Improvements to leased property are amortized over the initial terms of the respective leases or the estimated service lives of the improvements, whichever is shorter. The Company capitalized interest costs of $0.2 million, $0.4 million and $1.3 million in 2003, 2002 and 2001, respectively.
The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their estimated useful lives unless the estimated useful life is determined to be indefinite. Amortizable intangible assets are being amortized over useful lives of three to 17 years. Impairment losses are recognized if the carrying amount of an intangible, subject to amortization, is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.
The Company also maintains intangible assets with indefinite lives, which are not amortized. These intangibles are tested for impairment on an annual basis and more often if circumstances require, similar to the treatment for goodwill. Impairment losses are recognized whenever the implied fair value of these assets is less than their carrying value.
INSURANCE RESERVES
The Company purchases insurance for catastrophic exposures and those risks required to be insured by law. It also retains a significant portion of the risk of losses related to workers’ compensation, general liability and property. Reserves for these potential losses are based on an external analysis of the Company’s historical claims results and other actuarial assumptions.
WARRANTY RESERVES
The Company generally warrants the products it sells against defects for one year. For a significant portion of warranty claims, the manufacturer is responsible for the expenses associated with this warranty. For warranty expenses not covered by the manufacturer, the Company provides a reserve for future costs based primarily on historical experience. The reserve activity was as follows:
| | As of December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Beginning balance | | $ 3,000 | | $ 2,368 | | $ 2,597 | |
| Returns | | (8,143 | ) | (8,415 | ) | (7,730 | ) |
| Provisions | | 8,006 | | 9,047 | | 7,501 | |
| | |
| |
| |
| |
| Ending balance | | $ 2,863 | | $ 3,000 | | $ 2,368 | |
| |
| |
| |
| |
NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance will be applied prospectively. The provisions of SFAS No. 149 relating to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist should be applied to existing contracts as well as new contracts entered into after June 30, 2003. Adoption of SFAS No. 149 did not have a material effect on the Company’s results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. Adoption of SFAS No. 150 did not have a material effect on the Company’s results of operations or financial position.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN 46R), “Consolidation of Variable Interest Entities.” It is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” which replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” and revises the requirements for consolidation by business enterprises of variable interest entities with specific characteristics. The new consolidation requirements related to variable interest entities are required to be adopted no later than the first reporting period that ends after March 15, 2004 (as of March 31, 2004, for calendar-year enterprises). The Company does not expect adoption of this revised interpretation to have a material effect on its results of operations or financial position.
39
NOTE 3—CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the transition provisions of SFAS No. 141, “Business Combinations.” As a result of the application of the new impairment methodology introduced by SFAS No. 142, the Company completed its initial process of evaluating goodwill for impairment and recorded a noncash charge to earnings in 2002 of $32.3 million ($23.9 million after-tax, or $0.26 per diluted share) related to the write-down of goodwill of its Canadian subsidiary, Acklands. In performing the initial and periodic impairment reviews, the fair value of the reporting units acquired were estimated using a present value method that discounted future cash flows. When available and as appropriate, comparative market multiples were used to corroborate the results of the discounted cash flows. The Company performs its annual evaluation of goodwill and indefinite lived intangible assets for impairment in the fourth quarter of each year and no further write-downs have been required after the initial write-down noted above.
Previous accounting rules incorporated a comparison of book value to undiscounted cash flows, whereas the new rules require a comparison of book value to discounted cash flows, which are lower. There were no material adjustments relating to the classification of the Company’s intangible assets or amortization periods as a result of adopting SFAS No. 142.
If SFAS No. 142 had been in effect for the year ended December 31, 2001, reported net earnings would have increased by $3.3 million as a result of excluding the amortization expense, net of tax, of goodwill and intangible assets with indefinite lives. Basic earnings per share would have increased to $1.90 from $1.87 and diluted earnings per share would have increased to $1.87 from $1.84.
NOTE 4—BUSINESS ACQUISITIONS
On April 14, 2003, Lab Safety acquired substantially all of the assets and assumed certain liabilities of Gempler’s, a direct marketing division of Gempler’s, Inc., located in Wisconsin. The results of Gempler’s operations have been included in the Company’s consolidated financial statements since that date. Gempler’s, with annual sales in 2002 of approximately $32 million, serves agricultural, horticultural, grounds maintenance and contractor markets with tools, safety supplies, clothing and other equipment.
The aggregate purchase price was $36.7 million in cash and $0.7 million in assumed liabilities. Goodwill recognized in this transaction was $22.8 million and is expected to be fully deductible for tax purposes. Due to the immaterial nature of this transaction, disclosures of amounts assigned to the acquired assets and liabilities and pro forma results of operations are not considered necessary.
On February 26, 2001, Lab Safety acquired The Ben Meadows Co., Inc. (Ben Meadows) for approximately $14.4 million, including costs associated with the acquisition. Ben Meadows, a privately held U.S. corporation with annual sales of $20 million, was a business-to-business direct marketer specializing in equipment and supplies for the environmental and forestry management markets. Results for Ben Meadows are included in the Company’s results since the date of its acquisition. Due to the immaterial nature of this transaction, disclosures of amounts assigned to the acquired assets and liabilities and pro forma disclosures are not considered necessary.
NOTE 5—SPECIAL CHARGES
On April 23, 2001, the Company announced plans to shut down the operations of Material Logic, with the exception of FindMRO, and to write down its investment in other digital activities. The Company launched Material Logic in January 2001 as a utility for large customers to facilitate the purchase of facilities maintenance products over the Internet. In order for Material Logic to grow, it needed broad industry support and funding from other equity participants. The Company closed Material Logic in April 2001 because economic and market conditions made it difficult to find funding partners and the market developed slower than anticipated. The Company shut down all of Material Logic’s branded e-commerce sites except FindMRO, which was added to the Branch-based Distribution segment.
In connection with the closing of Material Logic, the Company took a pretax charge of $39.1 million (after-tax $23.2 million) in 2001. The Company provided a comprehensive separation package, including outplacement services, to 166 employees whose jobs were eliminated. Severance payments began in July 2001 and will continue until June 2004, when the last severance package expires. Other shutdown costs include lease obligations which, if not settled earlier, will continue until 2004. The Company reduced the reserve by $0.6 million and $1.9 million in 2003 and 2002, respectively, to reflect management’s revised estimate of costs.
In addition, in 2001, as part of other income and expense, the Company wrote down its investment in other digital enterprises and took a pretax charge of $25.1 million (after-tax $13.4 million). This included a $20.1 million pretax loss on the divestiture of the Company’s 40% investment in Works.com, Inc. (Works.com), which was recorded as Loss on liquidation of investment in unconsolidated entity. Also included was a $5.0 million write-down to net realizable value of investments in certain other digital businesses, which was recorded in Unclassified–net.
The total effect of these charges amounted to an after-tax cost of $36.6 million, or $0.39 per diluted share, in 2001.
40
The following tables show the activity from April 23, 2001 to December 31, 2003 and balances of the Material Logic restructuring reserve (in thousands of dollars):
| | | | | |
|---|
| | April 23, | | | | | | Dec. 31, | | | |
| | 2001 | | Deductions | | Adjustments | | 2001 | | | |
| |
| |
| |
| |
| | | |
| Restructuring reserve (Operating expenses): | | | | | | | | | | | |
| Workforce reductions | | $17,200 | | $ (9,264 | ) | $(3,056 | ) | $4,880 | |
| Asset and equipment write-offs and disposals | | 5,800 | | (4,277 | ) | (587 | ) | 936 | | | |
| Contractual obligations | | 5,000 | | (7,482 | ) | 2,482 | | -- | | | |
| Other shutdown costs | | 12,000 | | (8,570 | ) | 231 | | 3,661 | |
| |
| |
| |
| |
| | | |
| | | $40,000 | | $(29,593 | ) | $ (930 | ) | $9,477 | | | |
| |
| |
| |
| |
| | | |
| | | | | |
|---|
| | Dec. 31, | | | | | | Dec. 31, | | | |
| | 2001 | | Deductions | | Adjustments | | 2002 | | | |
| |
| |
| |
| |
| | | |
| Restructuring reserve (Operating expenses): | | | | | | | | | | | |
| Workforce reductions | | $ 4,880 | | $ (2,737 | ) | $ (499 | ) | $1,644 | |
| Asset and equipment write-offs and disposals | | 936 | | (936 | ) | -- | | -- | | | |
| Other shutdown costs | | 3,661 | | (1,371 | ) | (1,440 | ) | 850 | |
| |
| |
| |
| |
| | | |
| | | $ 9,477 | | $ (5,044 | ) | $(1,939 | ) | $2,494 | | | |
| |
| |
| |
| |
| | | |
| | | | | |
|---|
| | Dec. 31, | | | | | | Dec. 31, | | | |
| | 2002 | | Deductions | | Adjustments | | 2003 | | | |
| |
| |
| |
| |
| | | |
| Restructuring reserve (Operating expenses): | | | | | | | | | | | |
| Workforce reductions | | $ 1,644 | | $ (1,100 | ) | $ (122 | ) | $ 422 | |
| Other shutdown costs | | 850 | | (202 | ) | (442 | ) | 206 | |
| |
| |
| |
| |
| | | |
| | | $ 2,494 | | $ (1,302 | ) | $ (564 | ) | $ 628 | | | |
| |
| |
| |
| |
| | | |
Deductions in 2001 reflect cash payments of $17.6 million and noncash charges of $12.0 million. Deductions in 2002 reflect cash payments of $4.1 million and noncash charges of $0.9 million. Deductions in 2003 reflect cash payments of $1.3 million. The amounts in the adjustments column are reclassifications and reductions to reflect the Company’s revised estimate of costs by expense category.
