MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Goodwill, which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, increased by a net $336.9 million and intangible assets increased a net $120.7 million in 2004. Increases in goodwill and intangible assets resulted from acquisitions completed in 2004. Decreases in intangible assets from adjusting the carrying values of certain intangibles for impairment as required by SFAS No. 142 and SFAS No. 144, partially offset the value of acquired intangibles. Foreign currency adjustments and amortiza- tion of intangible assets with finite lives further reduced the net carrying values of intangible assets. Intangible assets with finite lives include costs related to designing, developing, obtaining and implementing internal use software that are capitalized and amortized in accor- dance with Statement of Position (SOP) 98-1, “Account- ing for the Cost of Computer Software Developed or Obtained for Internal Use.” See Note 4, pages 52 and 53 of this report, for a description of the asset impairments recorded in accordance with SFAS No. 142 and SFAS No. 144 during 2004 and a tabular summary of the car- rying values of goodwill and intangible assets. Deferred pension assets recognized in the Consolidat- ed Balance Sheets of $430.2 million at December 31, 2004 represented the recognized portion of the excess of the fair market value of assets in the Company’s defined benefit pension plans over the actuarially-determined pro- jected benefit obligations. The 2004 increase in deferred pension assets of $10.1 million represented primarily the recognition of the current year net pension credit of $6.0 million. The net pension credit increased $3.9 million in 2004 due primarily to a portion of the actual return on defined benefit pension plan assets in 2003 that exceeded the expected return on plan assets. A remaining unrecog- nized actuarial loss in the Company’s defined benefit pen- sion plans at December 31, 2004 related primarily to past years’ lower actual returns on defined benefit pension plan assets, primarily equity investments, compared to the expected returns and the effects of changes in assumptions. The expected long-term rate of return  26 At December 31, 2004, borrowings outstanding under the commercial paper program totaled $231.2 million due primarily to the current year acquisitions. The weighted-average interest rate related to these Net property, plant and equipment increased $70.1 million to $720.4 million at December 31, 2004. The increase was due to capital expenditures of $106.8 mil- lion, acquisitions of $67.2 million and favorable foreign currency translation rates, which were partially offset by depreciation expense of $109.1 million. Capital expen- ditures during 2004 in the Paint Stores Segment were primarily attributable to the opening of new paint stores, the purchase of new automated color matching equipment, the relocation of certain stores and the nor- mal replacement and upgrading of store equipment. In the Consumer, Automotive Finishes and International Coatings Segments, capital expenditures during 2004 were primarily related to efficiency improvements in production and distribution facilities and information systems hardware. The Administrative Segment incurred capital expenditures primarily for upgrading the Com- pany’s headquarters building and information systems hardware. In 2005, the Company expects to spend approximately 40 percent more for capital expenditures than in 2004. The predominant share of the capital expenditures will be due to the planned construction of a new emulsion plant in the western United States, vari- ous capacity and productivity improvement projects at existing manufacturing and distribution facilities, new store openings, completion of the rollout of automated color matching equipment, additional point-of-sale devices and new or upgraded information systems hard- ware. The Company does not anticipate the need for any specific long-term external financing to support these capital expenditures. on assets remained at 7.5 percent in 2004 and 2003. The assumed discount rate used to compute the actuarial present value of projected benefit obligations was decreased from 6.0 percent to 5.75 percent at December 31, 2004 due to reduced rates of high-quality, long-term investments. The net pension credit is expected to remain approximately the same in 2005 due to the net impact of decreasing the assumed discount rate offset by defined benefit pension plan asset returns that exceeded the expected return on plan assets in 2004. See Note 7, on pages 55 through 57 of this report, for a detailed descrip- tion of the defined benefit pension plans and for more financial information concerning the defined benefit pen- sion plans’ obligations, assets and net pension credit. (thousands of dollars) 2004  2003 2002 Net operating cash (Page 44) .................. $ 544,681 $ 558,929 $ 558,917 Capital expenditures (Page 44) .................. (106,822) (116,507) (126,530) Payments of cash dividends (Page 44) .. (96,915) (90,689) (91,007) Free cash flow ............. $ 340,944 $ 351,733 $ 341,380 