SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
X Annual
report pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the
year ended December 31, 2008 or
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period fromto
Commission
File Number 1-87
EASTMAN
KODAK COMPANY
(Exact
name of registrant as specified in its charter)
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NEW
JERSEY
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16-0417150
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(State
of incorporation)
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(IRS
Employer Identification No.)
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343
STATE STREET, ROCHESTER, NEW YORK
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14650
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:585-724-4000
_____________
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each Class
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Name of each exchange on which
registered
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Common
Stock, $2.50 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
[ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Page 1
of 126
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
[X]
Accelerated filer [
]
Non-accelerated filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
The
aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price as of the last business
day of the registrant's most recently completed second fiscal quarter, June 30,
2008, was approximately $4.2 billion. The registrant has no
non-voting common stock.
The
number of shares outstanding of the registrant's common stock as of February 20,
2009 was 268,196,483 shares of common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
PART
III OF FORM 10-K
The
following items in Part III of this Form 10-K incorporate by reference
information from the Notice of 2009 Annual Meeting and Proxy
Statement:
Item 10
- -DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 11
- -EXECUTIVE COMPENSATION
Item 12
- -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Item 13
- -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Item 14
- -PRINCIPAL ACCOUNTING FEES AND SERVICES
2
Eastman
Kodak Company
Form
10-K
December
31, 2008
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Table
of Contents
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Page
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Business
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4
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Risk
Factors
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11
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Unresolved
Staff Comments
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16
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Properties
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16
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Legal
Proceedings
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16
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Submission
of Matters to a Vote of Security Holders
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18
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Executive
Officers of the Registrant
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18
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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22
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Selected
Financial Data
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24
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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Liquidity
and Capital Resources
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49
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Quantitative
and Qualitative Disclosures About Market Risk
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57
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Financial
Statements and Supplementary Data
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58
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Consolidated
Statement of Operations
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59
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Consolidated
Statement of Financial Position
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60
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Consolidated
Statement of Shareholders' Equity
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61
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Consolidated
Statement of Cash Flows
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64
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Notes
to Financial Statements
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66
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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115
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Controls
and Procedures
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115
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Other
Information
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116
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Directors,
Executive Officers and Corporate Governance
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116
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Executive
Compensation
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116
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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116
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Certain
Relationships and Related Transactions, and Director
Independence
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118
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Principal
Accounting Fees and Services
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118
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Exhibits,
Financial Statement Schedules
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118
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Signatures
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119
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Schedule
II - Valuation and Qualifying Accounts
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120
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Index
to Exhibits
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121
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3
Eastman
Kodak Company (the “Company” or “Kodak”) is the world’s foremost imaging
innovator, providing imaging technology products and services to the
photographic and graphic communications markets. When used in this
report, unless otherwise indicated, “we,” “our,” “us,” the “Company” and “Kodak”
refer to Eastman Kodak Company. The Company’s products
span:
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·
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Digital
cameras and accessories
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·
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Consumer
inkjet printers and media
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·
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Digital
picture frames
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·
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Retail
printing kiosks, APEX drylab systems and related
media
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·
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KODAK
Gallery online imaging services
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·
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Prepress
equipment and consumables
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·
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Workflow
software for
commercial printing
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·
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Electrophotographic
equipment and consumables
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·
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Commercial
inkjet printing systems
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|
·
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Document
scanners
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|
·
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Origination
and print films for the entertainment
industry
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·
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Consumer
and professional photographic film
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·
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Photographic
paper and processing chemicals
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·
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Wholesale
photofinishing services
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Kodak was
founded by George Eastman in 1880 and incorporated in 1901 in the State of New
Jersey. The Company is headquartered in Rochester, New
York.
Through
mid-2008, Kodak had created significant momentum in its digital portfolio,
following the completion of its four-year corporate restructuring program in
2007. Revenues from digital businesses grew by double-digits for four
consecutive quarters from the third quarter of 2007 through the second quarter
of 2008. The revenue decline in the traditional businesses was in
line with the Company’s expectations. The Company had a successful
showing of its stream technology at the drupa tradeshow in Düsseldorf, Germany
in May, and received positive customer responses for its newly introduced
Adaptive Picture Exchange (APEX) dry labs and next generation of consumer inkjet
printers.
As the
Company entered the second half of 2008, the global recession broadened
dramatically and began to negatively impact all of its businesses. As
a result, the Company formulated the actions necessary to align the business
with the external realities. The Company has decided to focus its
investments on businesses at the core of its strategy, which are Consumer
Inkjet, Commercial Inkjet (including stream technology) and Enterprise
workflow. The Company has to make pragmatic decisions, rationalize
its product portfolio, and focus its resources on those core
opportunities. The Company will continue to build upon the stable,
cash generating businesses, and reposition other digital businesses, including
Kodak Gallery, OLED, Imaging Sensors and Electrophotographic Printing to
generate maximum value.
The
Company’s key priorities for 2009 are:
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·
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Align
the Company’s cost structure with external economic
realities
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·
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Fund
core investments
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·
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Transform
portions of its product portfolio
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·
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Drive
positive cash flow before dividends and
restructuring
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The
Company expects the weak economic climate will continue well into the year,
which will lead to reductions in revenue during 2009 as compared with
2008. However, the Company has maintained or improved its market
position in key product categories. These improved product market
positions, its people, and the strength of the Company’s brand and financial
position will allow the Company to emerge from this challenging period as a
leaner, stronger competitor.
4
REPORTABLE
SEGMENTS
As of and
for the year ended December 31, 2008, the Company reported financial information
for three reportable segments: Consumer Digital Imaging Group (“CDG”), Film,
Photofinishing and Entertainment Group (“FPEG”), and Graphic Communications
Group (“GCG”). The balance of the Company's operations, which
individually and in the aggregate do not meet the criteria of a reportable
segment, are reported in All Other.
The
following business discussion is based on the three reportable segments and All
Other as they were structured as of and for the year ended December 31,
2008. The Company's sales, earnings and assets by reportable segment
for these three reportable segments and All Other for each of the past three
years are shown in Note 23, “Segment Information.”
CONSUMER
DIGITAL IMAGING GROUP (“CDG”) SEGMENT
Sales
from continuing operations of the CDG segment for 2008, 2007 and 2006 were (in
millions) $3,088, $3,247, and $3,013, respectively.
The
Company is a global leader in providing digital photography and printing
products and services for consumer markets. Kodak holds top three
market shares in many major categories in which it participates, such as digital
still cameras, retail systems solutions, online imaging, and digital picture
frames.
CDG's
mission is to enhance people’s lives and social interactions through the
capabilities of digital imaging technology, combined with Kodak’s unique
consumer knowledge, brand and intellectual property. This focus has
led to a full range of product and service offerings to the
consumer. CDG’s strategy is to extend picture taking, picture
search/organizing, creativity, sharing and printing to bring innovative new
experiences to consumers – in ways that extend Kodak’s legendary heritage in
ease of use.
Digital
Capture and Devices: Consumer digital capture and devices include digital
still and video cameras, digital picture frames, imaging accessory products, and
snapshot printers and printer media. These product lines fuel Kodak’s
participation in the growing imaging device and accessory
markets. Products are sold directly to retailers or distributors, and
are also available to customers through the Internet at the KODAK Store (www.kodak.com) and
other online providers. Kodak’s full line of camera products and
accessories enable the consumer to personalize their digital camera and their
photographic experience. In the third quarter of 2008 Kodak
introduced the KODAK Zi6 Pocket Video Camera – allowing stunning HD videos,
which can be easily uploaded to YouTube via a built-in USB
connector. The Company also introduced a variety of stylish and
compact digital still cameras as well as high performance long zoom cameras with
image stabilization like the Z1015 IS.
Kodak is
a leader in the growing digital picture frame category. The Company’s
wireless digital picture frames enable consumers to easily share and view images
and videos with family and friends via photo-sharing sites including KODAK
Gallery, and also enjoy Internet content including news, weather, and sports via
FrameChannel. In the third quarter of 2008, Kodak introduced the
world’s first OLED wireless picture frame, featuring a spectacularly vivid
display based on organic light emitting diode technology that Kodak
invented.
Retail
Systems Solutions: In January 2008, the Retail Printing Group was
redefined and renamed Retail Systems Solutions, in order to manage Kodak’s
digital printing hardware, media and infrastructure offerings to
retailers. The Retail Systems Solutions group’s product and service
offerings to retailers include retail kiosks and consumables, consumer and
retailer software workflows, remote business monitoring, retail store
merchandising and identity programs, and after sale service and
support. In the first quarter of 2008, the Company introduced its
Adaptive Picture Exchange (“APEX”) drylab system that provides a lower total
cost of ownership alternative to traditional photofinishing processing at
retailer locations. This system utilizes dry thermal technology that
removes the need for chemical processing of photos and photo products, and as a
result uses up to 90% less electricity with almost no labor
required. This introduction, when combined with kiosks, increases
Kodak’s fleet to approximately 100,000 systems worldwide and represents the
world’s largest fleet of installed devices in retail locations.
5
Launched
mid-year in 2008, the DL2100 printer, which retailers can connect directly to a
kiosk or APEX, enables customers to make double-sided photobooks, calendars and
greeting cards, almost instantly in-store. This high-quality printer
enables consumers to personalize their products with sentiments and captions and
then take home a finished, personalized product. Other popular Kodak
premium products available quickly and easily in many of the world’s largest
retailers include the KODAK Picture-Movie DVD, which combines original artist
music with the consumer’s own pictures and creates a powerful
multimedia show playable on any DVD player, posters, collages and
more.
Online
Imaging Services: KODAK Gallery, which has more than 70 million members,
is a leading online merchandise and sharing service. The
Kodakgallery.com site provides consumers with a secure and easy way to view,
store and share their images with friends and family, and to receive Kodak
prints and other creative products from their pictures, such as photo books,
frames, calendars, and a host of other personalized
merchandise. Personalized photo cards are also available with
original designs by popular designers. Products are distributed
directly to consumers’ homes, or through major retailers. The site is
a chosen partner for leading companies such as Adobe, Apple, Microsoft, and
Amazon. In addition to Kodakgallery.com in the U.S., we operate seven
sites across Europe.
Kodak
also distributes Kodak EasyShare desktop software at no charge to consumers,
which provides easy organization and editing tools, and unifies the experience
between digital cameras, home printers, and the Kodak Gallery
services.
Imaging
Sensors: Kodak's line of CCD and CMOS sensors provides an attractive
market opportunity, including mobile, automotive, industrial and professional
imaging sectors. Kodak has leading sensor architecture intellectual
property positions, and operates with an "asset light" manufacturing strategy
that includes relationships with key industry players.
All-in-One
Inkjet Printers:
In February 2007, Kodak introduced the KODAK All-in-One Inkjet printers
as a major initiative to drive future revenue growth and
earnings. Four key components enable this breakthrough market
entry: 1) a proprietary high-speed inkjet printing system; 2)
nanoparticle pigment-based inks; 3) instant-dry, porous papers; and 4) Kodak’s
unique Image Science technologies. Additionally, the system is
designed with a permanent print head. This unique offering targets
the high-volume document and photo printer market with a breakthrough value
proposition delivering dramatically lower cost per printed page as compared with
competitive products. The inkjet operating model leverages Kodak
technology and the efficiency of the current industry infrastructure to achieve
an “asset light” approach to deliver this unmatched value proposition to the
marketplace.
Today,
the EASYSHARE All-in-One line of consumer inkjet printers has expanded into more
markets. Sell-through of inkjet printers for the full year more than
doubled compared with the prior year, resulting in an estimated installed base
of more than 1 million printers as of December 31, 2008.
Marketing and Competition: The
Company faces competition from other online service companies, consumer
electronics and printer companies in the markets in which it competes, generally
competing on price and technological advances. Rapid price declines
shortly after product introduction are common in this environment, as producers
are continually introducing new models with enhanced capabilities, such as
improved resolution and/or optical systems in cameras.
The key
elements of CDG’s marketing strategy emphasize ease of use, quality and the
complete solution offered by KODAK Products and Services. This is
communicated through a combination of in-store presentation, online marketing,
advertising, including direct television advertising, and public
relations. The Company's advertising programs actively promote the
segment’s products and services in its various markets, and its principal
trademarks, trade dress, and corporate symbol are widely used and
recognized. Kodak is frequently noted by trade and business
publications as one of the most recognized and respected brands in the
world.
FILM,
PHOTOFINISHING AND ENTERTAINMENT GROUP (“FPEG”) SEGMENT
Sales
from continuing operations of the FPEG segment for 2008, 2007 and 2006 were (in
millions) $2,987, $3,632, and $4,254, respectively.
6
This
segment is composed of traditional photographic products and services including
paper, film and chemistry used for consumer, professional and industrial imaging
applications and those products and services used in the creation of motion
pictures. The Company manufactures and markets films (motion picture,
consumer, professional, industrial and aerial), and one-time-use
cameras.
The
market for consumer and professional films, traditional photofinishing and
certain industrial and aerial films are in decline and are expected to continue
to decline due to digital substitution.
The
market for motion picture films, however, has remained relatively stable, with
any significant impact from digital substitution still expected to evolve
sometime into the future. The future impact of digital substitution
on the motion picture film market is difficult to predict due to a number of
factors, including the pace of digital technology adoption in major world
markets, the underlying economic strength or weakness in these markets, the
timing of digital infrastructure installation, and the ability to finance the
installation of digital systems. However, during 2008, the Company
noted a decline in the rate of digital adoption primarily due to instability in
the financial markets.
Marketing and
Competition: The fundamental elements of the Company’s
strategy with respect to the photographic products in this segment are to
maintain a profitable business model, serving customers for traditional products
while aggressively managing our cost structure for those businesses that are in
decline.
The
Company’s strategy for the Entertainment Imaging business is to sustain motion
picture film’s position as the pre-eminent capture medium for the creation of
feature films, television dramas, and commercials. Selective
investments to improve film’s superior image capture and quality characteristics
are part of this strategy. Kodak has the leading share of the
origination film market by a significant margin, led by the widely acclaimed and
OSCAR-award-winning VISION2 series of motion picture films, and the positively
received VISION3 series of motion picture films initially launched in late
2007.
The
distribution of motion pictures to theaters on print film is another important
element of the business, one in which the Company continues to be widely
recognized as the market leader. Price competition is a bigger factor
in this segment of the motion picture market, but the Company continues to
maintain the leading share position, with several multi-year agreements with
major studios.
Throughout
the world, most Entertainment Imaging products are sold directly to studios,
laboratories, independent filmmakers or production companies. Quality
and availability are important factors for these products, which are sold in a
price competitive environment. As the industry moves to digital
formats, the Company anticipates that it will face new competitors, including
some of its current customers and other electronics manufacturers.
Film
products and services for the consumer and professional markets and traditional
photofinishing are sold throughout the world, both directly to retailers and,
increasingly, through distributors. Price competition continues to
exist in all marketplaces. To be more cost competitive with its
traditional photofinishing and film offerings and to shift towards a variable
cost model, the Company has rationalized capacity and restructured its
go-to-market model. The Company will continue to manage this business
to focus on
cash flow and earnings performance in this
period of continuing revenue decline.
GRAPHIC
COMMUNICATIONS GROUP (“GCG”) SEGMENT
Sales
from continuing operations of the Graphic Communications Group segment for 2008,
2007 and 2006 were (in millions) $3,334, $3,413, and $3,287,
respectively.
The
Graphic Communications Group segment serves a variety of customers in the
creative, in-plant, data center, commercial printing, packaging, newspaper, and
digital service bureau market segments with a range of software, media, and
hardware products that provide customers with a variety of solutions for
prepress equipment, workflow software, digital and traditional printing,
document scanning, and multi-vendor services. Products include
digital and traditional prepress equipment and consumables, including plates,
chemistry, and media; workflow software and digital controller development;
color and black-and-white electrophotographic equipment and consumables;
high-speed, high-volume commercial inkjet printing systems; wide-format inkjet
inks and media; high-speed production and workgroup document scanners; and
micrographic peripherals and media (including micrographic films). GCG
also provides
7
maintenance
and professional services for Kodak and other manufacturers' products, as well
as providing imaging services to customers.
On
January 13, 2009, the Company announced its agreement to acquire the scanner
division of BOWE BELL + HOWELL, which markets a portfolio of production document
scanners that complements the products currently offered within the GCG
segment. Through this acquisition, Kodak expects to expand customer
value by providing a wider choice of production scanners. Since Kodak
has provided field service to BOWE BELL + HOWELL Scanners since 2001, this
acquisition is also expected to enhance global access to service and support for
channel partners and end-user customers worldwide.
Marketing and
Competition: Throughout the world, graphic communications
products are sold through a variety of direct and indirect
channels. The end users of these products include businesses in the
commercial printing, data center, in-plant and digital service provider market
segments. While there is price competition, the Company has generally
been able to maintain price by adding more attractive features to its products
through technological advances. The Company has developed a
wide-ranging portfolio of digital products - workflow, equipment, media, and
services - that combine to create a value-added complete solution to
customers. Maintenance and professional services for the Company's
products are sold either through product distribution channels or directly to
the end users. In addition, a range of inkjet products for digital
printing and proofing are sold through direct and indirect
means. Document scanners are sold primarily through a two-tiered
distribution channel to a number of different
industries.
ALL
OTHER
Sales
from continuing operations comprising All Other for 2008, 2007 and 2006 were (in
millions) $7, $9, and $14, respectively.
All Other
is composed of the Company's display business and other small, miscellaneous
businesses.
DISCONTINUED
OPERATIONS
HEALTH
GROUP
On April
30, 2007 the Company closed on the sale of its Health Group to Onex Healthcare
Holdings, Inc., a subsidiary of Onex Corporation. Approximately 8,100
employees of the Company associated with the Health Group transitioned to
Carestream Health Inc. as part of the transaction. Also included in
the sale were manufacturing operations focused on the production of health
imaging products, as well as an office building in Rochester, NY.
HPA
On
October 17, 2007, the shareholders of Hermes Precisa Pty. Ltd. (“HPA”), a
majority owned subsidiary of Kodak (Australasia) Pty. Ltd., a wholly owned
subsidiary of the Company, approved an agreement to sell all of the shares of
HPA to Salmat Limited. The sale was approved by the Federal Court of
Australia on October 18, 2007, and closed on November 2, 2007. HPA, a
publicly traded Australian company, is a provider of outsourced services in
business communication and data processes and was formerly reported within the
Company’s Graphic Communications Group segment.
The
results of the sales and operations for the Health Group and HPA are presented
as discontinued operations in the Consolidated Statement of
Operations. All prior periods have been revised for comparison
purposes. See Note 22, “Discontinued Operations” in the Notes to
Financial Statements for further discussion.
FINANCIAL
INFORMATION BY GEOGRAPHIC AREA
Financial
information by geographic area for the past three years is shown in Note 23,
“Segment Information.”
RAW
MATERIALS
The raw materials used by
the Company are many and varied, and are generally readily
available. Lithographic aluminum is the primary material used
in the manufacture of offset printing plates. The Company procures
raw aluminum coils from several suppliers on a spot
8
basis or under contracts
generally in place over the next one to three years. Silver is
one of the essential materials used in the manufacture of films and
papers. The Company purchases silver from numerous suppliers under
annual agreements or on a spot basis. Paper base is an essential
material in the manufacture of photographic papers. The Company has a
contract to acquire paper base from a certified photographic paper supplier over
the next several years.
SEASONALITY
OF BUSINESS
Sales and
earnings of the CDG segment are linked to the timing of holidays, vacations and
other leisure or gifting seasons. Sales of digital products are
typically highest in the last four months of the year. Digital
capture and consumer inkjet printing products have experienced peak sales in
this period as a result of the December holidays. However, the
economic downturn experienced in the fourth quarter of 2008 resulted in a
significant decline in consumer discretionary spending that negatively impacted
the Company’s digital camera and digital picture frame businesses in the CDG
segment. CDG net sales in the fourth quarter declined from 42% of
CDG’s full-year revenue for 2007 to only 31% of full-year revenue for
2008. Sales are normally lowest in the first quarter due to the
absence of holidays and fewer picture-taking opportunities during that
time.
Sales and
earnings of the FPEG segment are linked to the timing of holidays, vacations and
other leisure activities. Sales and earnings of traditional film and
photofinishing products are normally strongest in the second and third quarters
as demand is high due to heavy vacation activity and events such as weddings and
graduations. Sales of entertainment imaging film are typically
strongest in the second quarter reflecting demand due to the summer motion
picture season.
Sales and
earnings of the GCG segment generally exhibit modestly higher levels in the
fourth quarter. This is driven primarily by the sales of commercial
inkjet, electrophotographic printing, and document scanner products due to
seasonal customer demand linked to commercial year-end advertising
processes. However, in the second half of 2008, tightening credit
availability, combined with the weak economy, resulted in a reduction of capital
spending, negatively impacting equipment sales within GCG. The
reduction of global print demand during that timeframe had a negative impact on
GCG consumables sales.
RESEARCH
AND DEVELOPMENT
Through
the years, the Company has engaged in extensive and productive efforts in
research and development.
Research
and development expenditures for the Company’s three reportable segments and All
Other were as follows:
|
(in
millions)
|
For
the Year Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Consumer
Digital Imaging Group
|
$ | 215 | $ | 250 | $ | 290 | ||||||
|
Film,
Photofinishing and Entertainment Group
|
52 | 60 | 76 | |||||||||
|
Graphic
Communications Group
|
231 | 214 | 209 | |||||||||
|
All
Other
|
3 | 25 | 21 | |||||||||
|
Total
|
$ | 501 | $ | 549 | $ | 596 | ||||||
Research
and development is headquartered in Rochester, New York. Other U.S.
groups are located in Boston, Massachusetts; New Haven, Connecticut; Dayton,
Ohio; and San Jose, Emeryville, and San Diego, California. Outside
the U.S., groups are located in Canada, England, Israel, Germany, Japan, China,
and Singapore. These groups work in close cooperation with
manufacturing units and marketing organizations to develop new products and
applications to serve both existing and new markets.
It has
been the Company's general practice to protect its investment in research and
development and its freedom to use its inventions by obtaining
patents. The ownership of these patents contributes to the Company's
ability to provide leadership products and to generate revenue from
licensing. The Company holds portfolios of patents in several areas
important to its business, including digital cameras and image sensors; network
photo sharing and fulfillment; flexographic and lithographic printing plates and
systems; digital
9
printing
workflow and color management proofing systems; color and black-and-white
electrophotographic printing systems; wide-format, commercial, and consumer
inkjet printers; inkjet inks and media; thermal dye transfer and dye sublimation
printing systems; digital cinema; color negative films, processing and papers;
and organic light-emitting diodes. Each of these areas is important
to existing and emerging business opportunities that bear directly on the
Company's overall business performance.
The
Company's major products are not dependent upon one single, material
patent. Rather, the technologies that underlie the Company's products
are supported by an aggregation of patents having various remaining lives and
expiration dates. There is no individual patent expiration or group
of patents expirations which are expected to have a material impact on the
Company's results of operations.
ENVIRONMENTAL
PROTECTION
The
Company is subject to various laws and governmental regulations concerning
environmental matters. The U.S. federal environmental legislation and
state regulatory programs having an impact on the Company include the Toxic
Substances Control Act, the Resource Conservation and Recovery Act, the Clean
Air Act, the Clean Water Act, the NY State Chemical Bulk Storage Regulations and
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (the “Superfund Law”).
It is the
Company’s policy to carry out its business activities in a manner consistent
with sound health, safety and environmental management practices, and to comply
with applicable health, safety and environmental laws and
regulations. The Company continues to engage in programs for
environmental, health and safety protection and control.
Based
upon information presently available, future costs associated with environmental
compliance are not expected to have a material effect on the Company's capital
expenditures, results of operations or competitive position. However,
such costs could be material to results of operations in a particular future
quarter or year.
Environmental
protection is further discussed in Note 10, "Commitments and Contingencies," in
the Notes to Financial Statements.
EMPLOYMENT
At the
end of 2008, the Company employed the full time equivalent of approximately
24,400 people, of whom approximately 12,800 were employed in the
U.S. The actual number of employees may be greater because some
individuals work part time.
AVAILABLE
INFORMATION
The
Company files many reports with the Securities and Exchange Commission (“SEC”),
including annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K. These reports, and amendments to these
reports, are made available free of charge as soon as reasonably practicable
after being electronically filed with or furnished to the SEC. They
are available through the Company's website at www.Kodak.com. To
reach the SEC filings, follow the links to Investor Center, and then SEC
Filings. The Company also makes available its annual report to
shareholders and proxy statement free of charge through its
website.
We have
included the CEO and CFO certifications required by Section 302 of the
Sarbanes-Oxley Act of 2002 as exhibits to this report. We have also
included these certifications with the Form 10-K for the year ended December 31,
2007 filed on February 27, 2008. Additionally, we filed with the New
York Stock Exchange (“NYSE”) the CEO certification, dated June 12, 2008,
regarding our compliance with the NYSE's corporate governance listing standards
pursuant to Section 303A.12(a) of the listing standards, and indicated that the
CEO was not aware of any violations of the listing standards by the
Company.
10
Recent
economic trends could continue to adversely affect our financial
performance.
The
global economic recession and declines in consumption in the Company’s end
markets have adversely affected sales of both commercial and consumer products
and profitability for such products. Further, the global financial
markets have been experiencing extreme disruption in recent
months. Slower sales of consumer digital products due to the
deteriorating economic environment could lead to reduced sales and earnings
while increasing inventory. Economic conditions could also accelerate
the continuing decline in demand for traditional products, which could also
place pressure on Kodak’s results of operations and liquidity. The
recent tightening of credit in the global financial markets could adversely
affect the ability of our commercial customers to obtain financing for
significant equipment purchases, which could result in a decrease in, or
cancellation of, orders for our products and services. In addition,
accounts receivable and past due accounts could increase due to a decline in our
customers’ ability to pay as a result of the recent economic
downturn. In response to these circumstances, the Company may have to
take other actions to conserve or generate cash, which may impact our ability to
return cash to shareholders.
Our
future pension and other postretirement plan costs and required level of
contributions could be unfavorably impacted by changes in actuarial assumptions
and future market performance of plan assets which could adversely affect our
financial position, results of operations, and cash flow.
We have
significant defined benefit pension and other postretirement benefit
obligations. The funded status of the Company’s U.S. and non-U.S.
defined benefit pension plans and other postretirement benefit plans, and the
related cost reflected in our financial statements, are affected by various
factors that are subject to an inherent degree of uncertainty, particularly in
the current economic environment. Key assumptions used to value these
benefit obligations, funded status and expense recognition include the discount
rate for future payment obligations, the long-term expected rate of return on
plan assets, salary growth, healthcare cost trend rate, and other economic and
demographic factors. Significant differences in actual experience or
significant changes in future assumptions could lead to a potential future need
to contribute cash or assets to our plans in excess of currently estimated
contributions and benefit payments and could have an adverse effect on the
Company's consolidated results of operations, financial
position or liquidity.
If
we are unsuccessful with the strategic investment decisions we have made, our
financial performance could be adversely affected.
The
Company has selected certain of its businesses as “core investments” because of
their large, sustainable growth potential. Introduction of successful
innovative products and the achievement of scale in those businesses are
necessary for the Company to achieve its future financial success. In
addition, the Company has identified certain of its businesses that require
business model transformations to improve margins or maximize
cash. Such business model changes could include repositioning through
strategic partnerships. If the Company is unsuccessful in growing the
core investment businesses as planned or in executing the transformations that
are necessary in certain of its businesses, the Company’s financial performance
could be adversely affected.
If
we fail to comply with the financial covenants contained in our Secured Credit
Agreement, our ability to meet our financial obligations or access external
financing could be impaired under certain circumstances.
There are
affirmative, negative and financial covenants contained in the Company’s Secured
Credit Agreement. These covenants are typical for a secured credit
agreement of this nature. The Company’s failure to comply with the
financial covenants would result in a default under the Secured Credit
Agreement. If an event of default were to occur and not be waived by
the lenders, then all outstanding debt, interest and other payments under the
Secured Credit Agreement could become immediately due and payable, any unused
borrowing availability under the revolving credit facility of the Secured Credit
Agreement could be terminated by the lenders, and cash collateralization or a
similar remedy could be required for all letters of credit. The
failure of the Company to repay any accelerated debt for borrowed money under
the Secured Credit Agreement could result in acceleration of the majority of the
Company’s unsecured outstanding debt obligations under certain
circumstances. The Company was in full compliance with the financial
covenants as of December 31, 2008. Based on the Company’s current
financial forecast, it is reasonably likely that the Company could breach its
financial
11
covenants
in the first quarter of 2009 unless an appropriate amendment or waiver is
obtained. The Company is currently negotiating with its lenders to
ensure continued access to a Secured Credit Agreement, with the goal to have an
amended credit facility in place by the end of the first quarter. At
December 31, 2008, there was no debt outstanding and there were $131 million of
letters of credit issued, which are not considered debt for borrowed money under
the agreement, but do reduce the Company’s borrowing capacity under the Secured
Credit Agreement. Notwithstanding the Company’s view that it can
operate for the foreseeable future without additional external financing, the
Company’s liquidity could be impaired if it is not able to access a credit
facility.
If
we cannot effectively anticipate technology trends and develop new products to
respond to changing customer preferences, this could adversely affect our
revenues.
