0
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT TO APPLICATION OR REPORT
Filed Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act Of 1934
Eastman Kodak Company
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 1
In response to the Securities and Exchange Commission's periodic review
of our filings under the Securities Exchange Act of 1934, the undersigned
registrant hereby files Amendment No. 1 to amend
the following Items with respect to its Quarterly Report on Form 10-Q
for the three and six months ended June, 2003:
1) The registrant has amended Item 2, "Management Discussion and
Analysis of Financial Condition and Results of Operations," to:
(1) revise the discussion of consumer digital cameras in the
Photography segment section within the "2003 Compared with 2002
Second Quarter Results of Operations - Continuing Operations"
disclosure to describe the impact of seasonality on market share;
and (2) revise the discussion in the "Liquidity and Capital
Resources" disclosure to enhance the disclosure for the potential
impacts resulting from the recent downgrades of the registrant's
credit ratings; and
2) The registrant has amended Item 4, "Controls and Procedures,"
to revise the language to be in accordance with Item 307 of
Regulation S-K.
3) The registrant has amended Item 6, "Exhibits and Reports on
Form 8-K," to (1) revise the Form reference and date in its
certifications that are filed pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002, and in its certifications that are
filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, as a result
of the amendment of the Form 10-Q; and (2) add Exhibit 12,
"Statement Re Computation of Ratio of Earnings to Fixed
Charges."
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by
the undersigned, thereunto duly authorized.
Eastman Kodak Company
(Registrant)
Robert P. Rozek
Controller
Date: September 3, 2003
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-87
EASTMAN KODAK COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 16-0417150
(State of incorporation) (IRS Employer
Identification No.)
343 STATE STREET, ROCHESTER, NEW YORK 14650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 585-724-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class June 30, 2003
Common Stock, $2.50 par value 286,520,200
2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
(in millions, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ---------------------
2003 2002 Change 2003 2002 Change
Net sales $3,352 $3,336 0% $6,092 $6,042 + 1%
Earnings from continuing
operations before interest,
other charges, and income
taxes 177 406 -56 209 539 -61
Earnings from continuing
operations 112 286 -61 109 327 -67
Net earnings 112 284 -61 124 323 -62
Basic and diluted earnings
(loss) per share:
Continuing operations .39 .98 -60 .38 1.12 -66
Discontinued operations .00 (.01) .05 (.01)
Total .39 .97 -60 .43 1.11 -61
3
Net Sales from Continuing Operations by Reportable Segment and All
Other
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- -------------------
2003 2002 Change 2003 2002 Change
Photography
Inside the U.S. $ 972 $1,083 -10% $1,659 $1,882 -12%
Outside the U.S. 1,369 1,295 + 6 2,480 2,310 + 7
------ ------ --- ------ ------ ---
Total Photography 2,341 2,378 - 2 4,139 4,192 - 1
------ ------ --- ------ ------ ---
Health Imaging
Inside the U.S. 266 270 - 1 504 518 - 3
Outside the U.S. 341 299 +14 652 572 +14
------ ------ --- ------ ------ ---
Total Health Imaging 607 569 + 7 1,156 1,090 + 6
------ ------ --- ------ ------ ---
Commercial Imaging
Inside the U.S. 221 204 + 8 434 393 +10
Outside the U.S. 161 157 + 3 320 315 + 2
------ ------ --- ------ ------ ---
Total Commercial Imaging 382 361 + 6 754 708 + 6
------ ------ --- ------ ------ ---
All Other
Inside the U.S. 11 16 -31 22 27 -19
Outside the U.S. 11 12 - 8 21 25 -16
------ ------ --- ------ ------ ---
Total All Other 22 28 -21 43 52 -17
------ ------ --- ------ ------ ---
Consolidated total $3,352 $3,336 0% $6,092 $6,042 + 1%
====== ====== === ====== ====== ===
- -----------------------------------------------------------------------
4
Earnings (Loss) from Continuing Operations Before Interest, Other
Charges, and Income Taxes by Reportable Segment and All Other
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ----------------------
2003 2002 Change 2003 2002 Change
Photography $ 119 $ 257 -54% $ 73 $ 273 -73%
Percent of Sales 5.1% 10.8% 1.8% 6.5%
Health Imaging $ 131 $ 112 +17% $ 240 $ 188 +28%
Percent of Sales 21.6% 19.7% 20.8% 17.2%
Commercial Imaging $ 40 $ 53 -25% $ 84 $ 101 -17%
Percent of Sales 10.5% 14.7% 11.1% 14.3%
All Other $ (22) $ (6) $ (39) $ (13)
Percent of Sales (100.0%) (21.4%) (90.7%) (25.0%)
------- ------ --- ------ ----- ---
Total of segments $ 268 $ 416 -36% $ 358 $ 549 -35%
8.0% 12.5% 5.9% 9.1%
Venture investment
impairments - (10) - (10)
Impairment of Burrell
Companies' net assets
held for sale (9) - (9) -
Restructuring costs and
other (54) - (100) -
GE settlement - - (12) -
Patent infringement
claim settlement (14) - (14) -
Prior year acquisition
settlement (14) - (14) -
------- ------ ---- ------ ----- ---
Consolidated total $ 177 $ 406 -56% $ 209 $ 539 -61%
======= ====== ==== ====== ===== ===
- -----------------------------------------------------------------------
5
Earnings (Loss) From Continuing Operations by Reportable Segment and
All Other
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ----------------------
2003 2002 Change 2003 2002 Change
Photography $ 87 $ 175 -50% $ 52 $ 178 -71%
Percent of Sales 3.7% 7.4% 1.3% 4.2%
Health Imaging $ 101 $ 82 +23% $ 181 $ 132 +37%
Percent of Sales 16.6% 14.4% 15.7% 12.1%
Commercial Imaging $ 25 $ 25 0% $ 45 $ 49 - 8%
Percent of Sales 6.5% 6.9% 6.0% 6.9
All Other $ (17) $ (4) $ (31) $ (10)
Percent of Sales (77.3%) (14.3%) (72.1%) (19.2%)
------ ------ --- ------ ----- ---
Total of segments $ 196 $ 278 -29% $ 247 $ 349 -29%
5.8% 8.3% 4.1% 5.8%
Venture investment
impairments - (13) - (13)
Impairment of Burrell
Companies' net assets
held for sale (9) - (9) -
Restructuring costs
and other (54) - (100) -
GE settlement - - (12) -
Patent infringement
claim settlement (14) - (14) -
Prior year acquisition
settlement (14) - (14) -
Interest expense (34) (44) (71) (88)
Other corporate items 3 3 6 5
Tax benefit -
PictureVision
subsidiary closure - 45 - 45
Tax benefit - donation
of patents - - 8 -
Income tax effects on
above items and taxes
not allocated to
segments 38 17 68 29
------ ---- --- ------ ----- ---
Consolidated total $ 112 $286 -61% $ 109 $ 327 -67%
====== ==== === ====== ===== ===
- ---------------------------------------------------------------------
6
COSTS AND EXPENSES
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ----------------------
2003 2002 Change 2003 2002 Change
Gross profit $1,116 $1,254 -11% $1,940 $2,114 -8%
Percent of Sales 33.3% 37.6% 31.8% 35.0%
Selling, general and
administrative expenses $ 716 $ 656 + 9% $1,282 $1,196 +7%
Percent of Sales 21.4% 19.7% 21.0% 19.8%
Research and development
costs $ 179 $ 192 - 7% $ 373 $ 379 -2%
Percent of Sales 5.3% 5.8% 6.1% 6.3%
- -----------------------------------------------------------------------
2003 COMPARED WITH 2002
Second Quarter
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
Consolidated
Net worldwide sales were $3,352 million for the second quarter of 2003
as compared with $3,336 million for the second quarter of 2002,
representing an increase of $16 million, or a decrease of 6% excluding
the favorable impact of exchange. The increase in net sales was
primarily due to favorable exchange, which increased second quarter
sales by approximately 6.2 percentage points. This increase was
partially offset by decreases attributable to price/mix, primarily
driven by consumer film and photofinishing and consumer digital
cameras, which reduced second quarter sales by approximately 3.3
percentage points, and volume, primarily driven by consumer traditional
film and photofinishing, which reduced second quarter sales by
approximately 2.1 percentage points.
Net sales in the U.S. were $1,470 million for the second quarter of
2003 as compared with $1,573 million for the prior year quarter,
representing a decrease of $103 million, or 7%. Net sales outside the
U.S. were $1,882 million for the current quarter as compared with
$1,763 million for the second quarter of 2002, representing an increase
of $119 million, or 7% as reported, or a decrease of 4% excluding the
favorable impact of exchange.
7
The Company's operations outside the U.S. are reported in three
regions: (1) the Europe, Africa and Middle East region (EAMER), (2) the
Asia Pacific region and (3) the Canada and Latin America region. Net
sales in the EAMER region were $1,045 million for the second quarter of
2003 as compared with $932 million for the prior year quarter,
representing an increase of $113 million, or 12% as reported, or a
decrease of 4% excluding the favorable impact of exchange. Net sales
in the Asia Pacific region were $537 million for the current quarter as
compared with $557 million for the prior year quarter, representing a
decrease of $20 million, or 4% as reported, or a decrease of 9%
excluding the favorable impact of exchange. Net sales in the Canada
and Latin America region were $300 million in the current quarter as
compared with $274 million for the second quarter of 2002, representing
an increase of $26 million, or 9% as reported, or 5% excluding the
favorable impact of exchange.
The Company's major emerging markets include China, Brazil, India,
Mexico, Russia, Korea, Hong Kong and Taiwan. Net sales in emerging
markets were $602 million for the second quarter of 2003 as compared
with $605 million for the prior year quarter, representing a decrease
of $3 million, or a decrease of 4% excluding the favorable impact of
exchange. The emerging market portfolio accounted for approximately
18% of Kodak's worldwide sales and 32% of Kodak's non-U.S. sales in the
quarter. Sales growth in Russia, India and Mexico of 32%, 12% and 1%,
respectively, was offset by declines in China and Brazil of 19% and
12%, respectively.
The increase in sales in Russia is a result of Kodak Express and the
Company's efforts to expand the distribution channels for Kodak
products and services. Sales increases in India were driven by the
continued success from the Company's efforts to increase the level of
camera ownership and to increase the number of Photoshop retail stores.
Sales declines in China resulted from the impact of SARS particularly
for consumer and professional products and services. Declines in
Brazil are reflective of continued economic weakness in that emerging
market country.
Gross profit was $1,116 million for the second quarter of 2003 as
compared with $1,254 million for the second quarter of 2002,
representing a decrease of $138 million, or 11%. The gross profit
margin was 33.3% in the current quarter as compared with 37.6% in the
prior year quarter. The 4.3 percentage point decrease was primarily
attributable to declines in price/mix, driven primarily by consumer
film and consumer digital cameras, which reduced gross profit margins
by approximately 3.5 percentage points and manufacturing
productivity/cost, which negatively impacted gross profit margins by
approximately 1.8 percentage points. These decreases were partially
offset by exchange, which favorably impacted gross profit margins by
approximately 1.0 percentage points.
8
Selling, general and administrative expenses (SG&A) were $716 million
for the second quarter of 2003 as compared with $656 million for the
prior year quarter, representing an increase of $60 million, or 9%.
SG&A increased as a percentage of sales from 19.7% for the second
quarter of 2002 to 21.4% for the current quarter. The increase in SG&A
is primarily attributable to the following charges: $14 million
relating to a patent infringement claim, $14 million associated with
the settlement of outstanding issues related to a prior year
acquisition, $9 million associated with the write-down of the Burrell
Companies' net assets held for sale and unfavorable exchange of $34
million. These items were partially offset by cost savings realized
from position eliminations associated with the prior year's cost
reduction programs.
Research and development costs (R&D) were $179 million for the second
quarter of 2003 as compared with $192 million for the second quarter of
2002, representing a decrease of $13 million, or 7%. R&D decreased as
a percentage of sales from 5.8% for the second quarter of 2002 to 5.3%
for the current quarter. The net decrease in R&D is the result of cost
savings realized from position eliminations associated with the prior
year's cost reduction programs.
Earnings from continuing operations before interest, other charges, and
income taxes for the second quarter of 2003 were $177 million as
compared with $406 million for the second quarter of 2002, representing
a decrease of $229 million, or 56%. This decrease is primarily
attributable to (1) the decline in the gross profit margin and
increases in SG&A, as described above, and (2) focused cost reduction
charges of $54 million incurred during the second quarter of 2003, with
no such costs incurred in the prior year quarter.
Interest expense for the second quarter of 2003 was $34 million as
compared with $44 million for the prior year quarter, representing a
decrease of $10 million, or 23%. The decrease in interest expense is
primarily attributable to lower interest rates and lower average
borrowing levels in the second quarter of 2003 relative to the prior
year quarter.
