Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the Quarterly Period Ended September 27, 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.

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

The number of shares of Common Stock, $0.01 par value, outstanding as of the close of business on October 24, 2003 was 96,383,455.

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

THE DIAL CORPORATION
CONSOLIDATED BALANCE SHEET

See Notes to Consolidated Financial Statements.

2

Table of Contents

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

See Notes to Consolidated Financial Statements.

3

Table of Contents

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

See Notes to Consolidated Financial Statements.

4

Table of Contents

THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)

See Notes to Consolidated Financial Statements.

5

Table of Contents

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 were reclassified as a discontinued operation in the accompanying financial statements. At the beginning of the third quarter of 2003, we completed the sale of our discontinued Argentina business. 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 September 27, 2003, and the results of operations and cash flows for the quarters and nine months ended September 27, 2003 and September 28, 2002, respectively, 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. The adoption of this Statement had no impact on our financial position or results of operations.

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.

In January 2003, the FASB issued Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities – An Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This Interpretation states that consolidation of variable interest entities will be required by the primary beneficiary if the entities do not effectively disperse risks among the parties involved. The requirements are effective for fiscal years beginning after December 15, 2003 for variable interest entities acquired before February 1, 2003 and effective immediately for variable interest entities created after January 31, 2003. We do not believe that FIN No. 46 will impact our future financial results.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements relating to stock options under SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting.” We have adopted the new annual and interim disclosure requirements.

6

Table of Contents

In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This Interpretation clarifies that a guarantor is required to recognize a liability for the fair value of the obligation undertaken in issuing a guarantee and requires certain related disclosures. Currently under such guarantees, we could be liable for lease payments extending through 2006.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 supersedes guidance established in the FASB’s Emerging Issues Task Force (“EITF”) Issue No. 94-3 regarding certain exit and disposal costs. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. This Statement may have a financial impact on our business to the extent that we engage in exit or disposal activities in the future.

In April 2002, the FASB issued SFAS No. 145, “Rescission of Statements No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections.” This Statement rescinds SFAS No. 4 that required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item. Gains and losses from the extinguishment of debt will no longer be considered extraordinary. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. 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 discontinued 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.

In the third quarter of 2003, there was no impact on net income associated with the disposal of our discontinued Argentina business.

Our Argentina business was classified as a discontinued operation in our financial statements at December 31, 2002. Accordingly, we have not recognized any income from operation of this business during 2003. During the first nine months of 2002, we recorded $3.0 million in net income ($5.4 million pre-tax) from our discontinued Argentina business.

Our discontinued Argentina business was classified as held for sale on our balance sheet in December 2002. At the beginning of the third quarter of 2003, we completed the sale of our discontinued Argentina business. Accordingly, the related assets and liabilities that were sold were removed from our balance sheet. Assets and liabilities of the discontinued Argentina operation included in our consolidated financial statements as of December 31, 2002 were as follows:

7

Table of Contents

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 divest 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 that arose 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 before August 2006.

As of September 27, 2003, our balance sheet included $13.1 million in liabilities related to the discontinued SPC business, primarily for future operating lease payments. These liabilities will be

8

Table of Contents

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:

Note 6. Intangible Assets

Intangible assets subject to amortization consisted of the following:

9

Table of Contents

Intangible assets 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 September 27, 2003, there were no amounts outstanding under our credit facility.

At September 27, 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

10

Table of Contents

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.

11

Table of Contents

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 continue to evaluate capital allocation options in light of the amount of cash we are accumulating. The capital allocation alternatives we will continue to review include:

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

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.

After completing a review of our capital allocation alternatives in August 2003, our Board of Directors approved a 125% increase in our quarterly dividend rate, increasing the quarterly cash dividend from $0.04 per share to $0.09 per share. At the same time, our Board also authorized a repurchase of up to $100 million of our common stock over a two-year period. The repurchase program may be suspended at any time without notice. The timing of repurchases and the actual number of shares repurchased will depend upon market conditions, alternative uses of capital and other considerations.

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 discontinued 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

12

Table of Contents

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.

In the third quarter of 2003, there was no impact on net income associated with the disposal of our discontinued Argentina business.

Our Argentina business was classified as a discontinued operation in our financial statements at December 31, 2002. Accordingly, we have not recognized any income from operation of this business during 2003. During the first nine months of 2002, we recorded $3.0 million in net income ($5.4 million pre-tax) from our discontinued Argentina business.

