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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): October 22, 2003
Eastman Kodak Company
(Exact name of registrant as specified in charter)
New Jersey 1-87 16-0417150
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
343 State Street,
Rochester, New York 14650
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (585) 724-4000
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Item 7. Financial Statements and Exhibits
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(c) Exhibits
--------
Exhibit 99.1 Press release issued October 22, 2003 Furnished with
regarding financial results for third this document
quarter of 2003
Exhibit 99.2 Financial discussion document issued Furnished with
October 22, 2003 regarding financial this document
results for third quarter of 2003
Item 9. Regulation FD Disclosure
- ---------------------------------
In accordance with Securities and Exchange Commission Release No. 33-8126, the
following information, which is intended to be furnished under Item 12, "Results
of Operations and Financial Condition," is instead being furnished under Item 9,
"Regulation FD Disclosure." This information, including the exhibits attached
hereto, shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or incorporated by
reference in any filing under the Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set forth by specific reference in
such a filing.
On October 22, 2003, Eastman Kodak Company issued a press release and a
supplemental financial discussion document describing its financial results for
its third fiscal quarter ended September 30, 2003. Copies of the press release
and financial discussion document are attached as Exhibits 99.1 and 99.2,
respectively, to this report.
Within the Company's third quarter 2003 press release and financial discussion
document, the Company makes reference to certain non-GAAP financial measures
including "Income from continuing operations, excluding non-operational items",
"Operating cash flow", "Operating cash flow before acquisitions" and "Free cash
flow", which have a directly comparable GAAP financial measure, and to certain
calculations that are based on non-GAAP financial measures, including "Days
sales outstanding" and "Days supply in inventory." The Company believes that
these measures represent important internal measures of performance.
Accordingly, where these non-GAAP measures are provided, it is done so that
investors have the same financial data that management uses with the belief that
it will assist the investment community in properly assessing the underlying
performance of the company on a year-over-year and quarter-sequential basis.
Whenever such information is presented, the Company has complied with the
provisions of the rules under Regulation G and Item 12 of Form 8-K. The specific
reasons, in addition to the reasons described above, why the Company's
management believes that the presentation of the non-GAAP financial measures
provides useful information to investors regarding Kodak's financial condition,
results of operations and cash flows are as follows:
Income from continuing operations, excluding non-operational items - The
Company's management believes that presenting income from continuing operations,
excluding non-operational items, is an important additional measure of
performance that can be used for comparing results between reporting periods.
These operating measures represent the principle internal measures of
performance, and form the basis of internal management performance expectations
and incentive compensation.
Operating cash flow / Operating cash flow before acquisitions/ Free cash flow -
The Company believes that the presentation of operating cash flow, operating
cash flow before acquisitions and free cash flow is useful information to
investors as they facilitate the comparison of cash flows between reporting
periods. In addition, management utilizes these measures as tools to assess the
Company's ability to repay debt and repurchase its own common stock, after it
has satisfied its working capital needs, dividends, and funded capital
expenditures, acquisitions and investments. The operating cash flow before
acquisitions measure equals the operating cash flow measure excluding the impact
of acquisitions, while the free cash flow measure equals the operating cash flow
measure excluding the impact of dividend payments. Accordingly, the Company
believes that the presentation of this information is useful to investors as it
provides them with the same data as management uses to facilitate their
assessment of the Company's cash position.
Days sales outstanding (DSO) - The Company believes that the presentation of a
DSO result that includes the impact of reclassifying rebates as an offset to
receivables is useful information to investors, as this calculation is more
reflective of the Company's receivables performance and cash collection efforts
due to the fact that most customers reduce their actual cash payment to the
Company by the amount of rebates owed to them.
Days supply in inventory (DSI) - The Company believes that the presentation of a
DSI result that is based on inventory before the LIFO reserve is useful
information to investors, as this calculation is more reflective of the
Company's actual inventory turns due to the fact that the inventory values in
the calculation are based on current cost.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EASTMAN KODAK COMPANY
By: /s/ Robert P. Rozek
------------------------
Name: Robert P. Rozek
Title: Controller
Date: October 22, 2003
EXHIBIT INDEX
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Exhibit No. Description
- ---------- ------------
99.1 Press release issued October 22, 2003 regarding
financial results for third quarter 2003
99.2 Financial discussion document issued October 22, 2003
regarding financial results for third quarter 2003
Exhibit 99.1
Kodak Reports 3rd-Quarter Net Income of 42 Cents Per Share; Sales Rise
3% to $3.447 Billion EPS from Continuing Operations, Excluding Charges
and Other Items, Total 88 Cents
ROCHESTER, N.Y.--(BUSINESS WIRE)--Oct. 22, 2003--Eastman Kodak
Company said that third-quarter net income, in accordance with
Generally Accepted Accounting Principles (GAAP) in the U.S., totaled
42 cents per share and that sales rose 3% compared with the year-ago
period.