The other charges component includes principally investment income,
income and losses from equity investments, foreign exchange, and gains
and losses on the sales of assets and investments. Other charges for
the current quarter were $9 million as compared with other charges of
$22 million for the second quarter of 2002. The improvement is
primarily attributable to increased income from the Company's
investment in Kodak Polychrome Graphics (KPG), decreased losses
incurred in relation to the Company's equity investment in the Phogenix
joint venture, which was dissolved in the second quarter of 2003, and
reduced losses from the NexPress joint venture.
9
The Company's estimated annual effective tax rate decreased from 26% in
the three month period ended March 31, 2003 to 24% in the three month
period ended June 30, 2003. This decrease was primarily attributable
to further expected increased earnings from operations in certain lower-
taxed jurisdictions outside the U.S. relative to total consolidated
earnings.
The Company's estimated annual effective tax rate decreased from 29%
for the second quarter of 2002 to 24% for the second quarter of 2003.
The decrease in the estimated annual effective tax rate was primarily
attributable to expected increased earnings from operations in certain
lower-taxed jurisdictions outside the U.S. relative to total
consolidated earnings.
The effective tax rate for the three months ended June 30, 2003 was
approximately 16%, which is unchanged as compared with the effective
tax rate for the three months ended June 30, 2002. The effective tax
rate of 16% for the three months ended June 30, 2003 is lower than the
Company's estimated annual effective tax rate of 24% for 2003 due to
the recording of discrete period tax benefits of $31 million in
connection with the following items, all of which are taxed in
jurisdictions with tax rates greater than the estimated annual
effective tax rate: charges for focused cost reductions of $54 million;
a $14 million charge for the settlement of a patent infringement claim;
a $14 million charge for the settlement of certain issues relating to a
prior year acquisition; and a $9 million charge relating to the
impairment of the Burrell Companies' net assets held for sale.
The effective tax rate of 16% for the three months ended June 30, 2002
was lower than the Company's estimated annual effective tax rate of 29%
for 2002 due to the recording of a discrete period tax benefit of $45
million in connection with the closure of the Company's PictureVision
subsidiary.
The earnings from continuing operations for the second quarter of 2003
were $112 million, or $.39 per diluted share, as compared with earnings
from continuing operations for the second quarter of 2002 of $286
million, or $.98 per diluted share, representing a decrease of $174
million. This decrease in earnings from continuing operations is
attributable to the reasons described above.
10
Photography
Net worldwide sales for the Photography segment were $2,341 million for
the second quarter of 2003 as compared with $2,378 million for the
second quarter of 2002, representing a decrease of $37 million, or 2%
as reported, or 8% excluding the favorable impact of exchange. The
decrease in net sales was comprised of (1) decreases related to volume
driven primarily by volume declines for traditional consumer products
and services, which were partially offset by increases in volume for
consumer digital and entertainment products and services, which in
total reduced second quarter sales by approximately 4.0 percentage
points and (2) declines in price/mix primarily driven by consumer film
and photofinishing and consumer digital cameras, which reduced net
sales by approximately 4.1 percentage points. These declines were
partially offset by favorable exchange, which increased net sales by
approximately 6.5 percentage points.
Photography segment net sales in the U.S. were $972 million for the
current quarter as compared with $1,083 million for the second quarter
of 2002, representing a decrease of $111 million, or 10%. Photography
segment net sales outside the U.S. were $1,369 million for the second
quarter of 2003 as compared with $1,295 million for the prior year
quarter, representing an increase of $74 million, or 6% as reported, or
a decrease of 6% excluding the favorable impact of exchange.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 6% in the second
quarter of 2003 as compared with the second quarter of 2002, reflecting
decreases due to declines in volume of approximately 13%, partially
offset by an increase in price/mix of 1% and favorable exchange of
approximately 6%. Sales of the Company's consumer film products within
the U.S. decreased 9%, reflecting declines in volume of approximately
11% offset by positive price/mix of approximately 2%. The decrease in
volume is largely attributable to the decrease in U.S. consumer film
industry volume in the second quarter of 2003, as described below,
which reflects the downward trend in retail sales. Positive price/mix
trends in the U.S. were the result of better than expected one-time-use
camera mix driven by the HQ, black and white and one-time-use plus
digital family of products, as well as new premium film products
including High Definition and black and white films. It also reflects
the initial retailer inventory build in support of the launch of this
new family of premium one-time-use camera and film products. Sales of
the Company's consumer film products outside the U.S. decreased 2%,
reflecting declines in volume of approximately 14%, partially offset by
favorable exchange of approximately 12%.
U.S. consumer film industry volume decreased 7% in the second quarter
of 2003 as compared with the prior year quarter. The most current U.S.
market trends suggest that, for the second quarter of 2003, digital
substitution accounted for the majority of the industry decline. The
most current U.S. market data trends also indicate that, for the full
year 2003, the U.S. film industry volume will decrease 7% to 8% year-
over-year. The same data suggests that digital substitution will
account for the majority of the industry decline.
11
The Company's blended U.S. consumer film share decreased approximately
1% on a volume basis relative to the second quarter of 2002.
Management remains confident in maintaining full year, 2002 year-over-
year U.S. market share as it has done for the past several consecutive
years.
Worldwide volumes of consumer color paper decreased low double digits
in the second quarter of 2003 as compared with the second quarter of
2002. With U.S. volumes also declining low double digits and volumes
outside the U.S. decreasing high single digits. Kodak will no longer
report sales trends for color negative paper because paper and other
products are typically bundled together as a "systems sell" for
customer contracting purposes.
Net worldwide photofinishing sales, including Qualex in the U.S. and
Consumer Imaging Services (CIS) outside the U.S., decreased 16% in the
second quarter of 2003 as compared with the second quarter of 2002,
reflecting lower volumes and price/mix, partially offset by favorable
exchange. In the U.S., Qualex's sales decreased 22%, reflecting the
effects of a continued weak film industry and consumer's shifting
preference to on-site processing.
Net sales from the Company's consumer digital products and services,
which include picture maker kiosks/media and retail consumer digital
services revenue primarily from Picture CD and Retail.com, increased 1%
in the second quarter of 2003 as compared with the second quarter of
2002, driven primarily by an increase in sales of kiosks and consumer
digital services.
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs averaged 7.4% in the second quarter of 2003, an
increase from the 7.0% rate recorded in the second quarter of 2002.
The growth was driven by continued consumer acceptance of Picture CD
and Retail.com. However, the number of images scanned versus the second
quarter of 2002 decreased 15% due to the negative photofinishing trends
at Qualex resulting from a weak consumer film industry and consumer's
changing preferences towards on-site processing.
The Company's Ofoto business increased its sales 56% in the second
quarter of 2003 as compared with the prior year quarter. Ofoto now has
more than 8 million members and continues to be the market leader in
the online photo services space.
Net worldwide sales of consumer digital cameras increased 65% in the
second quarter of 2003 as compared with the prior year quarter,
primarily reflecting strong increases in volume and favorable exchange,
partially offset by a decline in price/mix. Sales continue to be
driven by strong consumer acceptance of the EasyShare digital camera
system. In addition, Kodak's new Printer Dock 6000, introduced to the
market in March of this year, exceeded sales expectations during the
second quarter.
12
Similar to the prior year, Kodak's U.S. consumer digital camera market
share declined slightly during the second quarter of 2003 on a quarter
sequential basis as the Company refreshes its product portfolio and
transitions to a new line of digital cameras becoming available
throughout the third quarter. A combination of (1) the timing of the
Company's annual introduction of new consumer digital camera products,
and (2) the Company's targeting of the value segment, digital camera
consumer drive higher sales during the holiday season within
the fourth quarter. Consequently, the Company's consumer digital
camera market share is seasonal in that it is typically higher in the
second half of the year, specifically the fourth quarter, as compared
with the first and second quarters. While complete data for second
quarter consumer digital market share is not yet available, all
indications are that Kodak continues to hold one of the top U.S.
market share positions in channels reporting share data, however,
some of Kodak's largest channels do not report market share data.
Net worldwide sales of inkjet photo paper increased 51% in the current
quarter as compared with the second quarter of 2002. The Company
maintained its top two market share position in the United States
quarter sequentially. The double-digit revenue growth and the
maintenance of market share are primarily attributable to strong
underlying market growth, successful merchandising efforts and the
continued growth and acceptance of a new product line of small format
inkjet papers.
Net worldwide sales of professional sensitized films, including color
negative, color reversal and black and white films, decreased 14% in
the second quarter of 2003 as compared with the second quarter of 2002,
primarily reflecting declines in volume and price/mix, partially offset
by favorable exchange. Net worldwide sales of professional sensitized
output declined 3% in the second quarter of 2003 as compared with the
second quarter of 2002, reflecting declines in volume and price/mix,
partially offset by favorable exchange. Sales declines resulted
primarily from the combined impacts of ongoing digital evolution and
continued economic weakness in markets worldwide. These declines were
partially offset by worldwide sales increases in the current quarter
related to digital cameras, digital writers, Event Imaging solutions,
digital systems and solutions, display materials and thermal equipment.
Net worldwide sales of origination and print film to the entertainment
industry increased 18% in the second quarter of 2003 as compared with
the prior year quarter, reflecting higher print film volumes due to a
strong industry motion picture release schedule and favorable exchange.
The new Vision 2 origination film continues to gain strong customer
acceptance.
Gross profit for the Photography segment was $757 million for the
second quarter of 2003 as compared with $896 million for the prior year
quarter, representing a decrease of $139 million or 16%. The gross
profit margin was 32.3% in the current year quarter as compared with
37.7% in the prior year quarter. The 5.4 percentage point decline was
primarily attributable to declines in price/mix primarily driven by
consumer film and consumer digital cameras, which reduced gross profit
margins by approximately 4.4 percentage points and decreases in
manufacturing productivity/cost, which reduced gross margins by
approximately 2.2 percentage points. These decreases were partially
offset by exchange, which favorably impacted gross profit margins by
approximately 1.2 percentage points.
13
SG&A expenses for the Photography segment increased $19 million, or 4%,
from $507 million in the second quarter of 2002 to $526 million in the
current quarter, and increased as a percentage of sales from 21.3% to
22.5%. The increase is primarily attributable to unfavorable exchange
of $28 million, partially offset by cost savings realized from position
eliminations associated with the prior year's cost reduction programs.
R&D costs for the Photography segment decreased $19 million, or 14%,
from $132 million in the second quarter of 2002 to $113 million in the
current quarter and decreased as a percentage of sales from 5.5% in the
prior year quarter to 4.8%. The decrease in R&D was primarily
attributable to cost savings realized from position eliminations
associated with the prior year's cost reduction programs.
Earnings from continuing operations before interest, other charges, and
income taxes for the Photography segment decreased $138 million, from
$257 million in the second quarter of 2002 to $119 million in the
second quarter of 2003, primarily as a result of the factors described
above.
Health Imaging
Net worldwide sales for the Health Imaging segment were $607 million
for the second quarter of 2003 as compared with $569 million for the
prior year quarter, representing an increase of $38 million, or 7% as
reported, or 1% excluding the favorable impact of exchange. The
increase in sales was comprised of (1) an increase in volume of
approximately 3.6 percentage points, driven primarily by volume
increases in digital media, digital capture equipment and equipment
services and (2) an increase from favorable exchange of approximately
6.0 percentage points, which was partially offset by a decrease in
price/mix of approximately 2.7 percentage points, primarily driven by
digital media, laser printers and analog medical film.
Net sales in the U.S. were $266 million for the current quarter as
compared with $270 million for the second quarter of 2002, representing
a decrease of $4 million, or 1%. Net sales outside the U.S. were $341
million for the second quarter of 2003 as compared with $299 million
for the prior year quarter, representing an increase of $42 million, or
14% as reported, or 3% excluding the favorable impact of exchange.
Net worldwide sales of digital products, which include laser printers
(DryView imagers and wet laser printers), digital media (DryView and
wet laser media), digital capture equipment (computed radiography
capture equipment and digital radiography equipment), services and
Picture Archiving and Communications Systems (PACS), increased 11% in
the second quarter of 2003 as compared with the prior year quarter.
The increase in digital product sales was primarily attributable to
favorable exchange and higher volumes of digital media, digital capture
equipment and equipment services. Service revenues increased due to an
increase in digital equipment service contracts during the current
quarter as compared with the second quarter of 2002.
14
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, increased 2% in the second quarter
of 2003 as compared with the second quarter of 2002 due to favorable
exchange and higher specialty film volumes. Traditional analog film
products (excluding specialty films) decreased 3% in the second quarter
of 2003 as compared with the prior year quarter due to lower price/mix,
partially offset by higher volumes and favorable exchange.
