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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): July 23, 2003
Eastman Kodak Company
(Exact name of registrant as specified in charter)
New Jersey 1-87 16-0417150
- ------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
343 State Street,
Rochester, New York 14650
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (585) 724-4000
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Item 7. Financial Statements and Exhibits
- ------------------------------------------
(c) Exhibits
--------
Exhibit 99.1 Press release issued July 23, 2003 Furnished with
regarding financial results for second this document
quarter of 2003
Exhibit 99.2 Financial discussion document issued Furnished with
July 23, 2003 regarding financial this document
results for second quarter of 2003
Item 9. Regulation FD Disclosure
- ---------------------------------
In accordance with Securities and Exchange Commission Release No. 33-8126, the
following information, which is intended to be furnished under Item 12, "Results
of Operations and Financial Condition," is instead being furnished under Item 9,
"Regulation FD Disclosure." This information, including the exhibits attached
hereto, shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or incorporated by
reference in any filing under the Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set forth by specific reference in
such a filing.
On July 23, 2003, Eastman Kodak Company issued a press release and a
supplemental financial discussion document describing its financial results for
its second fiscal quarter ended June 30, 2003. Copies of the press release and
financial discussion document are attached as Exhibits 99.1 and 99.2,
respectively, to this report.
Within the Company's second quarter 2003 press release and financial discussion
document, the Company makes reference to certain non-GAAP financial measures
including "Income from continuing operations, excluding non-operational items",
"Operating cash flow", "Operating cash flow before acquisitions" and "Free cash
flow", which have a directly comparable GAAP financial measure, and to certain
calculations that are based on non-GAAP financial measures, including "Days
sales outstanding" and "Days supply in inventory." The Company believes that
these measures represent important internal measures of performance.
Accordingly, where these non-GAAP measures are provided, it is done so that
investors have the same financial data that management uses with the belief that
it will assist the investment community in properly assessing the underlying
performance of the company on a year-over-year and quarter-sequential basis.
Whenever such information is presented, the Company has complied with the
provisions of the rules under Regulation G and Item 12 of Form 8-K. The specific
reasons, in addition to the reasons described above, why the Company's
management believes that the presentation of the non-GAAP financial measures
provides useful information to investors regarding Kodak's financial condition,
results of operations and cash flows are as follows:
Income from continuing operations, excluding non-operational items - The
Company's management believes that presenting income from continuing operations,
excluding non-operational items, is an important additional measure of
performance that can be used for comparing results between reporting periods.
These operating measures represent the principle internal measures of
performance, and form the basis of internal management performance expectations
and incentive compensation.
Operating cash flow / Operating cash flow before acquisitions/ Free cash flow -
The Company believes that the presentation of operating cash flow, operating
cash flow before acquisitions and free cash flow is useful information to
investors as they facilitate the comparison of cash flows between reporting
periods. In addition, management utilizes these measures as tools to assess the
Company's ability to repay debt and repurchase its own common stock, after it
has satisfied its working capital needs, dividends, and funded capital
expenditures, acquisitions and investments. The operating cash flow before
acquisitions measure equals the operating cash flow measure excluding the impact
of acquisitions, while the free cash flow measure equals the operating cash flow
measure excluding the impact of dividend payments. Accordingly, the Company
believes that the presentation of this information is useful to investors as it
provides them with the same data as management uses to facilitate their
assessment of the Company's cash position.
Days sales outstanding (DSO) - The Company believes that the presentation of a
DSO result that includes the impact of reclassifying rebates as an offset to
receivables is useful information to investors, as this calculation is more
reflective of the Company's receivables performance and cash collection efforts
due to the fact that most customers reduce their actual cash payment to the
Company by the amount of rebates owed to them.
Days supply in inventory (DSI) - The Company believes that the presentation of a
DSI result that is based on inventory before the LIFO reserve is useful
information to investors, as this calculation is more reflective of the
Company's actual inventory turns due to the fact that the inventory values in
the calculation are based on current cost.
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 hereunto duly authorized.
EASTMAN KODAK COMPANY
By: /s/ Robert P. Rozek
------------------------
Name: Robert P. Rozek
Title: Controller
Date: July 23, 2003
EXHIBIT INDEX
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Exhibit No. Description
- ---------- ------------
99.1 Press release issued July 23, 2003 regarding financial
results for second quarter 2003
99.2 Financial discussion document issued July 23, 2003
regarding financial results for second quarter 2003
Exhibit 99.1
Kodak Reports 2nd-Quarter Net Income of 39 Cents Per Share
Sales Unchanged at $3.352 Billion
ROCHESTER, N.Y.--(BUSINESS WIRE)--July 23, 2003--
EPS from Continuing Operations, Excluding
Charges and Other Items, Total 60 Cents
Eastman Kodak Company today said that second-quarter net income,
in accordance with Generally Accepted Accounting Principles (GAAP) in
the U.S., totaled 39 cents per share and that sales were unchanged
compared with the year-ago period.
Excluding the impact of previously announced focused cost
reductions and other non-operational items, earnings from continuing
operations were 60 cents per share, higher than the forecast of 25
cents to 35 cents per share that the company issued on June 18.
Relative to the June 18 forecast, the actual results primarily reflect
a more favorable sales mix of health imaging and traditional consumer
products and services. Better-than-expected performance from joint
ventures and a lower-than-expected tax rate also contributed to the
difference between actual and forecasted results.
For the second quarter of 2003:
-- Sales totaled $3.352 billion, unchanged from the second
quarter of 2002. Excluding foreign exchange, sales declined
6%.
-- The company reported net income of $112 million, or 39 cents
per share, compared with net income of $284 million, or 97
cents per share, in the second quarter of 2002.