Excluding the impact of previously announced focused cost
reductions and a one-time charitable donation, earnings from
continuing operations were 88 cents per share.
For the third quarter of 2003:
-- Sales totaled $3.447 billion, up 3% from $3.352 billion in the
third quarter of 2002. Excluding foreign exchange, sales
declined 1%.
-- The company reported net income of $122 million, or 42 cents
per share, compared with net income of $334 million, or $1.15
per share, in the third quarter of 2002.
-- Earnings from continuing operations, excluding the impact of
focused cost reductions and a non-operational item, were $252
million, or 88 cents per share. The after-tax non-operational
items include a charge of $125 million, or 44 cents per share,
related to previously announced cost reductions, and a charge
of $5 million, or 2 cents per share, for a charitable
contribution to the Infotonics Technology Center. The company
also adjusted its estimated annual effective tax rate to 19%
from 24%, which contributed 10 cents per share to both
operational and GAAP earnings. In the third quarter of 2002,
earnings from continuing operations, excluding non-operational
items, totaled $306 million, or $1.05 per share. The after-tax
non-operational items from the year-ago quarter added, on a
net basis, 11 cents per share to reported earnings and
included the restructuring of Japanese photofinishing
operations; a one-time write-down of venture investments;
adjustments related to previously announced restructuring
programs; and a one-time tax benefit related to the Japanese
photofinishing operations.
"Our third-quarter results reinforce the rationale behind the
strategy we unveiled to investors on Sept. 25," said Kodak Chairman
and Chief Executive Officer Daniel A. Carp. "Our digital businesses -
both commercial and consumer - continue to demonstrate solid growth.
In Health Imaging, for example, we are selling more computed
radiography and digital radiography systems. With the completion this
month of the PracticeWorks acquisition, we are now the leader in the
market for digital dentistry.
"On the consumer side, Kodak's EasyShare family of digital cameras
and printer docks continue to gain widespread acceptance," Carp said.
"Popular Photography & Imaging magazine, for example, recently hailed
the new Kodak EasyShare DX6490 digital camera for its ease-of-use and
image quality. And during the third quarter, Kodak posted its
first-ever profit in consumer digital cameras on a fully allocated
basis. The EasyShare printer dock also is selling briskly, providing
more evidence that Kodak knows how to satisfy the consumer's demand
for simple, high-quality prints at home.
"The company enjoyed solid cash generation in the third quarter,
which confirms our belief that we will continue to produce a
substantial amount of cash from our traditional businesses," Carp
said. "We are investing in a highly disciplined manner to fund the
transformation of Kodak into a digitally oriented imaging company.
"In markets where film continues to grow, we will continue to
invest smartly," Carp said. "Today, we announced that Kodak and China
Lucky Film Corp. have signed a 20-year agreement to expand each
other's market opportunities. This is an example of the kind of
disciplined investments that will help maximize the value of our
traditional businesses and create funding sources for the digital
transformation."
Other third-quarter 2003 details from continuing operations:
-- Kodak's operating cash flow was lower than the year-ago
quarter, primarily reflecting lower net income from continuing
operations.
-- For the quarter, operating cash flow was $243 million,
compared with $345 million in the third quarter of 2002.
(Kodak defines operating cash flow as net cash provided by
continuing operations, as determined under GAAP, plus proceeds
from the sale of assets minus capital expenditures,
acquisitions, investments in unconsolidated affiliates and
dividends.)
-- The company's debt totaled $2.890 billion at the end of the
quarter, compared with $2.742 billion in the year-ago quarter.
The company held $983 million in cash on its balance sheet at
the end of the quarter, up from $561 million at the end of the
third quarter of 2002. Net debt, or total debt minus cash,
totaled $1.907 billion at the end of the third quarter, down
$274 million from the year-ago quarter. These figures don't
include the $1.075 billion in debt that Kodak issued in
October.
-- Gross profit on an operational basis was 33.7%, compared with
38.5% in the year-ago period.
-- Selling, general and administrative expenses on an operational
basis were 18.3% of sales, down from 18.4% in the year-ago
quarter.
The segment results for the third quarter of 2003 are as follows:
-- Photography segment sales totaled $2.475 billion, up 3%. The
segment had earnings from operations of $204 million on an
operational and GAAP basis, compared with earnings from
operations of $324 million a year ago. Highlights for the
quarter included a 117% increase in consumer digital camera
sales, a 43% increase in sales at Ofoto, a 33% increase in
inkjet paper sales, and a 14% increase in the sale of photo
kiosks and related media.
