MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements of Consolidated Cash Flows, on pages 43 and 44 of this report. EBITDA as used by management is calculated as follows: (thousands of dollars) 2004 2003 2002 Net income (Page 43) .... $ 393,254  $ 332,058  $ 127,565  Cumulative effect of change in accounting principle (Page 43)..... 183,136  Interest expense (Page 43).................... 39,948  38,742  40,475  Income taxes (Page 43).. 185,662  190,868  186,463  Depreciation (Page 44) .. 109,058  104,803  103,659  Amortization (Page 44).. 16,584  11,761  11,989  EBITDA......................... $ 744,506  $ 678,232  $ 653,287  (thousands of dollars) 2003 Change 2002 Paint Stores.................. $ 3,468,857  5.1% $ 3,302,074  Consumer .................... 1,189,666  1.0% 1,178,199  Automotive Finishes .... 456,739  0.6% 453,811  International Coatings. 285,282  16.8% 244,252  Administrative ............. 7,220  11.9% 6,452  $5,407,764  4.3% $5,184,788  RESULTS OF OPERATIONS - 2003 vs. 2002 Shown below are net sales and the percentage change for the current period by reportable segment for 2003 and 2002: Consolidated net sales for 2003 increased due to strong domestic architectural paint sales and a favorable DIY market that continued to gain momentum through- out the year. These gains helped to offset soft domestic commercial architectural, industrial maintenance, prod- uct finishes markets that struggled through the first three quarters of 2003 with some improvement in the last quarter. The domestic automotive refinish market was sluggish in 2003 and could not maintain sales at the same level as 2002. Sales improvement in the interna- tional automotive operating units more than offset the domestic shortfall. Internationally, weak economic con- ditions in most South American countries and unfavor- able foreign currency exchange rates that existed in the first half of 2003 in most South American currencies improved slightly during the last half of 2003. A change in the fiscal year of the South American subsidiaries to a calendar year basis increased consolidated net sales by adding one month’s results. The impact of changing the fiscal year to a calendar year basis more than offset the effect of unfavorable currency exchange fluctuations for 2003. The net effect of the change to a calendar year and currency fluctuations increased consolidated net sales by $8.4 million for the full year 2003. Net sales in the Paint Stores Segment in 2003 increased due primarily to increases in architectural paint volume sales to contractors and DIY customers that were partially offset by weak sales in the industrial maintenance and product finishes categories. Sales from stores opened more than twelve calendar months increased 4.0 percent in 2003. During 2003, the Paint Stores Segment opened 51 new stores and closed 6 resulting in a net increase of 45 stores – no stores were added through acquisition in 2003. At the end of 2003, this Segment had 2,688 stores in operation in the United States, Canada, Mexico, Puerto Rico and the Virgin Islands. During 2003, a total of 495 stores were remer- chandised and their interior design refreshed bringing the total completed over the two-year life of the project to 1,335 stores by the end of 2003. Also in 2003, the Paint Stores Segment completed a two-year project by upgrading the point-of-sale devices in the remaining  half of its stores. Consumer Segment sales throughout 2003 increas- ingly benefited from the improving DIY market resulting in stronger architectural sales at some of the Segment’s largest retailers and increased sales of aerosol and wood care products. The Automotive Finishes Segment’s external net sales increase for 2003 resulted primarily from sales improve- ment in the international operating units of the Segment that more than offset soft domestic sales. The sales increase for 2003 was negatively impacted by unfavor- able currency exchange fluctuations that were partially offset by a change in the fiscal year of consolidated South American subsidiaries to a calendar year basis. The net impact of the unfavorable currency exchange fluctuations and change to a calendar year decreased net sales $1.8 million for 2003. There were 194 automotive branches open at the end of 2003 in the United States, Canada, Chile, Jamaica and Peru. External net sales in the International Coatings Seg- ment increased in 2003 due primarily to strengthening South American economies and a change in the fiscal year of South American subsidiaries to a calendar year basis, adding an additional month sales results, partially offset by unfavorable currency exchange rates. The change to a calendar year and currency exchange fluctu- ations increased net sales for the Segment by $9.7 mil- lion for 2003. Sales volume accounted for the majority of the sales improvement over 2002 as the South Ameri- 34