-- Earnings from continuing operations, excluding the impact of
focused cost reductions and other non-operational items, were
$172 million, or 60 cents per share. The after-tax
non-operational items include a charge of $36 million, or 13
cents per share, related to the previously announced focused
cost reductions; a charge of $9 million, or 3 cents per share,
in connection with the settlement of a patent infringement
claim; a charge of $9 million, or 3 cents per share, in
connection with a prior-year acquisition; and a charge of $6
million, or 2 cents per share, to write down certain assets
held for sale following the acquisition of the Burrell
companies. In the second quarter of 2002, earnings from
continuing operations, excluding non-operational items,
totaled $250 million, or 86 cents per share. The after-tax,
non-operational items from the year-ago quarter include a
one-time tax benefit totaling 15 cents per share resulting
from the closure of a subsidiary, and a one-time write-down of
assets associated with venture investments totaling 3 cents
per share.
"We are pleased to report quarterly earnings that are stronger
than we had previously expected," said Kodak Chairman and Chief
Executive Officer Daniel A. Carp. "Most of our businesses continue to
perform well in a difficult economic environment. We are encouraged by
the market's acceptance of the innovative products and services Kodak
is creating - from our latest computed radiography systems and Vision2
motion-picture film, to the newest EasyShare consumer digital cameras
and the well-received EasyShare Printer Dock."
"Our traditional consumer film and processing operations continue
to face challenges associated with the increasing popularity of
digital photography as well as persistent economic weakness,
continuing price pressure and an associated decline in travel and
tourism," Carp said. "Consumer adoption of digital photography is
growing at a more rapid pace than a year ago, and this is trimming
demand for consumer film. At the same time, we are seeing evidence
that more consumers want to print their digital photos at retail and
at home. This trend presents a huge opportunity for Kodak to generate
profitable sales of our market-leading Picture Maker kiosks and inkjet
paper, which will help offset declining sales from traditional film.
"Given these developments, we remain cautious about a material
upturn in the traditional consumer products and services for the
balance of 2003," Carp said. "In this environment, we remain committed
to reducing costs aggressively, strengthening our balance sheet and
bringing to market more innovative products for the benefit of our
customers."
Other second-quarter 2003 details from continuing operations:
-- Kodak's operating cash flow was lower than the year-ago
quarter, primarily reflecting lower net income from continuing
operations, increased incentive compensation payments earned
in 2002, including wage dividend, and a larger year-over-year
increase in accounts receivable.
-- For the quarter, operating cash flow was a negative $53
million, compared with a positive $302 million in the second
quarter of 2002. The $53 million use of cash in the second
quarter of 2003 included acquisitions of $34 million, while
the year- ago quarter included no acquisitions. (Kodak defines
operating cash flow as net cash provided by continuing
operations, as determined under GAAP, plus proceeds from the
sale of assets minus capital expenditures, acquisitions,
investments in unconsolidated affiliates and dividends.)
-- The company's debt totaled $2.990 billion at the end of the
quarter, compared with $3.053 billion in the year-ago quarter.
The company held $838 million in cash on its balance sheet at
the end of the quarter, up from $524 million at the end of the
second quarter of 2002.
-- Gross profit on an operational basis was 33.6%, compared with
37.6% in the year-ago period.
-- Selling, general and administrative expenses on an operational
basis were 20.3% of sales, up from 19.4% in the year-ago
quarter.
The segment results from continuing operations for the second
quarter of 2003 are as follows:
-- Photography segment sales totaled $2.341 billion, down 2%. The
segment had earnings from operations of $119 million on an
operational and GAAP basis, compared with earnings from
operations of $257 million a year ago. Highlights for the
quarter included a 65% increase in consumer digital camera
sales, and an 18% increase in sales of motion-picture
origination and print film.
-- Health Imaging segment sales were $607 million, up 7%.
Earnings from operations on an operational and GAAP basis for
the segment were $131 million, up from $112 million in the
year-ago period. Highlights included higher-than-expected
sales of digital radiography, computed radiography and Picture
Archiving and Communications Systems (PACS).
-- Commercial Imaging segment sales were $382 million, up 6%.
Earnings from operations on an operational and GAAP basis were
$40 million, compared with $53 million in the year-ago period.
-- All Other sales were $22 million, down from $28 million.
Losses from operations on an operational and GAAP basis
totaled $22 million, compared with losses of $6 million in the
year-ago period. The All Other category includes the Kodak
Display business, as well as Sensors, Optics and miscellaneous
businesses.
Earnings Outlook:
-- Given the extraordinary volatility of the current environment,
reflecting global economic weakness, international conflict as
well as the shifting mix of the portfolio of products sold,
the company expects operational earnings of $0.85 to $1.15 per
share, and GAAP earnings of $0.25 to $0.65 per share, for the
second half of 2003.
"As the results today indicate, our employees are succeeding in a
marketplace where change is constant and rapid," Carp said. "For
example, we expect that sales of our Digital & Applied Imaging
products and services - which include inkjet paper, the Ofoto online
photo service and EasyShare cameras and docks - will top more than $1
billion this year. Our Health Imaging segment continues to post strong
results as digital products and services account for an increasing
share of its sales."
"The performance of these businesses point to a fundamental shift
at Kodak," Carp said. "We are evolving from a historical film company
into one that is aggressively pursuing the vast potential of digital
imaging across all of our operations. We are extending the Kodak brand
into the digital age so that we become known as the world's leading
imaging company, building on our proud heritage as the world's leading
picture company. And during this evolution, we will create new
products and services with different business models but with a
potential for growth that is far beyond that of our more mature
operations.
"We will do this in markets that are global and intensely
competitive," Carp said. "They reward companies that increase
productivity, reduce costs and move fast to take advantage of
marketplace opportunities. Additionally, our historical consumer
business is getting smaller, so it is vital that the cost structure of
this business reflects that reality. We will continue to shape our
company so that we remain competitive for a future in a digital
world."
Consistent with this business reality, Kodak plans to reduce its
cost structure. The reductions will occur primarily in corporate
administrative departments, manufacturing, and research and
development. In addition, reductions will occur in the infrastructure
and administration supporting the Consumer Imaging and Kodak
Professional operations.
Based on preliminary plans, Kodak expects to reduce employment by
a range of 4,500 to 6,000, beginning later this year. This estimated
reduction represents about 6% to 9% of the company's worldwide
employment base of about 70,000 at the end of 2002. In keeping with
past practice and consistent with requirements in various countries,
the company will offer severance packages and outplacement services to
those affected.
The company will take charges during the next twelve months in the
range of $350 million to $450 million to cover the costs associated
with the new reductions. The company expects to generate annual
savings of $300 million to $400 million from the new reductions, with
$275 million to $325 million expected to be realized in 2004.
"Being a global company means taking actions that maintain and
extend our competitive position," Carp said. "While we can't know for
certain when the economy will rebound, we do know that the market
forces demanding lower costs, flexible manufacturing strategies and
speed to market will not abate. We also are looking at a wide range of
alternative cost reduction efforts, including health care, travel and
general budget reductions. The combination of these actions will help
Kodak become more profitable and more agile as we compete for a larger
slice of the $385 billion infoimaging market that we serve."
Operational items are non-GAAP financial measures as defined by
the Securities and Exchange Commission's final rules under "Conditions
for Use of Non-GAAP Financial Measures." Reconciliations of
operational items included in this press release to the most directly
comparable GAAP financial measures can be found in the Financial
Discussion Document attached to this press release.
Certain statements in this press release 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 second half 2003 revenue, earnings, 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 press release 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;
-- Development of the Company's business in emerging markets like
China, India, Brazil, Mexico, and Russia.
The forward-looking statements contained in this press release 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 substitution, including the
analog-to-digital shift;
-- Continuing customer consolidation and buying power;
-- General economic, geo-political, public health and business
conditions.
-- Other factors disclosed previously and from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this press release should be
evaluated in light of these important risk factors.
Editor's Note: For additional information about Kodak, visit our
web site on the Internet at: www.kodak.com/
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS - UNAUDITED
(in millions, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
2003 2002 2003 2002
Net sales $3,352 $3,336 $6,092 $6,042
Cost of goods sold 2,236 2,082 4,152 3,928
------ ------ ------ ------
Gross profit 1,116 1,254 1,940 2,114
Selling, general and
administrative expenses 716 656 1,282 1,196
Research and development costs 179 192 373 379
Restructuring costs and other 44 - 76 -
------ ------ ------ ------
Earnings from continuing
operations before interest,
other charges, and income
taxes 177 406 209 539
Interest expense 34 44 71 88
Other charges 9 22 30 53
------ ------ ------ ------
Earnings from continuing
operations before income taxes 134 340 108 398
Provision (benefit) for income
taxes 22 54 (1) 71
------ ------ ------ ------
Earnings from continuing
operations 112 286 109 327
Earnings (loss) from
discontinued operations, net
of income tax benefits for
the three and six months
ended June 30, 2002 of $1
and $2, respectively - (2) 15 (4)
------ ------ ------ ------
NET EARNINGS $ 112 $ 284 $ 124 $ 323
====== ====== ====== ======
Basic and diluted net
earnings (loss) per share:
Continuing operations $ .39 $ .98 $ .38 $ 1.12
Discontinued operations .00 (.01) .05 (.01)
------ ------ ------ ------
Total $ .39 $ .97 $ .43 $ 1.11
====== ====== ====== ======
Number of common shares used in
basic earnings (loss) per
share 286.5 291.7 286.4 291.5
Incremental shares from
assumed conversion of options 0.1 0.1 0.2 0.1
------ ------ ------ ------
Number of common shares used in
diluted earnings (loss) per
share 286.6 291.8 286.6 291.6
====== ====== ====== ======
Cash dividends per share $ .90 $ .90 $ .90 $ .90
- -------------------------------------------------------------------
SUPPLEMENTAL INFORMATION - UNAUDITED
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
2003 2002 2003 2002
Provision for depreciation $ 193 $ 201 $ 395 $ 386
After-tax exchange losses
and effect of translation
of net monetary items (5) (1) (5) (12)
Cash dividends declared 258 262 258 262
Capital expenditures 125 112 236 204
Net Sales from Continuing Operations
by Reportable Segment and All Other - Unaudited
(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
------ ------ --- ------ ------ ---
Total Net Sales $3,352 $3,336 0% $6,092 $6,042 + 1%
====== ====== === ====== ====== ===
- ----------------------------------------------------------------------
Earnings (Loss) from Continuing Operations Before Interest, Other
Charges, and Income Taxes by Reportable Segment and All Other -
Unaudited
(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%
Percent of Sales 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) -
------- ----- --- ------ ------ ---
Total $ 177 $ 406 -56% $ 209 $ 539 -61%
======= ===== === ====== ====== ===
Percent of Sales 5.3% 12.2% 3.4% 8.9%
- ----------------------------------------------------------------------
Earnings (Loss) From Continuing Operations by Reportable Segment and
All Other - Unaudited
(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%
Percent of Sales 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%
==== ==== ==== ==== ==== ====
Percent of Sales 3.3% 8.6% 1.8% 5.4%
- ----------------------------------------------------------------------
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
June 30, Dec. 31,
2003 2002
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 838 $ 569
Receivables, net 2,462 2,234
Inventories, net 1,190 1,062
Deferred income taxes 512 512
Other current assets 157 157
------- -------
Total current assets 5,159 4,534
------- -------
Property, plant and equipment, net 5,289 5,420
Goodwill, net 992 981
Other long-term assets 2,636 2,559
------- -------
TOTAL ASSETS $14,076 $13,494
======= =======
- ----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,538 $ 3,351
Short-term borrowings 1,474 1,442
Accrued income taxes 604 709
------- -------
Total current liabilities 5,616 5,502
OTHER LIABILITIES
Long-term debt, net of current portion 1,516 1,164
Postretirement liabilities 3,455 3,412
Other long-term liabilities 635 639
------- -------
Total liabilities 11,222 10,717
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 849 849
Retained earnings 7,462 7,611
Accumulated other comprehensive loss (572) (771)
Unearned restricted stock (7) -
------- -------
8,710 8,667
Less: Treasury stock at cost 5,856 5,890
------- -------
Total shareholders' equity 2,854 2,777
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,076 $13,494
======= =======
- ----------------------------------------------------------------------
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(in millions)
Six Months Ended
June 30
------------------
2003 2002
Cash flows relating to operating activities:
Net earnings $ 124 $ 323
Adjustments to reconcile to net cash
provided by operating activities:
(Gain) loss from discontinued operations (15) 4
Equity in losses from unconsolidated affiliates 30 48
Depreciation and amortization 395 386
Restructuring costs, asset impairments and
other non-cash charges 37 -
Provision for deferred taxes 16 -
Increase in receivables (196) (117)
Increase in inventories (60) (13)
Decrease in liabilities excluding borrowings (217) (106)
Other items, net 100 9
------ ------
Total adjustments 90 211
------ ------
Net cash provided by continuing
operations 214 534
------ ------
Net cash provided by (used in)
discontinued operations 19 (6)
------ ------
Net cash provided by operating activities 233 528
------ ------
Cash flows relating to investing activities:
Additions to properties (236) (204)
Acquisitions, net of cash acquired (88) (6)
Investments in unconsolidated affiliates (41) (68)
Marketable securities - purchases (44) (55)
Marketable securities - sales 43 29
------ ------
Net cash used in investing activities (366) (304)
------ ------
Cash flows relating to financing activities:
Net increase in borrowings
with original maturity of
90 days or less 129 113
Proceeds from other borrowings 715 515
Repayment of other borrowings (466) (778)
Exercise of employee stock options 12 2
------ ------
Net cash provided by (used in) financing
activities 390 (148)
------ ------
Effect of exchange rate changes on cash 12 -
------ ------
Net increase in cash and cash
equivalents 269 76
Cash and cash equivalents, beginning of year 569 448
------ ------
Cash and cash equivalents, end of quarter $ 838 $ 524
====== ======
CONTACT: Eastman Kodak Company
Gerard Meuchner, 585-724-4513
gerard.meuchner@kodak.com
or
Anthony Sanzio, 585-781-5481
anthony.sanzio@kodak.com
Exhibit 99.2
Eastman Kodak Company Financial Discussion Document
Second Quarter 2003 Results
2003 COMPARED WITH 2002
Second quarter, 2003 presentation reflects the adoption of the
Securities and Exchange Commission's final rules under "Conditions for
Use of Non-GAAP Financial Measures," which requires that financial
information be presented on a basis that conforms with generally
accepted accounting principles (GAAP) in the U.S. As a result, the
financial discussion which follows reflects the company's results from
continuing operations on an "as reported" or "GAAP" basis. However,
the Company also believes that presenting income from continuing
operations excluding non-operational items is an important additional
measure of performance that can be used for comparing results between
reporting periods. Accordingly, the Company has included analysis
based on non-GAAP financial measures in the discussion below.
Second Quarter
Consolidated Revenues:
Net worldwide sales were $3.352 billion for the second quarter of
2003 as compared with $3.336 billion for the second quarter of 2002,
representing an increase of $16 million, a decrease of 6% excluding
the favorable impact of exchange. The increase in net sales was
comprised of:
-- Volume: decreases in volume reduced second quarter sales by
approximately 2.0 percentage points driven primarily by
consumer traditional film and photofinishing.
-- Price/Mix: declines in price/mix reduced second quarter sales
by approximately 4.0 percentage points, primarily driven by
consumer film and photofinishing and consumer digital cameras.
-- Exchange: favorable exchange of approximately 6.0 percentage
points offset the negative impacts of price/mix and volume.
Net sales in the U.S. were $1.470 billion for the second quarter
of 2003 as compared with $1.573 billion for the prior year quarter,
representing a decrease of $103 million, or 7%. Net sales outside the
U.S. were $1.882 billion for the current quarter as compared with
$1.763 billion for the second quarter of 2002, representing an
increase of $119 million, or 7% as reported, a decrease of 4%
excluding the favorable impact of exchange.
Non-U.S. Revenues:
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 billion 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,
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, 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, an increase of 5% excluding the favorable impact of
exchange.
Emerging Markets:
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, 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 the result of Kodak Express and
new channel expansion for Kodak products and services. Sales increases
in India were driven by the continued success of camera seeding and
Photoshop expansion programs. 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.
Gross Profit:
GAAP:
Gross profit was $1.116 billion for the second quarter of 2003 as
compared with $1.254 billion 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:
-- Price/Mix: price/mix declines reduced gross profit margins by
3.5 percentage points. These declines relate primarily to
consumer film and consumer digital cameras.
-- Productivity/Cost: manufacturing productivity/cost negatively
impacted gross profit margins by approximately 2.0 percentage
points.
-- Exchange: favorably impacted gross profit margins by 1.0
percentage point.
Operational:
Excluding accelerated depreciation of $7 million and inventory
write-downs of $3 million relating to focused cost reduction actions,
gross profit on an operational basis was $1.126 billion for the second
quarter of 2003 as compared with $1.254 billion for the second quarter
of 2002, representing a decrease of $128 million, or 10%. The gross
profit margin was 33.6% in the current quarter as compared with 37.6%
in the prior year quarter. The 4.0 percentage point decrease was
primarily attributable to:
-- Price/Mix: price/mix declines reduced gross profit margins by
3.5 percentage points. These declines relate primarily to
consumer film and consumer digital cameras.
-- Productivity/Cost: manufacturing productivity/cost negatively
impacted gross profit margins by approximately 2.0 percentage
points.
-- Exchange: favorably impacted gross profit margins by 1.0
percentage point.
Selling, General and Administrative Expenses:
GAAP:
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 attributable to the following:
-- 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.
-- Unfavorable exchange of $34 million.
Operational:
Excluding the charges noted above, SG&A expenses on an operational
basis were $679 million for the second quarter of 2003 as compared
with $646 million for the prior year quarter, representing an increase
of $33 million, or 5%. The increase in SG&A is attributable to
unfavorable exchange of $34 million. As a percentage of sales, SG&A
increased from 19.4% for the second quarter of 2002 to 20.3% for the
current quarter.
Research and Development Costs:
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.
Cost Reduction Plans:
As announced in the fourth quarter of 2002 and the first quarter
of 2003, Kodak has implemented a series of cost reduction actions
resulting in pre-tax charges totaling $54 million or $.13 per share in
the second quarter. The components of restructuring in the second
quarter include $21 million for employee severance relating to the
elimination of approximately 525 positions, $17 million relating to
the dissolution of the Phogenix joint venture and $9 million
associated with inventory write-downs, business exits and asset
impairments. In addition, the company recorded accelerated
depreciation of $7 million during the quarter associated with assets
to be disposed of in connection with the relocation of certain
manufacturing operations.
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.
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 support relating
to the company's consumer and professional products and services. The
anticipated annual savings from these actions are expected to total
$300 million to $400 million, with $275 million to $325 million
expected to be realized in 2004.
Earnings From Operations:
GAAP:
Earnings from operations (EFO) 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 attributable to the reasons indicated above.
Operational:
Excluding charges for cost reduction actions and charges relating
to a patent infringement claim, a prior year acquisition and asset
write-downs, EFO on an operational basis for the second quarter of
2003 were $268 million as compared with $416 million for the second
quarter of 2002, representing a decrease of $148 million, or 36%. The
decrease in earnings from operations was primarily the result of lower
gross profit margins and higher SG&A.
Below EFO:
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 Kodak Polychrome
Graphics, reduced losses from the Phogenix joint venture due to its
dissolution, and reduced losses from the NexPress joint venture.
Corporate Tax Rate:
The Company's estimated annual effective tax rate from continuing
operations for 2003 decreased from 26% in the first quarter of 2003 to
24% in the current year quarter. This decrease is primarily
attributable to expectations that earnings in lower tax rate
jurisdictions will increase as a percentage of total earnings.
The Company's estimated annual effective tax rate from continuing
operations decreased from 29% for the prior year second quarter to 24%
for the second quarter of 2003. This decrease is primarily
attributable to expectations that earnings in lower tax rate
jurisdictions will increase as a percentage of total earnings.
During the second quarter of 2003, the Company recorded a tax
provision on a GAAP basis of $22 million, representing an effective
tax rate from continuing operations of approximately 16%. The primary
drivers of the lower effective tax rate relative to the estimated
annual effective tax rate of 24% were the following discrete period
items, which occurred in the second quarter and that are taxed in
jurisdictions with tax rates greater than the estimated annual
effective tax rate:
-- A $54 million charge for focused cost reductions
-- A $14 million charge for the settlement of a patent
infringement claim
-- A $14 million charge for the settlement of issues relating to
a prior year acquisition
-- A $9 million charge relating to the impairment of the Burrell
Companies' net assets held for sale
Earnings from Continuing Operations:
GAAP:
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 year over year. This decrease in earnings from continuing
operations is attributable to the reasons described above.
Operational:
Earnings from continuing operations on an operational basis for
the second quarter of 2003 were $172 million, or $.60 per diluted
share, as compared with earnings from continuing operations on an
operational basis for the second quarter of 2002 of $250 million, or
$.86 per diluted share, representing a decrease of $78 million, or
31%. Second quarter operational earnings from continuing operations
for 2003 exclude the following after-tax items:
-- A charge of $36 million ($54 million pre-tax), or $.13 per
share, resulting from previously announced cost reduction
initiatives in the fourth quarter of 2002 and the first
quarter of 2003. $44 million is recorded in "Restructuring
Costs and Other", $7 million of accelerated depreciation
associated with the relocation of certain manufacturing
operations and $3 million of inventory write-downs are
recorded in "Cost of Goods Sold" (COGS).
-- A charge of $9 million ($14 million pre-tax) or $.03 per share
is recorded in SG&A and relates to the settlement of a patent
infringement claim.
-- A charge of $9 million ($14 million pre-tax) or $.03 per share
is recorded in SG&A and relates to the settlement of
outstanding issues relating to a prior year acquisition.
-- A charge of $6 million ($9 million pre-tax) or $.02 per share
is recorded in SG&A and is associated with the write-down of
the Burrell companies' net assets held for sale.
Earnings from Discontinued Operations:
The company did not have earnings or loss from discontinued
operations in the second quarter of 2003. In the second quarter of
2002, a loss from discontinued operations of $.01 per diluted share
was reported.
Year-over-Year Comparison of Reported and Operational Earnings
(Amounts in millions of dollars)
- ----------------------------------------------------------------------
2Q 03 as Excluded 2Q 03 2Q 02 as Excluded 2Q 02
Reported Items Operational Reported Items Operational
----------------------------------------------------------
Sales $3,352 $3,352 $3,336 $3,336
COGS 2,236 10 a 2,226 2,082 2,082
--------- --------------------- ------------
Gross Profit 1,116 1,126 1,254 1,254
SG&A 716 37 b 679 656 10 d 646
R&D 179 179 192 192
Restructuring
costs and
other 44 44 c - - -
---------
EFO 177 268 406 416
Interest
Expense (34) (34) (44) (44)
Other Charges (9) (9) (22) 3 d (19)
--------- --------------------- ------------
Below EFO (43) (43) (66) (63)
Earnings
Before Taxes 134 225 340 353
Provision for
Taxes 22 31 e 53 54 49 f 103
--------- --------------------- ------------
Earnings -
Cont. Ops. 112 172 286 250
Earnings
(Loss)
Disc. Ops. - - - (2) 2 g -
Net Earnings $112 172 284 250
Diluted EPS -
Cont. Ops. $0.39 $0.60 $0.98 $0.86
Diluted EPS $0.39 $0.97
- ----------------------------------------------------------------------
Items excluded from Earnings on an operational basis:
a - Accelerated depreciation of $7 million and inventory write-downs
of $3 million in connection with focused cost reduction actions.
b - Charges for the Burrell Companies' net assets held for sale
impairment, patent infringement claim settlement, and prior year
acquisition settlement.
c - Charge for focused cost reductions of $44 million.
d - Strategic and non-strategic asset write-downs of $10 million and
$3 million, respectively, were taken in Q2 2002.
e - Tax impacts associated with the above-mentioned excluded items.
f - Tax benefit of $45 million related to the closure of a subsidiary
and the tax impacts associated with the above-mentioned excluded
items.
g - Loss from discontinued operations.
As Percent of Sales:
2Q 03 as 2Q 03 2Q 02 as 2Q 02
Reported Operational Reported Operational
------------------------------------------------
Gross Profit 33.3% 33.6% 37.6% 37.6%
SG&A 21.4% 20.3% 19.7% 19.4%
SG&A w/o Advertising 16.2% 15.1% 14.5% 14.2%
R&D 5.3% 5.3% 5.8% 5.8%
EFO 5.3% 8.0% 12.2% 12.5%
Net Earnings 3.3% 5.1% 8.6% 7.5%
- ----------------------------------------------------------------------
Segment Results:
Photography
Revenues:
Net worldwide sales for the Photography segment were $2.341
billion for the second quarter of 2003 as compared with $2.378 billion
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:
-- Volume: decreases in volume reduced second quarter sales by
approximately 4.0 percentage points. Volume declines for
traditional consumer products and services were partially
offset by increases in volume for consumer digital and
entertainment products and services.
-- Price/Mix: declines in price/mix reduced second quarter sales
by approximately 4.0 percentage points.
-- Exchange: favorable exchange of approximately 6.0 percentage
points offset the negative impacts of price/mix and volume.
Photography segment net sales in the U.S. were $972 million for
the current quarter as compared with $1.083 billion 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 billion for
the second quarter of 2003 as compared with $1.295 billion 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.
Consumer products and services revenues:
Net worldwide sales of consumer film products, including 35mm
film, Advantix film and one-time-use cameras (OTUC), decreased 6% in
the second quarter of 2003 as compared with the second quarter of
2002, reflecting 13% volume declines, partially offset by positive 1%
price/mix and 6% favorable exchange. Sales of the Company's consumer
film products within the U.S. decreased 9%, reflecting 11% volume
declines and positive 2% price/mix. Positive price/mix trends in the
U.S. were the result of better than expected OTUC mix driven by the
HQ, black and white and OTUC 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 OTUC and film
products. Sales of the Company's consumer film products outside the
U.S. decreased 2%, reflecting 14% volume declines, unchanged price
mix, partially offset by 12% favorable exchange.
U.S. consumer film industry volumes decreased approximately 7% in
the second quarter of 2003 as compared with the prior year quarter.
Year to date U.S. consumer film industry volumes decreased
approximately 8% year over year.
Early in 2003, the company predicted that full year 2003 U.S.
consumer film industry would decline 4% to 6% and that digital
transition would reduce industry growth by 4% to 5%. The most current
U.S. market data trends indicate that for full year 2003, the U.S.
film industry will contract in the 7% to 8% range and digital
substitution will reduce industry growth by approximately 8% to 10%
suggesting that digital transition accounts for the majority of the
industry decline.
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 consumer 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 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.
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 toward on-site processing.
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 volume increases and favorable exchange
partially offset by price declines. 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.
As in prior years, 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. 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. On a year to date basis, Kodak's U.S. consumer digital
camera market share increased modestly year over year.
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 line of small format inkjet
papers.
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.
Professional products and services revenues:
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 prior year quarter reflecting declines in volume and
price/mix partially offset by favorable exchange. Sales declines
resulted primarily from the combined impacts of ongoing digital
transition and continued economic weakness in markets worldwide.
During the second quarter, worldwide sales increases were recorded
for digital cameras, digital writers, Event Imaging solutions, digital
systems and solutions, display materials and thermal equipment.
Entertainment products and services revenues:
Net worldwide sales of origination and print film to the
entertainment industry increased 18%, primarily 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:
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:
-- Price/Mix: declines in price/mix reduced gross profit margins
by approximately 4.0 percentage points.
-- Productivity/Cost: manufacturing productivity/cost negatively
impacted gross profit margins by approximately 2.0 percentage
points.
-- Exchange: favorably impacted gross profit margins by
approximately 1.0 percentage point.
SG&A:
In the second quarter, 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 in SG&A is
attributable to unfavorable exchange of $28 million, partially offset
by cost reduction actions.
R&D:
Second quarter 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% 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.
EFO:
Earnings from operations 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
On July 21, 2003, Kodak Health Imaging announced its intention to
acquire PracticeWorks, Inc., a leading provider of dental practice
management software and digital radiographic imaging systems for
approximately $500 million in cash. This acquisition is expected to
contribute approximately $215 million in sales to the Health Imaging
business during the first full year. It is anticipated that the
transaction on an operating basis will be slightly dilutive through
2005 and accretive 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
and is expected to move Health Imaging into the leading position in
the dental practice management and dental digital radiographic
markets.
Revenues:
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, an increase of 1% excluding the favorable impact of
exchange. The increase in sales was comprised of:
-- Volume: increases in volume contributed approximately 4.0
percentage points to second quarter sales, driven primarily by
volumes increases in digital media, digital capture equipment
and services.
-- Price/Mix: declines in price/mix reduced second quarter sales
by approximately 3.0 percentage points, primarily driven by
digital media, laser printers and analog medical film.
-- Exchange: favorable exchange impacted sales by approximately
6.0 percentage points.
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.
Digital products and services revenues:
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 higher volumes of digital capture equipment, digital
media and services. Service revenues increased due to an increase in
digital equipment service contracts during the current quarter.
Traditional products and services revenues:
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 driven
primarily by favorable exchange and higher specialty film volumes.
Traditional analog film products (excluding specialty films) decreased
3% due to lower price/mix only partially offset by higher volumes and
favorable exchange.
Gross profit:
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:
-- Price/Mix: declines in price/mix negatively impacted gross
profit margins by approximately 1.7 percentage points.
-- Productivity/Cost: manufacturing productivity/cost increased
gross profit margins by approximately 2.2 percentage points.
-- Exchange: favorable exchange added approximately 1.3
percentage points to the gross profit rate.
SG&A:
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 unfavorable exchange of $4 million and increased
investment to drive growth.
R&D:
Second quarter R&D costs increased slightly from $37 million in
the prior year quarter to $38 million in the current year quarter, but
decreased as a percentage of sales from 6.5% for the second quarter of
2002 to 6.3% for the current quarter.
EFO:
Earnings from operations 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 while the operating
earnings margin rate increased 1.9 percentage points to 21.6% from
19.7% for the prior year quarter. The increase in operating earnings
reflects gross profit margin improvements.
Commercial Imaging
Revenues:
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, an increase of 3% excluding the favorable impact of
exchange. The increase in net sales was primarily comprised of:
-- Volume: increases in volume contributed approximately 3.0
percentage points to second quarter sales driven by Imaging
Services and document scanners.
-- Price/Mix: price/mix remained essentially unchanged.
-- Exchange: favorable exchange contributed approximately 3.0
percentage points to second quarter sales.
Net sales in the U.S. were $221 million for the current year
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, 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 transition and the
effect of continuing economic weakness in the commercial printing
market.
Despite continued weakness in the global economy, KPG's earnings
performance continues to improve driven primarily by its 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
continued to contribute positively to Kodak's "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:
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:
-- Price/Mix: declines in price/mix reduced gross profit margins
by approximately 1.0 percentage point.
-- Productivity/Cost: manufacturing productivity/cost reduced
gross profit margins by approximately 3.0 percentage points.
SG&A:
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%. Unfavorable exchange of $2 million in the
second quarter of 2003 accounted for the SG&A increase.
R&D:
Second quarter R&D costs for the Commercial Imaging segment
increased $1 million, or 7%, from $14 million in the second quarter of
2002 to $15 million for the current quarter, but remained unchanged as
a percentage of sales at 3.9%.
EFO:
Earnings from operations for the Commercial Imaging segment
decreased $13 million, or 25%, from $53 million in the second quarter
of 2002 to $40 million in the current quarter primarily as a result of
declining margin contributions from traditional graphic arts products.
All Other
Revenues:
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%.
SK Display Corporation, the OLED manufacturing joint venture
between Kodak and Sanyo, continues production scale-up with the goal
of supplying production quantity OLED screens to the marketplace
throughout the remainder of 2003.
EFO:
The loss from operations for All Other was $22 million in the
current quarter as compared with the loss from operations of $6
million in the second quarter of 2002 primarily driven by increased
levels of investment for Kodak's Display business.
Balance Sheet:
Cash Flow:
Kodak defines free cash flow as net cash provided by continuing
operations, (as determined under generally accepted accounting
principles in the U.S.- U.S. GAAP), plus proceeds from the sale of
assets minus capital expenditures, acquisitions and investments in
unconsolidated affiliates. Kodak's definition of operating cash flow
equals free cash flow less dividends.
Operating cash flow during the second quarter of 2003 was negative
$53 million, $355 million lower than the positive $302 million
generated in the year ago quarter. Primary drivers of the variance
include lower earnings from continuing operations, increased incentive
compensation payments, including wage dividend earned in 2002, and a
larger increase in accounts receivable in 2003 versus 2002.
In January of 2003, the Company provided guidance for full year,
2003 operating cash (before acquisitions) of approximately $450 to
$650 million. Kodak's current estimate for operating cash flow (before
acquisitions) is approximately $500 million for full year 2003. The
recently announced acquisition of PracticeWorks for approximately $500
million is expected to be funded by a combination of cash and debt.
Since the Company had no scheduled dividend payments in the second
quarter of 2003 or 2002, free cash flow and operating cash flow for
the current quarter are identical. Net cash provided by (used in)
continuing operations, investing activities and financing activities,
as determined under GAAP in the second quarter of 2003 were $127
million, ($179) million and $286 million, respectively. The table
below reconciles the net cash provided by continuing operations as
determined under U.S. GAAP to Kodak's definition of operating cash
flow for the second quarter of 2003:
($ millions)
Net cash provided by continuing operations $127
Additions to properties (125)
Investments in unconsolidated affiliates (21)
----------
Operating Cash Flow (Continuing Operations) before
acquisitions (19)
Acquisitions, net of cash acquired (34)
----------
Operating Cash Flow (Continuing Operations) $(53)
Dividend:
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 Spending:
Capital additions were $125 million in the second quarter of 2003,
with the majority of the spending supporting new products,
manufacturing productivity and quality improvements, infrastructure
improvements and ongoing environmental and safety initiatives.
Receivables:
Total receivables of $2.462 billion comprised of trade ($2.148
billion) and miscellaneous ($314 million) receivables at the end of
the second quarter, 2003, declined $89 million from second quarter of
2002. This reduction is driven by strong operational improvements,
including the reduction of past-due receivables. Accrued customer
rebates are classified as miscellaneous payables, however, the
majority of these are cleared through customer deductions. The effect
of offsetting these accrued customer rebates would reduce the trade
receivable balance by $429 million to $1.719 billion at the end of the
second quarter of 2003, and would reduce the trade receivable balance
by $327 million to $1.844 billion at the end of the second quarter of
2002.
Days sales outstanding (DSO) decreased approximately 10 days from
second quarter, 2002 and decreased approximately 1 day quarter
sequentially. The DSO calculation includes the impact of reclassifying
rebates as an offset to receivables for the last four quarters.
Excluding the impact of rebate reclassification, the operational
improvement in DSO was 4 days year over year and unchanged quarter
sequentially. Kodak defines DSO: 4 quarter moving average net trade
receivables after rebate reclassification, divided by 12 months of
sales, multiplied by 365 days.
Inventory:
Kodak's inventories (after LIFO) increased $42 million year over
year but decreased $7 million quarter sequentially.
DSI is defined as four-quarter average inventory before the LIFO
reserve divided by 12 months COGS as reported, multiplied by 365 days.
Kodak defines inventory turns as 12 months COGS as reported divided by
four quarter average inventory before the LIFO reserve.
Days supply in inventory (DSI) improved by more than 4 days from
the second quarter 2002 and by over 1 day quarter sequentially.
Inventory turns have improved slightly by 0.1 turns to 5.5 turns since
the end of the first quarter 2003. The DSI calculation is based on
inventory before the LIFO reserve. Including the impact of the LIFO
reserve, DSI improved by more than 2 days from the second quarter of
2002 and was essentially flat quarter sequentially; inventory turns
remained essentially flat at 7.3 turns relative to the first quarter
of 2003.
Debt to Capital Ratio:
Debt to total capital ratio was 51.2%, increasing 2.6 percentage
points quarter sequentially and 1.6 percentage points year over year.
Debt increased by $286 million to $2.990 billion and cash increased by
$241 million to $838 million quarter sequentially, in keeping with the
Company's plans to maintain a somewhat higher cash balance to ensure
adequate operational liquidity. On a debt less cash basis, net debt
was $2.152 billion, a decrease of $377 million from second quarter,
2002 levels of $2.529 billion.
Equity amounted to $2.854 billion, a decrease of $10 million
quarter sequentially, primarily due to earnings and the declaration of
the semi-annual dividend, offset by exchange.
Foreign Exchange:
Year over year, the impact of foreign exchange on operating
activities during the second quarter was a positive $0.17 per share
whereas foreign exchange activities recorded in "Other Charges" had a
negative $0.01 per share impact. Therefore, the sum of the operational
and reportable exchange impacts increased earnings in the quarter by
$0.16 per share.
Outlook for Full Year 2003:
Although it is difficult to predict earnings given the volatility
of the current environment reflecting global economic weakness,
international conflict and the continuing impact of the digital
transition underway at the company, Kodak expects operational earnings
of $.85 to $1.15 per share and GAAP earnings of $.25 to $.65 per share
for the second half of 2003.
Upcoming Meetings:
Kodak's annual strategy meeting with investors will be held on
Thursday, September 25, in New York City. Additional details will
follow shortly.
Safe Harbor Statement:
Operational items are non-GAAP financial measures as defined by
the Securities and Exchange Commission's final rules under "Conditions
for Use of Non-GAAP Financial Measures."
Certain statements in this press release 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 2003 revenue, earnings, 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 estimates as of July 23, 2003, and should not be
relied upon as representing estimates as of any subsequent date. While
the Company may elect to update forward-looking statements at some
point in the future, we specifically disclaim any obligation to do so,
even if estimates change. Forward-looking statements are subject to a
number of risk factors, including:
-- 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;
-- Development of the Company's business in emerging markets like
China, India, Brazil, Mexico, and Russia.
The forward-looking statements contained in this press release 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 substitution, including the
analog-to-digital shift;
-- Continuing customer consolidation and buying power;
-- General economic and business conditions.
-- Other factors disclosed previously and from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this press release should be
evaluated in light of these important risk factors.
CONTACT: Eastman Kodak Company
Gerard Meuchner, 585-724-4513
gerard.meuchner@kodak.com
or
Anthony Sanzio, 585-781-5481
anthony.sanzio@kodak.com