-- Health Imaging segment sales were $571 million, up 1%.
Earnings from operations on an operational and GAAP basis for
the segment were $117 million, down from $126 million in the
year-ago period. Highlights included higher sales of digital
capture equipment, digital media and services.
-- Commercial Imaging segment sales were $373 million, up 6%.
Earnings from operations on an operational and GAAP basis were
$33 million, compared with $42 million in the year-ago period.
-- All Other sales were $28 million, up from $26 million. Losses
from operations on an operational and GAAP basis totaled $19
million, compared with losses of $8 million in the year-ago
period. The All Other category includes the Kodak Display
business, as well as Sensors, Optics and miscellaneous
businesses.
Earnings Outlook:
-- The company expects operational earnings of $2.10 to $2.20 per
share, and GAAP earnings of $1.15 to $1.30 per share, for all
of 2003.
"As we said on Sept. 25, Kodak intends to harness the power of
digital technology to become a bigger, more diversified company,
pursuing markets as varied as consumer digital cameras, digital
medical imaging equipment, commercial printing and organic displays,"
Carp said. "In keeping with the Sept. 25 announcement, we will change
the way Kodak reports its financial results so that investors benefit
from a consistent, transparent presentation that aligns with the
markets we are pursuing."
Beginning with the first quarter of 2004, Kodak will report
results for the following segments: Digital & Film Imaging Systems;
Health Imaging; Commercial Imaging; and Commercial Printing. The All
Other category will include the operations that comprise Display &
Components. Kodak also will provide in the first quarter results from
past years that reflect the new reporting segments outlined above.
"As we execute on our strategy, investors can expect to see more
of the milestones that we've already achieved in digital markets,"
Carp said. "Kodak, for example, holds the No. 1 share position in the
market for photo kiosks at retail, online photofinishing through
Ofoto, high-speed document scanners, DryView laser printers for
medical images, digital dental equipment and software, and OLED
flat-panel displays, while sharing the top spot in the U.S. for
photo-quality inkjet paper. That's above and beyond our No. 1 position
in such traditional markets as consumer photographic film,
motion-picture film and medical x-ray film - just to name a few.
"Today's results represent another step toward the successful
implementation of a strategy that will allow Kodak to claim a larger
share of the growing $385 billion infoimaging market," Carp said.
"With success will come higher sales, profits and investment returns
for Kodak shareholders. I am committed - along with a management team
experienced in digital markets - to generate as much value as possible
from Kodak's assets, and we are convinced that the plan announced on
Sept. 25 represents the best way to achieve that goal."
Operational items are non-GAAP financial measures as defined by
the Securities and Exchange Commission's final rules under "Conditions
for Use of Non-GAAP Financial Measures." Reconciliations of
operational items included in this press release to the most directly
comparable GAAP financial measures can be found in the Financial
Discussion Document attached to this press release.
Certain statements in this press release may be forward looking in
nature, or "forward-looking statements" as defined in the United
States Private Securities Litigation Reform Act of 1995. For example,
references to the Company's fourth-quarter 2003 revenue, earnings,
cash flow expectations and future focused cost reductions are
forward-looking statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent our estimates only as of Oct. 22, 2003, and
should not be relied upon as representing our estimates as of any
subsequent date. While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any
obligation to do so, even if our estimates change. The forward-looking
statements contained in this press release are subject to a number of
risk factors, including the successful:
-- Implementation of product strategies (including category
expansion, digitization, OLED, and digital products);
-- Implementation of intellectual property licensing
strategies;
-- Development and implementation of e-commerce strategies;
-- Completion of information systems upgrades, including SAP;
-- Completion of various portfolio actions;
-- Reduction of inventories;
-- Improvement in manufacturing productivity;
-- Improvement in receivables performance;
-- Reduction in capital expenditures;
-- Improvement in supply chain efficiency;
-- Implementation of future focused cost reductions,
including personnel reductions;
-- Development of the Company's business in emerging markets
like China, India, Brazil, Mexico, and Russia.
The forward-looking statements contained in this press release are
subject to the following additional risk factors:
-- Inherent unpredictability of currency fluctuations and raw
material costs;
-- Competitive actions, including pricing;
-- The nature and pace of technology substitution, including the
analog-to-digital shift;
-- Continuing customer consolidation and buying power;
-- General economic, geo-political, public health and business
conditions.
-- Other factors disclosed previously and from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this press release should be
evaluated in light of these important risk factors.