Due to
changes in technology and customer preferences, the market for traditional
photography products and services is in decline. In its Film,
Photofinishing and Entertainment Group, the Company continues to experience
declines in customer demand for film products, consistent with industry
trends. Management has developed initiatives to address the
anticipated impact of these trends on the Company’s performance. In
addition, the Company’s product development efforts are focused on digital
capture devices (digital cameras and scanners) designed to improve the image
acquisition or digitalization process, software products designed to enhance and
simplify the digital workflow, output devices (thermal and inkjet printers and
commercial printing systems and solutions) and consumables designed to produce
high quality documents and images, and media (thermal and silver halide)
optimized for digital workflows. Kodak’s success depends in part on
its ability to develop and introduce new products and services in a timely
manner that keep pace with technological developments and that are accepted in
the market. The Company continues to introduce new consumer and
commercial digital product offerings. However, there can be no
assurance that the Company will be successful in anticipating and developing new
products, product enhancements or new solutions and services to adequately
address changing technologies and customer requirements. In addition,
if the Company is unable to anticipate and develop improvements to its current
technology, to adapt its products to changing customer preferences or
requirements or to continue to produce high quality products in a timely and
cost-effective manner in order to compete with products offered by its
competitors, this could adversely affect the revenues of the
Company.
If
we cannot continue to license or enforce the intellectual property rights on
which our business depends or if third parties assert that we violate their
intellectual property rights our revenue, earnings and expenses may be adversely
impacted.
Kodak
relies upon patent, copyright, trademark and trade secret laws in the United
States and similar laws in other countries, and agreements with its employees,
customers, suppliers and other parties, to establish, maintain and enforce its
intellectual property rights. Any of the Company’s direct or indirect
intellectual property rights could, however, be challenged, invalidated or
circumvented, or such intellectual property rights may not be sufficient to
permit the Company to take advantage of current market trends or otherwise to
provide competitive advantages, which could result in costly product redesign
efforts, discontinuance of certain product offerings or other competitive
harm. Further, the laws of certain countries do not protect
proprietary rights to the same extent as the laws of the United
States. Therefore, in certain jurisdictions, Kodak may be unable to
protect its proprietary technology adequately against unauthorized third party
copying or use, which could adversely affect its competitive
position. Also, because of the rapid pace of technological change in
the information technology industry, much of our business and many of our
products rely on key technologies developed or licensed by third parties, and we
may not be able to obtain or continue to obtain licenses and technologies from
these third parties at all or on reasonable terms.
Kodak has
made substantial investments in new, proprietary technologies and has filed
patent applications and obtained patents to protect its intellectual property
rights in these technologies as well as the interests of the Company’s
licensees. The execution and enforcement of licensing agreements
protects the Company's intellectual property rights and provides a revenue
stream in the form of royalties that enables Kodak to further innovate and
provide the marketplace with new products and services. There is no
assurance that such measures alone will be adequate to protect the Company's
intellectual property. The Company’s ability to execute its
intellectual property licensing strategies could also affect the Company’s
revenue and earnings. Kodak’s failure to develop and properly manage
new intellectual property could adversely affect the Company’s market positions
and business opportunities. Furthermore, the Company’s failure to
identify and implement licensing programs, including identifying appropriate
licensees, could adversely affect the profitability of Kodak's operations.
12
Finally,
third parties may claim that the Company or customers indemnified by Kodak are
infringing upon their intellectual property rights. Such claims may
be made by competitors seeking to block or limit Kodak’s access to digital
markets. Additionally, in recent years, individuals and groups have
begun purchasing intellectual property assets for the sole purpose of making
claims of infringement and attempting to extract settlements from large
companies like Kodak. Even if Kodak believes that the claims are
without merit, the claims can be time-consuming and costly to defend and
distract management’s attention and resources. Claims of intellectual
property infringement also might require the Company to redesign affected
products, enter into costly settlement or license agreements or pay costly
damage awards, or face a temporary or permanent injunction prohibiting Kodak
from marketing or selling certain of its products. Even if the
Company has an agreement to indemnify it against such costs, the indemnifying
party may be unable to uphold its contractual agreement to Kodak. If
we cannot or do not license the infringed technology at all, license the
technology on reasonable terms or substitute similar technology from another
source, our revenue and earnings could be adversely impacted.
If
we cannot attract, retain and motivate key employees, our business could be
harmed.
In order
for the Company to be successful, we must continue to attract, retain and
motivate executives and other key employees, including technical, managerial,
marketing, sales, research and support positions. Hiring and
retaining qualified executives, research professionals, and qualified sales
representatives are critical to the Company’s
future. Competition for experienced employees in the industries
in which we compete can be intense. The market for employees with
digital skills is highly competitive and, therefore, the Company’s ability to
attract such talent will depend on a number of factors, including compensation
and benefits, work location and persuading potential employees that the Company
is well-positioned for success in the digital markets Kodak is
entering. Given the Company’s compensation plans are highly
performance-based and given the impact of the global economy on the Company’s
performance, it may become more challenging to retain key
employees. The risk may be mitigated by the fact that many companies
recently are taking actions to limit or reduce compensation and benefits in
light of the difficult economy. The Company also must keep employees
focused on the strategic initiatives and goals in order to be
successful. If we cannot attract properly qualified individuals,
retain key executives and employees or motivate our employees, our business
could be harmed.
System
integration issues could adversely affect our revenue and earnings.
Portions
of our IT infrastructure may experience interruptions, delays or cessations of
service in connection with systems integration or migration work that takes
place from time to time; in particular, installation of SAP within our Graphic
Communications Group. We may not be successful in implementing new
systems and transitioning data, which could cause business disruptions and be
more expensive, time consuming, disruptive and
resource-intensive. Such disruption could adversely affect our
ability to fulfill orders and interrupt other processes. Delayed
sales, higher costs or lost customers resulting from these disruptions could
adversely affect our financial results and reputation.
Our
inability to effectively complete, integrate and manage acquisitions,
divestitures and other significant transactions could adversely impact our
business performance including our financial results.
As part
of our business strategy, we frequently engage in discussions with third parties
regarding possible investments, acquisitions, strategic alliances, joint
ventures, divestitures and outsourcing transactions ("transactions") and enter
into agreements relating to such transactions in order to further our business
objectives. In order to pursue this strategy successfully, we must
identify suitable candidates for and successfully complete transactions, some of
which may be large and complex, and manage post-closing issues such as the
integration of acquired companies or employees. Integration and other
risks of transactions can be more pronounced for larger and more complicated
transactions, or if multiple transactions are pursued
simultaneously. If we fail to identify and complete successfully
transactions that further our strategic objectives, we may be required to expend
resources to develop products and technology internally, we may be at a
competitive disadvantage or we may be adversely affected by negative market
perceptions, any of which may have a material adverse effect on our revenue,
gross margin and profitability.
13
Delays
in our plans to reduce the cost structure of the Company through execution of
restructuring and other actions could affect the consolidated results of
operations, financial position and liquidity.
If the
Company were to fail to successfully execute the plans within or the timing of
its current restructuring program to align the cost structure to the current
economic realities, the Company’s financial performance could be adversely
affected.
We
have outsourced a significant portion of our overall worldwide manufacturing and
back-office operations and face the risks associated with relying on third party
manufacturers and external suppliers.
We have
outsourced a significant portion of our overall worldwide manufacturing,
customer support and administrative operations (such as credit and collections,
and general ledger accounting functions) to third parties and various service
providers. To the extent that we rely on third party manufacturing
relationships, we face the risk that those manufacturers may not be able to (1)
develop manufacturing methods appropriate for our products, (2) maintain an
adequate control environment, (3) quickly respond to changes in customer demand
for our products, (4) obtain supplies and materials necessary for the
manufacturing process, or (5) mitigate the impact of labor shortages and/or
disruptions. As a result of such risks, Kodak’s manufacturing costs
could be higher than planned and the reliability of our products could
decline. Other supplier problems that Kodak could face include
component shortages, excess supply, risks related to terms of its contracts with
suppliers and risks related to dependency on single source
suppliers. If any of these risks were to be realized, and assuming
alternative third-party manufacturing relationships could not be established, we
could experience interruptions in supply or increases in costs that might result
in our being unable to meet customer demand for our products, damage to our
relationships with our customers, and reduced market share, all of which could
adversely affect our results of operations and financial condition.
The
competitive pressures we face could harm our revenue, gross margins and market
share.
The
markets in which we do business are highly competitive, and we encounter
aggressive price competition for all our products and services from numerous
companies globally. Over the past several years, price competition in
the market for digital products, film and services has been particularly intense
as competitors have aggressively cut prices and lowered their profit margins for
these products. In the Graphic Communications Group segment,
aggressive pricing tactics by our competitors have intensified the contract
negotiation process. Our results of operations and financial
condition may be adversely affected by these and other industry-wide pricing
pressures. If the Company is unable to obtain pricing or programs
sufficiently competitive with current and future competitors, Kodak could also
lose market share, adversely affecting its revenue and gross
margins.
If
we fail to manage distribution of our products and services properly, our
revenue, gross margins and earnings could be adversely impacted.
The
Company uses a variety of different distribution methods to sell our products
and services, including third-party resellers and distributors and both direct
and indirect sales to both enterprise accounts and
customers. Successfully managing the interaction of direct and
indirect channels to various potential customer segments for our products and
services is a complex process. Moreover, since each distribution
method has distinct risks and costs, our failure to implement the most
advantageous balance in the delivery model for our products and services could
adversely affect our revenue, gross margins and earnings. Due to
changes in the Company’s go-to-market models, the Company is more reliant on
fewer distributors. This has concentrated the Company’s credit risk,
which, if not appropriately managed, could result in an adverse impact on the
Company’s financial performance.
We
may provide financing and financial guarantees to our customers, some of which
may be for significant amounts.
The
competitive environment in which we operate may require us to provide financing
to our customers in order to win a contract. Customer financing
arrangements may include all or a portion of the purchase price for our products
and services. We may also assist customers in obtaining financing
from banks and other sources and may provide financial guarantees on behalf of
our customers. Our success may be dependent, in part, upon our
ability to provide customer financing on competitive terms and on our customers’
creditworthiness. As noted previously, the recent tightening of
credit in the global financial markets could adversely affect
14
the
ability of our customers to obtain financing for significant purchases, which
could result in a decrease in, or cancellation of, orders for our products and
services. If we are unable to provide competitive financing
arrangements to our customers or if we extend credit to customers whose
creditworthiness deteriorates, this could adversely impact our revenues,
profitability and financial position.
Due
to the nature of the products we sell and our worldwide distribution, we are
subject to changes in currency exchange rates, interest rates and commodities
costs that may adversely impact our results of operations and financial
position.
Kodak, as
a result of its global operating and financing activities, is exposed to changes
in currency exchange rates and interest rates, which may adversely affect its
results of operations and financial position. Exchange rates and
interest rates in certain markets in which the Company does business tend to be
volatile. In addition, Kodak’s products contain silver, aluminum,
petroleum-based or other commodity-based raw materials, the costs of which can
be volatile. There can be no guarantees that the global economic
situation will not worsen creating further volatility in currency exchange
rates, interest rates and commodity prices, which could have future negative
effects on revenue and earnings.
If
we cannot protect our reputation due to product quality and liability issues,
our business could be harmed.
Kodak
products are becoming increasingly sophisticated and complicated to design and
build as rapid advancements in technologies occur. Although Kodak has
established internal procedures to minimize risks that may arise from product
quality and liability issues, there can be no assurance that Kodak will be able
to eliminate or mitigate occurrences of these issues and associated
damages. Kodak may incur expenses in connection with, for example,
product recalls, service and lawsuits, and Kodak’s brand image and reputation as
a producer of high-quality products could suffer.
Business
disruptions could seriously harm our future revenue and financial condition and
increase our costs and expenses.
Our
worldwide operations could be subject to earthquakes, power shortages,
telecommunications failures, water shortages, tsunamis, floods, hurricanes,
typhoons, fires, extreme weather conditions, medical epidemics and other natural
or manmade disasters or business interruptions, for which we are predominantly
self-insured. The occurrence of any of these business disruptions
could seriously harm our revenue and financial condition and increase our costs
and expenses. In addition, some areas, including parts of the east
and west coasts of the United States, have previously experienced, and may
experience in the future, major power shortages and blackouts. These
blackouts could cause disruptions to our operations or the operations of our
suppliers, distributors and resellers, or customers. These events
could seriously harm our revenue and financial condition, and increase our costs
and expenses.
The
implementation of new legislation or regulations or changes in existing laws or
regulations could increase the Company’s cost to comply and consequently reduce
our profitability.
New
business legislation or regulations or changes to existing laws or regulation,
including interpretations of existing regulations by courts or regulators, could
adversely affect Kodak’s results of operations by increasing the Company’s cost
to comply. For example, tax, labor, environmental and securities laws
and regulations may be enacted in the future that require the Company to adopt
new policies, internal controls and other compliance practices or modify
existing production facilities and operations. Each of these
compliance initiatives could lead to internal and external cost
increases.
The
Company may be required to recognize additional impairments in the value of its
goodwill, which would increase expenses and reduce profitability.
Goodwill
represents the excess of the amount we paid to acquire businesses over the fair
value of their net assets at the date of the acquisition. The Company
tests goodwill for impairment annually or whenever events occur or circumstances
change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. This may occur for various reasons
including changes in actual or expected income or cash flows of a reporting
unit. In the fourth quarter 2008, we recorded a pre-tax non-cash
charge of $785 million to write-off
15
a
significant portion of the goodwill balance within the GCG
segment. We will continue to evaluate current market conditions that
may affect the fair value of our reporting units to assess whether any further
goodwill impairment exists in the future. Continued adverse or
worsening market conditions for certain businesses may have a significant impact
on the fair value of the reporting units and could result in additional future impairments of
goodwill.
None.
The
Company's worldwide headquarters is located in Rochester, New York.
The CDG
segment of Kodak’s business in the United States is headquartered in Rochester,
New York. Kodak Gallery operations are managed from Emeryville,
California. Kodak Consumer Inkjet Systems operations are located in
San Diego, California; Xiamen, China; and Rochester, New York. Many
of CDG’s businesses rely on manufacturing assets, company-owned or through
relationships with design and manufacturing partners, which are located close to
end markets and/or supplier networks.
The FPEG segment of Kodak’s
business is centered in Rochester, New York, where film and photographic
chemicals and related materials are manufactured. A manufacturing
facility in Harrow, England produces photographic
paper. Additional manufacturing facilities supporting the business
are located in Windsor, Colorado; China; Mexico; India; Brazil; and Russia. Entertainment
Imaging has business operations in Hollywood, California and Rochester, New York.
Products
in the GCG segment are manufactured in the United States, primarily in
Rochester, New York; Dayton, Ohio; Columbus, Georgia; Weatherford, Oklahoma; and
Windsor, Colorado. Manufacturing facilities outside the United States
are located in the United Kingdom, Germany, Israel, Bulgaria, China, Japan, and
Canada.
Properties
within a country may be shared by all segments operating within that
country.
Regional
distribution centers are located in various places within and outside of the
United States. The Company owns or leases administrative,
manufacturing, marketing, and processing facilities in various parts of the
world. The leases are for various periods and are generally
renewable.
During
March 2005, the Company was contacted by members of the Division of Enforcement
of the SEC concerning the announced restatement of the Company's financial
statements for the full year and quarters of 2003 and the first three unaudited
quarters of 2004. An informal inquiry by the staff of the SEC into
the substance of that restatement is continuing. The Company
continues to fully cooperate with this inquiry, and the staff has indicated that
the inquiry should not be construed as an indication by the SEC or its staff
that any violations of law have occurred.
On July
9, 2008, the Company received a proposed Consent Order from the New York State
Department of Environmental Conservation ("DEC”) resolving alleged violations of
the environmental quality programs at the Company's primary manufacturing
facility in Rochester, New York ("Kodak Park") which have occurred between
February 28, 2005 and June 30, 2008. These alleged violations include
violations of the solid and hazardous waste management regulations, the
facility-wide air permit and the waste water discharge permit; most were
discovered by Kodak and self-reported to the DEC. An agreement was
reached on September 23, 2008, concluding this matter, with Kodak paying
$125,000 to the DEC.
The
Company has been named as third-party defendant (along with approximately 200
other entities) in an action initially brought by the New Jersey Department of
Environmental Protection (NJDEP) against Occidental Chemical Corporation and
several other companies that are successors in interest to Diamond Shamrock
Corporation. The NJDEP seeks recovery of all costs associated with
the investigation, removal, cleanup and damage to natural resources occasioned
by Diamond Shamrock's disposal of various forms of chemicals in the
Passaic River. The damages are alleged to potentially range "from hundreds
of millions to several billions of dollars". Pursuant to New Jersey's
Court Rules, the defendants were required to identify all other parties which
could be subject to permissive joinder in the litigation based on common
questions
16
of law or
fact. Third-party complaints seeking contribution from more than 200
entities, who have been identified as potentially contributing to the
contamination in the Passaic, were filed on February 5, 2009. The
potential monetary exposure is likely to be in excess of $100,000 but is not
expected to be material.
On
November 17, 2008, the Company filed a complaint with the U.S. International
Trade Commission (“ITC”) against Samsung Electronics Company Ltd., Samsung
Electronics America Inc., Samsung Telecommunications America, LLC, LG
Electronics Inc., LG Electronics USA Inc., and LG Electronics MobileComm USA,
Inc. for infringement of patents related to digital camera
technology. Discovery has commenced before the ITC. The
Company is seeking a limited exclusion order preventing importation of
infringing devices, including certain mobile telephones and wireless
communication devices featuring digital cameras.
On
February 17, 2009 Samsung Electronics Company Ltd. and Samsung Electronics
America Inc. filed a complaint with the ITC against the Company for infringement
of certain of their patents alleged to be related to digital camera
technology. Samsung is seeking a limited exclusion order preventing
importation of devices found to infringe the asserted patents. The
Company intends to vigorously defend itself in this matter.
On
February 20, 2009 LG Electronics Inc. (Seoul, Korea) filed a complaint with the
ITC against the Company for infringement of certain of their patents alleged to
be related to digital camera technology. LGE is seeking a limited
exclusion order preventing importation of devices found to infringe the asserted
patents. The Company intends to vigorously defend itself in this
matter.
On
November 17, 2008, the Company filed a complaint against Samsung Electronics
Company Ltd., Samsung Electronics America Inc., and Samsung Telecommunications
America, LLC in Federal District Court in Rochester, New York, for infringement
of patents related to digital camera technology. The Company is
seeking unspecified damages and other relief.
On
November 17, 2008 the Company filed a complaint against LG Electronics Inc., LG
Electronics USA Inc., and LG Electronics MobileComm USA, Inc. in Federal
District Court in Rochester, New York, for infringement of patents related to
digital camera technology. The Company is seeking unspecified damages
and other relief.
On
February 20, 2009 LG Electronics Inc. (Seoul, Korea) commenced two actions
against the Company in Federal District court in the Southern District of
California for infringement of certain of their patents alleged to be related to
digital camera technology. LGE is seeking unspecified damages and
other relief. The Company intends to vigorously defend itself in this
matter.
On
November 17, 2008, the Company commenced a lawsuit in Landgericht Düsseldorf,
Germany against Samsung Electronics GmbH for infringement of a patent related to
digital camera technology. The Company is seeking unspecified damages
and other relief.
On
November 20, 2008, Research in Motion Ltd. and Research in Motion Corp.
(collectively “RIM”) filed a declaratory judgment action against the Company in
Federal District Court in Dallas, Texas. The suit seeks to invalidate
certain Company patents related to digital camera technology and software object
linking, and seeks a determination that RIM handheld devices do not infringe
such patents. On February 17, 2009, the Company filed its answer and
counterclaims for infringement of each of these same patents.
The
Company and its subsidiaries are involved in various lawsuits, claims,
investigations and proceedings, including commercial, customs, employment,
environmental, and health and safety matters, which are being handled and
defended in the ordinary course of business. In addition, the Company
is subject to various assertions, claims, proceedings and requests for
indemnification concerning intellectual property, including patent infringement
suits involving technologies that are incorporated in a broad spectrum of the
Company’s products. These matters are in various stages of
investigation and litigation, and are being vigorously
defended. Although the Company does not expect that the outcome in
any of these matters, individually or collectively, will have a material adverse
effect on its financial condition or results of operations, litigation is
inherently unpredictable. Therefore, judgments could be rendered or
settlements entered, that could adversely affect the Company’s operating results
or cash flows in a particular period. The Company routinely assesses
all of its litigation and threatened litigation as to the probability of
ultimately incurring a liability, and records its best estimate of the ultimate
loss in situations where it assesses the likelihood of loss as probable.
17
None.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Pursuant
to General Instructions G (3) of Form 10-K, the following list is included as an
unnumbered item in Part I of this report in lieu of being included in the Proxy
Statement for the Annual Meeting of Shareholders.
|
Date
First Elected
|
|||||||
|
an
|
to
|
||||||
|
Executive
|
Present
|
||||||
|
Name
|
Age
|
Positions
Held
|
Officer
|
Office
|
|||
|
Robert
L. Berman
|
51
|
Senior
Vice President
|
2002
|
2005
|
|||
|
Philip
J. Faraci
|
53 |
President
and Chief Operating Officer
|
2005
|
2007
|
|||
|
Joyce
P. Haag
|
58 |
General
Counsel and Senior Vice President
|
2005
|
2005
|
|||
|
Mary
Jane Hellyar
|
55 |
Executive
Vice President
|
2005
|
2007
|
|||
|
James
T. Langley
|
57 |
Senior
Vice President
|
2003
|
2003
|
|||
|
William
J. Lloyd
|
69 |
Senior
Vice President
|
2005
|
2005
|
|||
|
Antonio
M. Perez
|
63 |
Chairman
of the Board, Chief Executive Officer
|
2003
|
2005
|
|||
|
Frank
S. Sklarsky
|
52 |
Chief
Financial Officer and Executive Vice President
|
2006
|
2006
|
|||
|
Terry
R. Taber
|
54 |
Vice
President
|
2008
|
2008
|
|||
|
Diane
E. Wilfong
|
47 |
Chief
Accounting Officer and Corporate Controller
|
2006
|
2006
|
|||
Executive
officers are elected annually in February.
All of
the executive officers have been employed by Kodak in various executive and
managerial positions for at least five years, except: Mr. Langley, who joined
the Company on August 18, 2003; Mr. Faraci, who joined the Company on December
6, 2004; and Mr. Sklarsky who joined the Company on October 30,
2006.
The
executive officers' biographies follow:
Robert
L. Berman
Mr.
Berman was appointed to his current position in January 2002 and was elected a
Vice President of the Company in February 2002. In March 2005, he was
elected a Senior Vice President by the Board of Directors. In this
capacity, he is responsible for the design and implementation of all human
resources strategies, policies and processes throughout the corporation.
He is a member of the Eastman Kodak Company Executive Council, and serves on the
Company’s Senior Executive Diversity and Inclusion Council and Ethics
Committee. He works closely with Kodak’s CEO, Board of Directors and
Executive Compensation and Development Committee on all executive compensation
and development processes for the corporation. Prior to this position, Mr.
Berman was the Associate Director of Human Resources and the Director and
divisional vice president of Human Resources for Global Operations, leading the
delivery of strategic and operational human resources services to Kodak’s global
manufacturing, supply chain and regional operations around the world. He
has held a variety of other key human resources positions for Kodak over his 25
year career, including the Director and divisional vice president of Human
Resources for the global Consumer Imaging business and the Human Resources
Director for Kodak Colorado Division.
Philip
J. Faraci
Philip
Faraci was named President and Chief Operating Officer, Eastman Kodak Company,
in September 2007. As President and COO, Mr. Faraci is responsible
for the day-to-day management of Kodak’s two major digital businesses: the
Consumer Digital Imaging Group (“CDG”) and the Graphic Communications Group
(“GCG”).
18
Mr.
Faraci had been President of CDG and a Senior Vice President of the
Company. He joined Kodak as Director, Inkjet Systems Program in
December 2004. In February 2005, he was elected a Senior Vice
President of the Company. In June 2005, he was also named Director,
Corporate Strategy & Business Development.
Prior to
Kodak, Mr. Faraci served as Chief Operating Officer of Phogenix Imaging and
President and General Manager of Gemplus Corporation’s Telecom Business
Unit. Prior to these roles, he spent 22 years at Hewlett-Packard,
where he served as Vice President and General Manager of the Consumer Business
Organization and Senior Vice President and General Manager for the Inkjet
Imaging Solutions Group.
Joyce
P. Haag
Ms. Haag
began her Kodak career in 1981, as a lawyer on the Legal Staff. She
was elected Assistant Secretary in December 1991 and elected Corporate Secretary
in February 1995. In January 2001, she was appointed to the
additional position of Assistant General Counsel. In August 2003, she became
Director, Marketing, Antitrust, Trademark and Litigation, Legal Staff and
in March 2004, she became General Counsel, Europe, Africa and Middle East
Region (“EAMER”). In July 2005, she was promoted to Senior Vice
President and General Counsel.
Prior to
joining the Kodak Legal Staff, Ms. Haag was an associate with Boylan, Brown,
Code, Fowler, Vigdor & Wilson LLP in Rochester, New York.
Mary
Jane Hellyar
Mary Jane
Hellyar joined Eastman Kodak Company in 1982 as a research scientist in the
Kodak Research Laboratories and over the next ten years held a variety of
positions within R&D, Film Manufacturing, and chemical process
development. Following a one-year program at the Sloan School, she joined
Consumer Imaging in the Strategic Planning function in 1994.
In 1995,
Ms. Hellyar became director of the Color Product Platform, responsible for
development and commercialization of all color films, papers and
chemicals.
Effective
May 1999, Ms. Hellyar was named general manager, Consumer Film Business,
Consumer Imaging and was elected a Corporate Vice President. Subsequently,
her responsibilities were expanded to include professional films, photographic
paper and chemicals.
In
November 2004, Ms. Hellyar was named President, Display and Components
Group. In January 2005, the Board of Directors elected her a Senior Vice
President.
In
September 2005, the Company moved to four vertical businesses. Ms. Hellyar
became President, Film & Photofinishing Systems Group, while also continuing
responsibility for Kodak’s Display business.
In
January 2007, Ms. Hellyar's business was renamed the Film Products Group
reflecting its three core businesses: Entertainment Imaging, Film Capture,
and Aerial and Industrial Markets. In October 2007, the Board of Directors
elected Ms. Hellyar an Executive Vice President. In January 2008, the
business was renamed Film, Photofinishing and Entertainment Group.
James
T. Langley
Mr.
Langley, who retired from the Company effective March 15, 2008, was a Senior
Vice President of the Company. He joined Kodak as President,
Commercial Printing, in August 2003. In September 2003, he was
elected a Senior Vice President of the Company. The Commercial Printing
Group was renamed Graphic Communications Group in May 2004. In
September 2007, the Company created the new position of President, Chief
Operating Officer, and, as a result, eliminated the position of President for
GCG. Mr. Langley remained a Senior Vice President while completing several
special projects until his retirement.
He was
vice president of commercial printing at HP from March 2000 to August
2002. Prior to that assignment, Mr. Langley served for three years as
vice president of inkjet worldwide office printers, responsible for expanding
the presence of HP's inkjet products in new, higher-end markets. From
August 1993 to June 1997, Mr. Langley served as the general manager of HP’s
Vancouver Printer Division.
19
William
J. Lloyd
Mr.
Lloyd, who retired from the Company effective December 31, 2008, joined Kodak in
June 2003 as director, Portfolio Planning and Analysis. In October 2003,
he was named director, Inkjet Systems Program, and was elected Vice President of
the Company. In February 2005, he was elected a Senior Vice
President. He assumed his most recent position as Chief Technical
Officer in March 2005.
Prior to
Kodak, Mr. Lloyd was president of the consulting firm, Inwit, Inc. focused on
imaging technology. From November 2000 until March 2002, he served as
executive vice president and chief technology officer of Gemplus International,
the leading provider of Smart Card-based secure solutions for the wireless and
financial markets.
In 2000,
Mr. Lloyd served as the Co-CEO during the startup phase of Phogenix Imaging, a
joint venture between Eastman Kodak and Hewlett-Packard.
Mr. Lloyd
has extensive expertise in imaging and printing technologies, stemming from his
31-year career at Hewlett-Packard Company where he was group vice president and
CTO for consumer imaging and printing. In his career at HP, Mr. Lloyd held
a variety of positions in product development and research both in the U.S. and
Japan. During his tenure in Japan (from 1990 until 1993) he directed
the establishment of a branch of HP Laboratories.
Prior to
joining Hewlett-Packard, he spent 7 years in the aerospace industry, where,
among other things, he served as the project manager for the communications
antenna on the Apollo Command and Service Module used in the lunar landing
program.
Antonio
M. Perez
Since
joining the Company in April 2003, Kodak’s Chairman and Chief Executive Officer,
Antonio M. Perez, has led the worldwide transformation of Kodak from a business
based on film to one based primarily on digital technologies. In the past
four years, Kodak introduced an array of disruptive new digital technologies and
products for consumer and commercial applications that generated $6.4B in
revenues in 2008. Those include consumer inkjet printers, CMOS sensors for
digital cameras and mobile phones, dry labs and kiosks for printing at retail,
as well as high-volume digital production presses and digital plates for
commercial printing. The result is a new Kodak -- a company with 70
percent of revenue coming from digital products, higher gross margin commercial
businesses accounting for 60 percent of sales, and a sustainable traditional
business model.
Mr. Perez
brings to the task his experience from a 25-year career at Hewlett-Packard
Company, where he was a corporate vice president and a member of the company’s
Executive Council. As President of H-P’s Consumer Business, Mr. Perez
spearheaded the company’s efforts to build a business in digital imaging and
electronic publishing, generating worldwide revenue of more than $16
billion.
Prior to
that assignment, Mr. Perez served as President and CEO of H-P’s inkjet imaging
business for five years. During that time, the installed base of H-P's inkjet
printers grew from 17 million to 100 million worldwide, with revenue totaling
more than $10 billion.
After
H-P, Mr. Perez was President and CEO of Gemplus International, where he led the
effort to take the company public. While at Gemplus, he transformed the
company into the leading Smart Card-based solution provider in the fast-growing
wireless and financial markets. In the first fiscal year, revenue at
Gemplus grew 70 percent, from $700 million to $1.2 billion.
Frank
S. Sklarsky
Mr.
Sklarsky joined Kodak in October 2006 as Executive Vice President, and became
the Chief Financial Officer in November 2006.
20
Mr.
Sklarsky is responsible for worldwide financial operations, including Financial
Planning and Analysis, Treasury, Audit, Controllership, Tax, Investor Relations,
Aviation, Corporate Mergers and Acquisitions, Worldwide Information Systems and
Corporate Purchasing.
Prior to
joining Kodak, Mr. Sklarsky was Executive Vice President and Chief Financial
Officer of ConAgra Foods Inc., one of North America's leading packaged food
companies. At ConAgra, he implemented a new financial organization,
significantly strengthened the balance sheet, and played a major role in
building credibility with the investment community. He also helped expand
profit margins at the $14 billion company.
Prior to
joining ConAgra in 2004, Mr. Sklarsky was Vice President, Product Finance, at
DaimlerChrysler, a position he held between 2001 and 2004. He returned to
DaimlerChrysler to assist with the company's turnaround efforts after spending
more than one year as Vice President, Corporate Finance, and Vice President,
Finance, of Dell’s $5 billion consumer business. He first joined
DaimlerChrysler in 1983 and held a series of increasingly responsible finance
positions before leaving for Dell in 2000. At the time of his departure
for Dell, he was DaimlerChrysler’s Vice President, Corporate Financial
Activities, and also led the finance functions serving procurement, product
quality, cost management and worldwide manufacturing during his tenure.
Prior to DaimlerChrysler, Mr. Sklarsky, a certified public accountant, served as
a Senior Accountant at Ernst & Young International from 1978 to
1981.
Terry
R. Taber
Terry R.
Taber joined Kodak in 1980. In January 2009, he became Chief Technical
Officer reporting to Kodak Chairman and CEO Antonio M. Perez. The Board of
Directors elected him a Corporate Vice President in December
2008.
Mr.
Taber was previously the Chief Operating Officer of Kodak’s Image Sensor
Solutions (“ISS”) business, a leading developer of advanced CCD and CMOS sensors
serving imaging and industrial markets. Prior to joining ISS in 2007, Mr.
Taber held a series of senior positions in Kodak’s research and development and
product organizations. During his 28 years at Kodak, Mr. Taber has been involved
in new materials research, product development and commercialization,
manufacturing, and executive positions in R&D and business
management.
Mr.
Taber’s early responsibilities included research on new synthetic materials, an
area in which he holds several patents. He then became a program manager
for several film products before completing the Sloan Fellows program at the
Massachusetts Institute of Technology. He returned from MIT to become the
worldwide consumer film business product manager from 1999 to 2002, and then
became an Associate Director of R&D from 2002 to 2005, followed by a
position as the director of Materials & Media R&D from 2005 to
2007.
Diane
E. Wilfong
Ms.
Wilfong was elected Corporate Controller and Chief Accounting Officer, Eastman
Kodak Company in September 2006. She began her Kodak career in July 1999,
as Director – Finance and Vice President, Kodak Professional Division. In
late 2000, she was named Assistant to the Chairman and President and Chief
Executive Officer, where she served the Chairman’s office in an executive
capacity until early 2003. At that time, she took an operating line
position as General Manager, Graphics and Printing Systems SPG, in the
Commercial Imaging Group (now Graphic Communications Group). In mid-2005,
Ms. Wilfong was appointed Director, Corporate Audit.
Prior to
joining Kodak, Ms. Wilfong was Chief Financial Officer of Corning Asahi Video
Products of Corning Incorporated, in Corning, New York. Ms. Wilfong joined
Corning in 1990 and held a variety of management positions in its finance
organization. She is a certified public accountant and began her career at
PricewaterhouseCoopers, where she was an audit manager in the Charlotte, North
Carolina office of the firm.
21
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Eastman
Kodak Company common stock is traded on the New York Stock Exchange under the
symbol "EK." There were 55,759 shareholders of record of common stock
as of January 31, 2009.
MARKET
PRICE DATA
|
2008
|
2007
|
|||||||||||||||
|
Price
per share:
|
High
|
Low
|
High
|
Low
|
||||||||||||
|
1st
Quarter
|
$ | 22.03 | $ | 16.31 | $ | 27.08 | $ | 22.41 | ||||||||
|
2nd
Quarter
|
$ | 19.60 | $ | 12.20 | $ | 30.20 | $ | 22.54 | ||||||||
|
3rd
Quarter
|
$ | 17.71 | $ | 12.80 | $ | 29.29 | $ | 24.71 | ||||||||
|
4th
Quarter
|
$ | 15.68 | $ | 5.83 | $ | 29.60 | $ | 21.42 | ||||||||
DIVIDEND
INFORMATION
It is the
Company’s practice to make semi-annual dividend payments which, when declared by
its Board of Directors, will be paid on the Company’s 10th business day each
July and December to shareholders of record on the close of the first business
day of the preceding month.
On May
14, and October 14, 2008, the Board of Directors declared semi-annual cash
dividends of $.25 per share payable to shareholders of record at the close of
business on June 1, and November 3, 2008, respectively. These
dividends were paid on July 16 and December 12, 2008. Total dividends
paid for the year ended December 31, 2008 were $139 million.
On May 9,
and October 16, 2007, the Board of Directors declared semi-annual cash dividends
of $.25 per share payable to shareholders of record at the close of business on
June 1, and November 1, 2007. These dividends were paid on July 16,
and December 14, 2007. Total dividends paid for the year ended
December 31, 2007 were $144 million.
22
PERFORMANCE
GRAPH - SHAREHOLDER RETURN
The
following graph compares the performance of the Company's common stock with the
performance of the Standard & Poor's 500 Composite Stock Price Index and the
Dow Jones Industrial Index by measuring the changes in common stock prices from
December 31, 2003, plus reinvested dividends.
|
Copyright
© 2009 Standard & Poor's, a division of The McGraw-Hill Companies Inc.
All rights reserved.
(www.researchdatagroup.com/S&P.htm)
|
||||||||||||||||||||||||
|
Copyright
© 2009 Dow Jones & Company. All rights reserved.
|
||||||||||||||||||||||||
| 12/03 | 12/04 | 12/05 | 12/06 | 12/07 | 12/08 | |||||||||||||||||||
|
Eastman
Kodak Company
|
100.00 | 127.90 | 94.77 | 106.69 | 92.13 | 28.86 | ||||||||||||||||||
|
S&P
500
|
100.00 | 110.88 | 116.33 | 134.70 | 142.10 | 89.53 | ||||||||||||||||||
|
Dow
Jones US Industrial Average
|
100.00 | 105.31 | 107.13 | 127.53 | 138.86 | 94.52 | ||||||||||||||||||
Share
Repurchase Program
On June
24, 2008, the Company announced that its Board of Directors authorized a share
repurchase program allowing the Company, at management’s discretion, to purchase
up to $1.0 billion of its common stock. The program will expire at
the earlier of December 31, 2009 or when the Company has used all authorized
funds for repurchase. For the three months ended December 31, 2008,
the Company purchased 5,933,396 shares in open market
purchases. Through December 31, 2008, the Company repurchased
approximately 20 million shares at an average price of $15.01 per share, for a
total cost of $301 million under this program. While the share
repurchase authorization remains in effect through the end of 2009, Kodak is not
currently repurchasing any of its shares.
23
The
following table shows the share repurchase activity for each of the three months
in the quarter ended December 31, 2008:
(in
millions, except average price paid per share)
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Programs
|
Approximate
Dollar Value of Shares That May Yet Be Purchased under the Program
|
||||||||||||
|
October
1, 2008 to October 31, 2008
|
5.6 | $ | 14.00 | 5.6 | $ | 702 | ||||||||||
|
November
1, 2008 to November 30, 2008
|
0.3 | $ | 9.61 | 0.3 | $ | 699 | ||||||||||
|
December
1, 2008 to December 31, 2008
|
- | - | $ | 699 | ||||||||||||
|
Total
|
5.9 | $ | 13.77 | 5.9 | ||||||||||||
Refer to
Summary of Operating Data on page 114.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help the reader understand the
results of operations and financial condition of Kodak for the three years ended
December 31, 2008. All references to Notes relate to Notes to the
Financial Statements in Item 8. “Financial Statements and Supplementary
Data.”
OVERVIEW
Kodak is
the world’s foremost imaging innovator and generates revenue and profits from
the sale of products, technology, solutions and services to consumers,
businesses and creative professionals. The Company’s portfolio is
broad, including image capture and output devices, consumables and systems and
solutions for consumer, business, and commercial printing
applications. Kodak has three reportable business segments, which are
more fully described later in this discussion in “Kodak Operating Model and
Reporting Structure.” The three business segments are: Consumer
Digital Imaging Group (“CDG”), Film, Photofinishing and Entertainment Group
(“FPEG”) and Graphic Communications Group (“GCG”).
During
2008, the Company established the following strategic objectives for the
year:
|
·
|
Cash
generation before dividends
|
|
·
|
Growth
in revenue from the Consumer Digital Imaging Group and the Graphic
Communications Group
|
|
·
|
Growth
in earnings from operations
|
All of
the Company’s key operating metrics noted above were negatively impacted in 2008
by a dramatic decline in demand as a result of the global economic slowdown,
which accelerated late in the year. The demand for the Company’s
consumer products is largely discretionary in nature, and sales and earnings of
the Company’s consumer businesses are linked to the timing of holidays,
vacations, and other leisure or gifting seasons. The fourth quarter
of 2008 was marked by weak consumer holiday spending, the impacts of which were
significant in the Company’s digital camera and devices businesses in the CDG
segment. In the GCG segment, tightening credit availability, combined
with the weak economy, resulted in a reduction of capital spending, negatively
impacting equipment sales as well. In addition, the reduction
of global print demand had a negative impact on GCG consumables sales, and
increased costs for aluminum impacted gross margins. FPEG was also
impacted by the weak economy, which accelerated the decline of Film Capture and Traditional Photofinishing in
the fourth quarter, and increased silver and petroleum-based raw material costs
impacted gross margins.
24
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
accompanying consolidated financial statements and notes to consolidated
financial statements contain information that is pertinent to management’s
discussion and analysis of the financial condition and results of
operations. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses, and the related disclosure
of contingent assets and liabilities.
The
Company believes that the critical accounting policies and estimates discussed
below involve the most complex management judgments due to the sensitivity of
the methods and assumptions necessary in determining the related asset,
liability, revenue and expense amounts. Specific risks associated
with these critical accounting policies are discussed throughout this MD&A,
where such policies affect our reported and expected financial
results. For a detailed discussion of the application of these and
other accounting policies, refer to the Notes to Financial
Statements.
REVENUE
RECOGNITION
The
Company's revenue transactions include sales of the following: products;
equipment; software; services; equipment bundled with products and/or services
and/or software; integrated solutions, and intellectual property
licensing. The Company recognizes revenue when it is realized or
realizable and earned. For the sale of multiple-element arrangements
whereby equipment is combined with services, including maintenance and training,
and other elements, including software and products, the Company allocates to,
and recognizes revenue from, the various elements based on their fair
value.
At the
time revenue is recognized, the Company also records reductions to revenue for
customer incentive programs in accordance with the provisions of Emerging Issues
Task Force (“EITF”) Issue No. 01-09, "Accounting for Consideration Given from a
Vendor to a Customer (Including a Reseller of the Vendor's
Products)." Such incentive programs include cash and volume
discounts, price protection, promotional, cooperative and other advertising
allowances and coupons. For those incentives that require the
estimation of sales volumes or redemption rates, such as for volume rebates or
coupons, the Company uses historical experience and internal and customer data
to estimate the sales incentive at the time revenue is recognized. In
the event that the actual results of these items differ from the estimates,
adjustments to the sales incentive accruals would be recorded.
Incremental
direct costs of a customer contract in a transaction that results in the
deferral of revenue are deferred and netted against revenue in proportion to the
related revenue recognized in each period if: (1) an enforceable contract for
the remaining deliverable items exists; and (2) delivery of the remaining items
in the arrangement is expected to generate positive margins allowing realization
of the deferred costs. Incremental direct costs are defined as costs
that vary with and are directly related to the acquisition of a contract, which
would not have been incurred but for the acquisition of the
contract.
VALUATION
OF LONG-LIVED ASSETS, INCLUDING GOODWILL AND PURCHASED INTANGIBLE
ASSETS
The
Company reviews the carrying value of its long-lived assets, including goodwill
and purchased intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable.
The
Company tests goodwill for impairment annually (on September 30), or whenever
events occur or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount, by initially comparing
the fair value of each of the Company’s reporting units to their related
carrying values (step one). If the fair value of the reporting unit
is less than its carrying value, the Company must determine the implied fair
value of goodwill associated with that reporting unit (step two). The
implied fair value of
25
goodwill
is determined by first allocating the fair value of the reporting unit to all of
its assets and liabilities and then computing the excess of the reporting unit’s
fair value over the amounts assigned to the assets and
liabilities. If the carrying value of goodwill exceeds the implied
fair value of goodwill, such excess represents the amount of goodwill impairment
charge that must be recognized. The Company’s goodwill impairment
analysis also includes a comparison of the aggregate estimated fair value of all
reporting units to its total market capitalization.
Determining
the fair value of a reporting unit involves the use of significant estimates and
assumptions. The Company estimates the fair value of its reporting
units utilizing income and market approaches through the application of
discounted cash flow and market comparable methods. Key assumptions
used to determine the fair value of each reporting unit as of the Company’s
fiscal annual testing date (September 30, 2008) were: (a) expected cash flow for
the period from 2009 to 2013; and (b) discount rates of 14% to 17.5%, which were
based on the Company’s best estimates of the after-tax weighted-average cost of
capital of each reporting unit. Based upon the results of its
September 30, 2008 analysis, no impairment of goodwill was
indicated.
As of
December 31, 2008, due to the continuing challenging business conditions and the
significant decline in its market capitalization during the fourth quarter of
2008, the Company concluded there was an indication of possible
impairment. Certain key assumptions used to determine the fair value
of each reporting unit as of December 31, 2008 were revised to reflect: (a)
significant reductions in future expected cash flows for the period from 2009 to
2013 due to the actual results for the fourth quarter of 2008 and revised
forecasts for 2009 and later years; and (b) discount rates of 18.5% to 23.0%,
which were based on the Company’s best estimates of the after-tax
weighted-average cost of capital of each reporting unit, adjusted from September
30, 2008 for our latest assessment of financial risk and the increased risk
associated with the Company’s future operations. Based on its updated
analysis, the Company concluded that there was an impairment of goodwill related
to the Graphic Communications Group segment and, thus, recognized a pre-tax
non-cash charge of $785 million in the fourth quarter of 2008.
The fair
values of reporting units within the Company’s CDG and FPEG segments, and one of
the two GCG reporting units were greater than their respective carrying values
as of December 31, 2008, so no goodwill impairment was recorded for these
reporting units. Reasonable changes in the assumptions used to
determine these fair values would not have resulted in goodwill impairments in
any of these reporting units.
The
Company’s long-lived assets, other than goodwill and indefinite-lived intangible
assets, are evaluated for impairment whenever events or changes in circumstances
indicate the carrying value may not be recoverable. When
evaluating long-lived assets for impairment, the Company compares the carrying
value of an asset group to its estimated undiscounted future cash
flows. An impairment is indicated if the estimated future cash flows
are less than the carrying value of the asset group. The impairment
is the excess of the carrying value over the fair value of the long-lived asset
group.
Due to
continued operating losses and increased uncertainty of future cash flows
because of the economic environment in the fourth quarter of 2008, the Company
evaluated the long-lived assets of FPEG’s Paper and Output Systems business and
GCG’s Electrophotographic Solutions business for impairment. No
impairment loss was recorded related to either business as a result of this
evaluation.
INCOME
TAXES
The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes" and Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN
48”). The asset and liability approach underlying SFAS No. 109
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and tax basis of the Company’s assets and liabilities. FIN 48
prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return, and also provides guidance on various related matters
such as derecognition, interest and penalties, and disclosure.
The
Company records a valuation allowance to reduce its net deferred tax assets to
the amount that is more likely than not to be realized. The Company
has considered forecasted earnings, future taxable income, the mix of earnings
in the jurisdictions in which the
26
Company
operates and prudent and feasible tax planning strategies in determining the
need for these valuation allowances. If Kodak were to determine that
it would not be able to realize a portion of its net deferred tax assets in the
future, for which there is currently no valuation allowance, an adjustment to
the net deferred tax assets would be charged to earnings in the period such
determination was made. Conversely, if the Company were to make a
determination that it is more likely than not that the deferred tax assets, for
which there is currently a valuation allowance, would be realized, the related
valuation allowance would be reduced and a benefit to earnings would be
recorded.
The
Company’s effective tax rate considers the impact of undistributed earnings of
subsidiary companies outside of the U.S. Deferred taxes have not been
provided for the potential remittance of such undistributed earnings, as it is
the Company’s policy to indefinitely reinvest its retained
earnings. However, from time to time and to the extent that the
Company can repatriate overseas earnings on essentially a tax-free basis, the
Company's foreign subsidiaries will pay dividends to the
U.S. Material changes in the Company’s working capital and long-term
investment requirements could impact the decisions made by management with
respect to the level and source of future remittances and, as a result, the
Company’s effective tax rate.
The
Company operates within multiple taxing jurisdictions worldwide and is subject
to audit in these jurisdictions. These audits can involve complex
issues, which may require an extended period of time for
resolution. Although management believes that adequate provisions
have been made for such issues, there is the possibility that the ultimate
resolution of such issues could have an adverse effect on the earnings of the
Company. Conversely, if these issues are resolved favorably in the
future, the related provisions would be reduced, thus having a positive impact
on earnings.
PENSION
AND OTHER POSTRETIREMENT BENEFITS
Kodak’s
defined benefit pension and other postretirement benefit costs and obligations
are dependent on the Company's key assumptions. These assumptions,
which are reviewed at least annually by the Company, include the discount rate,
long-term expected rate of return on plan assets (“EROA”), salary growth,
healthcare cost trend rate and other economic and demographic
factors. Actual results that differ from our assumptions are recorded
as unrecognized gains and losses and are amortized to earnings over the
estimated future service period of the active participants in the plan or, if
almost all of a plan’s participants are inactive, the average remaining lifetime
expectancy of inactive participants, to the extent such total net unrecognized
gains and losses exceed 10% of the greater of the plan's projected benefit
obligation or the calculated value of plan assets. Significant
differences in actual experience or significant changes in future assumptions
would affect the Company’s pension and other postretirement benefit costs and
obligations.
The EROA
assumption is based on a combination of formal asset and liability studies that
include forward-looking return expectations, given the current asset
allocation. The EROA, once set, is applied to the calculated value of
plan assets in the determination of the expected return component of the
Company’s pension income or expense.
SFAS No.
87, “Employers’ Accounting for Pensions” (“FAS 87”) requires that expected
return be calculated using either fair value of plan assets or a calculated
value of plan assets. Kodak uses a calculated value that recognizes
changes in the fair value of assets over a four-year period. At
December 31, 2008, the calculated value of the assets of the major U.S. defined
benefit pension plan (the Kodak Retirement Income Plan “KRIP”) was approximately
$6 billion and the fair value was approximately $5 billion. Asset
gains and losses that are not yet reflected in the calculated value of plan
assets are not included in amortization of unrecognized gains and losses until
they are recognized as a part of the calculated value of plan
assets.
The
Company reviews its EROA assumption annually. To facilitate this
review, every three years, or when market conditions change materially, the
Company’s larger plans will undertake asset allocation or asset and liability
modeling studies. In early 2008, an asset and liability modeling
study for the KRIP was completed and resulted in a 9.0% EROA assumption, which
is the same rate outcome as concluded by the prior study in
2005. During the fourth quarter of 2008, the Kodak Retirement Income
Plan Committee (“KRIPCO,” the committee that oversees KRIP) reevaluated certain
portfolio positions relative to current market conditions and accordingly
approved a change to the portfolio to reduce risk associated with the volatility
in the financial markets. The Company has assumed an 8.0% EROA for
2009 for the KRIP based on these changes and the resulting asset allocation at
December 31, 2008. It is KRIPCO's intention to
27
reassess
the current asset allocation and complete a new asset and liability study in
early 2009. Certain of the Company’s other pension plans also
adjusted asset positions during the fourth quarter of 2008. EROA
assumptions for 2009 for those plans were similarly based on these changes and
the resulting asset allocations as of the end of the year.
Generally,
the Company bases the discount rate assumption for its significant plans on high
quality corporate bond yields in the respective countries as of the measurement
date. Specifically, for its U.S. and Canada plans, the Company
determines a discount rate using a cash flow model to incorporate the expected
timing of benefit payments and a AA-rated corporate bond yield
curve. For the Company's U.S. plans, the Citigroup Above Median
Pension Discount Curve is used. For the Company’s other non-U.S.
plans, the discount rates are determined by comparison to published local high
quality bond yields or indices considering estimated plan duration and removing
any outlying bonds, as warranted.
The
salary growth assumptions are determined based on the Company’s long-term actual
experience and future and near-term outlook. The healthcare cost
trend rate assumptions are based on historical cost and payment data, the
near-term outlook and an assessment of the likely long-term trends.
The
following table illustrates the sensitivity to a change to certain key
assumptions used in the calculation of expense for the year ending December 31,
2009 and the projected benefit obligation (“PBO”) at December 31, 2008 for the
Company's major U.S. and non-U.S. defined benefit pension plans:
|
(in
millions)
|
Impact
on 2009
Pre-Tax
Pension Expense Increase (Decrease)
|
Impact
on PBO
December
31, 2008 Increase (Decrease)
|
||||||||||||||
|
U.S.
|
Non-U.S.
|
U.S.
|
Non-U.S.
|
|||||||||||||
|
Change
in assumption:
|
||||||||||||||||
|
25
basis point decrease in discount rate
|
$ | (2 | ) | $ | 4 | $ | 102 | $ | 96 | |||||||
|
25
basis point increase in discount rate
|
2 | (4 | ) | (97 | ) | (91 | ) | |||||||||
|
25
basis point decrease in EROA
|
15 | 7 | N/A | N/A | ||||||||||||
|
25
basis point increase in EROA
|
(15 | ) | (7 | ) | N/A | N/A | ||||||||||
Total
pension income from continuing operations before special termination benefits,
curtailments, and settlements for the major funded and unfunded defined benefit
pension plans in the U.S. is expected to decrease from $179 million in 2008 to
$108 million in 2009, due primarily to lower expected returns on plan assets for
2009. Pension expense from continuing operations before special
termination benefits, curtailments and settlements for the major funded and
unfunded non-U.S. defined benefit pension plans is projected to decrease from
$27 million in 2008 to $5 million in 2009, which is primarily attributable to
lower amortization of actuarial losses.
Additionally,
due to changes in plan design, the Company expects the expense, before
curtailment and settlement gains and losses of its major other postretirement
benefit plans to approximate $48 million in 2009 as compared with $104 million
for 2008.
ENVIRONMENTAL
COMMITMENTS
Environmental
liabilities are accrued based on estimates of known environmental remediation
responsibilities. The liabilities include accruals for sites owned or
leased by Kodak, sites formerly owned or leased by Kodak, and other third party
sites where Kodak was designated as a potentially responsible party
(“PRP”). The amounts accrued for such sites are based on these
estimates, which are determined using the ASTM Standard E 2137-06, “Standard
Guide for Estimating Monetary Costs and Liabilities for Environmental
Matters.” The overall method includes the use of a probabilistic
model that forecasts a range of cost estimates for the remediation required at
individual sites. The Company’s estimate includes equipment and
operating costs for investigations, remediation and long-term monitoring of the
sites. Such estimates may be affected by changing determinations of
what constitutes an environmental
28
liability
or an acceptable level of remediation. Kodak's estimate of its
environmental liabilities may also change if the proposals to regulatory
agencies for desired methods and outcomes of remediation are viewed as not
acceptable, or additional exposures are identified. The Company has
an ongoing monitoring and identification process to assess how activities, with
respect to the known exposures, are progressing against the accrued cost
estimates, as well as to identify other potential remediation issues that are
presently unknown.
Additionally,
in many of the countries in which the Company operates, environmental
regulations exist that require the Company to handle and dispose of asbestos in
a special manner if a building undergoes major renovations or is
demolished. The Company records a liability equal to the estimated
fair value of its obligation to perform asset retirement activities related to
the asbestos, computed using an expected present value technique, when
sufficient information exists to calculate the fair value.
RECENTLY
ISSUED ACCOUNTING STANDARDS
For
discussion of the adoption and potential impacts of recently issued accounting
standards, refer to the “Recently Issued Accounting Standards” section of Note
1, “Significant Accounting Policies,” in the Notes to Financial
Statements.
KODAK
OPERATING MODEL AND REPORTING STRUCTURE
For 2008,
the Company had three reportable segments: Consumer Digital Imaging Group
(“CDG”), Film, Photofinishing and Entertainment Group (“FPEG”), and Graphic
Communications Group (“GCG”). Within each of the Company’s reportable
segments are various components, or Strategic Product Groups
(“SPGs”). Throughout the remainder of this document, references to
the segments’ SPGs are indicated in italics. The balance of the
Company's continuing operations, which individually and in the aggregate do not
meet the criteria of a reportable segment, are reported in All
Other. A description of the segments is as follows:
Consumer Digital Imaging Group
Segment (“CDG”): CDG encompasses digital still and video
cameras, digital devices such as picture frames, snapshot printers and related
media, kiosks and related media, APEX drylab systems which were introduced in
the first quarter of 2008, consumer inkjet printing, Kodak Gallery, and imaging
sensors. The APEX drylab system provides an alternative to
traditional photofinishing processing at retail locations. CDG also
includes the licensing activities related to the Company's intellectual property
in digital imaging products.
Film, Photofinishing and
Entertainment Group Segment (“FPEG”): FPEG encompasses
consumer and professional film, one-time-use cameras, graphic arts film, aerial
and industrial film, and entertainment imaging products and
services. In addition, this segment also includes paper and
output systems, and photofinishing services. This segment provides
consumers, professionals, cinematographers, and other entertainment imaging
customers with film-related products and services and also provides graphic arts
film to the graphics industry.
Graphic
Communications Group Segment (“GCG”): GCG serves a
variety of customers in the creative, in-plant, data center, commercial
printing, packaging, newspaper and digital service bureau market segments with a
range of software, media and hardware products that provide customers with a
variety of solutions for prepress equipment, workflow software, analog and
digital printing, and document scanning. Products and related
services include workflow software and
digital controllers; digital printing, which includes commercial inkjet and
electrophotographic products, including equipment, consumables and service;
prepress consumables; output devices; and document scanners.
All Other: All
Other is composed of Kodak's display business and other small, miscellaneous
businesses.
Prior
period segment results have been revised to conform to the current period
segment reporting structure.
CHANGE
IN COST ALLOCATION METHODOLOGY
Effective
January 1, 2008, the Company changed its cost allocation methodologies related
to employee benefits and corporate expenses. For the year ended
December 31, 2007, this change decreased cost of goods sold by $28 million,
increased selling, general, and administrative costs by $14 million, and
increased research and development costs by $14 million. For the year
ended December 31, 2006,
29
this
change decreased cost of goods sold by $37 million, increased selling, general,
and administrative costs by $19 million, and increased research and development
costs by $18 million.
Prior
period segment results have been revised to reflect the changes in cost
allocation methodologies outlined above.
