408 Planning and Forecasting
assessment of inf lation’s effects, as well as any company circumstances or ac-
tions taken which mitigate the negative effects of inf lation. A series of these
comments are presented in Exhibit 12.32.
The examples in Exhibit 12.32 are representative of over 100 such disclo-
sures that were examined. A recurrent theme is that inf lation has been low in
EXHIBIT 12.32 Management commentary on the effects of inf lation.
Low inf lation and cost recovery contracts: Air T Inc. (2000)
The Company believes that due to the current low levels of inf lation the impact of inf lation
and changing prices on its revenues and net earnings will not have a material effect on its
manufacturing operations, or on its air cargo business. This is because the major cost
components of its operations, consisting principally of fuel, crew and certain maintenance
costs are reimbursed, without markup, under current contract terms.
Inf lation and fixed-price contracts may create problems: American Pacific
Corporation (1999)
Inf lation may have an effect on gross profit in the future as certain of the Company’s
agreements with AP and sodium azide customers require fixed prices, although certain such
agreements contain escalation features that should somewhat mitigate the risks associated
with inf lation.
Inf lation leaves assets undervalued, but depreciation understated: Hartmarx
Corporation (1999)
Considering the impact of inf lation, the current value of net assets would be higher than
the Company’s $189 million book value after ref lecting the Company’s use of the LIFO
inventory method and increases in the value of properties since acquisition. Earnings would
be lower than reported, assuming higher depreciation expense without a corresponding
reduction in taxes.
Cost reduction programs, productivity improvements, and periodic price
increases maintain profit margins: Johnson & Johnson Inc. (1999)
Inf lation rates, even though moderate in many parts of the world during 1999, continue to
have an effect on worldwide economies and, consequently, on the way companies operate. In
the face of increasing costs, the Company strives to maintain its profit margins through cost
reduction programs, productivity improvements and periodic price increases.
Inf lation impact affected by ability to pass on cost increases to customers: Pegasus
Systems Inc. (1999)
Substantial increases in cost and expenses could have a significant impact on results of
operations to the extent such increases are not passed along to customers.
Pricing strategy and efficiency improvements offset inf lation: Polaroid
Corporation (1999)
Inf lation continues to be a factor in many countries in which the Company does business.
The Company’s pricing strategy and continuing efficiency improvements have offset to a
considerable degree inf lation and normal cost increases. The overall inf lationary impact on
the Company’s earnings has not been material.
Inf lation increases borrowing costs: Silgan Holdings Inc. (1999)
Historically, inf lation has not had a material effect on the Company, other than to increase
its cost of borrowing. In general, the Company has been able to increase the sales prices of
its products to ref lect any increases in the prices of raw materials.
SOURCES: Companies’ annual reports. The year following each company name designates the annual re-
port from which each example is drawn.