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS - UNAUDITED
(in millions, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
2003 2002 2003 2002
Net sales $3,447 $3,352 $9,539 $9,394
Cost of goods sold 2,320 2,062 6,472 5,990
------ ------ ------ ------
Gross profit 1,127 1,290 3,067 3,404
Selling, general and
administrative expenses 639 631 1,921 1,827
Research and development costs 194 188 567 567
Restructuring costs (credits)
and other 152 (9) 228 (9)
------ ------ ------ ------
Earnings from continuing
operations before interest,
other charges, and income
taxes 142 480 351 1,019
Interest expense 33 40 104 128
Other charges 9 21 39 74
------ ------ ------ ------
Earnings from continuing
operations before income taxes 100 419 208 817
(Benefit) provision for income
taxes (22) 83 (23) 154
------ ------ ------ ------
Earnings from continuing
operations 122 336 231 663
Earnings (loss) from discontinued
operations, net of income tax
benefits for the three and nine
months ended Sept. 30, 2002 of $2
and $4, respectively - (2) 15 (6)
------ ------ ------ ------
NET EARNINGS $ 122 $ 334 $ 246 $ 657
====== ====== ====== ======
Basic and diluted net earnings
(loss) per share:
Continuing operations $ .42 $ 1.16 $ .81 $ 2.27
Discontinued operations .00 (.01) .05 (.02)
------ ------ ------ ------
Total $ .42 $ 1.15 $ .86 $ 2.25
====== ====== ====== ======
Number of common shares used in
basic earnings (loss) per share 286.5 291.8 286.5 291.6
Incremental shares from
assumed conversion of options .1 - .1 -
------ ------ ------ ------
Number of common shares used in
diluted earnings (loss) per share 286.6 291.8 286.6 291.6
====== ====== ====== ======
Cash dividends per share $ .25 $ - $ 1.15 $ .90
====== ====== ====== ======
SUPPLEMENTAL INFORMATION - UNAUDITED
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2003 2002 2003 2002
Provision for depreciation $ 225 $ 215 $ 620 $ 601
After-tax exchange losses
and effect of translation
of net monetary items (6) (4) (11) (16)
Cash dividends declared 72 0 330 262
Capital expenditures 117 155 353 362
Net Sales from Continuing Operations by Reportable Segment
and All Other - Unaudited
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
2003 2002 Change 2003 2002 Change
Photography
Inside the U.S. $1,009 $1,051 - 4% $2,668 $2,933 - 9%
Outside the U.S. 1,466 1,358 + 8 3,946 3,668 + 8
------ ------ --- ------ ------ ---
Total Photography 2,475 2,409 + 3 6,614 6,601 0
------ ------ --- ------ ------ ---
Health Imaging
Inside the U.S. 251 273 - 8 755 791 - 5
Outside the U.S. 320 292 +10 972 864 +13
------ ------ --- ------ ------ ---
Total Health Imaging 571 565 + 1 1,727 1,655 + 4
------ ------ --- ------ ------ ---
Commercial Imaging
Inside the U.S. 223 200 +12 657 593 +11
Outside the U.S. 150 152 - 1 470 467 + 1
------ ------ --- ------ ------ ---
Total Commercial Imaging 373 352 + 6 1,127 1,060 + 6
------ ------ --- ------ ------ ---
All Other
Inside the U.S. 13 13 0 35 40 -13
Outside the U.S. 15 13 +15 36 38 - 5
------ ------ --- ------ ------ ---
Total All Other 28 26 + 8 71 78 - 9
------ ------ --- ------ ------ ---
Consolidated total $3,447 $3,352 + 3% $9,539 $9,394 + 2%
====== ====== === ====== ====== ===
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Earnings (Loss) from Continuing Operations Before Interest, Other
Charges, and Income Taxes by Reportable Segment and All Other -
Unaudited (in millions)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ----------------------
2003 2002 Change 2003 2002 Change
Photography $ 204 $ 324 - 37% $ 277 $ 597 - 54%
Percent of Sales 8.2% 13.4% 4.2% 9.0%
Health Imaging $ 117 $ 126 - 7% $ 357 $ 314 + 14%
Percent of Sales 20.5% 22.3% 20.7% 19.0%
Commercial Imaging $ 33 $ 42 - 21% $ 117 $ 143 - 18%
Percent of Sales 8.8% 11.9% 10.4% 13.5%
All Other $ (19) $ (8) -138% $ (58) $ (21) -176%
Percent of Sales (67.9%) (30.8%) (81.7%) (26.9%)
------- ------ ---- ------ ------ ----
Total of segments $ 335 $ 484 - 31% $ 693 $1,033 - 33%
9.7% 14.4% 7.3% 11.0%
Venture investment
impairments - (13) - (23)
Impairment of Burrell
Companies' net assets
held for sale - - (9) -
Restructuring credits
(costs) and other (185) 9 (285) 9