NOTE 6—CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit quality and, by policy, limits the amount of credit exposure to any one institution.
The Company has a broad customer base representing many diverse industries doing business in all regions of the United States as well as other areas of North America. Consequently, no significant concentration of credit risk is considered to exist.
NOTE 7—ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table shows the activity in the allowance for doubtful accounts:
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Balance at beginning of period | | $ 26,868 | | $ 30,552 | | $ 23,436 | |
| Provision for uncollectible accounts | | 9,263 | | 13,328 | | 21,483 | |
| Write-off of uncollectible accounts, less recoveries | | (11,713 | ) | (17,054 | ) | (14,290 | ) |
| Foreign currency exchange impact | | 318 | | 42 | | (77 | ) |
| |
| |
| |
| |
| Balance at end of period | | $ 24,736 | | $ 26,868 | | $ 30,552 | |
| |
| |
| |
| |
NOTE 8—INVENTORIES
Inventories primarily consist of merchandise purchased for resale.
Inventories would have been $234.4 million, $227.3 million and $224.3 million higher than reported at December 31, 2003, 2002 and 2001, respectively, if the first-in, first-out (FIFO) method of inventory accounting had been used for all Company inventories. Net earnings would have increased (decreased) by $4.3 million, $1.9 million and $(1.6) million for the years ended December 31, 2003, 2002 and 2001, respectively, using the FIFO method of accounting. Inventories under FIFO approximate replacement cost.
41
NOTE 9—INVESTMENTS IN UNCONSOLIDATED ENTITIES
In 2001, the Company wrote off its equity investment in Works.com. See Note 5 to the Consolidated Financial Statements.On February 1, 2002, the Company finalized an agreement creating the joint venture USI-AGI Prairies Inc. The joint venture was between Acklands and Uni-Select Inc. (Uni-Select), a Canadian company. The joint venture combined Uni-Select’s Western Division with the automotive aftermarket division of Acklands, which operated as Bumper to Bumper. Acklands’ contribution of net assets was approximately U.S.$14.6 million. Additionally, Acklands’ carrying value of its investment in this joint venture includes U.S.$5.1 million of allocated goodwill. The Company has a 50% stake in the new entity, which Uni-Select manages. Net sales for the automotive aftermarket parts division of Acklands were approximately U.S.$33 million in 2001.
No gain or loss was recognized when this transaction was finalized. Through February 1, 2002, the results of the Company’s automotive aftermarket parts division were consolidated with Acklands. Beginning February 2, 2002, the Company accounted for its joint venture investment using the equity method. In 2003, Acklands made a loan denominated in Canadian dollars to USI-AGI Prairies Inc., of U.S.$3.7 million bearing interest at market rates. The loan is due and payable on demand.
The Company also has investments in three Asian joint ventures, with ownership percentages ranging from 11% to 49%. The Company accounts for these joint ventures using the equity method of accounting. As start-up businesses, the time frame, or the ultimate ability, to achieve profitability is uncertain. Reaching profitability is also dependent upon the entities securing sufficient capital funding to support developmental activities. The losses reflect the start-up nature of these businesses. In the fourth quarter of 2003, the Company wrote off its investment in two of these Asian joint ventures due to their questionable market value and uncertainty regarding future profitability and capital funding.
The table below summarizes the activity of these investments.
| | Investment Cost | | Loan | | Cumulative
After-Tax
Equity Income
(Losses) | | Divestiture/
Write-down | | Foreign Currency Translation Adjustment | | Total | |
| |
| |
| |
| |
| |
| |
| |
| | | | | (In thousands of dollars) | | | | |
| | | | | | | | | | | | | | |
| Balance at January 1, 2001 | | $ 34,693 | | $ -- | | $ (10,855 | ) | $ -- | | $ -- | | $ 23,838 | |
| Works.com | | -- | | -- | | (4,608 | ) | (17,621 | ) | -- | | (22,229 | ) |
| Other equity investments | | 5,764 | | -- | | (2,597 | ) | -- | | -- | | 3,167 | |
| |
| |
| |
| |
| |
| |
| |
| Balance at December 31, 2001 | | 40,457 | | -- | | (18,060 | ) | (17,621 | ) | -- | | 4,776 | |
| USI-AGI Prairies Inc. | | 20,580 | | -- | | 970 | | -- | | (595 | ) | 20,955 | |
| Cash distribution from | |
| USI-AGI Prairies Inc. | | (8,959 | ) | -- | | -- | | -- | | -- | | (8,959 | ) |
| Other equity investments | | 3,211 | | -- | | (3,995 | ) | -- | | -- | | (784 | ) |
| |
| |
| |
| |
| |
| |
| |
| Balance at December 31, 2002 | | 55,289 | | -- | | (21,085 | ) | (17,621 | ) | (595 | ) | 15,988 | |
| USI-AGI Prairies Inc. | | -- | | 3,706 | | 1,442 | | -- | | 2,802 | | 7,950 | |
| Other equity investments | | 4,535 | | -- | | (3,730 | ) | (1,921 | ) | -- | | (1,116 | ) |
| |
| |
| |
| |
| |
| |
| |
| Balance at December 31, 2003 | | $ 59,824 | | $ 3,706 | | $ (23,373 | ) | $ (19,542 | ) | $ 2,207 | | $ 22,822 | |
| |
| |
| |
| |
| |
| |
| |
|
NOTE 10—INVESTMENTS
Investments consist of marketable securities and non-publicly traded equity securities for which a market value is not readily determinable. Marketable securities are all classified as available-for-sale and are reported at fair value, with unrealized gains or losses on such securities reflected, net of taxes, in the Accumulated other comprehensive earnings (losses) component of shareholders’ equity. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Company evaluates whether a decline in fair value below cost is other than temporary based on the amount of unrealized losses and their duration. Other-than-temporary impairments are recognized in earnings. Non-publicly traded equity securities are reported at the lower of cost or estimated net realizable value. Adjustments to net realizable value are recognized in earnings. There have been no dividends earned on these investments. During 2003, the Company completed the sale of its investments in marketable securities. At December 31, 2002 and 2001, the Company held marketable securities investments of $5.3 million and $27.0 million, respectively, selling a portion of the original investments during each of those years. The gains on these sales were calculated using the specific identification method and were reported in Unclassified–net.
42
The original cost, pretax realized and unrealized (losses) gains, reductions to net realizable value and fair value of investments are as follows:
| | | |
|---|
| | As of December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| Marketable securities | | | | | | | |
| Cost | | $ -- | | $ 6,521 | | $ 16,517 | |
| Unrealized (losses) gains, net | | -- | | (1,206 | ) | 8,661 | |
| |
| |
| |
| |
| Fair value | | -- | | 5,315 | | 25,178 | |
| |
| |
| |
| |
| Non-publicly traded equity securities, | | | | | |
| at estimated net realizable value | | -- | | -- | | 1,845 | |
| |
| |
| |
| |
| Investments | | $ -- | | $ 5,315 | | $ 27,023 | |
| |
| |
| |
| | | | | | | |
|
| | | |
|---|
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | | (In thousands of dollars) | |
| | | | | | | |
| Proceeds from sales | | $ 6,115 | | $ 15,957 | | $ 1,015 | |
| |
| |
| |
| | | | | | | |
| Realized gains on sales | | $ 1,208 | | $ 7,308 | | $ 138 | |
| |
| |
| |
| | | | | | | |
| Reductions to net realizable value | | $ -- | | $ (1,845 | ) | $ (8,155 | ) |
| |
| |
| |
| | | | | | | |
| | | | | | | |
NOTE 11—CAPITALIZED SOFTWARE
Amortization of capitalized software is predominately on a straight-line basis over three and five years. Amortization expense was $14.0 million, $17.6 million and $19.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In 2003, the Company determined certain capitalized amounts were no longer recoverable and wrote down the carrying cost by $1.0 million.