Our discontinued Argentina business was classified as held for sale on our balance sheet in December 2002. At the beginning of the third quarter of 2003, we completed the sale of our discontinued Argentina business. Accordingly, the related assets and liabilities that were sold were removed from our balance sheet.

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.

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 that arose 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 before August 2006.

As of September 27, 2003, our balance sheet included $13.1 million in liabilities related to the discontinued SPC business, primarily for future operating lease payments. These liabilities will be

13

Table of Contents

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

As we previously disclosed, in July of 2003, we entered into a seven-year information technology outsourcing agreement with Electronic Data Systems Corporation (“EDS”). Under this 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.

We expect capital and operating savings to total approximately $21 million over the term of the agreement with EDS, and anticipate realizing additional capital and operating savings relating to efficiencies gained through the use of the implemented SAP software.

The implementation of SAP began in the third quarter of 2003 and is currently 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. In 2003 we expect to capitalize approximately $12.3 million in expenditures related to the SAP implementation.

$50 Million 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 reduced 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. Due to the significant pension contributions and asset returns in 2003, our qualified plans are now approximately 90% funded based upon the difference between plan assets and the projected benefit obligation as of September 30, 2003.

Guatemala Operations

We are in the beginning stages of evaluating whether we should continue to maintain our translucent soap manufacturing operations in Guatemala or whether we should move the manufacturing of these soap products to our plant in Aurora, Illinois. Any sale or closure of our manufacturing operations in Guatemala could require us to record an impairment charge which would adversely impact earnings in the quarter in which any such impairment charge is recorded. Our balance sheet currently includes approximately $12 million in net assets related to this manufacturing facility.

14

Table of Contents

Comparison of the Third Quarter of 2003 with the Third Quarter of 2002

Net sales information for our businesses is set forth below:

Laundry Care net sales increased primarily due to continued growth in Purex liquid detergent, offset in part by a 19.1% decline in net sales of our Purex powder detergent. The increase in Purex liquid detergent sales resulted from continued promotions and the current consumer preference for liquid detergent versus powder detergent products. We currently expect that this consumer preference will continue. Personal Cleansing net sales increased primarily due to lower promotional spending as a result of fewer new product introductions and promotional events in 2003. These sales were offset in part by a decrease bar soap sales driven in part by a growing consumer preference for body washes. We expect that this consumer preference will continue. Food Products net sales increased primarily due to stronger sales of Armour branded products, particularly Armour branded Vienna sausage. These sales were offset in part by a decline in private label sales. Sales of Armour branded products benefited from strong consumer purchases due in part to an active hurricane season. Air Fresheners net sales increased primarily due to higher sales of Renuzit Super Odor Neutralizer, Adjustables and Renuzit Universal Scented Oil Refills, offset in part by a decrease in sales due to discontinued products and a continued weakness in the candle segment.

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 our Branded Commercial Markets business. International and Other segment sales increased 13.2% in the third quarter of 2003 excluding foreign currency gains.

Our gross margin improved 60 basis points to 37.6% from 37.0% last year. This increase primarily resulted from lower promotional expenses in 2003 due to fewer new product launches.

Selling, general and administrative expenses increased 2.7% to $67.7 from $66.0 million last year. The increase is primarily due to higher employee benefits expense, costs to start up and outsource our information technology function and accelerated depreciation expense on existing information technology assets resulting from the implementation of SAP, offset in part by decreased legal expenses.

Interest expense decreased 10.8% to $6.3 million from $7.1 million last year. The decrease is a result of lower effective interest rates due to our current and previously terminated interest rate swaps.

Our effective tax rate from continuing operations in the third quarter decreased to 36.7% from the comparable 2002 rate of 37.0%. The 2003 quarterly rate benefited from higher export sales, tax-free municipal interest income and research and development credits. We expect our full year tax rate to be 37.0%.

15

Table of Contents

Income from continuing operations was $35.8 million or $0.37 per diluted share, compared to $30.2 million or $0.32 per diluted share last year. As discussed above, this increase resulted primarily from higher sales and improved operating margin. Earnings per share growth was partially offset by an increase in the number of shares outstanding. The following table reconciles diluted net income per share from continuing operations to net income per diluted share: