DIAL CORP /NEW/ - 10-Q Quarterly Report

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 March 29, 2003

Commission file number 1-11793

THE DIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)


DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		51-0374887 (I.R.S. Employer Identification No.)


15501 NORTH DIAL BOULEVARD SCOTTSDALE, ARIZONA (Address of Principal Executive Offices)		85260-1619 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (480) 754-3425

Indicate by check mark whether the registrant (1) has filed all Exchange Act reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

The number of shares of Common Stock, $0.01 par value, outstanding as of the close of business on April 25, 2003 was 95,438,061.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Certification
EXHIBIT INDEX
EX-10.1
EX-10.2
EX-99.1
EX-99.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
THE DIAL CORPORATION
CONSOLIDATED BALANCE SHEET


				(Unaudited)
(In thousands, except share data)				March 29, 2003			December 31, 2002

ASSETS
Current Assets:
	Cash and cash equivalents			$	246,712		$	219,554
	Receivables, less allowance of $2,765 and $1,256				84,476			88,466
	Inventories				139,238			131,508
	Deferred income taxes				27,394			23,255
	Income tax receivable				—			7,901
	Current assets of discontinued operation				20,197			18,547
	Other current assets				9,336			7,605

		Total current assets			527,353			496,836
Property and equipment, net					215,179			52,956
Goodwill					312,910			312,678
Other intangibles, net					51,081			51,070
Non-current assets of discontinued operation					2,143			2,226
Other assets					14,080			9,125

			Total assets	$	1,175,702		$	1,149,739

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Trade accounts payable			$	94,941		$	94,187
	Income taxes payable				28,187			—
	Current liabilities of discontinued operation				15,080			13,512
	Other current liabilities				122,630			161,217

		Total current liabilities			260,838			268,916
Long-term debt					460,898			458,393
Post-retirement and other employee benefits					269,559			267,225
Other liabilities					5,319			6,207

		Total liabilities			996,614			1,000,741

Stockholders’ Equity:
	Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued and outstanding				—			—
	Common stock, $0.01 par value, 300,000,000 shares authorized; 106,374,032 and 106,372,531 shares issued				1,064			1,064
	Additional paid-in capital				431,660			436,262
	Retained income				34,749			8,835
	Accumulated other comprehensive loss				(31,996	)		(32,350	)
	Unearned employee benefits				(39,190	)		(48,103	)
	Treasury stock, 10,935,598 and 10,910,433 shares held				(217,199	)		(216,710	)

		Total stockholders’ equity			179,088			148,998

		Total liabilities and stockholders’ equity		$	1,175,702		$	1,149,739

See Notes to Consolidated Financial Statements.

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


				Quarter Ended

(In thousands, except per share data)				March 29, 2003		March 30, 2002

Net sales				$	312,401	$	294,579

Costs and expenses:
		Cost of products sold			193,495		186,172
		Selling, general and administrative expenses			61,835		60,807

			Total costs and expenses		255,330		246,979

Operating income					57,071		47,600
Interest expense					6,760		8,408
Other expenses, net					3,103		2,616

Income from continuing operations before income taxes					47,208		36,576
Income taxes on continuing operations					17,560		13,480

Income from continuing operations					29,648		23,096

Discontinued operations:
		Adjustment to loss on disposal of discontinued Specialty Personal Care segment, net of income tax of $740			—		1,260
	Income from operation of discontinued Argentina business, net of income tax of $485				—		476

Total gain from discontinued operations					—		1,736
Cumulative effect of the change in accounting principle, net of income tax of $661					—		(43,308	)

NET INCOME (LOSS)				$	29,648	$	(18,476	)

Basic net income (loss) per common share:
Income from continuing operations				$	0.32	$	0.25
Income from discontinued operations					—		0.02
Effect of change in accounting principle					—		(0.47	)

NET INCOME (LOSS) PER SHARE — BASIC				$	0.32	$	(0.20	)

Diluted net income (loss) per common share:
Income from continuing operations				$	0.31	$	0.25
Income from discontinued operations					—		0.02
Effect of change in accounting principle					—		(0.47	)

NET INCOME (LOSS) PER SHARE — DILUTED				$	0.31	$	(0.20	)

Weighted average basic shares outstanding					93,216		91,794
Weighted average equivalent shares					1,805		1,285

Weighted average diluted shares outstanding					95,021		93,079

NET INCOME (LOSS)				$	29,648	$	(18,476	)
Other comprehensive income (loss):
Foreign currency translation adjustment					353		(27,024	)

COMPREHENSIVE INCOME (LOSS)				$	30,001	$	(45,500	)

See Notes to Consolidated Financial Statements.

THE DIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)


			Quarter Ended

(In thousands)			March 29, 2003			March 30, 2002

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)			$	29,648		$	(18,476	)
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustment to loss on disposal of discontinued Specialty Personal Care operation, net of tax				—			(1,260	)
Argentina business discontinued operation, net of tax				—			(476	)
Effect of change in accounting principle, net of tax				—			43,308
	Depreciation			8,938			8,585
	Amortization			45			34
	Deferred income taxes			(83	)		(946	)
	Change in operating assets and liabilities:
		Receivables		3,990			(6,918	)
		Inventories		(7,730	)		1,057
		Trade accounts payable		754			(1,333	)
		Income taxes payable		36,088			21,155
		Other assets and liabilities, net		(39,779	)		(16,287	)

Net cash provided by operating activities				31,871			28,443

CASH FLOWS USED BY INVESTING ACTIVITIES:
Capital expenditures				(3,156	)		(2,824	)
Investment in Argentina discontinued operation				—			(6,198	)
Proceeds from disposition of discontinued operation				—			2,000
Proceeds from sale of assets				33			292

Net cash used by investing activities				(3,123	)		(6,730	)

CASH FLOWS USED BY FINANCING ACTIVITIES:
Repayment and amortization of debt				(622	)		(447	)
Dividends paid on common stock				(3,734	)		(3,667	)
Cash proceeds from stock options exercised				2,766			1,301

Net cash used by financing activities				(1,590	)		(2,813	)

Effects of foreign currency exchange rates on cash balances				—			(570	)

Net increase in cash and cash equivalents				27,158			18,330
Cash and cash equivalents, beginning of period				219,554			28,310

CASH AND CASH EQUIVALENTS, END OF PERIOD			$	246,712		$	46,640

See Notes to Consolidated Financial Statements.

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. The sale is subject to satisfaction of negotiated closing conditions and receipt of approvals under Argentina’s bulk transfer laws. The sale is expected to close late in the second quarter of 2003. 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.

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 March 29, 2003, and the results of operations and cash flows for the quarters ended March 29, 2003 and March 30, 2002, have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year.

Note 2. Discontinued Operations

Argentina Operations - 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 is structured as the sale of assets of Dial Argentina, S.A., which includes the stock of its two subsidiaries, Sulfargen, S.A. and The Dial Corporation San Juan, S.A. The sale is subject to the satisfaction of negotiated closing conditions and receipt of approvals under Argentina’s bulk transfer laws. The sale currently is expected to close late in the second quarter of 2003. The sale price is $6.0 million and resulted in tax benefits of approximately $61 million. In December 2002, we recorded an after-tax loss of $62.4 million on the pending disposal and reclassified our Argentina business as a discontinued operation. This primarily non-cash loss includes the reversal of the $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.

In the first quarter of 2003, operation and disposal of our discontinued Argentina business had no impact on our net income. In the first quarter of 2002, we recorded $0.5 million in after-tax income from operation of our discontinued Argentina business.

Assets and liabilities of the discontinued Argentina operation included in our consolidated financial statements as of March 29, 2003 and December 31, 2002 were as follows:


(In thousands)		March 29, 2003		December 31, 2002

Cash and cash equivalents		$	3,649	$	1,657
Receivables			2,299		3,988
Inventories			12,481		10,483
Other current assets			1,768		2,419

	Current assets of discontinued operation	$	20,197	$	18,547

Other non-current assets			2,143		2,226

	Non-current assets of discontinued operation	$	2,143	$	2,226

Trade accounts payable			15,080		13,512

	Current liabilities of discontinued operation	$	15,080	$	13,512

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 Income Statement 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. On 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. We will realize tax benefits on these capital losses only to the extent that we generate capital gains within five years of the sale.

As of March 29, 2003, our balance sheet included $14.1 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. Inventories

Inventories consisted of the following:


(In thousands)		March 29, 2003		December 31, 2002

Raw materials and supplies		$	34,719	$	34,575
Work in process			6,788		8,515
Finished goods			97,731		88,418

	Total inventories	$	139,238	$	131,508

Note 4. Intangible Assets

Intangible assets subject to amortization consisted of the following:


(In thousands)		March 29, 2003							December 31, 2002

				Accumulated							Accumulated
		Gross Carrying Value		Amortization			Net Carrying Value		Gross Carrying Value		Amortization			Net Carrying Value

Patents		$	2,160	$	(179	)	$	1,981	$	2,171	$	(149	)	$	2,022
Other intangibles			900		(593	)		307		900		(578	)		322

	Total	$	3,060	$	(772	)	$	2,288	$	3,071	$	(727	)	$	2,344

Intangibles not subject to amortization consisted of the following:


(In thousands)		March 29, 2003		December 31, 2002

Goodwill (1)		$	312,910	$	312,678
Trademarks			39,493		39,426
Pension Related intangibles			9,300		9,300

	Total	$	361,703	$	361,404

(1) Additions to goodwill were the result of the Zout earnout.

Note 5. Long-Term Debt

Long-term debt consisted of the following:


(In thousands)		March 29, 2003		December 31, 2002

$250 million 7.0% Senior Notes due 2006, net of issue discount		$	247,633	$	247,460
$200 million 6.5% Senior Notes due 2008, net of issue discount			198,837		198,785

	Total long-term debt		446,470		446,245
Deferred gain on interest rate swaps terminated in August 2002			11,301		12,148
Fair market value of interest rate swaps entered into in January 2003			3,127		—

	Reported long-term debt	$	460,898	$	458,393

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 revol

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