NOTE 12—SHORT-TERM DEBT
The following summarizes information concerning short-term debt:
| | As of December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | | (In thousands of dollars) | |
| Bank Debt | | | | | | | |
| Outstanding at December 31 | | $ -- | | $ 2,967 | | $ 4,526 | |
| Maximum month-end balance during the year | | $ 2,967 | | $ 4,194 | | $ 4,559 | |
| Average amount outstanding during the year | | $ 1,382 | | $ 3,611 | | $ 3,645 | |
| Weighted average interest rate during the year | | 2.6 | % | 3.4 | % | 5.3 | % |
| Weighted average interest rate at December 31 | | -- | % | 2.9 | % | 3.4 | % |
| | | | | | | | |
| Commercial Paper | | | | | | | |
| Outstanding at December 31 | | $ -- | | $ -- | | $ -- | |
| Maximum month-end balance during the year | | $ -- | | $ -- | | $128,632 | |
| Average amount outstanding during the year | | $ -- | | $ -- | | $ 64,438 | |
| Weighted average interest rate during the year | | -- | % | -- | % | 5.3 | % |
| Weighted average interest rate at December 31 | | -- | % | -- | % | -- | % |
The Company and its subsidiaries had committed lines of credit totalling $265.4 million, $267.7 million and $417.6 million at December 31, 2003, 2002 and 2001, respectively, including $15.4 million, $12.7 million and $12.6 million, respectively, denominated in Canadian dollars. At December 31, 2003, there were no borrowings under the committed lines of credit. At December 31, 2002 and 2001, borrowings under Company committed lines of credit were $3.0 million and $4.5 million, respectively. The Company had committed lines of credit available of $265.4 million, $264.7 million and $413.1 million at December 31, 2003, 2002 and 2001, respectively.
The Company also had a $7.7 million, $15.9 million and $15.7 million uncommitted line of credit denominated in Canadian dollars at December 31, 2003, 2002 and 2001, respectively.
43
NOTE 13—EMPLOYEE BENEFITS
Retirement Plans. A majority of the Company’s employees are covered by a noncontributory profit sharing plan. This plan provides for annual employer contributions generally based upon a formula related primarily to earnings before federal income taxes, limited to 25% of the total compensation paid to all eligible employees. The Company also sponsors additional defined contribution plans, which cover most of the other employees. Provisions under all plans were $45.9 million, $50.0 million and $47.6 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Postretirement Benefits. The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its retired employees and their dependents should they elect to maintain such coverage. Covered employees become eligible for participation when they qualify for retirement while working for the Company. Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company. The Company uses a December 31 measurement date for its postretirement plan.
The net periodic benefits costs charged to operating expenses included the following components:
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Service cost | | $ 6,462 | | $ 5,332 | | $ 3,442 | |
| Interest cost | | 5,662 | | 5,097 | | 3,689 | |
| Expected return on assets | | (1,081 | ) | (1,192 | ) | (1,421 | ) |
| Amortization of transition asset (22-year amortization) | | (143 | ) | (143 | ) | (143 | ) |
| Amortization of unrecognized losses (gains) | | 2,002 | | 1,079 | | (144 | ) |
| Amortization of prior service cost | | (641 | ) | (75 | ) | (75 | ) |
| |
| |
| |
| |
| Net periodic benefits costs | | $ 12,261 | | $ 10,098 | | $ 5,348 | |
| | |
| |
| |
| |
Reconciliations of the beginning and ending balances of the accumulated postretirement benefit obligation (APBO), the fair value of assets and the funded status of the benefit obligation follow:
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Benefit obligation at the beginning of the year | | $ 90,141 | | $ 62,811 | | $ 49,044 | |
| Service cost | | 6,462 | | 5,332 | | 3,442 | |
| Interest cost | | 5,662 | | 5,097 | | 3,689 | |
| Plan participant contributions | | 1,070 | | 929 | | 882 | |
| Amendment | | (6,903 | ) | -- | | -- | |
| Actuarial loss | | 14,172 | | 18,956 | | 7,960 | |
| Benefits paid | | (2,894 | ) | (2,984 | ) | (2,206 | ) |
| |
| |
| |
| |
| Benefit obligation at the end of the year | | 107,710 | | 90,141 | | 62,811 | |
| |
| |
| |
| |
| Fair value of plan assets at the beginning of the year | | 20,013 | | 19,866 | | 20,505 | |
| Actual return (loss) on plan assets | | 5,235 | | (3,738 | ) | (2,785 | ) |
| Employer contributions | | 10,980 | | 5,940 | | 3,470 | |
| Plan participant contributions | | 1,071 | | 929 | | 882 | |
| Benefits paid | | (2,894 | ) | (2,984 | ) | (2,206 | ) |
| |
| |
| |
| |
| Fair value of plan assets at the end of the year | | 34,405 | | 20,013 | | 19,866 | |
| |
| |
| |
| |
| Funded status | | (73,305 | ) | (70,128 | ) | (42,945 | ) |
| Unrecognized transition asset | | (1,571 | ) | (1,714 | ) | (1,856 | ) |
| Unrecognized net actuarial losses | | 39,685 | | 31,669 | | 8,863 | |
| Unrecognized prior service cost | | (6,887 | ) | (625 | ) | (702 | ) |
| |
| |
| |
| |
| Accrued postretirement benefits cost | | $(42,078 | ) | $(40,798 | ) | $(36,640 | ) |
| |
| |
| |
| |
The benefit obligation was determined by applying the terms of the plan and actuarial models required by SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” These models include various actuarial assumptions, including discount rates, assumed rates of return on plan assets and healthcare cost trend rates. The actuarial assumptions also anticipate future cost-sharing changes to retiree contributions that will maintain the current cost-sharing ratio between the Company and the retirees. The Company evaluates its actuarial assumptions on an annual basis and considers changes in these long-term factors based upon market conditions, historical experience and the requirements of SFAS No. 106.
44
The plan amendment, which changed the prescription drug benefits, was effective January 1, 2003.
The following assumptions were used to determine benefit obligations at December 31:
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| Discount rate | | 6.0 | % | 6.5 | % | 7.0 | % |
| Expected long-term rate of return on plan assets, net of tax at 40% | | 6.0 | % | 5.4 | % | 6.0 | % |
| Initial healthcare cost trend rate | | 10.5 | % | 10.0 | % | 8.1 | % |
| Ultimate healthcare cost trend rate | | 5.0 | % | 5.0 | % | 5.0 | % |
| Year ultimate healthcare cost trend rate reached | | 2016 | | 2014 | | 2010 | |
The following assumptions were used to determine net periodic benefit cost for years ended December 31:
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| Discount rate | | 6.5 | % | 7.0 | % | 7.5 | % |
| Expected long-term rate of return on plan assets, net of tax at 40% | | 5.4 | % | 6.0 | % | 6.0 | % |
| Initial healthcare cost trend rate | | 10.5 | % | 10.5 | % | 8.1 | % |
| Ultimate healthcare cost trend rate | | 5.0 | % | 5.0 | % | 5.0 | % |
| Year ultimate healthcare cost trend rate reached | | 2016 | | 2014 | | 2010 | |
The discount rate assumptions reflect the rates available on high-quality fixed income debt instruments on December 31 of each year.
The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects on December 31, 2003 results:
| | | | | |
| | 1-Percent-Point | | 1-Percent-Point | |
| | Increase | | Decrease | |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | |
| Effect on total of service and interest cost | | $ 2,884 | | $ (2,230) | |
| Effect on accumulated postretirement benefit obligation | | 21,128 | | (16,787) | |
The Company has established a Group Benefit Trust to fund the plan and process benefit payments. The assets of the trust are invested entirely in funds designed to track the Standard & Poor’s 500 Index (S&P 500). This investment strategy reflects the long-term nature of the plan obligation and seeks to take advantage of the superior earnings potential of equity securities. The Company uses the long-term historical return on the plan assets and the historical performance of the S&P 500 to develop its expected return on plan assets. The required use of an expected long-term rate of return on plan assets may result in recognizing income that is greater or less than the actual return on plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income recognition that more closely matches the pattern of the services provided by the employees. The change in the expected long-term rate of return on plan assets did not have a material effect on the net periodic benefit cost for the year ended December 31, 2003. The expected long-term rate of return on plan assets was unchanged in 2002.
The funding of the trust is an estimated amount which is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended, and was $11.0 million, $5.9 million and $3.5 million, for the years ended December 31, 2003, 2002 and 2001, respectively. There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC.
The Company forecasts the following benefit payments, which includes a projection for expected future employee service: $1.6 million in 2004, $1.9 million in 2005, $2.2 million in 2006, $2.7 million in 2007, $3.2 million in 2008 and $26.2 million over the five-year period covering 2009 through 2013.
On December 8, 2003, the “Medicare Prescription Drug, Improvement, and Modernization Act of 2003” (Act) was signed into law. In accordance with FASB Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” the Company has elected to defer recognizing the effects of the Act. Therefore, the benefit obligation and net periodic postretirement benefit cost in the Company’s financial statements and accompanying notes do not reflect the effects of the Act on the plan. Specific authoritative guidance on the accounting for the federal subsidy is pending and such guidance, when issued, could require the Company to change previously reported information. Also, the Company may need to amend the plan to benefit from the Act.
45
NOTE 14—LONG-TERM DEBT
Long-term debt consisted of the following:
| | As of December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Commercial paper | | $114,127 | | $113,807 | | $ -- | |
| Derivative instrument | | 25,418 | | 991 | | -- | |
| Uncommitted revolving credit facility | | -- | | -- | | 113,324 | |
| Industrial development revenue and private activity bonds | | 9,485 | | 11,400 | | 17,415 | |
| |
| |
| |
| |
| | 149,030 | | 126,198 | | 130,739 | |
| Less current maturities | | 144,135 | | 6,505 | | 12,520 | |
| |
| |
| |
| |
| | $ 4,895 | | $119,693 | | $118,219 | |
| |
| |
| |
| |
During the third quarter of 2002, the Company refinanced a C$180.4 million bank loan that had been designated as a nonderivative hedge of the net investment in the Company’s Canadian subsidiary. The bank loan was replaced with commercial paper in support of a cross-currency swap (derivative instrument). This derivative instrument was designated as a hedge of the net investment in the Company’s Canadian subsidiary and is recognized on the balance sheet at its fair value.
The two-year cross-currency swap matures on September 27, 2004. The cross-currency swap is based on notional principal amounts of C$180.4 million and U.S.$113.7 million, respectively. Initially, the Company gave the counterparty U.S.$113.7 million and received from the counterparty C$180.4 million. The Company receives interest based on the 30-day U.S. commercial paper rate. At December 31, 2003, this rate was 1.02%. The Company pays interest to the counterparty based on the 30-day Canadian Bankers’ Acceptances rate plus 19 basis points. At December 31, 2003 this rate was 2.94%. The outstanding underlying commercial paper was U.S.$114.1 million with an interest rate of 1.10% at December 31, 2003. The fair value of the derivative instrument was a liability of U.S.$25.4 million as of December 31, 2003. The Company has the ability and the intent to refinance the underlying commercial paper issued in connection with the two-year cross-currency swap with its credit lines through the swap’s maturity, therefore the commercial paper has been classified as long-term debt. The Company is determining whether or not it will renew the cross-currency swap when it comes due on September 27, 2004. As a result, the commercial paper debt and related derivative instrument have been classified as current maturities of long-term debt at December 31, 2003. When the cross-currency swap matures, the Company will pay the counterparty C$180.4 million and will receive U.S.$113.7 million.
The Company formally assesses, on a quarterly basis, whether the cross-currency swap is effective at offsetting changes in the fair value of the underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, exchange rate changes in the value of the cross-currency swap are generally offset by changes in the value of the net investment. Under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” changes in the fair value of this instrument are recognized in foreign currency translation adjustments, a component of Accumulated other comprehensive earnings (losses), to offset the change in the value of the net investment of the Canadian investment being hedged. During 2003, the Company included a U.S.$14.9 million, net of tax, loss in Accumulated other comprehensive earnings (losses) related to this hedge. The impact to 2003 and 2002 earnings resulting from the ineffective portion of the hedge was immaterial. The cross-currency swap is an over-the-counter instrument with a liquid market. The Company has established strict counterparty credit guidelines and entered into the transaction with an investment grade financial institution. The Company does not enter into derivative financial instruments for trading purposes.
The industrial development revenue and private activity bonds include various issues that bear interest at variable rates capped at 15%, and come due in various amounts from 2009 through 2021. At December 31, 2003, the weighted average interest rate was 1.58%. Interest rates on some of the issues are subject to change at certain dates in the future. The bondholders may require the Company to redeem certain bonds concurrent with a change in interest rates and certain other bonds annually. In addition, $4.6 million of these bonds had an unsecured liquidity facility available at December 31, 2003, for which the Company compensated a bank through a commitment fee of 0.07%. There were no borrowings related to this facility at December 31, 2003. The Company classified $4.6 million, $6.5 million and $12.5 million of bonds currently subject to redemption options in current maturities of long-term debt at December 31, 2003, 2002 and 2001, respectively.
46
The aggregate amounts of long-term debt maturing in each of the five years subsequent to December 31, 2003, are as follows:
| | | Amounts | |
| Amounts Payable | | Subject to | |
| Under Terms of | | Redemption | |
| Agreements | | Options | |
|
| |
| |
| (In thousands of dollars) | |
| | | | | |
| 2004 | $139,545 | | $4,590 | |
| 2005 | $ -- | | $4,895 | |
| 2006 | $ -- | | $ -- | |
| 2007 | $ -- | | $ -- | |
| 2008 | $ -- | | $ -- | |
| | | | |
The Company’s debt instruments include only standard affirmative and negative covenants that are normal in debt instruments of similar amounts and structure. The Company’s debt instruments do not contain financial or performance covenants restrictive to the business of the Company, reflecting its strong financial position.
The Company is in compliance with all debt covenants for the year ended December 31, 2003.
NOTE 15—LEASES
The Company leases certain land, buildings and equipment. The Company capitalizes all significant leases that qualify for capitalization, of which there were none at December 31, 2003.
At December 31, 2003, the approximate future minimum aggregate payments for all operating leases were as follows (in thousands of dollars):
| | Rent | | |
| | Expense | | |
| |
| | |
| 2004 | | $ 18,192 | | |
| 2005 | | 13,454 | | |
| 2006 | | 9,131 | | |
| 2007 | | 7,213 | | |
| 2008 | | 4,672 | | |
| Thereafter | | 7,383 | | |
| |
| | |
| Total minimum payments required | | $60,045 | | |
| Less amounts representing sublease income | | 455 | | |
| |
| | |
| | $59,590 | | |
| |
| | |
Total rent expense, including both items under lease and items rented on a month-to-month basis, was $19.5 million, $18.8 million and $16.6 million for 2003, 2002 and 2001, respectively. Rent expense is net of sublease income of $0.5 million, $0.4 million and $0.5 million for 2003, 2002 and 2001, respectively.
NOTE 16—STOCK INCENTIVE PLANS
The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to employees. Shares of common stock were authorized for issuance under the plans in connection with awards of nonqualified stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards.
The plans authorize the granting of options to purchase shares at a price of not less than 100% of the closing market price on the last trading day preceding the date of grant. The options expire no later than ten years after the date of grant.
Shares relating to terminated, surrendered or canceled options and stock appreciation rights, to forfeited restricted stock or other awards, or to transactions that result in fewer shares being issued under the plans, are again available for awards under the plans.
In 2001, a broad-based stock option grant covering 774,500 shares was made to employees who had a minimum of five years of service and who were not participants in other stock option programs. In 2003 and 2002, the Company continued to give broad-based stock option grants by granting options covering 161,300 and 89,600 shares, respectively, to those employees who reached major service milestones.
The plans authorize the granting of restricted stock, which is held by the Company pursuant to the terms and conditions related to the applicable grants. Except for the right of disposal, holders of restricted stock have full shareholders’ rights during the period of restriction, including voting rights and the right to receive dividends.
On March 26, 2001, a group of 83 executive officers and other key managers bought 787,020 treasury shares from the Company at the then-current market price of the shares. Cash proceeds from the sale, which amounted to $24.4 million, were used by the Company to repurchase shares of the Company’s stock on the open market.
47
Most employees financed their purchases through loans arranged with a local bank. As of December 31, 2003, all loans payable were settled between each employee and the bank. Executives who met a threshold purchase requirement of one times their annual base salary received a 25% matching grant of restricted stock that vested if they remained with the Company and held their purchased shares for a minimum of two years. The grant totaled 192,275 shares of restricted stock. In 2002, 95,720 of these shares were converted from restricted stock into a like number of restricted stock units, which are subject to the same vesting provisions as the original restricted stock. These restricted stock units are to be settled, at various times after vesting, by the delivery of unrestricted shares of Company common stock on a one for one basis. In March 2003, 95,720 restricted stock units vested.
There were 20,000 shares of restricted stock issued in 2003 with a weighted average fair market value of $47.72 per share. There were 110,000 shares of restricted stock issued in 2002 with a weighted average fair market value of $56.31 per share. There were 247,275 shares of restricted stock issued in 2001 with a weighted average fair market value of $33.30 per share. The shares vest over periods from two to ten years from issuance, although accelerated vesting is provided in certain instances. Restricted stock vested was 96,790, 112,000 and 87,000 shares in 2003, 2002 and 2001, respectively. Compensation expense related to restricted stock awards is based upon market prices at the date of grant and is charged to earnings on a straight-line basis over the period of restriction. Total compensation expense related to restricted stock was $4.8 million, $6.4 million and $8.9 million in 2003, 2002 and 2001, respectively. In 2001, $2.2 million of restricted stock compensation expense related to the 2001 digital business restructuring was included in restructuring charges.
Nonemployee directors participate in the Company’s Director Stock Plan. A total of 346,630 shares of common stock are available for issuance under the plan as of December 31, 2003.
A retainer fee for board service is paid to nonemployee directors in the form of an annual award of unrestricted shares of common stock under the Director Stock Plan. The number of shares awarded is equal to the retainer fee divided by the fair market value of a share of common stock at the time of the award, rounded up to the next ten-share increment. Total shares granted were 6,160, 5,850 and 8,130 in 2003, 2002 and 2001, respectively.
In addition, nonemployee directors receive an annual grant under the Director Stock Plan, denominated in dollars, of options to purchase shares of common stock. The number of shares covered by each option is equal to the dollar amount of the grant divided by the fair market value of a share of common stock at the time of the award, rounded to the next ten-share increment. The options are issued at market price at date of grant. The options are fully exercisable upon award and have a ten-year term. Total option awards were 15,840, 14,850 and 19,200 shares in 2003, 2002 and 2001, respectively.
The Company awards stock units under the Director Stock Plan in connection with deferrals of director fees and dividend equivalents on existing stock units. A stock unit is the economic equivalent of a share of common stock. Deferred fees and dividend equivalents on existing stock units are converted into stock units on the basis of the market value of the stock at the relevant times. Payment of the value of stock units is scheduled to be made after termination of service as a director. As of December 31, 2003, nine directors held stock units. As of both December 31, 2002 and 2001, ten directors held stock units. The Company recognized expense for the appreciation in equivalent value of stock units of $1.0 million, $0.5 million and $0.4 million for 2003, 2002 and 2001, respectively. Total stock units outstanding were 39,506, 45,556 and 45,844 as of December 31, 2003, 2002 and 2001, respectively.
Transactions involving stock options are summarized as follows:
| | Shares Subject to Option | | Weighted Average Price Per Share | | Options Exercisable | |
| |
| |
| |
| |
| Outstanding at January 1, 2001 | | 5,953,410 | | $40.96 | | 2,363,810 | |
| | | | | |
| |
| Granted | | 3,080,780 | | $39.26 | | | |
| Exercised | | (385,567 | ) | $26.13 | | | |
| Cancelled or expired | | (259,036 | ) | $42.78 | | | |
| |
| | | | | |
| Outstanding at December 31, 2001 | | 8,389,587 | | $40.96 | | 2,826,979 | |
| | | | | |
| |
| Granted | | 2,080,005 | | $54.50 | | | |
| Exercised | | (706,102 | ) | $33.68 | | | |
| Cancelled or expired | | (298,652 | ) | $42.19 | | | |
| |
| | | | | |
| Outstanding at December 31, 2002 | | 9,464,838 | | $44.44 | | 3,320,888 | |
| | | | | |
| |
| Granted | | 1,856,590 | | $45.69 | | | |
| Exercised | | (427,857 | ) | $36.72 | | | |
| Cancelled or expired | | (479,639 | ) | $45.90 | | | |
| |
| | | | | |
| Outstanding at December 31, 2003 | | 10,413,932 | | $44.91 | | 4,148,846 | |
| |
| | | |
| |
48
All options were issued at market price on the date of grant. Options were issued with initial vesting periods ranging from immediate to six years.
Information about stock options outstanding and exercisable as of December 31, 2003, is as follows:
| | | | | |
|---|
| | Options Outstanding | |
| |
| |
| | | | | | Weighted Average | |
| | | | | |
| |
| | Range of Exercise
Prices | | Number
Outstanding | | Remaining
Contractual Life | | Exercise
Price | |
| |
| |
| |
| |
| |
| | $30.74 - $37.51 | | 2,928,803 | | 5.7 years | | $36.46 | |
| | $37.52 - $47.26 | | 3,999,214 | | 7.9 | | $44.62 | |
| | $47.27 - $57.08 | | 3,485,915 | | 6.8 | | $52.36 | |
| | | |
|
| | | | | 10,413,932 | | 6.9 years | | $44.91 | |
| | | | | | | | | | |
| | Options Exercisable | | | |
| |
| | | |
| | Range of Exercise
Prices | | Number
Exercisable | | Weighted Average
Exercise Price | | | |
| |
| |
| |
| | | |
| | $30.74 - $37.51 | | 1,117,240 | | $34.80 | | | |
| | $37.52 - $47.26 | | 1,461,161 | | $43.75 | | | |
| | $47.27 - $57.08 | | 1,570,445 | | $49.74 | | | |
| | | |
| | |
| | | | | 4,148,846 | | $43.61 | | | |
Shares available for issuance in connection with awards of stock options, stock appreciation rights, stock units, shares of common stock, restricted shares of common stock and other stock-based awards to employees and directors were 2,016,160, 2,161,563 and 3,805,674 at December 31, 2003, 2002 and 2001, respectively.
In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to continue to account for stock compensation under Accounting Principles Board Opinion No. 25. Pro forma net earnings and earnings per share, as calculated under SFAS No. 123, are as follows:
| | | |
|---|
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars, | |
| | except for per share amounts) | |
| | | | | | | | |
| Net earnings, pro forma | | $212,710 | | $196,860 | | $162,269 | |
| Earnings per share, pro forma: | |
| Basic | | $ 2.34 | | $ 2.14 | | $ 1.74 | |
| Diluted | | $ 2.31 | | $ 2.10 | | $ 1.72 | |
The weighted average fair value of the stock options granted during 2003, 2002 and 2001 was $10.43, $14.77 and $10.89, respectively. The fair value of each option grant was estimated using the Black-Scholes option-pricing model based on the date of the grant and the following weighted average assumptions:
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| Risk-free interest rate | | 3.4 | % | 4.9 | % | 5.1 | % |
| Expected life | | 7 years | | 7 years | | 7 years | |
| Expected volatility | | 20.1 | % | 20.1 | % | 20.1 | % |
| Expected dividend yield | | 1.8 | % | 1.8 | % | 1.8 | % |
49
NOTE 17—CAPITAL STOCK
The Company had no shares of preferred stock outstanding as of December 31, 2003, 2002 and 2001. The activity of outstanding common stock and common stock held in treasury was as follows:
| | | | | | |
|---|
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | Outstanding Common Stock | | Treasury Stock | | Outstanding Common Stock | | Treasury Stock | | Outstanding Common Stock | | Treasury Stock | |
| |
| |
| |
| |
| |
| |
| |
| Balance at beginning of period | | 91,568,055 | | 17,449,587 | | 93,344,641 | | 15,129,062 | | 93,932,870 | | 14,104,212 | |
| Exercise of stock options | | 415,244 | | (5,500 | ) | 582,243 | | (1,000 | ) | 332,217 | | -- | |
| Issuance and vesting of restricted | |
| stock, net of 30,920, 35,224 | |
| and 28,216 shares retained, | |
| respectively | | (10,920 | ) | -- | | 74,776 | | -- | | 219,059 | | -- | |
| Cancellation of restricted shares | | (39,250 | ) | -- | | (16,360 | ) | -- | | (114,655 | ) | -- | |
| Conversion of restricted stock | |
| to restricted stock units | | -- | | -- | | (95,720 | ) | -- | | -- | | -- | |
| Purchase of 4,801,600 shares | |
| of stock, net of 4,695,725 | |
| treasury shares transferred in | |
| connection with related | |
| party transaction | | -- | | -- | | (105,875 | ) | 105,875 | | -- | | -- | |
| Purchase of treasury shares, | |
| net of 6,160, 5,850 and | |
| 8,130 shares issued, | |
| respectively | | (912,140 | ) | 912,140 | | (2,215,650 | ) | 2,215,650 | | (1,811,870 | ) | 1,811,870 | |
| Issuance of treasury shares | |
| related to executive | |
| stock purchase | | -- | | -- | | -- | | -- | | 787,020 | | (787,020 | ) |
| |
| |
| |
| |
| |
| |
| |
| Balance at end of period | | 91,020,989 | | 18,356,227 | | 91,568,055 | | 17,449,587 | | 93,344,641 | | 15,129,062 | |
| |
| |
| |
| |
| |
| |
| |
NOTE 18—INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company does not provide for a U.S. income tax liability on undistributed earnings of its foreign subsidiaries. The earnings of non-U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in those non-U.S. operations or will be remitted substantially free of additional tax.
Income tax expense consisted of:
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Current provision: | | | | | | | |
| Federal | | $121,671 | | $140,453 | | $107,667 | |
| State | | 22,307 | | 24,696 | | 18,998 | |
| Foreign | | 4,759 | | 3,680 | | 5,023 | |
| |
| |
| |
| |
| Total current | | 148,737 | | 168,829 | | 131,688 | |
| Deferred tax provision (benefit) | | 5,382 | | (6,480 | ) | (8,938 | ) |
| |
| |
| |
| |
| Total provision | | $154,119 | | $162,349 | | $122,750 | |
| |
| |
| |
| |
50
The income tax effects of temporary differences that gave rise to the net deferred tax asset were:
| | As of December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Deferred tax assets: | | | | | | | |
| Inventory valuation | | $ 42,365 | | $ 38,583 | | $ 37,810 | |
| Administrative and general expenses deducted | |
| on a paid basis for tax purposes | | 52,820 | | 52,090 | | 55,850 | |
| Employment-related benefits expense | | 32,470 | | 32,391 | | 29,321 | |
| Intangibles amortization | | 987 | | 6,723 | | 3,623 | |
| Foreign net operating loss carryforwards | | 10,248 | | 10,032 | | 10,618 | |
| Unrealized capital losses | | 4,671 | | 1,950 | | 3,316 | |
| Tax benefit (expense) related to designated hedge | | 9,914 | | 387 | | (607 | ) |
| Other | | 1,401 | | 2,830 | | 2,824 | |
| |
| |
| |
| |
| Deferred tax assets | | 154,876 | | 144,986 | | 142,755 | |
| Less valuation allowance | | (14,919 | ) | (11,982 | ) | (13,934 | ) |
| |
| |
| |
| |
| Deferred tax assets, net of valuation allowance | | $139,957 | | $133,004 | | $128,821 | |
| | |
| |
| |
| |
| Deferred tax liabilities: | |
| Purchased tax benefits | | $(11,008 | ) | $(11,854 | ) | $ (12,540 | ) |
| Temporary differences related to | |
| property, buildings and equipment | | (9,154 | ) | (5,273 | ) | (5,329 | ) |
| Unrealized gain on investments | | -- | | -- | | (3,378 | ) |
| Deferred tax liability of foreign investment | |
| corporation | | -- | | -- | | (11,359 | ) |
| |
| |
| |
| |
| Deferred tax liabilities | | (20,162 | ) | (17,127 | ) | (32,606 | ) |
| |
| |
| |
| |
| Net deferred tax asset | | $119,795 | | $115,877 | | $ 96,215 | |
| |
| |
| |
| |
| The net deferred tax asset is classified as follows: | |
| Current assets | | $ 99,499 | | $ 95,336 | | $ 97,454 | |
| Noncurrent assets (liabilities) | | 20,296 | | 20,541 | | (1,239 | ) |
| |
| |
| |
| |
| Net deferred tax asset | | $119,795 | | $115,877 | | $ 96,215 | |
| |
| |
| |
| |
The purchased tax benefits represent lease agreements acquired in prior years under the provisions of the Economic Recovery Act of 1981.
At December 31, 2003, the Company has $30.6 million of foreign operating loss carryforwards related to a foreign operation, which begin to expire in 2006. The valuation allowance represents a provision for uncertainty as to the realization of these carryforwards.
In addition, the Company recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to capital loss carryforward limitations. The changes in the valuation allowance were as follows:
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Beginning balance | | $ 11,982 | | $ 13,934 | | $ 8,217 | |
| Foreign net operating loss carryforwards | | 216 | | (586 | ) | 2,401 | |
| Unrealized capital losses | | 2,721 | | (1,366 | ) | 3,316 | |
| |
| |
| |
| |
| Ending balance | | $ 14,919 | | $ 11,982 | | $ 13,934 | |
| |
| |
| |
| |
51
A reconciliation of income tax expense with federal income taxes at the statutory rate follows:
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Federal income taxes at the statutory rate | | $133,382 | | $139,243 | | $104,048 | |
| Foreign rate differences | | 1,025 | | 1,631 | | 1,725 | |
| State income taxes, net of federal income tax benefits | | 14,500 | | 15,404 | | 12,349 | |
| Other-net | | 5,212 | | 6,071 | | 4,628 | |
| |
| |
| |
| |
| Income tax expense | | $154,119 | | $162,349 | | $122,750 | |
| |
| |
| |
| |
| Effective tax rate | | 40.4 | % | 40.8 | % | 41.3 | % |
| |
| |
| |
| |
NOTE 19—EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares outstanding during the year. Diluted earnings per share is based on the combination of weighted average number of shares outstanding and dilutive potential shares. The Company had additional outstanding stock options of 3.6 million, 2.7 million and 1.7 million for the years ended December 31, 2003, 2002 and 2001, respectively, that were not included in the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of the common stock.
The following table sets forth the computation of basic and diluted earnings per share:
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands, except for | |
| | per share amounts) | |
| | | | | | | | |
| Earnings before cumulative effect of accounting change | | $226,971 | | $235,488 | | $174,530 | |
| Cumulative effect of accounting change | | -- | | (23,921 | ) | -- | |
| |
| |
| |
| |
| Net earnings | | $226,971 | | $211,567 | | $174,530 | |
| |
| |
| |
| |
| |
| Denominator for basic earnings per share- | |
| weighted average shares | | 90,731 | | 91,982 | | 93,189 | |
| Effect of dilutive securities stock-based compensation | | 1,663 | | 2,321 | | 1,539 | |
| |
| |
| |
| |
| |
| Denominator for diluted earnings per share- | |
| weighted average shares adjusted for dilutive securities | | 92,394 | | 94,303 | | 94,728 | |
| |
| |
| |
| |
| Basic earnings per share before | | | | | | | |
| cumulative effect of accounting change | | $ 2.50 | | $ 2.56 | | $ 1.87 | |
| Cumulative effect of accounting change | | -- | | (0.26 | ) | -- | |
| |
| |
| |
| |
| Basic earnings per common share | | $ 2.50 | | $ 2.30 | | $ 1.87 | |
| |
| |
| |
| |
| Dilutive earnings per share before | |
| cumulative effect of accounting change | | $ 2.46 | | $ 2.50 | | $ 1.84 | |
| Cumulative effect of accounting change | | -- | | (0.26 | ) | -- | |
| |
| |
| |
| |
| Dilutive earnings per common share | | $ 2.46 | | $ 2.24 | | $ 1.84 | |
| |
| |
| |
| |
NOTE 20—PREFERRED SHARE PURCHASE RIGHTS
The Company has a Shareholder Rights Plan, under which there is outstanding one preferred share purchase right (Right) for each outstanding share of the Company’s common stock. Each Right, under certain circumstances, may be exercised to purchase one one-hundredth of a share of Series A-1999 Junior Participating Preferred Stock (intended to be the economic equivalent of one share of the Company’s common stock) at a price of $250.00, subject to adjustment. The Rights become exercisable only after a person or a group, other than a person or group exempt under the plan, acquires or announces a tender offer for 15% or more of the Company’s common stock. If a person or group, other than a person or group exempt under the plan, acquires 15% or more of the Company’s common stock or if the Company is acquired in a merger or other business combination transaction, each Right generally entitles the holder, other than such person or group, to purchase, at the then-current exercise price, stock and/or other securities or assets of the Company or the acquiring company having a market value of twice the exercise price.
52
The Rights expire on May 15, 2009, unless earlier redeemed. They generally are redeemable at $.001 per Right until thirty days following announcement that a person or group, other than a person or group exempt under the plan, has acquired 15% or more of the Company’s common stock. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings of the Company.
NOTE 21—SEGMENT INFORMATION
The Company reports three segments: Branch-based Distribution, Lab Safety and Integrated Supply. The Branch-based Distribution segment provides customers with solutions to their immediate facilities maintenance and other needs. Branch-based Distribution is an aggregation of the following: Industrial Supply, Acklands (Canada), FindMRO, Export, Global Sourcing, Parts, Grainger, S.A. de C.V. (Mexico) and Grainger Caribe Inc. (Puerto Rico). Lab Safety is a direct marketer of safety and other industrial products. Integrated Supply serves customers who have chosen to outsource a portion or all of their indirect materials management processes. In April 2001, the Company discontinued its Digital segment except FindMRO, which became part of Branch-based Distribution. See Note 5 to the Consolidated Financial Statements.
The Company’s segments offer differing ranges of services and products and require different resources and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment transfer prices are established at external selling prices, less costs not incurred due to the related party sale.
| | 2003 | |
| |
| |
| | Branch-based Distribution | | Lab
Safety | | Integrated Supply | | Digital | | Total | |
| |
| |
| |
| |
| |
| |
| | | | (In thousands of dollars) | | | |
| | | | | | | | | | | | |
| Total net sales | | $4,167,164 | | $305,480 | | $211,679 | | $ -- | | $4,684,323 | |
| Intersegment net sales | | (15,496 | ) | (1,813 | ) | -- | | -- | | (17,309 | ) |
| |
| |
| |
| |
| |
| |
| Net sales to external customers | | $4,151,668 | | $303,667 | | $211,679 | | $ -- | | $4,667,014 | |
| | | | | | | | | | | | |
| Segment operating earnings | | $ 390,183 | | $ 41,885 | | $ 3,201 | | $ -- | | $ 435,269 | |
| | | | | | | | | | | | |
| Segment assets | | $1,851,640 | | $142,466 | | $ 40,094 | | $ -- | | $2,034,200 | |
| Depreciation and amortization | | 65,744 | | 7,239 | | 1,286 | | -- | | 74,269 | |
| Additions to long-lived assets | | 73,287 | | 33,123 | | 1,839 | | -- | | 108,249 | |
| | | | |
| | 2002 | |
| |
| |
| | Branch-based Distribution | | Lab
Safety | | Integrated Supply | | Digital | | Total | |
| |
| |
| |
| |
| |
| |
| | | | (In thousands of dollars) | | | |
| | | | | | | | | | | | |
| Total net sales | | $4,147,955 | | $286,797 | | $225,967 | | $ -- | | $4,660,719 | |
| Intersegment net sales | | (15,411 | ) | (1,410 | ) | -- | | -- | | (16,821 | ) |
| |
| |
| |
| |
| |
| |
| Net sales to external customers | | $4,132,544 | | $285,387 | | $225,967 | | $ -- | | $4,643,898 | |
| | | | | | | | | | | | |
| Segment operating earnings | | $ 394,861 | | $ 47,105 | | $ 6,231 | | $ -- | | $ 448,197 | |
| | | | | | | | | | | | |
| Segment assets | | $1,872,471 | | $104,372 | | $ 29,539 | | $ -- | | $2,006,382 | |
| Depreciation and amortization | | 68,966 | | 6,421 | | 1,214 | | -- | | 76,601 | |
| Additions to long-lived assets | | 123,039 | | 2,127 | | 1,581 | | -- | | 126,747 | |
| | | | | | | | | | | | |
| | 2001 | |
| |
| |
| | Branch-based Distribution | | Lab
Safety | | Integrated Supply | | Digital | | Total | |
| |
| |
| |
| |
| |
| |
| | | | (In thousands of dollars) | | | |
| | | | | | | | | | | | |
| Total net sales | | $4,251,596 | | $324,797 | | $190,811 | | $ 29,979 | | $4,797,183 | |
| Intersegment net sales | | (13,436 | ) | (1,292 | ) | -- | | (28,138 | ) | (42,866 | ) |
| |
| |
| |
| |
| |
| |
| Net sales to external customers | | $4,238,160 | | $323,505 | | $190,811 | | $ 1,841 | | $4,754,317 | |
| | | | | | | | | | | | |
| Segment operating earnings | | $ 386,331 | | $ 51,114 | | $ 449 | | $(49,227 | ) | $ 388,667 | |
| | | | | | | | | | | | |
| Segment assets | | $1,804,216 | | $114,030 | | $ 27,401 | | $ -- | | $1,945,647 | |
| Depreciation and amortization | | 75,686 | | 8,012 | | 617 | | 1,383 | | 85,698 | |
| Additions to long-lived assets | | 71,281 | | 12,448 | | 185 | | 639 | | 84,553 | |
53
Following are reconciliations of the segment information with the consolidated totals per the financial statements:
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| Operating earnings: | | | | | | | |
| | | | | | | | |
| Total operating earnings for reportable segments | | $ 435,269 | | $ 448,197 | | $ 388,667 | |
| Unallocated expenses | | (48,008 | ) | (55,042 | ) | (50,094 | ) |
| |
| |
| |
| |
| Total consolidated operating earnings | | $ 387,261 | | $ 393,155 | | $ 338,573 | |
| |
| |
| |
| |
| | |
| Assets: | |
| | | | | | | | |
| Total assets for reportable segments | | $ 2,034,200 | | $ 2,006,382 | | $ 1,945,647 | |
| Unallocated assets | | 590,478 | | 431,066 | | 385,599 | |
| |
| |
| |
| |
| Total consolidated assets | | $ 2,624,678 | | $ 2,437,448 | | $ 2,331,246 | |
| |
| |
| |
| |
| |
| | 2003 | |
| |
| |
| | Segment | | | | Consolidated | |
| | Totals | | Unallocated | | Total | |
| |
| |
| |
| |
| Other significant items: | | (In thousands of dollars) | |
| | | | | | | | |
| Depreciation and amortization | | $ 74,269 | | $ 15,984 | | $ 90,253 | |
| Additions to long-lived assets | | $ 108,249 | | $ 3,680 | | $ 111,929 | |
| | | | | | | | |
| | | | | | Long-lived | |
| Geographic Information: | | | | Revenues | | Assets | |
| | | |
| |
| |
| United States | | | | $4,183,321 | | $ 773,411 | |
| Canada | | | | 393,938 | | 143,007 | |
| Other foreign countries | | | | 89,755 | | 4,052 | |
| | | |
| |
| |
| | | | $4,667,014 | | $ 920,470 | |
| | | |
| |
| |
| | | | |
| | 2002 | |
| |
| |
| | Segment | | | | Consolidated | |
| Other significant items: | | Totals | | Unallocated | | Total | |
| |
| |
| |
| |
| Depreciation and amortization | | $ 76,601 | | $ 16,887 | | $ 93,488 | |
| Additions to long-lived assets | | $ 126,747 | | $ 17,278 | | $ 144,025 | |
| | | | | | | | |
| | | | | | Long-lived | |
| Geographic Information: | | | | Revenues | | Assets | |
| | | |
| |
| |
| United States | | | | $ 4,215,483 | | $ 762,661 | |
| Canada | | | | 342,489 | | 118,979 | |
| Other foreign countries | | | | 85,926 | | 4,109 | |
| | | |
| |
| |
| | | | $ 4,643,898 | | $ 885,749 | |
| | | |
| |
| |
| | | | |
| | 2001 | |
| |
| |
| | Segment | | | | Consolidated | |
| Other significant items: | | Totals | | Unallocated | | Total | |
| |
| |
| |
| |
| Depreciation and amortization | | $ 85,698 | | $ 17,511 | | $ 103,209 | |
| Additions to long-lived assets | | $ 84,553 | | $ 32,906 | | $ 117,459 | |
| | | | | | | | |
| | | | | | Long-lived | |
| Geographic Information: | | | | Revenues | | Assets | |
| | | |
| |
| |
| United States | | | | $ 4,275,852 | | $ 722,547 | |
| Canada | | | | 392,433 | | 156,712 | |
| Other foreign countries | | | | 86,032 | | 5,149 | |
| | | |
| |
| |
| | | | $ 4,754,317 | | $ 884,408 | |
| | | |
| |
| |
54
Long-lived assets consist of property, buildings, equipment, capitalized software, goodwill and other intangibles.
Revenues are attributed to countries based on the location of the customer.
Unallocated expenses and unallocated assets primarily relate to the Company headquarters’ support services, which are not part of any business segment. Unallocated expenses include payroll and benefits, depreciation and other costs associated with headquarters-related support services. Unallocated assets include non-operating cash and cash equivalents, and certain prepaid expenses and property, buildings and equipment, net.
The change in the carrying amount of goodwill by segment from December 31, 2001 to December 31, 2003 is as follows:
Goodwill, net by Segment
| | Branch-
based Distribution | |
Lab Safety | |
Integrated Supply | |
Total | |
| |
| |
| |
| |
| |
| | | (In thousand of dollars) | | |
| | | | | | | | | | |
| Balance at December 31, 2001 | | $125,443 | | $25,002 | | $ -- | | $150,445 | |
| Transition impairment | | (32,265 | ) | -- | | -- | | (32,265 | ) |
| Transfer to investment in unconsolidated entity | | (5,063 | ) | -- | | -- | | (5,063 | ) |
| Translation and other | | 1,208 | | 103 | | -- | | 1,311 | |
| |
| |
| |
| |
| |
| Balance at December 31, 2002 | | $ 89,323 | | $25,105 | | $ -- | | $114,428 | |
| Acquisition | | -- | | 22,823 | | -- | | 22,823 | |
| Translation and other | | 19,018 | | -- | | -- | | 19,018 | |
| |
| |
| |
| |
| |
| Balance at December 31, 2003 | | $108,341 | | $47,928 | | $ -- | | $156,269 | |
| |
| |
| |
| |
| |
NOTE 22—SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for 2003 and 2002 is as follows:
| | 2003 Quarter Ended | |
| |
| |
| | | (In thousands of dollars, except for per share amounts) | | |
| | | | | | | | | | | | |
| | March 31 | | June 30 | | September 30 | | December 31 | | Total | |
| |
| |
| |
| |
| |
| |
| Net sales | | $1,139,269 | | $1,172,661 | | $1,200,669 | | $1,154,415 | | $4,667,014 | |
| Cost of merchandise sold | | 745,413 | | 768,589 | | 786,530 | | 728,405 | | 3,028,937 | |
| Gross profit | | 393,856 | | 404,072 | | 414,139 | | 426,010 | | 1,638,077 | |
| Warehousing, marketing and | |
| administrative expenses | | 302,449 | | 311,292 | | 319,818 | | 317,821 | | 1,251,380 | |
| Restructuring credits | | -- | | -- | | -- | | (564 | ) | (564 | ) |
| Operating earnings | | 91,407 | | 92,780 | | 94,321 | | 108,753 | | 387,261 | |
| Net earnings | | 52,404 | | 55,993 | | 56,836 | | 61,738 | | 226,971 | |
| Earnings per share-basic | | 0.58 | | 0.61 | | 0.63 | | 0.68 | | 2.50 | |
| Earnings per share-diluted | | $ 0.57 | | $ 0.60 | | $ 0.62 | | $ 0.67 | | $ 2.46 | |
| | | | | | |
|---|
| | 2002 Quarter Ended | |
| |
| |
| | | (In thousands of dollars, except for per share amounts) | | |
| | | | | | | | | | | | |
| | March 31 | | June 30 | | September 30 | | December 31 | | Total | |
| |
| |
| |
| |
| |
| |
| Net sales | | $1,125,265 | | $1,194,792 | | $1,203,400 | | $1,120,441 | | $4,643,898 | |
| Cost of merchandise sold | | 742,236 | | 795,230 | | 800,840 | | 707,380 | | 3,045,686 | |
| Gross profit | | 383,029 | | 399,562 | | 402,560 | | 413,061 | | 1,598,212 | |
| Warehousing, marketing and | |
| administrative expenses | | 293,069 | | 305,298 | | 302,370 | | 306,259 | | 1,206,996 | |
| Restructuring credits | | -- | | -- | | -- | | (1,939 | ) | (1,939 | ) |
| Operating earnings | | 89,960 | | 94,264 | | 100,190 | | 108,741 | | 393,155 | |
| Net earnings | | 34,537 | | 54,499 | | 59,953 | | 62,578 | | 211,567 | |
| Earnings per share-basic | | 0.37 | | 0.59 | | 0.65 | | 0.69 | | 2.30 | |
| Earnings per share-diluted | | $ 0.36 | | $ 0.57 | | $ 0.64 | | $ 0.67 | | $ 2.24 | |
In 2003 and 2002, the Company reduced the restructuring reserve related to the shutdown of Material Logic by $0.6 million and $1.9 million, respectively, to reflect management’s revised estimates of costs. See Note 5 to the Consolidated Financial Statements.
In the 2002 first quarter, the Company recorded an expense for a cumulative effect of a change in accounting of $23.9 million after-tax. See Note 3 to the Consolidated Financial Statements.
55
NOTE 23—RELATED PARTY TRANSACTION
On February 28, 2002, the Company purchased substantially all of the assets, consisting of 4,801,600 shares of Company common stock and cash, of Mountain Capital Corporation, a Nevada corporation (MCC). In exchange, the Company transferred to MCC 4,695,725 shares of Company common stock. The number of shares transferred reflected a 1.5% discount (72,024 shares) from the number of shares received, and additionally reflected other adjustments designed to reimburse the Company for its direct transaction expenses of $0.6 million (10,549 shares) and for the Company’s payment of indebtedness of MCC of $1.3 million (23,302 shares). The effect on the Company of this transaction was to increase the number of shares held as Treasury stock, thereby reducing the number of shares outstanding by 105,875 shares. The shares received by MCC from the Company were subsequently distributed to the MCC shareholders pursuant to a plan of complete liquidation of MCC.
The transaction documentation includes:
| (i) | a Purchase Agreement containing the terms and conditions of the transaction; |
| (ii) | an Escrow Agreement providing for the pledge by MCC of 10% of the shares received in the transaction, and the |
| pledge by the MCC shareholders of the escrowed shares, as security for the indemnification obligations |
| and liabilities of MCC and the MCC shareholders and |
| (iii) | a Share Transfer Restriction Agreement providing for certain restrictions on the transfer of Company common |
| stock received by or otherwise held by the MCC shareholders and certain other parties to that agreement. |
Prior to the transaction, James D. Slavik, a Company director, was the president and a director of MCC. In addition, Mr. Slavik and certain members of his family owned all of the outstanding stock of MCC either directly or indirectly, including through family trusts of which Mr. Slavik served as trustee. Mr. Slavik was not present and did not participate in any of the deliberations of the Board of Directors or any of its committees relating to the review, consideration or approval of the transaction.
NOTE 24—UNCLASSIFIED–NET
The components of Unclassified–net were as follows:
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands of dollars) | |
| | | | | | | | |
| Gains on sales of investment securities | | $ 1,208 | | $ 7,308 | | $ 138 | |
| Gains on sales of fixed assets | | 3,110 | | 6,409 | | 1,613 | |
| Other income | | 198 | | 1,106 | | 48 | |
| |
| |
| |
| |
| Total income | | 4,516 | | 14,823 | | 1,799 | |
| |
| |
| |
| |
| Write-down of investments | | (1,614 | ) | (3,192 | ) | (7,400 | ) |
| Losses on sales of fixed assets | | (1,503 | ) | (1,190 | ) | -- | |
| Other expense | | (693 | ) | (1,144 | ) | (517 | ) |
| |
| |
| |
| |
| Total expense | | (3,810 | ) | (5,526 | ) | (7,917 | ) |
| |
| |
| |
| |
| Unclassified-net | | $ 706 | | $ 9,297 | | $ (6,118 | ) |
| |
| |
| |
| |
NOTE 25—CONTINGENCIES AND LEGAL MATTERS
The Company has an outstanding guarantee relating to an industrial revenue bond assumed by the buyer of one of the Company’s formerly owned facilities. The maximum exposure under this guarantee is $8.5 million. The Company has not recorded any liability relating to this guarantee and believes it is unlikely that material payments will be required.
As of January 28, 2004, the Company is named, along with numerous other nonaffiliated companies, as a defendant in litigation involving asbestos and/or silica filed on behalf of approximately 3,300 plaintiffs in various states. These lawsuits typically involve claims of personal injury arising from the alleged exposure to asbestos and/or silica as a consequence of products purportedly distributed by the Company. In 2003, lawsuits involving approximately 275 plaintiffs were dismissed with respect to the Company based on the lack of product identification. The Company has denied, or intends to deny, the allegations in the remaining lawsuits. If a specific product distributed by the Company is identified in any of these lawsuits, the Company would attempt to exercise indemnification remedies against the product manufacturer. In addition, the Company believes that a substantial portion of these claims are covered by insurance. The Company is engaged in active discussions with its insurance carriers regarding the scope and amount of coverage. While the Company is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position or results of operations.
56
EXHIBIT 11
W.W. Grainger, Inc. and Subsidiaries |
|---|
| |
| COMPUTATIONS OF EARNINGS PER SHARE |
| | | | | | | | |
| | | | | | | | |
| | 2003 | | 2002 | | 2001 | |
| BASIC: | |
| |
| |
| |
| Weighted average number of shares outstanding during the year | | 90,731,013 | | 91,982,430 | | 93,189,132 | |
| |
| |
| |
| |
| Earnings before cumulative effect of accounting change | | $ 226,971,000 | | $ 235,488,000 | | $ 174,530,000 | |
| Cumulative effect of accounting change | | -- | | (23,921,000 | ) | -- | |
| |
| |
| |
| |
| Net earnings | | $ 226,971,000 | | $ 211,567,000 | | $ 174,530,000 | |
| |
| |
| |
| |
| |
| Earnings per share before cumulative | |
| effect of accounting change | | $ 2.50 | | $ 2.56 | | $ 1.87 | |
| Cumulative effect of accounting change per share | | -- | | (0.26 | ) | -- | |
| |
| |
| |
| |
| Earnings per share | | $ 2.50 | | $ 2.30 | | $ 1.87 | |
| |
| |
| |
| |
| |
| DILUTED: | |
| Weighted average number of shares outstanding during the year | | 90,731,013 | | 91,982,430 | | 93,189,132 | |
| Potential shares: | |
| Shares issuable under outstanding options | | 6,849,373 | | 7,115,270 | | 4,155,999 | |
| Shares which could have been purchased based on | |
| the average market value for the period | | (5,920,171 | ) | (5,721,423 | ) | (3,625,281 | ) |
| |
| |
| |
| |
| | | 929,202 | | 1,393,847 | | 530,718 | |
| Dilutive effect of exercised options prior to being exercised | | 11,815 | | 29,738 | | 16,696 | |
| |
| |
| |
| |
| Shares for the portion of the period | |
| that the options were outstanding | | 941,017 | | 1,423,585 | | 547,414 | |
| Contingently issuable shares | | 722,055 | | 897,482 | | 991,322 | |
| |
| |
| |
| |
| | | 1,663,072 | | 2,321,067 | | 1,538,736 | |
| |
| |
| |
| |
| Adjusted weighted average number of shares | |
| outstanding during the year | | 92,394,085 | | 94,303,497 | | 94,727,868 | |
| |
| |
| |
| |
| | | | | | | |
| Earnings before cumulative effect of accounting change | | $ 226,971,000 | | $ 235,488,000 | | $ 174,530,000 | |
| Cumulative effect of accounting change | | -- | | (23,921,000 | ) | -- | |
| |
| |
| |
| |
| Net earnings | | $ 226,971,000 | | $ 211,567,000 | | $ 174,530,000 | |
| |
| |
| |
| |
| | | | | | | |
| |
| Earnings per share before | |
| cumulative effect of accounting change | | $ 2.46 | | $ 2.50 | | $ 1.84 | |
| Cumulative effect of accounting change per share | | -- | | (0.26 | ) | -- | |
| |
| |
| |
| |
| Earnings per share | | $ 2.46 | | $ 2.24 | | $ 1.84 | |
| |
| |
| |
| |
| | | | | | | |
57
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS | EXHIBIT 23 |
We hereby consent to the incorporation of our report dated January 28, 2004 on page 27 of the Annual Report
for the year ended December 31, 2003 by reference in the prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 33-43902, 333-24215, 333-61980 and 333-105185) and on Form S-4 (No. 33-32091)
of W.W. Grainger, Inc. |
Chicago, Illinois
March 9, 2004 |
58
