 2002, respectfully, have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year.

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Statement requires the classification of certain financial instruments, previously classified within the equity section of the balance sheet, to be included in liabilities. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and June 15, 2003 for all other instruments. We do not believe that this Statement will impact our future financial position.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities”. This Statement amended and refined certain characteristics of derivative instruments and hedges. We do not anticipate a financial impact as a result of this Statement.

Note 2. Discontinued Operations

Argentina - In December 2002, we announced that we had reached an agreement to sell our Argentina business to an entity designated by Southern Cross Group, a private equity investor in Argentina. The transaction was structured as the sale of assets of Dial Argentina, S.A., which included the stock of its two subsidiaries, Sulfargen, S.A. and The Dial Corporation San Juan, S.A. In December 2002, we recorded an after-tax loss of $62.4 million on the pending sale and reclassified our Argentina business as a discontinued operation. This primarily non-cash loss includes the reversal of $92.8 million in currency translation adjustments, which had previously been recorded as a reduction of equity and an accrual for estimated exit and closing costs. This transaction also resulted in current tax benefits of approximately $61 million.

At the beginning of the third quarter of 2003, we completed the sale of our Argentina business, based on negotiations concluded prior to June 28, 2003. The sale resulted in higher cash proceeds and lower projected exit and closing costs than originally anticipated. Accordingly, in the second quarter of 2003, we recognized a $2.1 million after-tax ($3.4 million pre-tax) reduction in the previously recorded loss on the disposal of our discontinued Argentina business.

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The tax benefits from the sale of Argentina were utilized by the end of the second quarter of 2003.

Our discontinued Argentina business has been classified as held for sale and as a discontinued operation since December 2002. Accordingly, we did not recognize any income from operation of this business during 2003. During the first six months of 2002, we recorded $2.1 million in net income ($3.7 million pre-tax) from our discontinued Argentina business.

Assets and liabilities of the discontinued Argentina operation included in our consolidated financial statements as of June 28, 2003 and December 31, 2002 were as follows:

In the first quarter of 2002, we recorded a $43.3 million after-tax impairment loss on the goodwill and trademarks of our Argentina business as a result of adopting Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, which established a new method of testing goodwill for impairment. The impairment was calculated using a discounted cash flow model and was recorded in our Statement of Consolidated Operations and Comprehensive Income as a Cumulative effect of the change in accounting principle and, therefore, is not included in operating income.

Specialty Personal Care - On August 28, 2001, we completed the sale of our Specialty Personal Care (“SPC”) business. This business segment included a variety of skin, hair, bath, body and foot care products sold under the Freeman and Sarah Michaels brand names. The sale of SPC was in line with our strategy to fix or jettison under-performing businesses. As a result of the sale, we incurred a one-time charge of $198.4 million, net of income tax benefits and expected sale proceeds, related to the write-off of SPC assets and an accrual for estimated exit costs. Proceeds from the sale were used to repay debt. As a result of this transaction, we sold the stock of our wholly-owned subsidiary, Sarah Michaels, Inc., and the inventories, fixed assets and intangibles of the SPC business, but retained the related receivables and liabilities arising on or prior to the closing.

As consideration for the sale, we received aggregate purchase price consideration of $12.0 million, which consisted of $8.0 million in cash and two subordinated promissory notes in the amount of $2.0 million each. As of December 31, 2001, we had not recorded the $4.0 million in promissory notes because of uncertainties regarding the realizability of such amounts. In the first quarter of 2002, we entered into an agreement with the buyer of this business to resolve disputes that arose in connection with the sale. Under the terms of that agreement, we received full payment on one of these notes, forgave the other note and agreed to bear the cost of some disputed expenses. In the first quarter of 2002, we recorded the $2.0 million ($1.3 million after-tax) received as a reduction of the loss recognized on the sale of the SPC business.

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As a result of the loss recognized on the sale, we recorded a current tax benefit of approximately $40.0 million. This tax benefit resulted in cash savings in the third and fourth quarters of 2001 and throughout 2002. The loss on the sale of SPC is comprised primarily of the write-off of goodwill and inventories. In addition, the sale resulted in approximately $52.3 million in capital losses for which no tax benefits were provided. In the second quarter of 2003, we utilized $0.7 million of these capital losses. We will realize additional tax benefits on these capital losses only to the extent that we generate capital gains within five years of the sale.

As of June 28, 2003, our balance sheet included $13.2 million in liabilities related to the discontinued SPC business, primarily for future operating lease payments. These liabilities will be adjusted in the future if our estimate of remaining lease and other exit costs change. The effect of any future adjustments to SPC liabilities would be presented in the income statement as an adjustment to the previously recorded loss on disposal of discontinued operation.

Note 3. Special Gains

In the second quarter of 2002, we recorded a net gain of $2.9 million ($2.2 million after-tax or $0.02 per diluted share) associated with the previously dissolved joint venture with Henkel KGaA of Germany (“Henkel”) and from the sale of our Mexico City facility, offset in part by a writedown of fixed assets in our Guatemala facility. The gain from our Dial/Henkel joint venture of $1.7 million was included in Income from joint ventures for income statement purposes. We sold our Mexico facility for $2.7 million, resulting in a pre-tax gain of $2.4 million, which was offset in part by a writedown of the carrying value of our Guatemala facility by approximately $1.2 million, pre-tax. For income statement purposes, the gain on the sale of our Mexico facility and the writedown of fixed assets in our Guatemala facility are included in Asset writedowns and other special items (net gain).

Note 4. Dial/Henkel Joint Venture

In April 1999, we formed Dial/Henkel LLC, a joint venture with Henkel. Dial and Henkel each owned 50% of this joint venture. The joint venture was formed to develop and market a range of enhanced laundry products in North America. In July 1999, the joint venture acquired the Custom Cleaner home dry-cleaning business. During the third quarter of 2001, the joint venture discontinued the Custom Cleaner home dry cleaning business.

In the second quarter of 2002, Henkel received certain intellectual property rights related to the former Custom Cleaner business in exchange for their interest in Dial/Henkel LLC. As a result, we consolidated Dial/Henkel LLC’s operations in the second quarter of 2002. Prior to our assumption of Henkel’s interest in Dial/Henkel LLC, we accounted for this joint venture under the equity method of accounting. In the second quarter of 2002, we recorded a gain of $1.7 million ($1.6 million after-tax) related to lower than expected costs associated with the discontinued Custom Cleaner business. For income statement purposes, the gain was included in Income from joint ventures.

Note 5. Inventories

Inventories consisted of the following:

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Note 6. Intangible Assets

Intangible assets subject to amortization consisted of the following:

Intangibles not subject to amortization consisted of the following:

(1)

Additions to goodwill are the result of the Zout acquisition earnout.

Note 7. Long-Term Debt

Long-term debt consisted of the following:

In January 2003, we entered into two interest rate swap contracts that effectively change the interest rate on our 6.5% Senior Notes from fixed to variable. The $200 million notional value of the interest rate swaps, which expire in September 2008, effectively converts approximately 45% of our total debt to variable interest rate debt. Under the interest rate swaps, we pay a variable rate of interest based on the 6-month LIBOR plus 278 basis points and receive a fixed interest rate of 6.5%. Variable interest rates are paid and reset semi-annually.

During the first quarter of 2003, we renewed the $100 million short-term commitment portion of our $200 million revolving credit facility until March 2004. The remaining $100 million long-term portion of our credit facility, due in March 2005, has remained unchanged. Terms and conditions under the credit facility have remained the same and are described within our Annual Report on Form 10-K for the year ended December 31, 2002. As of June 28, 2003, there were no amounts outstanding under our credit facility.

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At June 28, 2003, we were in compliance with all covenants under our $200 million credit facility, our $250 million of 7.0% Senior Notes due 2006 and our $200 million of 6.5% Senior Notes due 2008.

Note 8. Stock Options

We account for our stock-based compensation plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. We have adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Accordingly, no compensation cost has been recognized, as all options under the stock-based compensation plans had an exercise price equal to or greater than the fair market value of the underlying common stock at the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards using the Black-Scholes valuation model for the periods ended:

Note 9. Segments of an Enterprise

We are organized into two business segments: (i) Domestic Branded and (ii) International and Other. The segments were identified based on economic characteristics, types of products sold, customer base and method of distribution.

Information related to our operations in different business segments is set forth below. The calculation of operating income for each segment includes an allocation of indirect general and administrative expenses based on each segment’s share of our consolidated net sales. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002.

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Note 10. Subsequent Events

Pension Contribution – At the beginning of the third quarter of 2003, we made a $50 million tax-deductible contribution to our pension plans. This contribution reduces the shortfall between our pension plan assets and projected pension liabilities. The shortfall is primarily due to negative returns in the capital markets over the past few years coupled with the decline in interest rates. The decrease in interest rates caused the present value of our pension liabilities to increase while the losses in the capital markets led to a decline in our pension assets, thereby creating a shortfall in the funded status of the plans. The difference between the fair value of assets and accumulated benefit obligation for our qualified pension plans was approximately $57 million as of December 31, 2002.

The net cash outflow from this pension contribution will be approximately $31 million after the related tax deduction.

Sale of Dial Argentina Business – At the beginning of the third quarter of 2003, we completed the sale of our Argentina business, based on negotiations concluded prior to June 28, 2003. The sale resulted in higher cash proceeds and lower projected exit and closing costs than originally anticipated. Accordingly, in the second quarter of 2003, we recorded a $2.1 million after-tax ($3.4 million pre-tax) reduction in the previously recorded loss on the disposal of our discontinued Argentina business.

IT Outsourcing and SAP Implementation Project – In July of 2003, we entered into an approximate $110 million, seven-year information technology outsourcing agreement with Electronic Data Systems Corporation (“EDS”). Under this outsourcing agreement, EDS will provide information technology infrastructure, support and management services. In addition, EDS, teaming with SAP, will lead a complete SAP software implementation for our enterprise operations, including the manufacturing, supply chain, finance, accounting and performance management environments as well as customer relationship management.

The implementation of SAP is currently expected to cost approximately $35 million. As a result of the move to SAP, we will recognize approximately $8 million of accelerated depreciation expense over the next 18 months related to our current software system.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Potential Sale of Dial And Future Capital Allocation Strategy

We believe that the long-term interests of our shareholders would be best served if we were part of a larger enterprise. We will continue to explore opportunities to become part of a larger company, which could include transactions with multiple parties. We have been working with Goldman Sachs & Co. and may continue to do so as we evaluate any opportunities for us to be part of a larger company.

No time constraints have been set for any transaction, and any decision regarding any potential transactions will be based upon the best interests of our shareholders. Accordingly, there is no assurance that any sale, merger or other transactions involving us or any of our businesses will occur in the near future or at all. In addition, decisions made in the course of continuing to improve our operating results could require additional special or restructuring charges or additional asset writedowns.

We will continue to focus on growing our core businesses and will evaluate capital allocation options in light of the amount of cash we are accumulating. The capital allocation alternatives we are reviewing include:

•		Acquisitions
•		Dividend increases
•		Share repurchases
•		Investment in our base business

If suitable acquisition options do not emerge, then we currently expect to use cash to increase our dividend and/or repurchase shares. At the present time, we are not considering reduction of debt as one of our capital allocation alternatives, but we will continue to evaluate this as an option in the future.

Critical Accounting Policies

Management has discussed critical accounting policies and estimates used in the preparation of our financial statements within our Annual Report on Form 10-K for the year ended December 31, 2002. There have been no changes to our critical accounting policies in the current year.

Sale of Dial Argentina Business

In December 2002, we announced that we had reached an agreement to sell our Argentina business to an entity designated by Southern Cross Group, a private equity investor in Argentina. The transaction was structured as the sale of assets of Dial Argentina, S.A., which included the stock of its two subsidiaries, Sulfargen, S.A. and The Dial Corporation San Juan, S.A. In December 2002, we recorded an after-tax loss of $62.4 million on the pending sale and reclassified our Argentina business as a discontinued operation. This primarily non-cash loss includes the reversal of $92.8 million in currency translation adjustments, which had previously been recorded as a reduction of equity and an accrual for estimated exit and closing costs. This transaction also resulted in current tax benefits of approximately $61 million.

At the beginning of the third quarter of 2003, we completed the sale of our Argentina business, based on negotiations concluded prior to June 28, 2003. The sale resulted in higher cash proceeds and lower projected exit and closing costs than originally anticipated. Accordingly, in the second quarter of 2003, we recognized a $2.1 million after-tax ($3.4 million pre-tax) reduction in the previously recorded loss on the disposal of our discontinued Argentina business.

The tax benefits from the sale of Argentina were utilized by the end of the second quarter of 2003.

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Our discontinued Argentina business has been classified as held for sale and as a discontinued operation since December 2002. Accordingly, we did not recognize any income from operation of this business during 2003. During the first six months of 2002, we recorded $2.1 million in net income ($3.7 million pre-tax) from our discontinued Argentina business.

In the first quarter of 2002, we recorded a $43.3 million after-tax impairment loss on the goodwill and trademarks of our Argentina business as a result of adopting Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, which established a new method of testing goodwill for impairment.

Sale of Specialty Personal Care Segment

On August 28, 2001, we completed the sale of our Specialty Personal Care (“SPC”) business. This business segment included a variety of skin, hair, bath, body and foot care products sold under the Freeman and Sarah Michaels brand names. The sale of SPC was in line with our strategy to fix or jettison under-performing businesses. As a result of the sale, we incurred a one-time charge of $198.4 million, net of income tax benefits and expected sale proceeds, related to the write-off of SPC assets and an accrual for estimated exit costs. Proceeds from the sale were used to repay debt. As a result of this transaction, we sold the stock of our wholly-owned subsidiary, Sarah Michaels, Inc., and the inventories, fixed assets and intangibles of the SPC business, but retained the related receivables and liabilities arising on or prior to the closing.

As consideration for the sale, we received aggregate purchase price consideration of $12.0 million, which consisted of $8.0 million in cash and two subordinated promissory notes in the amount of $2.0 million each. As of December 31, 2001, we had not recorded the $4.0 million in promissory notes because of uncertainties regarding the realizability of such amounts. In the first quarter of 2002, we entered into an agreement with the buyer of this business to resolve disputes that arose in connection with the sale. Under the terms of that agreement, we received full payment on one of these notes, forgave the other note and agreed to bear the cost of some disputed expenses. In the first quarter of 2002, we recorded the $2.0 million ($1.3 million after-tax) received as a reduction of the loss recognized on the sale of the SPC business.

As a result of the loss recognized on the sale, we recorded a current tax benefit of approximately $40.0 million. This tax benefit resulted in cash savings in the third and fourth quarters of 2001 and throughout 2002. The loss on the sale of SPC is comprised primarily of the write-off of goodwill and inventories. In addition, the sale resulted in approximately $52.3 million in capital losses for which no tax benefits were provided. In the second quarter of 2003, we utilized $0.7 million of these capital losses. We will realize additional tax benefits on these capital losses only to the extent that we generate capital gains within five years of the sale.

As of June 28, 2003, our balance sheet included $13.2 million in liabilities related to the discontinued SPC business, primarily for future operating lease payments. These liabilities will be adjusted in the future if our estimate of remaining lease and other exit costs change. The effect of any future adjustments to SPC liabilities would be presented in the income statement as an adjustment to the previously recorded loss on disposal of discontinued operation.

Recent Developments

IT Outsourcing and SAP Implementation Project- In July of 2003, we entered into an approximate $110 million, seven-year information technology outsourcing agreement with Electronic Data Systems Corporation (“EDS”). Under this outsourcing agreement, EDS will provide information technology infrastructure, support and management services. In addition, EDS, teaming with SAP, will lead a complete SAP software implementation for our enterprise operations, including the manufacturing, supply chain, finance, accounting and performance management environments as well as customer relationship management.

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We expect capital and operating savings totaling approximately $21 million over the term of the agreement with EDS, and anticipate realizing additional capital and operating savings benefits relating to the implementation of the SAP software.

The implementation of SAP will commence in the third quarter of 2003 and currently is expected to be completed over the next 18 months. The implementation of SAP is currently expected to cost approximately $35 million. As a result of the move to SAP, we will recognize approximately $8 million of accelerated depreciation expense over the next 18 months related to our current software system.

EEOC Litigation Settlement - As we previously disclosed, we were defending a lawsuit filed by the U.S. Equal Employment Opportunity Commission (“EEOC”), which was pending in the U.S. District Court for the Northern District of Illinois, Eastern Division, and was entitled Equal Employment Opportunity Commission v. The Dial Corporation, Civil Action No. 99 C 3356. The EEOC alleged that we engaged in a pattern and practice of discrimination against a class of female employees at our Aurora, Illinois manufacturing facility by subjecting them to sexual harassment and not taking prompt remedial action after these employees complained. Most of the potential claimants’ allegations relate to incidences that allegedly occurred prior to 1996. The EEOC sought injunctive relief and unspecified compensatory and punitive damages.

On April 29, 2003, we announced that we had reached a settlement with the EEOC that involves a payment of $10 million by Dial. As previously disclosed, this settlement is not expected to materially affect our earnings for 2003. However, negative publicity resulting from this lawsuit or the settlement could adversely affect our sales and operating results.

Kmart Bankruptcy and Store Closings - In January 2002, Kmart Corporation filed for Chapter 11 bankruptcy protection. Kmart is one of our top ten customers. Prior to March 2003, we sold products to Kmart primarily through Kmart’s distributor, Fleming Companies, Inc. However, Kmart and Fleming recently agreed that Fleming would no longer be Kmart’s contracted distributor. As a result, in March 2003 we began to sell our products directly to Kmart.

Kmart closed approximately 600 stores prior to emerging from bankruptcy in May 2003. Our sales to Kmart have decreased as a result of these store closings and from a decline in consumers visiting Kmart’s open stores. Kmart’s bankruptcy has not had a material adverse effect on our planned sales or operating results. However, Kmart’s financial condition could have an adverse impact on our sales and operating results in the future.

Fleming Bankruptcy - As mentioned above, we previously sold products to Kmart through Fleming. Fleming filed for Chapter 11 bankruptcy protection in April 2003. Due to the uncertainty of Fleming’s ability to pay its creditors, we increased our bad debt reserve for our accounts receivable from Fleming during the first quarter of 2003. This reserve and the related accounts receivable were subsequently written off in the second quarter of 2003 due to their uncollectibility. To date, Fleming’s bankruptcy has not had a material adverse effect on our planned sales or operating results. However, Fleming’s bankruptcy and financial condition could have an adverse impact on our sales and operating results in the future.

FASMA LLC Bankruptcy - The buyer of our Specialty Personal Care business, FASMA L.L.C., filed for Chapter 11 bankruptcy protection on May 1, 2003. FASMA is subleasing a facility in Dedham, Massachusetts from us. In May 2003 we reached an agreement with FASMA that allows them to remain in the facility until September 30, 2003 for a monthly rental fee. FASMA is responsible for all liabilities related to the SPC business, including customer deductions and returns. It is too early to determine if FASMA’s bankruptcy could impact our financial results. At June 28, 2003, our balance sheet included $13.2 million in liabilities related to the discontinued SPC business, primarily for future operating lease payments. If we decide that we need to increase the reserves related to the discontinued SPC business, our net income would be adversely impacted.

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Comparison of the Second Quarter of 2003 with the Second Quarter of 2002

Net sales information for our businesses is set forth below:

Laundry Care sales decreased primarily due to a 16.8% decline in sales of Purex powder detergent and increased promotional spending, offset in part by continued growth in Purex liquid detergent. The increase in Purex liquid detergent sales resulted from continued promotions and consumer demand as well as the current consumer preference for liquid detergent versus powder detergent products. We currently expect that this consumer preference will continue. Personal cleansing sales increased primarily due to sales of new products introduced in the second half of 2002 and first quarter of 2003. These sales were offset in part by a decrease in bar soap sales. The decrease in bar sales was driven in part by a growing consumer preference for body washes. We expect that this consumer preference will continue. Food Products sales increased primarily as a result of stronger sales of Armour branded Vienna sausage and private label sales. Increased sales of Vienna sausage were driven in large part by segment growth as well as increased promotions and distribution. Sales were offset in part by increased promotional spending. Air Fresheners sales increased primarily as a result of the launch of three new products, Renuzit Super Odor Neutralizer, Renuzit Universal Scented Oil Refills and Renuzit High Impact Scented Oil, which were introduced in the second half of 2002. Sales of new products were primarily offset by the discontinuation of One Touch electric scented oil products combined with continued weakness in the candle segment. We are discontinuing Renuzit High Impact Scented Oil and expect related sales to decline in future periods.

Sales in our International and Other segment increased primarily due to higher Canadian sales of Purex liquid laundry detergent, foreign currency gains and growth in Branded Commercial Markets. International and Other segment sales increased 17.2% in the second quarter of 2003 excluding foreign currency gains.

Our gross margin decreased 110 basis points to 37.4% from 38.5% last year. This decrease primarily resulted from higher energy and petroleum related costs, higher raw material prices, increased promotional spending and special gains recorded in 2002.

Selling, general and administrative expenses decreased 4.8% to $62.4 from $65.6 million last year. The decrease is primarily due to lower performance-based compensation expense as compared to the same period in 2002.

Other net expenses decreased 21.4% to $2.3 million from $2.9 million primarily as a result of a $0.7 million gain recorded on the sale of surplus land at our Aurora plant.

We recognized a $1.7 million gain from the Dial/Henkel joint venture in the second quarter of 2002 primarily as a result of lower than expected costs associated with the discontinued Custom Cleaner business. No additional adjustments have been recorded since the second quarter of 2002.

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Our effective tax rate from continuing operations of 37.2% is higher than the 2002 rate of 36.3%. The 2002 rate benefited from a lower tax rate on joint venture income, offset in part by higher taxes on foreign income.

Income from continuing operations was $33.4 million or $0.35 per diluted share, compared to $31.8 million or $0.34 per diluted share last year. As discussed above, this increase resulted primarily from higher sales and lower selling, general and administrative expense, offset in part by an increase in the number of shares outstanding. The following table reconciles diluted earnings per share from income from continuing operations to net income per diluted share: