11 Foreign Exchange Derivative Financial Instruments Critical Accounting Policies and Estimates The company uses derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activi- ties are to mitigate its exposure to changes in exchange rates  on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates  naturally occurring offsetting positions and then hedges residual balance sheet exposures. At January 1, 2005, the company had  no forward and option purchase contracts outstanding. The company accounts for its derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, which was adopted in the first quarter of 2001. In accordance with SFAS No.133, as amended, these instruments are recognized on the balance sheet as either an asset or a liability measured at fair value. Changes  in the market value and the related foreign exchange gains and losses are recorded in the statement of earnings. Management’s discussion and analysis of financial condition and results of operations are based upon the company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United  States. The preparation of these financial statements requires  the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses  as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments based on historical experi- ence and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these  estimates under different assumptions or conditions. PROPERTY AND EQUIPMENT. Property and equipment are depreci- ated or amortized on a straight-line basis over their useful lives based on management’s estimates of the period over which the assets will be utilized to benefit the operations of the company. The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. The company periodically reviews these lives rela- tive to physical factors, economic factors and industry trends. If there are changes in the planned use of property and equipment or if technological changes were to occur more rapidly than antici- pated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods. INCOME TAXES. The company operates in numerous foreign and domestic taxing jurisdictions where it is subject to various types of tax, including sales tax and income tax. The company’s tax filings are subject to audits and adjustments. Because of the nature of the company’s operations, the nature of the audit items can be complex, and the objectives of the government auditors can result in a tax on the same transaction or income in more than one state or country. As part of the company’s calculation of the provision LITIGATION. From time to time, the company is subject to proceedings, lawsuits and other claims related to products, suppliers, employees, customers and competitors. The company maintains insurance to cover product liability, workers compensa- tion, property and casualty, and general liability matters. The company is required to assess the likelihood of any adverse judg- ments or outcomes to these matters as well as potential ranges  of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after assessment of each matter and the related insurance coverage. The reserve requirements may change in the future due to new developments or changes in approach such as a change in settlement strategy  in dealing with these matters. The company does not believe that any pending litigation will have a material adverse effect on its financial condition or results of operations. WARRANTY. In the normal course of business the company issues product warranties for specific product lines and provides for  the estimated future warranty cost in the period in which the sale is recorded. The estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, claims costs may differ from amounts provided. Adjustments  to initial obligations for warranties are made as changes in the obligations become reasonably estimable. LONG-LIVED ASSETS. Long-lived assets (including goodwill and other intangibles) are reviewed for impairment annually and  whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of the company’s long-lived assets, the company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. Estimates of future cash flows are judgments based on the company’s  experience and knowledge of operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If the company’s estimates or the underlying assumptions change in the future, the company may be required to record impairment charges.