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Notes to Consolidated Financial Statements NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the company and all majority-owned subsidiaries. International subsidiaries are included in the financial statements on the basis of their November 30 fiscal year-ends to facilitate the timely inclusion of such entities in the company's consolidated financial reporting. All intercompany transactions and profits are eliminated in consolidation. Foreign Currency Translation Financial position and results of operations of the company's international subsidiaries generally are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive income (loss) in shareholders' equity. The cumulative translation gain as of year-end 2004 and 2003 was $87,093,000 and $16,064,000, respectively. The cumulative translation loss as of year-end 2002 was $74,537,000. Income statement accounts are translated at the average rates of exchange prevailing during the year. The different exchange rates from period to period impact the amount of reported income from the company's international operations. Cash and Cash Equivalents Cash equivalents include highly-liquid investments with a maturity of three months or less when purchased. Allowance for Doubtful Accounts The company estimates the balance of allowance for doubtful accounts by analyzing accounts receivable balances by age and applying historical write-off trend rates to the most recent 12 months' sales, less actual write-offs to date. The company estimates include separately providing for specific customer balances when it is deemed probable that the balance is uncollectible. Account balances are charged off against the allowance when it is probable the receivable will not be recovered. The company's allowance for doubtful accounts balance includes an allowance of approximately $6 million for the expected return of products shipped, credits related to pricing or quantities shipped. All of this returns and credits activity is recorded directly to accounts receivable or sales. The following table summarizes the activity in the allowance for doubtful accounts:
* Other amounts are primarily the effects of changes in currency. Inventory Valuations Inventories are valued at the lower of cost or market. Domestic chemical inventory costs are determined on a last-in, first-out (lifo) basis. Lifo inventories represented 30 percent, 29 percent and 30 percent of consolidated inventories at year-end 2004, 2003 and 2002, respectively. All other inventory costs are determined on a first-in, first-out (fifo) basis. Property, Plant and Equipment Property, plant and equipment are stated at cost. Merchandising equipment consists principally of various systems that dispense the company's cleaning and sanitizing products and dishwashing machines. The dispensing systems are accounted for on a mass asset basis, whereby equipment is capitalized and depreciated as a group and written off when fully depreciated. Depreciation is charged to operations using the straight-line method over the assets' estimated useful lives ranging from 5 to 50 years for buildings, 3 to 7 years for merchandising equipment, and 3 to 11 years for machinery and equipment. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income. Goodwill and Other Intangible Assets Goodwill and other intangible assets arise principally from business acquisitions. Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Other intangible assets include primarily customer relationships, trademarks, patents and other technology. The fair value of identifiable intangible assets is estimated based upon discounted future cash flow projections. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful life of other intangible assets was 13 years, 12 years and 15 years as of December 31, 2004, 2003 and 2002, respectively. The weighted-average useful life by class at December 31, 2004 is as follows:
The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period. Total amortization expense related to other intangible assets during the years ended December 31, 2004, 2003 and 2002 was approximately $21.7 million, $21.2 million and $16.9 million, respectively. As of December 31, 2004, future estimated amortization expense related to amortizable other identifiable intangible assets will be:
Effective with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, the company was required to test all existing goodwill for impairment as of January 1, 2002 on a reporting unit basis. Generally, the company's reporting units are its operating segments. Under SFAS No. 142, the fair value approach is used to test goodwill for impairment. This method differed from the company's prior policy of using an undiscounted cash flow method for testing goodwill impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. Fair values of reporting units were established using a discounted cash flow method. Where available and as appropriate, comparative market multiples were used to corroborate the results of the discounted cash flow method. The result of testing goodwill for impairment in accordance with the adoption of SFAS No. 142, was a non-cash charge of $4.0 million after tax, or $0.02 per share, which is reported on the accompanying consolidated statement of income as a cumulative effect of a change in accounting in 2002. The impairment charge relates to the Africa/Export operations, which is part of the International reportable segment. The primary factor resulting in the impairment charge was the difficult economic environment in the region. In accordance with SFAS No. 142, the company continues to test goodwill for impairment on an annual basis for all reporting units, including businesses reporting losses such as GCS Service. Based on the company's testing in 2004 and 2003, there has been no additional impairment of goodwill. The company performs its annual goodwill impairment test during the second quarter. If circumstances change significantly within a reporting unit, the company would test for impairment prior to the annual test. Long-Lived Assets The company periodically reviews its long-lived assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset's carrying value over its fair value. Revenue Recognition The company recognizes revenue as services are performed or on product sales at the time title transfers to the customer. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The company records estimated reductions to revenue for customer programs and incentive offerings, including pricing arrangements, promotions and other volume-based incentives at the time the sale is recorded. The company also records estimated reserves for anticipated uncollectible accounts and for product returns and credits at the time of sale. Income Per Common Share The computations of the basic and diluted income from continuing operations per share amounts were as follows:
Restricted stock awards of approximately 62,300 shares for 2004, 52,800 shares for 2003 and 203,550 shares for 2002 were excluded from the computation of basic weighted-average shares outstanding because such shares were not yet vested at those dates. Stock options to purchase approximately 4.2 million shares for 2004, 4.3 million shares for 2003 and 8.4 million shares for 2002 were not dilutive and, therefore, were not included in the computations of diluted common shares outstanding. Stock-Based Compensation The company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting. Had the company used the fair value-based method of accounting to measure compensation expense for its stock incentive and option plans and charged compensation cost against income, over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for 2004, 2003 and 2002 would have been reduced to the pro forma amounts in the following table:
Pro forma net income for 2004 includes approximately $0.03 per share of after-tax expense related to the acceleration of vesting and issuance of options under a reload feature associated with executive retirements. Note 10 to the consolidated financial statements contains the significant assumptions used in determining the underlying fair value of options. Comprehensive Income Comprehensive income includes net income, foreign currency translation adjustments, minimum pension liabilities, gains and losses on derivative instruments designated and effective as cash flow hedges and nonderivative instruments designated and effective as foreign currency net investment hedges that are charged or credited to the accumulated other comprehensive income (loss) account in shareholders' equity. Derivative Instruments and Hedging Activities The company uses foreign currency forward contracts, interest rate swaps and foreign currency debt to manage risks generally associated with foreign exchange rates, interest rates and net investments in foreign operations. The company does not hold derivative financial instruments of a speculative nature. On the date that the company enters into a derivative contract, it designates the derivative as (1) a hedge of (a) the fair value of a recognized asset or liability or (b) an unrecognized firm commitment (a "fair value" hedge), (2) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash flow" hedge); or (3) a foreign-currency fair-value or cash flow hedge (a "foreign currency" hedge). The company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the company will discontinue hedge accounting prospectively. The company believes that on an ongoing basis its portfolio of derivative instruments will generally be highly effective as hedges. Hedge ineffectiveness during the years ended December 31, 2004, 2003 and 2002 was not significant. All of the company's derivatives are recognized on the balance sheet at their fair value. The earnings impact resulting from the change in fair value of the derivative instruments is recorded in the same line item in the consolidated statement of income as the underlying exposure being hedged. Use of Estimates The preparation of the company's financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. New Accounting Pronouncements In December 2003, The Financial Accounting Standards Board ("FASB") issued a revision to SFAS No. 132, Employers' Disclosures about Pensions and Other Post Retirement Benefits, which requires additional disclosures about the assets, obligations, cash flows and period benefit costs of defined benefit pension plans and other defined benefit post retirement plans. The company adopted these provisions for domestic plans in 2003 and, as permitted under the standard, for international plans in 2004. Note 15 presents the new disclosure requirements. In March 2004, the FASB issued Emerging Issues Task Force (EITF) No. 03- 01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, which provides new guidance for assessing impairment losses on debt and equity investments. The new impairment model applies to investments accounted for under the cost or equity method and investments accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. EITF No. 03-01 also includes new disclosure requirements for cost method investments and for all investments that are in an unrealized loss position. In September 2004, the FASB delayed the accounting provisions of EITF No. 03-01; however the disclosure requirements remain effective and the applicable ones have been adopted for the company's year-end 2004. The company does not expect this guidance to have a significant impact on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payments ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require the company to expense share-based payment awards with compensation cost measured at the fair value of the award. SFAS No. 123R requires the company to adopt the new accounting provisions beginning in the third quarter of 2005. The company expects to restate prior period results as part of its transition to the new standard in line with to the pro forma amounts shown in Note 2 under Stock-Based Compensation. In May 2004, the FASB issued a FASB Staff Position ("FSP") regarding SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions. FSP No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, discusses the effect of the Medicare Prescription Drug, Improvement and Modernization Act (the "Act") enacted in April 2004 and supersedes FSP No. 106-1, which was issued in January 2004. FSP No. 106-2 considers the effect of the two new features introduced in the Act in determining our accumulated postretirement benefit obligation ("APBO") and net periodic postretirement benefit cost. The effect on the APBO will be accounted for as an actuarial experience gain to be amortized into income over the average remaining service period of plan participants. The company's adoption of FSP No. 106-2 in the third quarter of 2004 resulted in an after-tax reduction of the net periodic pension cost of approximately $1.0 million and a reduction of the benefit obligation of $15.5 million during 2004. In November 2004, the FASB issued SFAS No. 151, Inventory Costs – an amendment of ARB No. 43 ("SFAS No. 151"), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-periodic charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company is evaluating the impact of this standard and currently does not expect it to have a significant impact on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets – an Amendment of APB Opinion No. 29, ("SFAS No. 153"). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The company is currently evaluating the impact of this standard and does not expect it to have a significant impact on its consolidated financial statements. In December 2004, the FASB issued an FSP regarding Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, SFAS 109-1. Under the guidance in SFAS No. 109-1, the deduction will be treated as a "special deduction" as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the company's tax return. The company expects to benefit from this deduction with a modest benefit beginning in 2005. In December 2004, the FASB issued an FSP regarding Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("AJCA"), SFAS No. 109-2. SFAS No. 109-2 allows the company time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the AJCA on its plans for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. The AJCA includes a deduction for 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA, at an effective tax cost of 5.25 percent on any such repatriated foreign earnings. Companies may elect to apply this provision to qualifying earnings repatriations in fiscal 2005. The company has begun an evaluation of the effects of the repatriation provisions; however, the company does not expect to be able to complete this evaluation until Congress or the Treasury Department provides additional clarifying language on key elements of the provision. The company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. |
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