The
changes in cost allocation methodologies referred to above increased (decreased)
segment operating results for the years ended December 31, 2007 and 2006 as
follows:
|
For
the Year Ended December 31,
|
||||||||
|
(in
millions)
|
2007
|
2006
|
||||||
|
Consumer
Digital Imaging Group
|
$ | (32 | ) | $ | (54 | ) | ||
|
Film,
Photofinishing and Entertainment Group
|
28 | 75 | ||||||
|
Graphic
Communications Group
|
(23 | ) | (57 | ) | ||||
|
All
Other
|
27 | 36 | ||||||
|
Consolidated
impact
|
$ | - | $ | - | ||||
30
DETAILED
RESULTS OF OPERATIONS
Net
Sales from Continuing Operations by Reportable Segment and All Other
(1)
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||||||
|
(in
millions)
|
2008
|
Change
|
Foreign Currency Impact
|
2007
|
Change
|
Foreign Currency Impact
|
2006
|
|||||||||||||||||||||
|
Consumer
Digital Imaging Group
|
||||||||||||||||||||||||||||
|
Inside
the U.S.
|
$ | 1,811 | -10 | % | 0 | % | $ | 2,012 | +5 | % | 0 | % | $ | 1,910 | ||||||||||||||
|
Outside
the U.S.
|
1,277 | +3 | +3 | 1,235 | +12 | +7 | 1,103 | |||||||||||||||||||||
|
Total
Consumer Digital Imaging Group
|
3,088 | -5 | +1 | 3,247 | +8 | +3 | 3,013 | |||||||||||||||||||||
|
Film,
Photofinishing and Entertainment
Group
|
||||||||||||||||||||||||||||
|
Inside
the U.S.
|
835 | -21 | 0 | 1,054 | -23 | 0 | 1,366 | |||||||||||||||||||||
|
Outside
the U.S.
|
2,152 | -17 | +3 | 2,578 | -11 | +4 | 2,888 | |||||||||||||||||||||
|
Total
Film, Photofinishing and
Entertainment
Group
|
2,987 | -18 | +2 | 3,632 | -15 | +3 | 4,254 | |||||||||||||||||||||
|
Graphic
Communications Group
|
||||||||||||||||||||||||||||
|
Inside
the U.S.
|
1,036 | -12 | 0 | 1,178 | -4 | 0 | 1,231 | |||||||||||||||||||||
|
Outside
the U.S.
|
2,298 | +3 | +5 | 2,235 | +9 | +7 | 2,056 | |||||||||||||||||||||
|
Total
Graphic Communications Group
|
3,334 | -2 | +3 | 3,413 | +4 | +4 | 3,287 | |||||||||||||||||||||
|
All
Other
|
||||||||||||||||||||||||||||
|
Inside
the U.S.
|
7 | 10 | 12 | |||||||||||||||||||||||||
|
Outside
the U.S.
|
- | (1 | ) | 2 | ||||||||||||||||||||||||
|
Total
All Other
|
7 | 9 | 14 | |||||||||||||||||||||||||
|
Consolidated
|
||||||||||||||||||||||||||||
|
Inside
the U.S.
|
3,689 | -13 | 0 | 4,254 | -6 | 0 | 4,519 | |||||||||||||||||||||
|
Outside
the U.S.
|
5,727 | -5 | +4 | 6,047 | 0 | +5 | 6,049 | |||||||||||||||||||||
|
Consolidated
Total
|
$ | 9,416 | -9 | % | +2 | % | $ | 10,301 | -3 | % | +3 | % | $ | 10,568 | ||||||||||||||
(1)Sales
are reported based on the geographic area of destination.
31
(Loss)
Earnings from Continuing Operations Before Interest Expense, Other Income
(Charges), Net and Income Taxes by Reportable Segment and All Other
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
(in
millions)
|
2008
|
Change
|
2007
|
Change
|
2006
|
|||||||||||||||
|
Consumer
Digital Imaging Group
|
$ | (177 | ) | -941 | % | $ | (17 | ) | +92 | % | $ | (206 | ) | |||||||
|
Film,
Photofinishing and Entertainment Group
|
196 | -30 | 281 | -12 | 319 | |||||||||||||||
|
Graphic
Communications Group
|
31 | -70 | 104 | +49 | 70 | |||||||||||||||
|
All
Other
|
(17 | ) | +32 | (25 | ) | -14 | (22 | ) | ||||||||||||
|
Total
of segments
|
33 | -90 | 343 | +113 | 161 | |||||||||||||||
|
Restructuring
costs, rationalization and other
|
(149 | ) | (662 | ) | (698 | ) | ||||||||||||||
|
Postemployment
benefit changes
|
94 | - | - | |||||||||||||||||
|
Other
operating (expenses) income, net
|
(766 | ) | 96 | 59 | ||||||||||||||||
|
Adjustments
to contingencies and legal reserves/settlements
|
(33 | ) | (7 | ) | 2 | |||||||||||||||
|
Interest
expense
|
(108 | ) | (113 | ) | (172 | ) | ||||||||||||||
|
Other
income (charges), net
|
55 | 87 | 65 | |||||||||||||||||
|
Loss
from continuing operations before
income taxes
|
$ | (874 | ) | -241 | % | $ | (256 | ) | +56 | % | $ | (583 | ) | |||||||
32
2008
COMPARED WITH 2007
RESULTS
OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
|
(in
millions, except per share data)
|
For
the Year Ended
|
|||||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||||||
|
|
2008
|
%
of Sales
|
2007
|
%
of Sales
|
Increase
/ (Decrease)
|
%
Change
|
||||||||||||||||||
|
Net
sales
|
$ | 9,416 | $ | 10,301 | $ | (885 | ) | -9 | % | |||||||||||||||
|
Cost
of goods sold
|
7,247 | 7,757 | (510 | ) | -7 | % | ||||||||||||||||||
|
Gross
profit
|
2,169 | 23.0 | % | 2,544 | 24.7 | % | (375 | ) | -15 | % | ||||||||||||||
|
Selling,
general and administrative expenses
|
1,583 | 17 | % | 1,778 | 17 | % | (195 | ) | -11 | % | ||||||||||||||
|
Research
and development costs
|
501 | 5 | % | 549 | 5 | % | (48 | ) | -9 | % | ||||||||||||||
|
Restructuring
costs, rationalization and other
|
140 | 543 | (403 | ) | -74 | % | ||||||||||||||||||
|
Other
operating expenses (income), net
|
766 | (96 | ) | 862 | -898 | % | ||||||||||||||||||
|
Loss
from continuing operations before interest expense,
other income (charges), net and income taxes
|
(821 | ) | -9 | % | (230 | ) | -2 | % | (591 | ) | -257 | % | ||||||||||||
|
Interest
expense
|
108 | 113 | (5 | ) | -4 | % | ||||||||||||||||||
|
Other
income (charges), net
|
55 | 87 | (32 | ) | -37 | % | ||||||||||||||||||
|
Loss
from continuing operations before income taxes
|
(874 | ) | (256 | ) | (618 | ) | -241 | % | ||||||||||||||||
|
Benefit
for income taxes
|
(147 | ) | (51 | ) | (96 | ) | 188 | % | ||||||||||||||||
|
Loss
from continuing operations
|
(727 | ) | -8 | % | (205 | ) | -2 | % | (522 | ) | -255 | % | ||||||||||||
|
Earnings
from discontinued operations, net of income taxes
|
285 | 881 | (596 | ) | -68 | % | ||||||||||||||||||
|
NET
(LOSS) EARNINGS
|
$ | (442 | ) | $ | 676 | $ | (1,118 | ) | -165 | % | ||||||||||||||
|
For
the Year Ended
|
||||||||||||||||||||||||
|
December
31,
|
Change
vs. 2007
|
|||||||||||||||||||||||
|
2008
Amount
|
Change
vs. 2007
|
Volume
|
Price/Mix
|
Foreign
Exchange
|
Manufacturing
and Other Costs
|
|||||||||||||||||||
|
Total
net sales
|
$ | 9,416 | -8.6 | % | -4.4 | % | -6.4 | % | 2.2 | % | n/a | |||||||||||||
|
Gross
profit margin
|
23.0 | % |
-1.7pp
|
n/a |
-5.5pp
|
0.2pp
|
3.6pp
|
|||||||||||||||||
As noted
earlier in this MD&A, the Company's results of operations were severely
affected by the economic downturn that accelerated in late 2008. The
normal seasonality of the Company, which is heavily skewed to the second half of
the year, further magnified the effects of the economic downturn on its
results. The last four months of 2008 saw the global retail markets
collapse, which affected the Company’s various consumer businesses, combined
with a rapid decline in global print demand which affected its GCG
businesses. In response, the Company has outlined actions to focus
business investments in certain areas that are core to the Company's strategy,
while also maintaining an intense focus on cash generation and conservation in
2009.
33
Worldwide
Revenues
For the
year ended December 31, 2008, net sales decreased by 9% compared with 2007 due
primarily to the significant economic deterioration in the fourth quarter in
which the Company’s revenues were 24% lower than in the prior year
quarter. The impact of the downturn was particularly severe to the
Company because of the normal seasonality of its sales, which are typically
highest in the last four months of the year. For the full year, the
downturn led to unfavorable price/mix across all segments and accelerated volume
declines in Film Capture
and Traditional
Photofinishing within FPEG. These declines were partially
offset by volume increases in CDG, and Document Imaging within GCG,
and favorable foreign exchange across all segments. Within CDG, Digital Capture and Devices
and Consumer Inkjet
Systems experienced significant increases in volume in 2008, primarily
related to new product introductions in 2007 and throughout
2008.
Gross
Profit
Gross
profit declined in 2008 in both dollars and as a percentage of sales, due
largely to the broad deterioration late in the year in sales volume, as well as
unfavorable price/mix across all segments, partially offset by reductions in
manufacturing and other costs within CDG, and favorable foreign
exchange. The improvements in manufacturing and other costs were
driven by manufacturing efficiencies within CDG, the benefit of lower
depreciation expense as a result of the change in useful lives executed during
the first quarter of 2008 that benefited FPEG, lower benefit costs (including
other postemployment benefits), and lower restructuring-related charges,
partially offset by increased silver, aluminum, paper, and petroleum-based raw
material and other costs.
Included
in gross profit was a non-recurring amendment of an intellectual property
licensing agreement and a new non-recurring intellectual property licensing
agreement within Digital
Capture and Devices. These licensing agreements contributed
approximately 2.4% of consolidated revenue to consolidated gross profit dollars
in 2008, as compared with 2.3% of consolidated revenue to consolidated gross
profit dollars for non-recurring agreements in the prior year.
In the
first quarter of 2008, the Company performed an updated analysis of expected
industry-wide declines in the traditional film and paper businesses and its
useful lives on related assets. This analysis indicated that the
assets will continue to be used in these businesses for a longer period than
previously anticipated. As a result, the Company revised the useful
lives of certain existing production machinery and equipment, and
manufacturing-related buildings effective January 1, 2008. These
assets, which were previously set to fully depreciate by mid-2010, are now being
depreciated with estimated useful lives ending from 2011 to 2015. The
change in useful lives reflects the Company’s estimate of future periods to be
benefited from the use of the property, plant, and equipment. As a
result of these changes, for full year 2008 the Company reduced depreciation
expense by approximately $107 million, of which approximately $95 million
benefited loss from continuing operations before income taxes. The
net impact of the change in estimate to loss from continuing operations for the
year ended December 31, 2008 was a reduced loss of $93 million, or $.33 on a
fully-diluted loss per share basis.
Selling,
General and Administrative Expenses
The
year-over-year decrease in consolidated selling, general and administrative
expenses (“SG&A”) was primarily attributable to company-wide cost reduction
actions, and lower benefit costs (including other postemployment benefits – see
below), partially offset by unfavorable foreign exchange, a contingency accrual
related to employment litigation matters of approximately $20 million, and costs
associated with the Company’s participation in the drupa tradeshow in the second
quarter of 2008.
Research
and Development Costs
The
decrease in consolidated research and development costs (“R&D”) compared
with prior year was primarily attributable to company-wide cost reduction
actions and significantly reduced spending in 2008 within CDG due to the
introduction of consumer inkjet printers in 2007. These decreases in
R&D spending were partially offset by investments in new workflow products
in Enterprise Solutions
and stream technology within Digital Printing Solutions,
and R&D related acquisitions made in the second quarter of 2008, both
within GCG.
34
Postemployment
Benefit Plan Changes
In the
third quarter of 2008, the Company amended certain of its U.S. postemployment
benefits effective as of January 1, 2009. As a result of these plan
changes, curtailment and other gains of $94 million were recognized in the third
quarter of 2008. The gains are reflected in the Consolidated
Statement of Operations as follows: $48 million in cost of goods sold, $27
million in SG&A, and $19 million in R&D. The impact of these
gains is not reflected in segment results. Refer to Note 18, “Other
Postretirement Benefits” and Note 23, “Segment Information.”
Restructuring
Costs, Rationalization and Other
These
costs, as well as the restructuring and rationalization-related costs reported
in cost of goods sold, are discussed under the "RESTRUCTURING COSTS,
RATIONALIZATION AND OTHER" section.
Other
Operating Expenses (Income), Net
The Other
operating expenses (income), net category includes gains and losses on sales of
capital assets and businesses, and goodwill and other long-lived asset
impairment charges. The year-over-year change in Other operating
expenses (income), net was largely driven by the goodwill impairment charge of
$785 million in 2008, as compared with significant one-time gains on sales of
capital assets and businesses recognized in 2007. Refer to Note 5,
“Goodwill and Other Intangible Assets,” for more information on the 2008
charge.
Other
Income (Charges), Net
The Other
income (charges), net category includes interest income, income and losses from
equity investments, and foreign exchange gains and losses. The
decrease in Other income (charges), net was primarily attributable to a decrease
in interest income due to lower interest rates and lower cash balances in 2008
as compared with 2007.
Income
Tax Benefit
|
(dollars
in millions)
|
For
the Year Ended
|
|||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Loss
from continuing operations before income
taxes
|
$ | (874 | ) | $ | (256 | ) | ||
|
Benefit
for income taxes
|
$ | (147 | ) | $ | (51 | ) | ||
|
Effective
tax rate
|
16.8 | % | 19.9 | % | ||||
The
change in the Company’s effective tax rate from continuing operations is
primarily attributable to: (1) a $270 million benefit recognized during the
second quarter of 2008 for interest earned on a refund received from the U.S.
Internal Revenue Service, (2) losses generated within the U.S. and in certain
jurisdictions outside the U.S. in 2008 that were not benefited due to the impact
of valuation allowances, (3) a tax benefit recorded in continuing operations in
2007 for losses in certain jurisdictions due to the recognition of an offsetting
tax expense on the pre-tax gain in discontinued operations, (4) the release or
establishment of valuation allowances in certain jurisdictions outside the U.S.,
which are evaluated separately by jurisdiction and dependent on its specific
circumstances, (5) the mix of earnings from operations in certain
lower-taxed jurisdictions outside the U.S., (6) adjustments for uncertain tax
positions and tax
audits, and (7) a pre-tax goodwill impairment charge of $785 million that
resulted in a tax benefit of only $4 million due to a full valuation allowance
in the U.S. and the limited amount of tax deductible goodwill that existed as of
December 31, 2008.
35
CONSUMER
DIGITAL IMAGING GROUP
|
(dollars
in millions)
|
For
the Year Ended
|
|||||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||||||
|
|
2008
|
%
of Sales
|
2007
|
%
of Sales
|
Increase
/ (Decrease)
|
%
Change
|
||||||||||||||||||
|
Total
net sales
|
$ | 3,088 | $ | 3,247 | $ | (159 | ) | -5 | % | |||||||||||||||
|
Cost
of goods sold
|
2,495 | 2,419 | 76 | -3 | % | |||||||||||||||||||
|
Gross
profit
|
593 | 19.2 | % | 828 | 25.5 | % | (235 | ) | -28 | % | ||||||||||||||
|
Selling,
general and administrative expenses
|
555 | 18 | % | 595 | 18 | % | (40 | ) | -7 | % | ||||||||||||||
|
Research
and development costs
|
215 | 7 | % | 250 | 8 | % | (35 | ) | -14 | % | ||||||||||||||
|
Loss
from continuing operations before interest
expense, other income (charges), net
and income taxes
|
$ | (177 | ) | -6 | % | $ | (17 | ) | -1 | % | $ | (160 | ) | 941 | % | |||||||||
|
For
the Year Ended
|
||||||||||||||||||||||||
|
December
31,
|
Change
vs. 2007
|
|||||||||||||||||||||||
|
2008
Amount
|
Change
vs. 2007
|
Volume
|
Price/Mix
|
Foreign
Exchange
|
Manufacturing
and Other Costs
|
|||||||||||||||||||
|
Total
net sales
|
$ | 3,088 | -4.9 | % | 8.6 | % | -14.6 | % | 1.1 | % | n/a | |||||||||||||
|
Gross
profit margin
|
19.2 | % |
-6.3pp
|
n/a |
-13.4pp
|
0.7pp
|
6.4pp
|
|||||||||||||||||
Worldwide Revenues
Net sales
for CDG decreased 5% in 2008 primarily as a result of the sharp decline in
global consumer demand experienced in the fourth quarter of 2008. The
economic downturn negatively impacted all industries that rely on consumer
discretionary spending. CDG net sales in the fourth quarter declined
from 42% of CDG’s full-year revenue for 2007 to only 31% of full-year revenue
for 2008. Volume increases in 2008 attributable to products
introduced in 2007 and throughout 2008 were more than offset by unfavorable
price/mix, as reduced demand resulted in downward price pressure and a shift in
consumer demand to lower-priced products. However, Kodak continued to
maintain or increase its market share position in key product categories in
which it participates.
Net sales
for CDG decreased primarily due to unfavorable price/mix in Digital Capture and Devices,
partially offset by volume growth in Consumer Inkjet and Digital Capture and Devices,
and favorable foreign exchange across all SPGs.
Net
worldwide sales of Digital
Capture and Devices, which includes consumer digital still and video
cameras, digital picture frames, accessories, memory products, snapshot printers
and related media, and intellectual property royalties, decreased 7% in the year
ended December 31, 2008 as compared with the prior year. This
decrease primarily reflects unfavorable price/mix for digital cameras and
digital picture frames, volume declines in snapshot printing, and lower
intellectual property royalties (see gross profit discussion below), partially
offset by increased volumes for digital cameras and digital picture frames as
well as favorable foreign exchange. Digital picture frames were
introduced at the end of the first quarter of 2007.
Net
worldwide sales of Consumer
Inkjet Systems, which includes inkjet printers and related consumables,
increased in the year ended December 31, 2008, primarily reflecting volume
improvements due to the launch of the product line at the end of the first
quarter of 2007 and the introduction of the second generation of printers in the
first quarter of 2008, partially offset by unfavorable
price/mix. Sell-through of inkjet printers for the full year more
than doubled compared with the prior year, resulting in an estimated
36
installed
base of more than 1 million printers as of December 31, 2008.
Net
worldwide sales of Retail
Systems Solutions, which includes kiosks and related media and APEX
drylab systems, increased 1% in the year ended December 31, 2008 as compared
with the prior year, reflecting higher equipment and media volumes as well as
favorable foreign exchange, partially offset by unfavorable
price/mix.
Gross Profit
The
decrease in gross profit dollars and margin for CDG was primarily attributable
to unfavorable price/mix within Digital Capture and Devices
and lower intellectual property royalties, partially offset by reduced
manufacturing and other costs primarily in consumer inkjet printers, digital
cameras and digital frames, as well as favorable foreign exchange.
Included
in gross profit was a non-recurring amendment of an intellectual property
licensing agreement with an existing licensee and a new non-recurring
intellectual licensing agreement. The impact of these agreements
contributed approximately 7.4% of segment revenue to segment gross profit
dollars in the current year, as compared with 7.3% of segment revenue to segment
gross profit dollars for non-recurring agreements in the prior
year. The new agreement also provides the Company with an opportunity
for continued collaboration with the licensee.
The
results also included approximately $126 million related to intellectual
property licensing arrangements under which the Company’s continuing obligations
were fulfilled as of December 31, 2008. The Company expects to secure
other new licensing agreements, the timing and amounts of which are difficult to
predict. These types of arrangements provide the Company with a return on
portions of historical R&D investments, and new licensing opportunities are
expected to have a continuing impact on the results of operations.
Selling,
General and Administrative Expenses
The
decrease in SG&A expenses for CDG was primarily driven by ongoing efforts to
achieve target cost models and lower benefit costs (including other
postemployment benefits), partially offset by unfavorable foreign
exchange.
Research
and Development Costs
The
decrease in R&D costs for CDG was primarily attributable to reduced spending
in 2008 as compared with the prior year due to the introduction of consumer
inkjet printers in 2007, as well as cost reduction actions taken throughout the
segment in 2008.
FILM,
PHOTOFINISHING AND ENTERTAINMENT GROUP
|
(dollars
in millions)
|
For
the Year Ended
|
|||||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||||||
|
|
2008
|
%
of Sales
|
2007
|
%
of Sales
|
Increase
/ (Decrease)
|
%
Change
|
||||||||||||||||||
|
Total
net sales
|
$ | 2,987 | $ | 3,632 | $ | (645 | ) | -18 | % | |||||||||||||||
|
Cost
of goods sold
|
2,335 | 2,771 | (436 | ) | -16 | % | ||||||||||||||||||
|
Gross
profit
|
652 | 21.8 | % | 861 | 23.7 | % | (209 | ) | -24 | % | ||||||||||||||
|
Selling,
general and administrative expenses
|
404 | 14 | % | 520 | 14 | % | (116 | ) | -22 | % | ||||||||||||||
|
Research
and development costs
|
52 | 2 | % | 60 | 2 | % | (8 | ) | -13 | % | ||||||||||||||
|
Earnings
from continuing operations before interest
expense, other income (charges), net
and income taxes
|
$ | 196 | 7 | % | $ | 281 | 8 | % | $ | (85 | ) | -30 | % | |||||||||||
37
|
For
the Year Ended
|
||||||||||||||||||||||||
|
December
31,
|
Change
vs. 2007
|
|||||||||||||||||||||||
|
2008
Amount
|
Change
vs. 2007
|
Volume
|
Price/Mix
|
Foreign
Exchange
|
Manufacturing
and Other Costs
|
|||||||||||||||||||
|
Total
net sales
|
$ | 2,987 | -17.8 | % | -18.6 | % | -1.3 | % | 2.1 | % | n/a | |||||||||||||
|
Gross
profit margin
|
21.8 | % |
-1.9pp
|
n/a |
-2.1pp
|
0.3pp
|
-0.1pp
|
|||||||||||||||||
Worldwide
Revenues
Net sales
for FPEG decreased 18% primarily due to Film Capture and Traditional Photofinishing,
reflecting continuing volume declines in the consumer film industry and
reduced demand due to the global economic slowdown that began in the latter part
of 2008, partially offset by favorable foreign exchange. Net worldwide
sales of Film Capture
and Traditional
Photofinishing decreased 40% and 19%, respectively, in 2008 as compared
with 2007.
Net
worldwide sales for Entertainment Imaging
decreased 5% compared with the prior year, driven by volume declines primarily
reflecting the effects of the writers’ strike in the first quarter of 2008, and
reduced demand in the second half of 2008 from the delay in creation of feature
films resulting from uncertainty surrounding industry labor contract issues, as
well as the weak economy. This decrease was partially offset by
favorable foreign exchange.
Gross
Profit
The
decrease in FPEG gross profit dollars is primarily a result of declines in sales
volume within Film Capture
as described above, unfavorable price/mix across all SPGs, partially
offset by favorable foreign exchange.
The
decrease in FPEG gross profit margin was primarily driven by unfavorable
price/mix across all SPGs. In addition, increased manufacturing and
other costs in Film
Capture were driven by higher costs of silver,
paper, and petroleum-based raw material and other costs. These cost increases
were largely offset by lower benefit costs (including other postemployment
benefits) and the benefit of lower depreciation expense as a result of the
change in useful lives executed during the first quarter of this
year.
Selling,
General and Administrative Expenses
The
decline in SG&A expenses for FPEG was attributable to lower benefit costs
(including other postemployment benefits) and ongoing efforts to achieve target
cost models, partially offset by unfavorable foreign exchange.
38
GRAPHIC
COMMUNICATIONS GROUP
|
(dollars
in millions)
|
For
the Year Ended
|
|||||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||||||
|
|
2008
|
%
of Sales
|
2007
|
%
of Sales
|
Increase
/ (Decrease)
|
%
Change
|
||||||||||||||||||
|
Total
net sales
|
$ | 3,334 | $ | 3,413 | $ | (79 | ) | -2 | % | |||||||||||||||
|
Cost
of goods sold
|
2,445 | 2,438 | 7 | 0 | % | |||||||||||||||||||
|
Gross
profit
|
889 | 26.7 | % | 975 | 28.6 | % | (86 | ) | -9 | % | ||||||||||||||
|
Selling,
general and administrative expenses
|
627 | 19 | % | 657 | 19 | % | (30 | ) | -5 | % | ||||||||||||||
|
Research
and development costs
|
231 | 7 | % | 214 | 6 | % | 17 | 8 | % | |||||||||||||||
|
Earnings
from continuing operations before interest
expense, other income (charges), net
and income taxes
|
$ | 31 | 1 | % | $ | 104 | 3 | % | $ | (73 | ) | -70 | % | |||||||||||
|
For
the Year Ended
|
||||||||||||||||||||||||
|
December
31,
|
Change
vs. 2007
|
|||||||||||||||||||||||
|
2008
Amount
|
Change
vs. 2007
|
Volume
|
Price/Mix
|
Foreign
Exchange
|
Manufacturing
and Other Costs
|
|||||||||||||||||||
|
Total
net sales
|
$ | 3,334 | -2.3 | % | -1.6 | % | -4.1 | % | 3.4 | % | n/a | |||||||||||||
|
Gross
profit margin
|
26.7 | % |
-1.9pp
|
n/a |
-1.1pp
|
-0.6pp
|
-0.2pp
|
|||||||||||||||||
Worldwide
Revenues
GCG net
sales decreased 2% as compared with the prior year, driven by unfavorable
price/mix and volume declines, partially offset by favorable foreign
exchange. Recent global financial market disruptions affected
equipment placements across most product lines, and tightening credit
availability resulted in deferrals of some orders taken earlier this year at the
drupa tradeshow. In addition, the decline in global print demand
translated into decreased sales of consumables, especially in the second half of
2008.
Net
worldwide sales of Prepress
Solutions decreased 2% compared with 2007, driven primarily by volume
declines in analog plates and output devices, partially offset by volume growth
in digital plates and favorable foreign exchange. The decline in
global print demand accelerated the volume decline for analog plates and
negatively impacted the volume growth rate for digital
plates. Despite the effects of the economic downturn, digital plates
experienced volume growth in the high single digits during 2008.
Net
worldwide sales of Digital
Printing Solutions decreased 6% compared with the prior
year. Unfavorable price/mix and declines in volume were partially
offset by favorable foreign exchange for all products. Volume
declines were largely attributable to black-and-white electrophotographic
equipment and consumables due to overall market declines, as certain customers
convert to solutions that offer color options. Color
electrophotographic equipment and consumables volumes increased, driven by new
product line introductions and enhancements. Page volume growth of
12% in the color electrophotographic space was a key contributor to the growth
of color consumable sales volumes. Unfavorable inkjet equipment
volume and price/mix were partially offset by favorable volume and price/mix in
inkjet consumables. General price erosion, declines in legacy product
sales, and a mix shift toward units requiring lower levels of capital investment
were contributors to this performance.
39
Net
worldwide sales of Document
Imaging decreased 2% compared with the prior
year. Unfavorable price/mix was partially offset by volume growth and
favorable foreign exchange. While volume grew in both the Production
Scanner and Distributed Scanner categories, a shift toward low-page volume units
in both categories drove unfavorable price/mix.
Net
worldwide sales of Enterprise
Solutions decreased 1% as compared with the prior
year. Unfavorable price/mix and volume declines were partially offset
by favorable foreign exchange and acquisitions made during the second quarter of
2008.
Gross
Profit
The
decline in gross profit dollars and margin was primarily driven by Prepress Solutions and Digital Printing
Solutions. Increased manufacturing costs related to aluminum
and petroleum-based raw materials, as well as higher distribution expense and
volume declines, drove the decrease in the Prepress Solutions gross
profit dollars and margin. For Digital Printing Solutions,
higher costs of newly introduced digital printers, price erosion and adverse mix
were partially offset by manufacturing cost productivity.
Selling,
General and Administrative Expenses
The
decrease in SG&A expenses for GCG primarily reflects lower benefit costs
(including other postemployment benefits) and ongoing efforts to achieve target
cost models, partially offset by increased costs associated with the Company’s
participation in the drupa tradeshow in the second quarter of 2008, go-to-market
investments, and unfavorable foreign exchange.
Research
and Development Costs
The
increase in R&D costs for GCG was primarily driven by investments in new
workflow products in Enterprise Solutions, R&D
related to acquisitions made in the second quarter of 2008, increased
investments for stream technology within Digital Printing Solutions,
and unfavorable foreign exchange. These increases were partially
offset by ongoing efforts to achieve target cost models.
RESULTS
OF OPERATIONS – DISCONTINUED OPERATIONS
Total
Company earnings from discontinued operations for the year ended December 31,
2008 and 2007 of $285 million and $881 million, respectively, include a benefit
for income taxes of $288 million and a provision for income taxes of $262
million, respectively.
Earnings
from discontinued operations in 2008 were primarily driven by a tax refund that
the Company received from the U.S. Internal Revenue Service. The
refund was related to the audit of certain claims filed for tax years
1993-1998. A portion of the refund related to past federal income
taxes paid in relation to the 1994 sale of a subsidiary, Sterling Winthrop Inc.,
which was reported in discontinued operations. Refer to Note 15,
“Income Taxes,” for further discussion of the tax refund.
Earnings
from discontinued operations in 2007 were primarily driven by the $986 million
pre-tax gain on the sale of the Health Group segment on April 30, 2007, and the
$123 million pre-tax gain on the sale of Hermes Precisa Pty. Ltd. (“HPA”) on
November 2, 2007. Also included in discontinued operations in 2007
are the results of operations of the Health Group segment and HPA through their
respective dates of sale.
For a
detailed discussion of the components of discontinued operations, refer to Note
22, “Discontinued Operations,” in the Notes to Financial
Statements.
NET
(LOSS) EARNINGS
The
Company’s consolidated net loss for 2008 was $442 million, or a loss of $1.57
per basic and diluted share, as compared with net earnings for 2007 of $676
million, or earnings of $2.35 per basic and diluted share, representing a
decrease of $1,118 million or 165%. This decrease is attributable to
the reasons outlined above.
40
2007
COMPARED WITH 2006
RESULTS
OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
|
(in
millions, except per share data)
|
For
the Year Ended
|
|||||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||||||
|
|
2007
|
%
of Sales
|
2006
|
%
of Sales
|
Increase
/ (Decrease)
|
%
Change
|
||||||||||||||||||