Gross profit for the Health Imaging segment was $263 million for the
second quarter of 2003 as compared with $236 million in the prior year
quarter, representing an increase of $27 million, or 11%. The gross
profit margin was 43.3% in the current quarter as compared with 41.5%
in the second quarter of 2002. The increase in the gross profit margin
of 1.8 percentage points was principally attributable to (1) favorable
cost and manufacturing productivity, which increased gross profit
margins by approximately 2.2 percentage points, and (2) favorable
exchange, which contributed approximately 1.3 percentage points to the
gross profit margin. These increases were partially offset by
decreases in price/mix, which negatively impacted gross profit margins
by 1.7 percentage points due to lower prices for digital media, analog
medical film and laser printers.
SG&A expenses for the Health Imaging segment increased $7 million, or
8%, from $87 million in the second quarter of 2002 to $94 million for
the current quarter, and increased as a percentage of sales from 15.3%
to 15.5%. The increase in SG&A expenses is primarily attributable to
the unfavorable effects of foreign exchange, which accounted for $4
million of this change, and increased spending to drive growth.
Second quarter R&D costs increased $1 million, or 3%, from $37 million
to $38 million, but decreased as a percentage of sales from 6.5% for
the second quarter of 2002 to 6.3% for the current quarter.
Earnings from continuing operations before interest, other charges, and
income taxes for the Health Imaging segment increased $19 million, or
17%, from $112 million for the prior year quarter to $131 million for
the second quarter of 2003 due primarily to the reasons described
above.
On July 21, 2003, the Company announced that it has entered into an
agreement to acquire all of the outstanding shares of PracticeWorks
Inc., a leading provider of dental practice management software and
digital radiographic imaging systems for $500 million in cash. This
acquisition is expected to contribute approximately $215 million in
sales to the Health Imaging segment during the first full year. It is
anticipated that the transaction will be slightly dilutive to earnings
from the date of acquisition through the end of 2005 and accretive to
earnings thereafter. This acquisition will enable Kodak to offer its
customers a full spectrum of dental imaging products and services from
traditional film to digital radiography and photography.
15
Commercial Imaging
Net worldwide sales for the Commercial Imaging segment were $382
million for the second quarter of 2003 as compared with $361 million
for the prior year quarter, representing an increase of $21 million, or
6% as reported, or an increase of 3% excluding the favorable impact of
exchange. The increase in net sales was primarily comprised of (1)
increases in volume, which contributed approximately 3.0 percentage
points to second quarter sales, with imaging services and document
scanners being key drivers, and (2) an increase of approximately 3.1
percentage points due to favorable exchange, which was partially offset
by price/mix declines of approximately 0.4 percentage points.
Net sales in the U.S. were $221 million for the current quarter as
compared with $204 million for the prior year quarter, representing an
increase of $17 million, or 8%. Net sales outside the U.S. were $161
million in the second quarter of 2003 as compared with $157 million for
the prior year quarter, representing an increase of $4 million or 3% as
reported, or a decrease of 5% excluding the favorable impact of
exchange.
Net worldwide sales of graphic arts products to Kodak Polychrome
Graphics (KPG), an unconsolidated joint venture affiliate in which the
Company has a 50% ownership interest, decreased 16% in the current
quarter as compared with the second quarter of 2002, primarily
reflecting volume and price/mix declines in graphic arts film. This
reduction resulted largely from digital technology evolution and the
effect of continuing economic weakness in the commercial printing
market.
Despite a continued weakness in the global economy, KPG's earnings
performance continues to improve driven primarily by its world leading
position in the growth segments of digital proofing and digital
printing plates, coupled with favorable foreign exchange. KPG's
operating profit has been positive for 12 consecutive quarters and has
shown consistent improvement during that same period. The Company's
equity in the earnings of KPG contributed positive results to other
charges during the second quarter of 2003.
NexPress, the unconsolidated joint venture between Kodak and Heidelberg
in which the Company has a 50% ownership interest, continues to
increase unit placements of the NexPress 2100 Digital Production Color
Press despite a weak printing market, with good customer acceptance and
average monthly page volumes for these units running higher than
planned.
Gross profit for the Commercial Imaging segment was $105 million for
the second quarter of 2003 as compared with $115 million in the prior
year quarter, representing a decrease of $10 million, or 9%. The gross
profit margin was 27.5% in the current quarter as compared with 31.9%
in the prior year quarter. The decrease in the gross profit margin of
4.4 percentage points was primarily attributable to (1) manufacturing
productivity which negatively impacted gross profit margins by
approximately 3.0 percentage points, (2) declines in price/mix, which
reduced gross profit margins by approximately 0.9 percentage points
primarily due to declining contributions from traditional graphic arts
products, and (3) negative exchange, which reduced gross profit margins
by 0.5 percentage points.
16
SG&A expenses for the Commercial Imaging segment increased $2 million,
or 4%, from $48 million for the second quarter of 2002 to $50 million
for the current quarter, but decreased as a percentage of sales from
13.3% to 13.1%. The increase in SG&A expense was due to the
unfavorable impact of exchange, which accounted for the entire $2
million increase.
Second quarter R&D costs for the Commercial Imaging segment increased
$1 million, or 7%, from $14 million for the second quarter of 2002 to
$15 million for the current quarter, but remained unchanged as a
percentage of sales at 3.9%.
Earnings from continuing operations before interest, other charges, and
income taxes for the Commercial Imaging segment decreased $13 million,
or 25%, from $53 million in the second quarter of 2002 to $40 million
in the second quarter of 2003. This decrease is primarily attributable
to the reasons described above.
All Other
Net worldwide sales for All Other were $22 million for the second quarter
of 2003 as compared with $28 million for the second quarter of 2002,
representing a decrease of $6 million, or 21%. Net sales in the U.S.
were $11 million in the current quarter as compared with $16 million in
the second quarter of 2002. Net sales outside the U.S. were $11 million
in the second quarter of 2003 as compared with $12 million in the prior
year quarter, representing a decrease of $1 million, or 8%.
SK Display Corporation, the OLED manufacturing joint venture between
Kodak and Sanyo, continued production scale-up with the goal of supplying
production quantity OLED screens to the marketplace throughout the
remainder of 2003.
The loss from continuing operations before interest, other charges, and
income taxes for All Other was $22 million in the current quarter as
compared with a loss of $6 million in the second quarter of 2002
primarily driven by increased levels of investment for the Company's
Display business.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
The Company did not have earnings (loss) from discontinued operations,
net of income taxes in the second quarter of 2003. In the second
quarter of 2002 a loss from discontinued operations of $2 million, or
$.01 per diluted share, was reported.
NET EARNINGS
Net earnings for the second quarter of 2003 were $112 million, or $.39
per diluted share, as compared with net earnings for the second quarter
of 2002 of $284 million, or $.97 per diluted share, representing a
decrease of $172 million, or 61%. This decrease is primarily
attributable to the reasons outlined above.
17
Year to Date
Consolidated
Net worldwide sales were $6,092 million for the six months ended June
30, 2003 as compared with $6,042 million for the six months ended June
30, 2002, representing an increase of $50 million, or 1% as reported,
or a decrease of 5% excluding the favorable impact of exchange. The
slight increase in net sales was primarily due to a positive impact
from exchange of approximately 6.0 percentage points. This increase
was almost entirely offset by decreases attributable to price/mix,
which reduced sales by approximately 3.8 percentage points, primarily
driven by consumer film, photofinishing and consumer digital cameras,
and volume, which reduced sales by approximately 1.1 percentage points,
primarily driven by consumer traditional film and photofinishing.
Net sales in the U.S. were $2,619 million for the current year period
as compared with $2,820 million for the prior year period, representing
a decrease of $201 million, or 7%. Net sales outside the U.S. were
$3,473 million for the current year period as compared with $3,222
million for the prior year period, representing an increase of $251
million, or 8% as reported, or a decrease of 3% excluding the favorable
impact of exchange.
The Company's operations outside the U.S. are reported in three
regions: (1) the Europe Africa and Middle East region (EAMER), (2) the
Asia Pacific region and (3) the Canada and Latin America region. Net
sales in the EAMER region for the first six months of 2003 were $1,840
million as compared with $1,648 million for the first six months of
2002, representing an increase of 12% as reported, or a decrease of 4%
excluding the favorable impact of exchange. Net sales in the Asia
Pacific region for the first six months of 2003 were $1,085 million as
compared with $1,061 million for the first six months of 2002,
representing an increase of 2% as reported, or a decrease of 4%
excluding the favorable impact of exchange. Net sales in the Canada
and Latin America region for the first six months of 2003 were $548
million as compared with $513 million for the first six months of 2002,
representing a decrease of 7% as reported, or 3% excluding the negative
impact of exchange.
The Company's major emerging markets include China, Brazil, India,
Mexico, Russia, Korea, Hong Kong and Taiwan. Net sales for Emerging
Market countries were $1,180 million for the six months ended June 30,
2003 as compared with $1,149 million for the six months ended June 30,
2002, representing an increase of $31 million, or 3%, with no impact
from exchange. Sales growth in Russia, India and China of 35%, 13% and
4%, respectively, were the primary drivers of the increase in sales in
Emerging Market countries, partially offset by decreased sales in
Brazil, Hong Kong, Taiwan and Mexico of 18%, 17%, 22% and 2%,
respectively.
18
The increase in sales in Russia is a result of Kodak Express and the
Company's efforts to expand the distribution channels for Kodak
products and services. Sales increases in India were driven by
continued success from the Company's efforts to increase the level of
camera ownership and to increase the number of Photoshop retail stores.
Sales growth in China resulted from strong business performance for all
Kodak's operations in that region in the first quarter of 2003;
however, this growth was partially offset by the impact of SARS
particularly for consumer and professional products and services. The
declines in Hong Kong and Taiwan are also a result of the impact from
SARS. The declines in Brazil are reflective of the continued economic
weakness in that country.
Gross profit was $1,940 million for the six months ended June 30, 2003
as compared with $2,114 million for the six months ended June 30, 2002,
representing a decrease of $174 million, or 8%. The gross profit
margin was 31.8% in the current year period as compared with 35.0% in
the prior year period. The decrease of 3.2 percentage points was
primarily attributable to declines in price/mix and manufacturing
productivity/cost, which reduced gross profit margins by approximately
3.7 and 0.4 percentage points, respectively. The declines in price/mix
relate primarily to consumer film and consumer digital cameras. These
declines were partially offset by favorable exchange, which increased
gross profit margins by approximately 0.9 percentage points.
SG&A expenses were $1,282 million for the six months ended June 30,
2003 as compared with $1,196 million for the six months ended June 30,
2002, representing an increase of $86 million, or 7%. SG&A increased
as a percentage of sales from 19.8% for the prior year period to 21.0%
for the current year period. The net increase in SG&A is primarily
attributable to the following: a charge of $12 million relating to an
intellectual property settlement; a charge of $14 million relating to a
patent infringement claim; a charge of $14 million associated with the
settlement of outstanding issues relating to a prior year acquisition;
a charge of $9 million associated with the write-down of the Burrell
Companies' net assets held for sale; and unfavorable exchange of $62
million. These items were partially offset by cost savings realized
from position eliminations associated with the prior year's cost
reduction programs.
R&D costs were $373 million for the six months ended June 30, 2003 as
compared with $379 million for the six months ended June 30, 2002,
representing a decrease of $6 million, or 2%. R&D decreased slightly
as a percentage of sales from 6.3% for the prior year period to 6.1%
for the current year period. The net decrease in R&D is the result of
cost savings realized from position eliminations associated with the
prior year's cost reduction programs, which were partially offset by a
$21 million R&D charge in the first quarter of 2003 relating to the
Company's purchase of rights to certain print technology that is
currently in development and not yet ready for commercialization. This
technology qualifies as in-process R&D and, therefore, was written off
in the first quarter of 2002.
19
Earnings from continuing operations before interest, other charges, and
income taxes for the six months ended June 30, 2003 were $209 million
as compared with $539 million for the six months ended June 30, 2002,
representing a decrease of $330 million, or 61%. The decrease is
primarily the result of (1) the decline in gross profit margin and an
increase in SG&A, and (2) net focused cost reduction charges of $100
million incurred during the first half of 2003, with no such costs
incurred in the prior year period.
Interest expense for the six months ended June 30, 2003 was $71 million
as compared with $88 million for the six months ended June 30, 2002,
representing a decrease of $17 million, or 19%. The decrease in
interest expense is primarily attributable to lower interest rates and
lower average borrowing levels in the first six months of 2003 relative
to the first six months of 2002.
Other charges for the current year period were a net charge of $30
million as compared with a net charge of $53 million for the prior year
period. The decrease in other charges is primarily attributable to
increased income from the Company's equity investment in KPG and
decreased losses incurred in relation to the Company's equity
investment in the Phogenix joint venture, which was dissolved in the
second quarter of 2003.
The effective tax rate for the six months ended June 30, 2003 was
approximately 1%, as compared with 18% for the six months ended June
30, 2002. The decrease in the effective tax rate is due to a decrease
in the estimated annual effective tax rate from 29% in the first half
of 2002 to 24% in the first half of 2003, as well as discrete period
items, which resulted in tax benefits of $68 million in the first half
of 2003. The decrease in the estimated annual effective tax rate from
29% for the first half of 2002 to 24% for the first half of 2003 was
primarily attributable to expected increased earnings from operations
in certain lower-taxed jurisdictions outside the U.S. relative to total
consolidated earnings. The discrete period items are attributable to
the following items, all of which are taxed in jurisdictions with tax
rates greater than the estimated annual effective tax rate: net focused
cost reduction charges of $100 million; a $21 million charge for
purchased in-process research and development costs; a $14 million
charge for the settlement of a patent infringement claim; a $14 million
charge for the settlement of certain issues relating to a prior year
acquisition; a $12 million charge related to an intellectual property
settlement; and a $9 million charge related to the impairment of the
Burrell Companies' net assets held for sale. In addition, the discrete
period items also include a tax benefit of $8 million relating to the
donation of intellectual property to a tax-qualified organization.
The effective tax rate of 18% for the six months ended June 30, 2002
was lower than the Company's estimated annual effective tax rate of 29%
for 2002 due to the recording of a discrete period tax benefit of $45
million in connection with the closure of the Company's PictureVision
subsidiary.
20
Earnings from continuing operations for the six months ended June 30,
2003 were $109 million, or $.38 per basic and diluted share, as
compared with earnings from continuing operations for the six months
ended June 30, 2002 of $327 million, or $1.12 per basic and diluted
share, representing a decrease of $218 million, or 67%. The decrease
in net earnings is primarily attributable to the reasons described
above.
Photography
Net worldwide sales for the Photography segment were $4,139 million for
the six months ended June 30, 2003 as compared with $4,192 million for
the six months ended June 30, 2002, representing a decrease of $53
million, or 1% as reported, or 7% excluding the positive impact of
exchange. The decrease in net sales was comprised of (1) decreases
related to volume, driven primarily by consumer traditional film and
photofinishing, which were partially offset by increases in volume for
consumer digital and entertainment products and services, which in
total, reduced net sales by 2.7 percentage points and (2) declines in
price/mix primarily driven by consumer film and consumer digital
cameras, which reduced net sales by approximately 4.7 percentage
points. These declines were partially offset by favorable exchange,
which increased net sales by approximately 6.5 percentage points.
Photography segment net sales in the U.S. were $1,659 million for the
current year period as compared with $1,882 million for the prior year
period, representing a decrease of $223 million, or 12%. Photography
segment net sales outside the U.S. were $2,480 million for the current
year period as compared with $2,310 million for the prior year period,
representing an increase of $170 million, or 7% as reported, or a
decrease of 4% excluding the positive impact of exchange.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 7% in the six months
ended June 30, 2003 as compared with the six months ended June 30,
2002, reflecting declines in volume and negative price/mix of
approximately 11% and 3%, respectively, partially offset by favorable
exchange of approximately 7%. Sales of the Company's consumer film
products within the U.S. decreased 14%, reflecting declines in volume
of approximately 13% and negative price/mix of approximately 1%. The
decrease in volume is largely attributable to the decrease in U.S.
consumer film industry volume in the first half of 2003, as described
below, which reflects the downward trend in retail sales. Sales of the
Company's consumer film products outside the U.S. decreased 1%,
reflecting declines in volume and negative price/mix of approximately
9% and 3%, respectively, which was partially offset by favorable
exchange of approximately 11%.
21
The U.S. film industry volume decreased approximately 8% in the six
month period ended June 30, 2003 as compared with the six month period
ended June 30, 2002. The most current U.S. market data trends suggest
that, for the six month period ended June 30, 2003, digital
substitution accounted for the majority of the industry decline. The
most current U.S. market data trends also indicate that, for the full
year 2003, the U.S. film industry volume will decrease 7% to 8% year-
over-year. The same data suggests that digital substitution will
account for the majority of the industry decline.
The Company's blended U.S. consumer film share decreased slightly on a
volume basis in the first half of 2003 relative to the first half of
2002. Management remains confident in maintaining full year, 2002 year-
over-year U.S. market share as it has done for the past several
consecutive years.
Worldwide volumes of consumer color paper decreased high single digits
in the six month period ended June 30, 2003 as compared with the six
month period ended June 30, 2002 with U.S. volumesdeclining low double
digits and volumes outside the U.S. decreasing mid-single digits.
Kodak will no longer report sales trends for color negative paper
because paper and other products are typically bundled together as a
"systems sell" for customer contracting purposes.
Net worldwide photofinishing sales, including Qualex in the U.S. and
CIS outside the U.S., decreased 16% in the six month period ended June
30, 2003 as compared with the six month period ended June 30, 2002,
reflecting lower volumes and price/mix, partially offset by favorable
exchange. In the U.S., Qualex's sales decreased 22% in the first half
of 2003 as compared with the first half of 2002, reflecting the effects
of a continued weak film industry, consumer's shifting preference to on-
site processing, and the adverse impact of several hundred store
closures by a major U.S. retailer.
Net sales from the Company's consumer digital products and services,
which include picture maker kiosks/media and retail consumer digital
services revenue from Picture CD and Retail.com, increased 2% in the
six month period ended June 30, 2003 as compared with the six month
period ended June 30, 2002, driven primarily by an increase in sales of
picture maker kiosks and consumer digital services.
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs averaged 7.6% for the six month period ended
June 30, 2003, reflecting an increase from the 7.0% rate in the six
month period ended June 30, 2002. The growth was driven by continued
consumer acceptance of Picture CD and Retail.com. However, the number
of images scanned versus the first half of 2002 decreased 11% due to
negative photofinishing trends at Qualex resulting from a weak customer
film industry and consumer's changing preference towards on-site
processing.
22
The Company's Ofoto business increased its sales 69% in the first half
of 2003, as compared with the first half of 2002. Ofoto now has more
than 8 million members and continues to be the market leader in the
online photo services space.
Net worldwide sales of consumer digital cameras increased 50% in the
six month period ended June 30, 2003 as compared with the six month
period ended June 30, 2002, primarily reflecting strong increases in
volume and a favorable impact from exchange, partially offset by a
decline in price/mix. Sales continue to be driven by strong customer
acceptance of the EasyShare digital camera system. In addition,
Kodak's new Printer Dock 6000, introduced in March of this year,
exceeded sales expectations during the period.
While complete data for second quarter consumer digital market share is
not yet available, Kodak's U.S. consumer digital camera market share
year-to-date through May 2003 is up over 1 percentage point as compared
with the same period in 2002. All indications are that Kodak continues
to hold one of the top U.S. market share positions in channels
reporting share data; however, some of Kodak's largest channels do not
report market share data.
Net worldwide sales of inkjet photo paper increased 51% in the six
month period ended June 30, 2003 as compared with the six month period
ended June 30, 2002. The Company maintained its top market share
position in the United States during the period. The double-digit
revenue growth and the maintenance of market share are primarily
attributable to strong underlying market growth, successful
merchandising efforts and the continued growth and acceptance of a new
line of small format inkjet papers.
Net worldwide sales of professional sensitized films, including color
negative, color reversal and black and white films, decreased 11% in
the six month period ended June 30, 2003 as compared with the six month
period ended June 30, 2002, reflecting declines in volume and
price/mix, partially offset by favorable exchange. Net worldwide sales
of professional sensitized output decreased 2% in the first half of
2003 as compared with the first half of 2002, reflecting declines in
volume and price/mix, partially offset by favorable exchange. Sales
declines resulted primarily from the combined impacts of ongoing
digital evolution and continued economic weakness in markets worldwide.
These declines were partially offset by worldwide sales increases in
the current year period as compared with the prior year period related
to display materials, digital writers, scanners, digital systems and
solutions, thermal media and equipment, digital cameras, Event Imaging
solutions, and Kodak Weddings.
23
Net worldwide sales of origination and print film to the entertainment
industry increased 18% in the six month period ended June 30, 2003 as
compared with the six month period ended June 30, 2002, reflecting
higher print film volumes due to a strong industry motion picture
release schedule and favorable exchange. The new Vision 2 origination
film continues to gain strong customer acceptance.
Gross profit for the Photography segment was $1,259 million for the six
month period ended June 30, 2003 as compared with $1,446 million for
the six month period ended June 30, 2002, representing a decrease of
$187 million or 13%. The gross profit margin was 30.4% in the current
year period as compared with 34.5% in the prior year period. The 4.1
percentage point decrease was primarily attributable to decreases in
price/mix primarily driven by consumer film and consumer digital
cameras, which decreased gross profit margins by approximately 4.7
percentage points and decreases in manufacturing productivity/cost,
which decreased gross profit margins by approximately 0.5 percentage
points. This decrease was partially offset by favorable exchange,
which increased gross profit margins by approximately 1.1 percentage
points.
SG&A expenses for the Photography segment increased $33 million, or 4%,
from $912 million for the six month period ended June 30, 2002 to $945
million for the six month period ended June 30, 2003. As a percentage
of sales, SG&A expense increased from 21.8% in the prior year period to
22.8% in the current year period. The increase is primarily
attributable to unfavorable exchange of $50 million, partially offset
by cost savings realized from position eliminations associated with the
prior year's cost reduction programs.
R&D costs for the Photography segment decreased $20 million or 8% from
$261 million in the six month period ended June 30, 2002 to $241
million in the six month period ended June 30, 2003. As a percentage
of sales, R&D costs decreased from 6.2% in the prior year period to
5.8% in the current year period. The decrease in R&D was primarily
attributable to cost savings realized from position eliminations
associated with the prior year's cost reduction programs. This
decrease was partially offset by the $21 million charge associated with
the write-off of purchased in-process R&D as noted above.
Earnings from continuing operations before interest, other charges, and
income taxes for the Photography segment decreased $200 million, or
73%, from $273 million in the six month period ended June 30, 2002 to
$73 million in the six month period ended June 30, 2003, primarily as a
result of the factors described above.
24
Health Imaging
Net worldwide sales for the Health Imaging segment were $1,156 million
for the six month period ended June 30, 2003 as compared with $1,090
million for the first half of 2002, representing an increase of $66
million, or 6% as reported, or remained unchanged excluding the
favorable impact of exchange. The increase in sales was comprised of
(1) an increase in volume of approximately 2.4 percentage points,
driven primarily by volume increases in digital media, digital capture
equipment and equipment services, and (2) an increase from favorable
exchange of approximately 6.1 percentage points, which was partially
offset by a decrease in price/mix of approximately 2.3 percentage
points, primarily driven by digital media, laser printers and analog
medical film.
Net sales in the U.S. were $504 million for the six month period ended
June 30, 2003 as compared with $518 million for the first half of 2002,
representing a decrease of $14 million, or 3%. Net sales outside the
U.S. were $652 million for the first half of 2003 as compared with $572
million for the six month period ended June 30, 2002, representing an
increase of $80 million, or 14% as reported, or 2% excluding the
favorable impact of exchange.
Net worldwide sales of digital products, which include laser printers
(DryView imagers and wet laser printers), digital media (DryView and
wet laser media), digital capture equipment (computed radiography
capture equipment and digital radiography equipment), services and
Picture Archiving and Communications Systems (PACS), increased 11% for
the six month period ended June 30, 2003 as compared with the first
half of 2002. The increase in digital product sales was primarily
attributable to favorable exchange and higher volumes of digital media,
digital capture equipment and equipment services. Service revenues
increased due to an increase in digital equipment service contracts
during the first half of 2003 as compared with the prior year period.
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, were consistent in the first half of
2003 as compared with the first half of 2002, reflecting favorable
exchange that was offset by declines in price/mix. Traditional analog
film products (excluding specialty films) decreased 1% in the first
half of 2003 as compared with the first half of 2002 due to lower
price/mix, partially offset by favorable exchange and higher volumes.
25
Gross profit for the Health Imaging segment was $492 million for the
first half of 2003 as compared with $432 million for the six month
period ended June 30, 2002, representing an increase of $60 million, or
14%. The gross profit margin was 42.6% in the current year period as
compared with 39.6% in the first half of 2002. The increase in the
gross profit margin of 3.0 percentage points was principally
attributable to (1) favorable cost and manufacturing productivity,
which increased gross profit margins by approximately 3.2 percentage
points, primarily due to favorable media and equipment manufacturing
productivity led by DryView digital media and digital capture
equipment, complemented by lower service costs and improved supply
chain management, and (2) favorable exchange, which contributed
approximately 1.3 percentage points to the gross profit margin. These
increases were partially offset by decreases in price/mix, which
negatively impacted gross profit margins by 1.5 percentage points due
to lower prices for digital media, analog medical film and laser
printers.
SG&A expenses for the Health Imaging segment increased $5 million, or
3%, from $170 million in the first half of 2002 to $175 million for the
six month period ended June 30, 2003, but decreased as a percentage of
sales from 15.6% to 15.1%. The increase in SG&A expenses is
attributable to the unfavorable effects of foreign exchange, which
increased SG&A expenses by $8 million in the current period relative to
the prior year period. The decrease in SG&A expense as a percentage of
sales is primarily attributable to expense management.
R&D costs increased $3 million, or 4%, from $74 million for the first
half of 2002 to $77 million for the first half of 2003, but decreased
slightly as a percentage of sales from 6.8% to 6.7%. R&D expenses
increased in the first half as the segment increased spending to drive
growth in selected areas of the product portfolio.
Earnings from continuing operations before interest, other charges, and
income taxes for the Health Imaging segment increased $52 million, or
28%, from $188 million for the prior year period to $240 million for
the first half of 2003 due primarily to the reasons described above.
On July 21, 2003, the Company announced that it has entered into an
agreement to acquire all of the outstanding shares of PracticeWorks
Inc., a leading provider of dental practice management software and
digital radiographic imaging systems for $500 million in cash. This
acquisition is expected to contribute approximately $215 million in
sales to the Health Imaging segment during the first full year. It is
anticipated that the transaction will be slightly dilutive to earnings
from the date of acquisition through the end of 2005 and accretive to
earnings thereafter. This acquisition will enable Kodak to offer its
customers a full spectrum of dental imaging products and services from
traditional film to digital radiography and photography.
26
Commercial Imaging
Net worldwide sales for the Commercial Imaging segment were $754
million for the first half of 2003 as compared with $708 million for
the six month period ended June 30, 2002, representing an increase of
$46 million, or 6% as reported, or an increase of 3% excluding the
favorable impact of exchange. The increase in net sales was primarily
comprised of (1) increases in volume, which contributed approximately
4.4 percentage points to first half of 2003 sales, and (2) an increase
of approximately 3.1 percentage points due to favorable exchange, which
was partially offset by price/mix declines of approximately 1.1
percentage points.
Net sales in the U.S. were $434 million for the current year period as
compared with $393 million for the first half of 2002, representing an
increase of $41 million, or 10%. Net sales outside the U.S. were $320
million in the first half of 2003 as compared with $315 million for the
prior year period, representing an increase of $5 million or 2% as
reported, or a decrease of 5% excluding the favorable impact of
exchange.
Net worldwide sales of graphic arts products to Kodak Polychrome
Graphics (KPG), an unconsolidated joint venture affiliate in which the
Company has a 50% ownership interest, decreased 16% in the six month
period ended June 30, 2003 as compared with the first half of 2002,
primarily reflecting volume and price/mix declines in graphic arts
film. This reduction resulted largely from digital technology
evolution and the effect of continuing economic weakness in the
commercial printing market.
Despite a continued weakness in the global economy, KPG's earnings
performance continues to improve driven primarily by its world leading
position in the growth segments of digital proofing and digital
printing plates, coupled with favorable foreign exchange. KPG's
operating profit has been positive for 12 consecutive quarters and has
shown consistent improvement during that same period. The Company's
equity in the earnings of KPG contributed positive results to other
charges during the first half of 2003.
NexPress, the unconsolidated joint venture between Kodak and Heidelberg
in which the Company has a 50% ownership interest, continues to
increase unit placements of the NexPress 2100 Digital Production Color
Press despite a weak printing market, with good customer acceptance and
average monthly page volumes for these units running higher than
planned.
Gross profit for the Commercial Imaging segment was $212 million for
the first half of 2003 as compared with $224 million for the six month
period ended June 30, 2002, representing a decrease of $12 million, or
5%. The gross profit margin was 28.1% in the current year period as
compared with 31.6% in the first half of 2002. The decrease in the
gross profit margin of 3.5 percentage points was primarily attributable
to (1) declines in price/mix, which reduced gross profit margins by
approximately 1.1 percentage points primarily due to declining
contributions from traditional graphic arts products, (2) manufacturing
productivity which negatively impacted gross profit margins by
approximately 2.1 percentage points, and (3) unfavorable exchange,
which negatively impacted gross profit margins by 0.3 percentage point.
27
SG&A expenses for the Commercial Imaging segment increased $4 million,
or 4%, from $95 million for the first half of 2002 to $99 million for
the six month period ended June 30, 2003, but decreased as a percentage
of sales from 13.4% to 13.1%. The increase in SG&A expense was due to
the impact of unfavorable exchange, which accounted for the entire $4
million increase.
R&D costs for the Commercial Imaging segment increased $1 million, or
4%, from $28 million for the first half of 2002 to $29 million for the
first half of 2003, but decreased as a percentage of sales from 4.0% to
3.8%.
Earnings from continuing operations before interest, other charges, and
income taxes for the Commercial Imaging segment decreased $17 million,
or 17%, from $101 million in the first half of 2002 to $84 million in
the first half of 2003. This decrease is primarily attributable to the
reasons described above.
All Other
Net worldwide sales for All Other were $43 million for the first half
of 2003 as compared with $52 million for the first half of 2002,
representing a decrease of $9 million, or 17%. Net sales in the U.S.
decreased $5 million, or 19%, from $27 million for the six month period
ended June 30, 2002 to $22 million for the first half of 2003. Net
sales outside the U.S. were $21 million in the first half of 2003 as
compared with $25 million in the prior year period, representing a
decrease of $4 million, or 16%.
SK Display Corporation, the OLED manufacturing joint venture between
Kodak and Sanyo, continued production scale-up with the goal of
supplying production quantity OLED screens to the marketplace
throughout the remainder of 2003.
The loss from continuing operations before interest, other charges, and
income taxes for All Other was $39 million for the six months ended
June 30, 2003 as compared with a loss of $13 million for the first half
of 2002, representing a decrease of $26 million. This decrease was
primarily driven by increased levels of investment for the Company's
Display business.
28
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
Earnings from discontinued operations were $.05 per diluted share for
the first half of 2003, as compared with a loss from discontinued
operations for the first half of 2002 of $.01 per diluted share.
During the six month period ended June 30, 2003, the Company reversed a
tax reserve of $15 million through discontinued operations. The
reversal of the tax reserve was triggered by the Company's repurchase
of certain properties that were initially sold in connection with the
1994 divestiture of Sterling Winthrop Inc., which represented a portion
of the Company's non-imaging health businesses. The repurchase of
these properties will allow the Company to directly manage the
environmental remediation that the Company is required to perform in
connection with those properties, which will result in better overall
cost control. In addition, the repurchase eliminated the uncertainty
regarding the recoverability of tax benefits associated with the
indemnification payments that were previously being made to the
purchaser.
NET EARNINGS
Net earnings for the first half of 2003 were $124 million, or $.43 per
diluted share, as compared with net earnings for the first half of 2002
of $323 million, or $1.11 per diluted share, representing a decrease of
$199 million, or 62%. This decrease is primarily attributable to the
reasons outlined above.
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29
RESTRUCTURING
Currently, the company is being adversely impacted by negative global
economic conditions and a progressing digital transition. As the
company continues to adjust its operating model in light of changing
business conditions, it is probable that ongoing cost reduction
activities will be required from time to time.
In accordance with this, the Company periodically announces planned
restructuring programs (Programs), which often consist of a number of
restructuring initiatives. These Program announcements provide
estimated ranges relating to the number of positions to be eliminated
and the total restructuring charges to be incurred. The actual charges
for initiatives under a Program are recorded in the period in which the
Company commits to formalized restructuring plans or executes the
specific actions contemplated by the Program and all criteria for
restructuring charge recognition under the applicable accounting
guidance have been met.
Fourth Quarter, 2002 Restructuring Program
During the fourth quarter of 2002, the Company announced a planned
Program consisting of a number of focused cost reduction initiatives
designed to deploy manufacturing assets more effectively in order to
provide competitively-priced products to the global market. In the
announcement, the Company discussed the restructuring initiatives under
its Fourth Quarter, 2002 Restructuring Program that would begin in the
fourth quarter of 2002 and extend into 2003. These initiatives were
expected to affect a total of 1,300 to 1,700 positions worldwide,
including approximately 150 positions in the Company's U.S. research
and development organizations, 500 positions in its U.S. one-time-use
camera assembly operations, 300 positions in its Mexico sensitizing
operations and 550 positions in its global manufacturing and logistics
organization. Specific initiatives included the relocation of the one-
time-use camera assembly operations in Rochester, New York and the
graphic arts and x-ray film sensitizing operations in Mexico to other
Kodak locations.
The total restructuring charge for continuing operations recorded in
the fourth quarter of 2002 for these initiatives that were implemented
was $116 million, which was composed of severance, inventory write-
downs, long-lived asset impairments and exit costs of $55 million, $7
million, $37 million and $17 million, respectively. The severance
charge related to the termination of 1,150 employees, including
approximately 525 manufacturing and logistics, 300 service and
photofinishing, 175 administrative and 150 research and development
positions.
30
The geographic composition of the 1,150 employees terminated included
approximately 775 in the United States and Canada and 375 throughout
the rest of the world. The charge for the long-lived asset impairments
includes the write-off of $13 million relating to equipment used in the
manufacture of cameras and printers, $13 million for sensitized
manufacturing equipment, $5 million for lab equipment used in
photofinishing and $6 million for other assets that were scrapped or
abandoned immediately. The reduction of 1,150 employees and the $72
million charge for severance and exit costs are reflected in the Fourth
Quarter, 2002 Restructuring Program table below. These amounts exclude
the fourth quarter termination of 150 employees and the restructuring
charges relating to the shutdown of Kodak Global Imaging, Inc., as
these charges were reflected in the loss from discontinued operations
for the year ended December 31, 2002.
During the first quarter of 2003, the Company recorded an additional
severance charge of $16 million in continuing operations relating to
450 positions that were contemplated under its Fourth Quarter, 2002
Restructuring Program. The reduction of 450 positions and the related
severance charge of $16 million are reflected in the Fourth Quarter,
2002 Restructuring Program table below.
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded in connection with
the focused cost reductions that were announced in the fourth quarter
of 2002 and the remaining balance in the related reserves at June 30,
2003:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- -------- ------- -------
Q4, 2002 charges l,l50 $ 55 $ 17 $ 72
Q4, 2002 utilization (250) (2) - (2)
------ ----- ---- ----
Balance at 12/31/02 900 53 17 70
Q1, 2003 charges 450 16 - 16
Q1, 2003 utilization (850) (24) (2) (26)
------ ----- ---- ----
Balance at 3/31/03 500 45 15 60
Q2, 2003 charges 25 1 - 1
Q2, 2003 utilization (500) (11) (4) (15)
------ ----- ---- ----
Balance at 6/30/03 25 $ 35 $ 11 $ 46
====== ===== ==== ====
31
The charges taken in the first and second quarters of 2003 for
severance of $16 million and $1 million, respectively, were reported in
restructuring costs and other in the accompanying Consolidated
Statement of Earnings for the six months ended June 30, 2003. The
severance and exit costs require the outlay of cash, while the
inventory write-downs and long-lived asset impairments represent non-
cash items. Severance payments will continue beyond 2003 since, in
many instances, the terminated employees can elect or are required to
receive their severance payments over an extended period of time. The
Company expects the actions contemplated by the reserve for exit costs
to be completed by the end of 2003. Most exit costs are expected to be
paid during 2003. However, certain costs, such as long-term lease
payments, will be paid over periods after 2003.
As a result of initiatives implemented under the Fourth Quarter, 2002
Restructuring Program, the Company recorded $7 million and $21 million
of accelerated depreciation on long-lived assets in cost of goods sold
in the accompanying Consolidated Statement of Earnings for the three
and six months ended June 30, 2003, respectively. The accelerated
depreciation relates to long-lived assets accounted for under the held
and used model of SFAS No. 144 and the year-to-date amount of $21
million was comprised of $12 million relating to equipment used in the
manufacture of cameras, $6 million for lab equipment used in
photofinishing and $3 million for sensitized manufacturing equipment
that will be used until their abandonment in 2003. The Company will
incur accelerated depreciation charges of $3 million in the third
quarter of 2003 as a result of the initiatives implemented under the
Fourth Quarter, 2002 Restructuring Program.
With respect to the Fourth Quarter, 2002 Restructuring Program, the
Company anticipates completing the relocation of the U.S. one-time-use
camera assembly operation and Mexico sensitizing operations by the end
of 2003. Such initiatives are expected to result in the elimination of
an additional 200 to 300 positions with anticipated charges in the
range of $5 million to $10 million.
Cost savings resulting from the implementation of all Fourth Quarter,
2002 Restructuring Program actions are in line with the original
estimate and are still expected to be approximately $90 million to $95
million in 2003 and $205 million to $210 million on an annual basis
thereafter.
The $8 million of charges recorded in the second quarter of 2003
included $7 million of charges applicable to the Photography segment
and $1 million associated with manufacturing, which is shared across
all segments. The year-to-date charges of $38 million included $23
million of charges applicable to the Photography segment, $3 million
relating to the Commercial Imaging segment and $12 million associated
with manufacturing, research and development, and administrative
functions, which are shared across all segments.
32
First Quarter, 2003 Restructuring Program
In the early part of the first quarter of 2003, as part of its
continuing focused cost-reduction efforts and in addition to the
remaining initiatives under the Fourth Quarter, 2002 Restructuring
Program, the Company announced its First Quarter, 2003 Restructuring
Program that included new initiatives to further reduce employment
within a range of 1,800 to 2,200 employees. A significant portion of
these new initiatives relate to the rationalization of the Company's
photofinishing operations in the U.S. and Europe. Specifically, as a
result of declining film and photofinishing volumes and in response to
global economic and political conditions, the Company began to
implement initiatives to 1) close certain photofinishing operations in
the U.S. and EAMER, 2) rationalize manufacturing capacity by
eliminating manufacturing positions on a worldwide basis and 3)
eliminate selling, general and administrative positions, particularly
in the Photography segment.
The total restructuring charge for continuing operations recorded in
the first quarter of 2003 relating to the First Quarter, 2003
Restructuring Program was $28 million, which represented severance
charges relating to 425 positions that are being eliminated. The
reduction of 425 positions and the total restructuring charge of $28
million are reflected in the First Quarter, 2003 Restructuring Program
table below.
The total severance charge of $44 million recorded in the first quarter
of 2003 relating to the Fourth Quarter, 2002 and the First Quarter,
2003 Restructuring Programs, represents the total termination of 875
employees, including approximately 450 manufacturing and logistics, 250
administrative and 175 photofinishing positions. The geographic
composition of the employees terminated include approximately 425 in
the United States and Canada and 450 throughout the rest of the world.
The total restructuring charges for continuing operations recorded in the
second quarter of 2003 for actions that were contemplated under the First
Quarter, 2003 Restructuring Program were $29 million, which was composed
of severance, inventory write-downs, long-lived asset impairments and
exit costs of $20 million, $1 million, $4 million and $4 million,
respectively. The severance charge related to the termination of 500
employees, including approximately 250 photofinishing, 125 manufacturing
and 125 administrative positions. The geographic composition of the
employees to be terminated include approximately 200 in the United States
and Canada and 300 throughout the rest of the world. The reduction of
500 positions and the $24 million charge for severance and exit costs are
reflected in the First Quarter, 2003 Restructuring Program table below.
33
The following table summarizes the activity with respect to the
severance and exit cost charges recorded in connection with the focused
cost reductions that were announced in the first quarter of 2003 and
the remaining balances in the related reserves at June 30, 2003:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- -------- ------- -----
Q1, 2003 charges 425 $ 28 $ - $ 28
Q1, 2003 utilization (150) (2) - (2)
----- ---- ---- ----
Balance at 3/31/03 275 26 - 26
Q2, 2003 charges 500 20 4 24
Q2, 2003 utilization (500) (13) - (13)
---- ---- ---- ----
Balance at 6/30/03 275 $ 33 $ 4 $ 37
==== ==== ==== ====
The first quarter charges of $28 million were reported in restructuring
costs and other in the accompanying Consolidated Statement of Earnings
for the six months ended June 30, 2003. The second quarter charges for
severance, long-lived asset impairments and exit cost reserves were
reported in restructuring costs and other in the accompanying
Consolidated Statement of Earnings for the three and six months ended
June 30, 2003. The charges taken for inventory write-downs were
reported in cost of goods sold in the accompanying Consolidated
Statement of Earnings for the three and six months ended June 30, 2003.
The severance and exit costs require the outlay of cash, while the
inventory write-downs and long-lived asset impairments represent non-
cash items. Severance payments relating to the second quarter
restructuring actions will be paid during the period from 2003 through
2005 since, in many instances, the terminated employees can elect or
are required to receive their severance payments over an extended
period of time. Most exit costs are expected to be paid during 2003.
However, certain costs, such as long-term lease payments, will be paid
over periods after 2003.
In addition to the $29 million of restructuring charges recorded in the
second quarter of 2003 under the First Quarter, 2003 Restructuring
Program, the Company recorded $17 million of charges in the second
quarter associated with the Company's exit from the Photography
segment's Phogenix joint venture with Hewlett Packard. The $17 million
charge included approximately $2 million of inventory write-downs, $6
million of long-lived asset impairments and $9 million of exit costs.
The inventory write-downs were reported in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the three and six
months ended June 30, 2003. The long-lived asset impairments and exit
costs were reported in restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the three and six
months ended June 30, 2003. The exit costs, which represent the only
cash portion of the charge, are expected to be paid during the
remainder of 2003.
34
With respect to the First Quarter, 2003 Restructuring Program, the
Company anticipates completing the remaining initiatives originally
contemplated under the Program by the end of 2003. Specifically, the
Company expects to complete the closure of photofinishing labs in the
U.S. and EAMER under this Program by the end of 2003. Such closures
are expected to result in the elimination of an additional 700 to 800
positions with anticipated charges in the range of $25 to $30 million.
Approximately 100 to 200 additional administrative positions will be
eliminated throughout the world by the end of 2003 under this Program
at a cost of $5 to $10 million. Severance payments will continue
beyond 2003 since, in many instances, the terminated employees can
elect or are required to receive their severance payments over an
extended period of time. The Company expects the initiatives
contemplated by the reserve for exit costs to be completed by the end
of 2003. Most exit costs are expected to be paid during 2003.
However, certain costs, such as long-term lease payments will be paid
over periods after 2003.
Cost saving resulting from the implementation of all First Quarter,
2003 Restructuring Program actions are expected to be approximately $35
million to $50 million in 2003 and $65 million to $85 million on an
annual basis thereafter.
The charges of $29 million recorded in the second quarter of 2003
included $20 million applicable to the Photography segment and $5
million applicable to the Commercial Imaging segment. The remaining $4
million was applicable to manufacturing, research and development, and
administrative functions, which are shared across all segments. The
charges of $57 million recorded in the six months ended June 30, 2003
included $40 million applicable to the Photography segment and $5
million applicable to the Commercial Imaging segment. The remaining
$12 million was applicable to manufacturing, research and development,
and administrative functions, which are shared across all segments.
Future Expected Restructuring Actions
Over the next twelve months, Kodak intends to implement a series of cost
reduction actions, which are expected to result in pre-tax charges totaling
$350 million to $450 million. It is anticipated that these actions will
result in a reduction of approximately 4,500 to 6,000 positions worldwide
primarily relating to the rationalization of global manufacturing assets,
reduction of corporate administration and R&D, and the consolidation of the
infrastructure and administration supporting the Company's consumer imaging
and professional products and services operations. The Company expects the
2004 cost savings as a result of these actions to be $275 million to $325
million, with annual savings of $300 million to $400 million thereafter.
35
2001 Restructuring Programs
At December 31, 2002 the Company had remaining severance and exit cost
reserves of $67 million and $18 million, respectively, relating to the
restructuring plans it implemented during 2001. During the first
quarter of 2003, the Company completed the severance actions associated
with the 2001 Restructuring Programs and recorded a reversal of $12
million of reserves through restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the six months
ended June 30, 2003. The completion of the 2001 Restructuring Programs
resulted in the elimination of the remaining 200 positions included in
the original plans. A total of 6,425 personnel were terminated under
the 2001 Restructuring Programs.
The remaining severance reserve of $21 million as of June 30, 2003 has
not been paid since, in many instances, the terminated employees could
elect or were required to receive their severance payments over an
extended period of time. However, substantially all of these payments
will be made by the end of 2003. Most of the remaining exit cost
reserves of $16 million as of June 30, 2003 are expected to be utilized
during 2003. However, certain costs, such as long-term lease payments,
will be paid over periods after 2003.
- -----------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $269 million to $838
million at June 30, 2003. The increase resulted primarily from $233
million of net cash provided by operating activities and $390 million
of net cash provided by financing activities, partially offset by $366
million of net cash used in investing activities.
The net cash provided by operating activities of $233 million was
partially attributable to net earnings of $124 million, which, when
adjusted for the earnings from discontinued operations, equity in
losses from unconsolidated affiliates, depreciation and amortization,
provision for deferred taxes, and restructuring costs, asset
impairments and other charges, provided $587 million of operating cash.
Also contributing to the net cash provided by operating activities were
the cash receipt of $19 million in connection with the Sterling
Winthrop Inc. settlement and the $100 million impact of the change in
long-term assets and other items, net, which were partially offset by
increases in receivables of $196 million and inventories of $60 million
and a decrease in liabilities excluding borrowings of $217 million.
The net cash used in investing activities of $366 million was utilized
primarily for capital expenditures of $236 million, business
acquisitions of $88 million and investments in unconsolidated
affiliates of $41 million. The net cash provided by financing
activities of $390 million was primarily the result of a net increase
in borrowings of $378 million.
36
The Company regularly accesses the commercial paper (short-term debt)
market in managing its working capital to fund its operating and
investing activities. At any point in time, the Company is typically
in a negative working capital position. The negative working capital
is driven primarily by the level of outstanding short-term debt. Short-
term debt is issued or repaid to meet seasonal requirements and provide
flexibility on timing for the issuance of long-term debt to meet
potential long-term capital needs associated with investing activities.
During the second quarter the Company issued $550 million of long-term
debt to replace $550 million of short-term debt resulting in improved
working capital.
The Company maintains $2,482 million in committed bank lines of credit
and $1,841 million in uncommitted bank lines of credit to ensure
continued access to short-term borrowing capacity. The Company has a
medium-term note program with $650 million available for the issuance
of new long-term debt as of June 30, 2003. On July 15, 2003, the
Company's Board of Directors authorized the filing of a new debt shelf
registration that would allow the Company to issue $2,000 million of
long-term public debt. These funding alternatives provide the Company
with sufficient flexibility and liquidity to meet its working capital
and investing needs. See further discussion in this section relating
to the Company's use of commercial paper and long-term debt in light of
its recent credit rating downgrades. Net working capital, excluding
short-term borrowings, increased to $1,017 million from $474 million at
year-end 2002. This increase is mainly attributable to higher cash,
receivables and inventories balances, and lower accrued income taxes
balances, partially offset by higher accounts payable and other current
liabilities.
The Company has a dividend policy whereby it makes semi-annual payments
which, when declared, will be paid on the Company's 10th business day
each July and December to shareholders of record on the first business
day of the preceding month. On April 15, 2003, the Company's Board of
Directors declared a semi-annual cash dividend of $0.90 per share on
the outstanding common stock of the Company. This dividend was paid on
July 16, 2003 to shareholders of record at the close of business on
June 2, 2003.
Capital additions were $236 million in the first half of 2003, with the
majority of the spending supporting new products, manufacturing
productivity and quality improvements, infrastructure improvements and
ongoing environmental and safety initiatives. The Company has been
working on plans to reduce capital spending. For the full year 2003,
the Company now expects its capital spending, excluding acquisitions
and equipment purchased for lease, to be approximately $500 million.
Based on the year-to-date experience, the capital spending is in line
with the full-year plan.
The Company believes that its cash flow from operations will be
sufficient to cover its working capital and capital investment needs
and the funds required for potential future debt reduction, dividend
payments, modest acquisitions or the repurchase of shares of the
Company's common stock. The Company's cash balances and financing
arrangements will be used to bridge timing differences between
expenditures and cash generated from operations.
37
The Company has $2,225 million in committed revolving credit
facilities, which are available to support the Company's commercial
paper program and for general corporate purposes. The credit
facilities are comprised of the $1,000 million 364-day committed
revolving credit facility (364-Day Facility) expiring in July 2004 and
a 5-year committed facility at $1,225 million expiring in July 2006 (5-
Year Facility). If unused, they have a commitment fee of $3 million
per year, at the Company's current credit rating of BBB (as revised by
Standard & Poor's (S&P) on July 21, 2003) and Baa1 (Moody's). Interest
on amounts borrowed under these facilities is calculated at rates based
on spreads above certain reference rates and the Company's credit
rating. Under the 364-Day Facility and 5-Year Facility, there is a
financial covenant, which requires the Company to maintain a certain
EBITDA ratio. In the event of violation of the covenant, the facility
would not be available for borrowing until the covenant provisions were
waived, amended or satisfied. The Company was in compliance with this
covenant at June 30, 2003. The Company does not anticipate that a
violation is likely to occur.
The Company has other committed and uncommitted lines of credit at June
30, 2003 totaling $257 million and $1,841 million, respectively. These
lines primarily support borrowing needs of the Company's subsidiaries,
which include term loans, overdraft coverage, letters of credit and
revolving credit lines. Interest rates and other terms of borrowing
under these lines of credit vary from country to country, depending on
local market conditions. Total outstanding borrowings against these
other committed and uncommitted lines of credit at June 30, 2003 were
$160 million and $411 million, respectively. These outstanding
borrowings are reflected in the short-term borrowings and long-term
debt, net of current portion balances in the accompanying Consolidated
Statement of Financial Position at June 30, 2003.
At June 30, 2003, the Company had $888 million in commercial paper
outstanding, with a weighted average interest rate of 1.42%. To
provide additional financing flexibility, the Company has an accounts
receivable securitization program, which provides for borrowings up to
a maximum of $250 million. At June 30, 2003, the Company had
outstanding borrowings under this program of $105 million. The
estimated annualized interest rate under this program is 1.81%.
The Company has a medium-term note program of $2,200 million for
issuance of debt securities due nine months or more from date of issue.
At June 30, 2003, the Company had debt securities outstanding of $1,250
million under this medium-term note program, with none of this balance
due within one year. The Company has remaining availability of $650
million under its medium-term note program for the issuance of new
notes.
38
On April 15, 2003, S&P revised its outlook on Kodak to negative from
stable and reaffirmed its BBB+ corporate credit rating. The action was
attributable to S&P's focus on unfunded pension and other
postretirement benefit obligations. On May 20, 2003, Fitch lowered the
Company's long-term credit rating from A- to BBB, but reaffirmed the
short-term credit rating at F-2. The downgrade in the Company's long-
term credit rating is attributable to Fitch's concerns about the
Company's weakened sales and profitability in the core photographic
businesses due to continuing pricing pressure from competitors, digital
substitution and unfavorable economic factors. In connection with its
downgrade, Fitch changed the Company's outlook from negative to stable.
The stable outlook reflects Fitch's expectation that the Company's
restructuring efforts combined with its emphasis on cash flow
generation will result in continuing debt reduction. The stable
outlook also reflects Fitch's belief that the Company's leading market
position in the U.S. consumer film market and strong shares in
international markets, along with lower leverage will allow the Company
more time to stabilize operations. On June 18, 2003, S&P placed the
Company's long-term credit rating of BBB+ and short-term credit rating
of A-2 on CreditWatch, with negative implications. The action is
attributable to S&P's concerns about the weak economy, continued
competitive pressures, reduced leisure travel, continued digital
evolution and potential future restructuring actions that may reduce
earnings and restrict cash flow, slowing efforts to further reduce
debt. On July 21, 2003, S&P lowered its rating on Kodak's long-term
debt from BBB+ to BBB as a result of the Company's planned cash
acquisition of PracticeWorks Inc. In S&P's view, the cash purchase of
PracticeWorks Inc. will hinder the Company's debt reduction efforts
over the near-term. S&P further stated that the Company's credit
ratings would remain on CreditWatch, with negative implications, as
they remain concerned with the pressures on Kodak's revenue and
earnings resulting from the transition from conventional to digital
imaging, tough competition and weak economic and leisure travel
conditions. S&P commented that further reductions in the Company's
credit rating is currently expected to be limited to one notch.
39
On July 22, 2003, Fitch reaffirmed the Company's long-term and short-
term credit ratings at BBB and F-2, respectively, but changed the
Company's outlook to negative from stable. The negative outlook was a
direct result of the Company's announcement to acquire PracticeWorks
Inc., and reflects Fitch's concerns about the Company's reduced
financial flexibility as a result of this transaction. In addition,
over the longer term, Fitch anticipates that digital substitution,
competitive pricing pressures, and unfavorable economic factors will
continue to stress revenue and operating earnings, which could force
the Company to enter into additional acquisitions to augment growth
opportunities over time. On August 8, 2003, Moody's lowered the
Company's long-term senior unsecured debt rating to Baa2 from Baa1 and
indicated that the Company's short-term and long-term debt ratings
remain under review for further downgrade. Moody's lowered its credit
rating as a result of the Company's (1) weak cash flow, which is
partially attributable to the performance of the Company's consumer
imaging products and services, (2) heavy reliance on short-term debt in
its capital structure, (3) prospects for limited debt reduction due to
its reduced cash flow and the recent announcement of its intentions to
acquire PracticsWorks, Inc. for approximately $500 million, and (4)
increased cash flow outlays that will occur over the next couple of
years related to its restructuring programs. Moody's commented that
its review for further downgrades will assess the Company's (1) actions
to improve cash flow and to moderate short-term debt, (2) execution
risk to align to a new business environment less dependent on
traditional consumer film, (3) plans for debt reduction as the digital
substitution continues to evolve, and (4) timing of cash payments
expected through 2004 relating to its restructuring actions. On August
11, 2003, Fitch lowered the Company's long-term senior unsecured debt
rating to BBB- from BBB, lowered its commercial paper rating (short-
term credit rating) to F3 from F2, and reaffirmed its outlook as
negative. Fitch downgraded Kodak's credit ratings as a result of the
Company's continued weak operating performance due to increased pricing
pressure from competitors, accelerated digital substitution, limited
gains from cost reduction efforts, and unfavorable economic factors,
which have adversely affected the sales and profitability of the core
consumer imaging products and services. Fitch indicated that the
negative outlook reflects Kodak's increasing business risk, higher
leverage, and reduced financial flexibility.
40
As of and for the six months ended June 30, 2003, these credit rating
actions did not materially impact the operations of the Company.
However, if the Company's credit ratings were to be reduced further,
such actions could potentially affect access to commercial paper
borrowing. If such an event did take place, the Company could use
alternative sources of borrowing, including the long-term debt market
and its revolving credit facilities. The Company does expect to issue
long-term debt under its shelf registration statements to reduce the
level of outstanding commercial paper. Due to recent increases in
interest rates and the reductions in the Company's credit ratings as
outlined above, to the extent it replaces outstanding commercial paper
with long-term debt, the Company's interest expense will increase
following such debt issuance. For example, the Company's outstanding
commercial paper at June 30, 2003 had a weighted average annual
interest rate of 1.42% as compared with an annual interest rate of
3.625% on the fixed rate long-term notes the Company issued in May 2003
under its existing shelf registration statement, representing a
difference of 2.2 percentage points. When the Company ultimately
issues long-term debt to reduce the level of outstanding commercial
paper, the difference between the annual interest rate on its
commercial paper and the annual interest rate on the long-term debt it
issues is likely to be larger than the 2.2 percentage points,
depending on the prevailing interest rates and term length of the
notes issued at that time.
The Company is in compliance with all covenants or other requirements
set forth in its credit agreements and indentures. Further, the
Company does not have any rating downgrade triggers that would
accelerate the maturity dates of its debt, with the exception of the
following: $35 million in term notes that will amortize through 2005
that can be accelerated if the Company's credit rating from S&P or
Moody's were to fall below BBB and Baa2, respectively; and the
outstanding borrowings under the accounts receivable securitization
program if the Company's credit ratings from S&P or Moody's were to
fall below BBB- and Baa3, respectively, and such condition continued
for a period of 30 days. Further downgrades in the Company's credit
rating or disruptions in the capital markets could impact borrowing
costs and the nature of its funding alternatives. However, the Company
has access to $2,225 million in committed revolving credit facilities
to meet unanticipated funding needs should it be necessary.
41
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At June 30, 2003, these
guarantees totaled a maximum of $329 million, with outstanding
guaranteed amounts of $161 million. The maximum guarantee amount
includes guarantees of up to: $160 million of debt for KPG ($71 million
outstanding); $6 million for other unconsolidated affiliates and third
parties ($6 million outstanding); and $163 million of customer amounts
due to banks in connection with various banks' financing of customers'
purchase of products and equipment from Kodak ($84 million outstanding).
The KPG debt facility and the related guarantee mature on December 31,
2005, but may be renewed at KPG's, the joint venture partners' and the
bank's discretion. The guarantees for the other unconsolidated
affiliates and third party debt mature between July 1, 2003 and May 31,
2005 and are not expected to be renewed. The customer financing
agreements and related guarantees typically have a term of 90 days for
product and short-term equipment financing arrangements, and up to 3
years for long-term equipment financing arrangements. These guarantees
would require payment from Kodak only in the event of default on payment
by the respective debtor. In some cases, particularly for guarantees
related to equipment financing, the Company has collateral or recourse
provisions to recover and sell the equipment to reduce any losses that
might be incurred in connection with the guarantee; however, this
activity is not material. Management believes the likelihood is remote
that material payments will be required under any of these guarantees
disclosed above. With respect to the guarantees that the Company issued
in the three and six months ended June 30, 2003, the Company assessed
the fair value of its obligation to stand ready to perform under these
guarantees by considering the likelihood of occurrence of the specified
triggering events or conditions requiring performance as well as other
assumptions and factors. Through internal analysis and external
valuations, the Company determined that the fair value of the guarantees
was not material to the Company's financial position, results of
operations or cash flows.
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $733
million, and the outstanding debt under those guarantees, which is
recorded within the short-term borrowings and long-term debt, net of
current portion components in the accompanying Consolidated Statement of
Financial Position, is $567 million. These guarantees expire in 2003
through 2005 with the majority expiring in 2003.
The Company may provide up to $100 million in loan guarantees to support
funding needs for SK Display Corporation, an unconsolidated affiliate in
which the Company has a 34% ownership interest. As of June 30, 2003,
the Company has not been required to guarantee any of the SK Display
Corporation's outstanding debt.
42
The Company issues indemnifications in certain instances when it sells
businesses and real estate, and in the ordinary course of business with
its customers, suppliers, service providers and business partners.
Further, the Company indemnifies its directors and officers who are, or
were, serving at Kodak's request in such capacities. Historically,
costs incurred to settle claims related to these indemnifications have
not been material to the Company's financial position, results of
operations or cash flows. Additionally, the fair value of the
indemnifications that the Company issued during the three and six months
ended June 30, 2003 was not material to the Company's financial
position, results of operations or cash flows.
In connection with the Company's investment in China that began in
1998, certain unaffiliated entities invested in two Kodak consolidated
companies with the opportunity to put their minority interests to Kodak
for cash at any time after the third anniversary, but prior to the
tenth anniversary, of the date on which the two companies were
established. The total exercise price in connection with the remaining
put options, which increases at a rate of 2% per annum, is
approximately $60 million at June 30, 2003. The Company expects that
approximately $15 million of the remaining $60 million in total put
options will be exercised within the next six months.
43
Qualex, a wholly owned subsidiary of Kodak, has a 50% ownership
interest in Express Stop Financing (ESF), which is a joint venture
partnership between Qualex and Dana Credit Corporation (DCC), a wholly
owned subsidiary of Dana Corporation. Qualex accounts for its
investment in ESF under the equity method of accounting. ESF provides
a long-term financing solution to Qualex's photofinishing customers in
connection with Qualex's leasing of photofinishing equipment to third
parties, as opposed to Qualex extending long-term credit. As part of
the operations of its photofinishing business, Qualex sells equipment
under a sales-type lease arrangement and records a long-term
receivable. These long-term receivables are subsequently sold to ESF
without recourse to Qualex. ESF incurs long-term debt to finance the
purchase of the receivables from Qualex. This debt is collateralized
solely by the long-term receivables purchased from Qualex and, in part
by, a $60 million guarantee from DCC. Qualex provides no guarantee or
collateral to ESF's creditors in connection with the debt, and ESF's
debt is non-recourse to Qualex. Qualex's only continued involvement in
connection with the sale of the long-term receivables is the servicing
of the related equipment under the leases. Qualex has continued
revenue streams in connection with this equipment through future sales
of photofinishing consumables, including paper and chemicals, and
maintenance.
Qualex has risk with respect to the ESF arrangement as it relates to
its continued ability to procure spare parts from the primary
photofinishing equipment vendor (the Vendor) to fulfill its servicing
obligations under the leases. This risk is attributable to the fact
that, throughout 2002, the Vendor was experiencing financial difficulty
which ultimately resulted in its filing for bankruptcy on December 24,
2002. Since that time, certain of its affiliates have also filed for
bankruptcy in the various countries in which they are organized.
Although the lessees' requirement to pay ESF under the lease agreements
is not contingent upon Qualex's fulfillment of its servicing
obligations, under the agreement with ESF, Qualex would be responsible
for any deficiency in the amount of rent not paid to ESF as a result of
any lessee's claim regarding maintenance or supply services not
provided by Qualex. Such lease payments would be made in accordance
with the original lease terms, which generally extend over 5 to 7
years. ESF's outstanding lease receivable amount was approximately
$416 million at June 30, 2003.
44
To mitigate the risk of not being able to fulfill its service
obligations, Qualex built up its inventory of these spare parts during
2002 and began refurbishing used parts. To further mitigate its
exposure, effective April 3, 2002, Kodak entered into certain
agreements with the Vendor under which the Company paid $19 million for
a license relating to the spare parts intellectual property, an equity
interest in the Vendor and an entity created to hold intellectual
property and certain other assets conveyed by the Vendor and its
affiliates related to spare parts, and an arrangement to purchase spare
parts from the Vendor or its affiliates. After entering into these
arrangements, the Company obtained the documentation and specifications
of the parts it sourced solely from the Vendor and a comprehensive
supplier list for the parts the Vendor sourced from other suppliers.
However, under these arrangements, Kodak had a use restriction, which
precluded the Company from manufacturing a limited number of parts that
were covered by patents owned by the Vendor and from purchasing such
parts directly from the Vendor's suppliers. This use restriction would
be effective until certain triggering events occurred, the most
significant of which was the filing for bankruptcy by the Vendor. As
indicated above, the Vendor filed for bankruptcy on December 24, 2002.
As part of the bankruptcy proceedings, the Company has acquired 100%
ownership of the entity that was created to own the above-described
intellectual property and certain other assets related to spare parts,
and the Company has finalized written agreements necessary to
facilitate the manufacture of the parts previously produced by the
Vendor. Additionally, the Company has begun to source parts directly
from the Vendor's suppliers. Accordingly, the Company does not
anticipate any significant situations where it would be unable to
fulfill its service obligations under the arrangement with ESF.
Effective July 22, 2003, ESF entered into an agreement amending the
Receivables Purchase Agreement (RPA). Under the amended RPA agreement,
maximum borrowings were lowered to $257 million. Total outstanding
borrowings under the RPA at June 30, 2003 were $280 million. The
difference between the amended maximum borrowing amount of $257 million
and the outstanding balance at June 30, 2003 of $280 million is
attributable to payments subsequent to June 30, 2003 through the date
of the amendment. The amended RPA extends through July 2004, at which
time the RPA can be extended or terminated. If the RPA were
terminated, Qualex would no longer be able to sell its lease
receivables to ESF and would need to find an alternative financing
solution for future sales of its photofinishing equipment. The term of
the ESF partnership agreement between Qualex and DCC continues through
October 6, 2003. In light of the timing of the partnership
termination, Qualex plans to utilize the services of Eastman Kodak
Credit Corporation, a wholly owned subsidiary of General Electric
Capital Corporation, as an alternative financing solution for
prospective leasing activity with its customers.
45
At June 30, 2003, the Company had outstanding letters of credit
totaling $99 million and surety bonds in the amount of $105 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 applies to legal obligations associated
with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The fair
value of the liability is added to the carrying amount of the
associated asset, and this additional carrying amount is expensed over
the life of the asset. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of SFAS No. 143 did not have a material
impact on the Company's financial position, results of operations or
cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
the financial accounting and reporting for costs associated with exit
or disposal activities and supercedes Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 requires recognition of
the liability for costs associated with an exit or disposal activity
when the liability is incurred. Under EITF No. 94-3, a liability for
an exit cost was recognized at the date of the Company's commitment to
an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS
No. 146 impacts the timing of recognition and the initial measurement
of the amount of liabilities the Company recognizes in connection with
exit or disposal activities initiated after December 31, 2002. The
Company adopted SFAS No. 146 effective January 1, 2003. The Company
primarily accounts for employee termination actions under SFAS No. 112,
which requires recording when such charges are probable and estimable.
As such, the adoption of SFAS No. 146 did not have an impact for the
three and six months ended June 30, 2003, as there were no significant
one-time severance actions or other exit costs that were subject to
SFAS No. 146.
46
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
requires that a liability be recorded in the guarantor's balance sheet
upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees, including indemnifications, that an entity has
issued and a rollforward of the entity's product warranty liabilities.
The disclosure provisions of FIN 45 were effective for financial
statements of interim periods or annual periods ending after December
15, 2002. In addition, the Company adopted the recognition provisions
of FIN 45 effective January 1, 2003 for guarantees issued or modified
after December 31, 2002. The adoption of FIN 45 did not have a
material impact on the Company's financial position, results of
operations or cash flows. See Note 8, "Guarantees."
In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF
No. 00-21 provides guidance on how to determine when an arrangement
that involves multiple revenue-generating activities or deliverables
should be divided into separate units of accounting for revenue
recognition purposes, and if this division is required, how the
arrangement consideration should be allocated among the separate units
of accounting. The guidance in the consensus is effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003. The Company is currently evaluating the effect that the adoption
of EITF No. 00-21 will have on its financial position, results of
operations and cash flows.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which clarifies the
application of Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements," relating to consolidation of certain entities.
First, FIN 46 will require identification of the Company's
participation in variable interest entities (VIEs), which are defined
as entities with a level of invested equity that is not sufficient to
fund future activities to permit them to operate on a stand alone
basis, or whose equity holders lack certain characteristics of a
controlling financial interest. Then, for entities identified as VIEs,
FIN 46 sets forth a model to evaluate potential consolidation based on
an assessment of which party to the VIE, if any, bears a majority of
the exposure to its expected losses, or stands to gain from a majority
of its expected returns. FIN 46 is effective for all new VIEs created
or acquired after January 31, 2003. For VIEs created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15, 2003. FIN 46
also sets forth certain disclosures regarding interests in VIEs that
are deemed significant, even if consolidation is not required. See
Note 6, "Variable Interest Entities" for these disclosures. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its financial position, results of operations and cash
flows.
47
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is
generally effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
The Company is currently evaluating whether or not the adoption of SFAS
No. 149 will have an effect on its financial position, results of
operations and cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 requires that certain financial instruments,
which under previous guidance were accounted for as equity, must now be
accounted for as liabilities. The financial instruments affected
include mandatorily redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares
in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003 and
must be applied to the Company's existing financial instruments
effective July 1, 2003, the beginning of the first fiscal period after
June 15, 2003. The Company adopted SFAS No. 150 on June 1, 2003. The
adoption of this statement did not have a material effect on the
Company's financial position, results of operations or cash flows.
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48
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in nature, or
"forward-looking statements" as defined in the United States Private
Securities Litigation Reform Act of 1995. For example, references to
the Company's revenue, cash flow expectations and future focused cost
reductions are forward-looking statements.
Actual results may differ from those expressed or implied in forward-
looking statements. In addition, any forward-looking statements
represent our estimates only as of July 23, 2003, and should not be
relied upon as representing our estimates as of any subsequent date.
While we may elect to update forward-looking statements at some point
in the future, we specifically disclaim any obligation to do so, even
if our estimates change. The forward-looking statements contained in
this report are subject to a number of risk factors, including the
successful: implementation of product strategies (including category
expansion, digitization, OLED, and digital products); implementation of
intellectual property licensing strategies; development and
implementation of e-commerce strategies; completion of information
systems upgrades, including SAP; completion of various portfolio
actions; reduction of inventories; improvement in manufacturing
productivity; improvement in receivables performance; reduction in
capital expenditures; improvement in supply chain efficiency;
implementation of future focused cost reductions, including personnel
reductions; and development of the Company's business in emerging
markets like China, India, Brazil, Mexico, and Russia. The forward-
looking statements contained in this report are subject to the
following additional risk factors: inherent unpredictability of
currency fluctuations and raw material costs; competitive actions,
including pricing; the nature and pace of technology evolution,
including the analog-to-digital shift; continuing customer
consolidation and buying power; general economic and business
conditions; and other risk factors disclosed herein and from time to
time in the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this report should be evaluated in
light of these important risk factors.
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Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company, as a result of its global operating and financing
activities, is exposed to changes in foreign currency exchange rates,
commodity prices, and interest rates, which may adversely affect its
results of operations and financial position. In seeking to minimize
the risks and/or costs associated with such activities, the Company may
enter into derivative contracts.
49
Foreign currency forward contracts are used to hedge existing foreign
currency denominated assets and liabilities, especially those of the
Company's International Treasury Center, as well as forecasted foreign
currency denominated intercompany sales. Silver forward contracts are
used to mitigate the Company's risk to fluctuating silver prices. The
Company's exposure to changes in interest rates results from its
investing and borrowing activities used to meet its liquidity needs.
Long-term debt is generally used to finance long-term investments,
while short-term debt is used to meet working capital requirements.
The Company does not utilize financial instruments for trading or other
speculative purposes.
Using a sensitivity analysis based on estimated fair value of open
forward contracts using available forward rates, if the U.S. dollar had
been 10% weaker at June 30, 2003 and 2002, the fair value of open
forward contracts would have increased $16 million, and decreased $22
million, respectively. Such gains or losses would be substantially
offset by losses or gains from the revaluation or settlement of the
underlying positions hedged.
Using a sensitivity analysis based on estimated fair value of open
forward contracts using available forward prices, if available forward
silver prices had been 10% lower at June 30, 2003 and 2002, the fair
value of open forward contracts would have decreased $6 million and $1
million, respectively. Such losses in fair value, if realized, would
be offset by lower costs of manufacturing silver-containing products.
The Company is exposed to interest rate risk primarily through its
borrowing activities and, to a lesser extent, through investments in
marketable securities. The Company utilizes U.S. dollar denominated
and foreign currency denominated borrowings to fund its working capital
and investment needs. The majority of short-term and long-term
borrowings are in fixed-rate instruments. There is inherent rollover
risk for borrowings and marketable securities as they mature and are
renewed at current market rates. The extent of this risk is not
predictable because of the variability of future interest rates and
business financing requirements.
Using a sensitivity analysis based on estimated fair value of short-
term and long-term borrowings, if available market interest rates had
been 10% (about 30 basis points) higher at June 30, 2003, the fair
value of short-term and long-term borrowings would have decreased $1
million and $13 million, respectively. Using a sensitivity analysis
based on estimated fair value of short-term and long-term borrowings,
if available market interest rates had been 10% (about 42 basis points)
higher at June 30, 2002, the fair value of short-term and long-term
borrowings would have decreased $2 million and $20 million,
respectively.
The Company's financial instrument counterparties are high-quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk
by requiring specific minimum credit standards and diversification of
counterparties. The Company has procedures to monitor the credit
exposure amounts. The maximum credit exposure at June 30, 2003 was not
significant to the Company.
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50
Item 4. Controls and Procedures
In accordance with the Securities Exchange Act Rules 13a-15 and 15d-15,
the Company's management, under the supervision of the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the design and operation of the
Company's disclosure controls and procedures were effective. There
have been no significant changes in internal controls over financial
reporting or in other factors that could significantly affect internal
controls over financial reporting subsequent to the date of such
evaluation.
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51
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and financial statement schedules required as part of this
report are listed in the index appearing on page 52.
(b) Reports on Form 8-K.
On April 23, 2003, the Company furnished (not filed) pursuant to Item
12 under Item 9 (in accordance with the interim filing guidance for
these Items) the press release and related financial discussion
document relating to the results of its first fiscal quarter ended
March 31, 2003, which was also filed as an exhibit under Item 7.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
EASTMAN KODAK COMPANY
(Registrant)
Date September 3, 2003
Robert P. Rozek
Controller
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52
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit
Number
(10) M. Martin M. Coyne Agreement dated November 9, 2001.
(Incorporated by reference to the Eastman Kodak
Company Annual Report of Form 10-K for the fiscal
year ended December 31, 2001, Exhibit 10.)
Letter, dated July 9, 2003.
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges.
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(99.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(99.3) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(99.4) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
1 Exhibit (12) Eastman Kodak Company and Subsidiary Companies Computation of Ratio of Earnings to Fixed Charges (in millions, except for ratios) Six Months Ended June 30, 2003 Earnings from continuing operations before provision for income taxes $ 108 Adjustments: Minority interest in income of subsidiaries with fixed charges 8 Undistributed loss of equity method investees 23 Interest expense 71 Interest component of rental expense (1) 27 Amortization of capitalized interest 13 ----- Earnings as adjusted $ 250 ===== Fixed charges: Interest expense 71 Interest component of rental expense (1) 27 Capitalized interest 1 ----- Total fixed charges $ 99 ===== Ratio of earnings to fixed charges 2.5x (1) Interest component of rental expense is estimated to equal 1/3 of such expense, which is considered a reasonable approximation of the interest factor.
1 Exhibit (99.1) CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Daniel A. Carp, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation (the "Evaluation Date"); and c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably like to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
2 a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 3, 2003 /s/ Daniel A. Carp Daniel A. Carp Chief Executive Officer
1 Exhibit (99.2) CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert H. Brust, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation (the "Evaluation Date"); and c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
2 a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 3, 2003 /s/ Robert H. Brust Robert H. Brust Chief Financial Officer
1
Exhibit (99.3)
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Eastman Kodak Company (the
"Company") on Form 10-Q/A for the three and six month periods ended
June 30, 2003 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Daniel A. Carp, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to the best of my knowledge:
1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Daniel A. Carp
Daniel A. Carp
Chief Executive Officer
September 3, 2003
1 Exhibit (99.4) CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Eastman Kodak Company (the "Company") on Form 10-Q/A for the three and six month periods ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert H. Brust, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert H. Brust Robert H. Brust Chief Financial Officer September 3, 2003