Donation to technology
enterprise (8) - (8) -
GE settlement - - (12) -
Patent infringement
claim settlement - - (14) -
Prior year acquisition
settlement - - (14) -
------- ------ ---- ------ ------ -----
Consolidated total $ 142 $ 480 - 70% $ 351 $1,019 - 66%
======= ====== ==== ====== ====== ====
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Earnings (Loss) From Continuing Operations by Reportable Segment and
All Other - Unaudited
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ----------------------
2003 2002 Change 2003 2002 Change
Photography $ 172 $ 232 - 26% $ 224 $ 410 - 45%
Percent of Sales 6.9% 9.6% 3.4% 6.2%
Health Imaging $ 106 $ 89 + 19% $ 287 $ 221 + 30%
Percent of Sales 18.6% 15.8% 16.6% 13.4%
Commercial Imaging $ 22 $ 23 - 4% $ 67 $ 72 - 7%
Percent of Sales 5.9% 6.5% 5.9% 6.8
All Other $ (21) $ (9) -133% $ (52) $ (19) -174%
Percent of Sales (75.0%) (34.6%) (73.2%) (24.4%)
------ ------ ---- ------ ----- -----
Total of segments $ 279 $ 335 - 17% $ 526 $ 684 - 23%
8.1% 10.0% 5.5% 7.3%
Venture investment
impairments - (21) - (34)
Impairment of Burrell
Companies' net assets
held for sale - - (9) -
Restructuring credits
(costs) and other (185) 9 (285) 9
Donation to technology
enterprise (8) - (8) -
GE settlement - - (12) -
Patent infringement
claim settlement - - (14) -
Prior year acquisition
settlement - - (14) -
Interest expense (33) (40) (104) (128)
Other corporate items 2 4 8 9
Tax benefit -
PictureVision
subsidiary closure - - - 45
Tax benefit - Kodak
Imagex Japan - 46 - 46
Tax benefit - donation
of patents - - 8 -
Income tax effects on
above items and taxes
not allocated to
segments 67 3 135 32
------ ----- ---- ------ ----- ----
Consolidated total $ 122 $336 - 64% $ 231 $ 663 - 65%
====== ===== ==== ====== ===== ====
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Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
Sept. 30, Dec. 31,
2003 2002
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 983 $ 569
Receivables, net 2,340 2,234
Inventories, net 1,202 1,062
Deferred income taxes 524 512
Other current assets 184 157
------- -------
Total current assets 5,233 4,534
------- -------
Property, plant and equipment, net 5,157 5,420
Goodwill, net 1,021 981
Other long-term assets 2,626 2,559
------- -------
TOTAL ASSETS $14,037 $13,494
======= =======
- ----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,531 $ 3,351
Short-term borrowings 1,410 1,442
Accrued income taxes 619 709
------- -------
Total current liabilities 5,560 5,502
OTHER LIABILITIES
Long-term debt, net of current portion 1,480 1,164
Postretirement liabilities 3,436 3,412
Other long-term liabilities 637 639
------- -------
Total liabilities 11,113 10,717
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 849 849
Retained earnings 7,509 7,611
Accumulated other comprehensive loss (552) (771)
Unearned restricted stock (8) -
------- -------
8,776 8,667
Less: Treasury stock at cost 5,852 5,890
------- -------
Total shareholders' equity 2,924 2,777
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,037 $13,494
======= =======
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(in millions)
Nine Months Ended
September 30
------------------
2003 2002
Cash flows relating to operating activities:
Net earnings $ 246 $ 657
Adjustments to reconcile to net cash
provided by operating activities:
(Gain) loss from discontinued operations (15) 6
Equity in losses from unconsolidated affiliates 43 73
Gain on sale of assets (12) (17)
Depreciation and amortization 620 601
Restructuring costs, asset impairments and
other non-cash charges 41 (9)
(Benefit) provision for deferred taxes (4) 35
(Increase) decrease in receivables (68) 126
Increase in inventories (65) (56)
Decrease in liabilities excluding borrowings (55) (35)
Other items, net 93 (72)
------ ------
Total adjustments 578 652
------ ------
Net cash provided by continuing
operations 824 1,309
------ ------
Net cash provided by (used in)
discontinued operations 19 (9)
------ ------
Net cash provided by operating activities 843 1,300
------ ------
Cash flows relating to investing activities:
Additions to properties (353) (362)
Net proceeds from sales of businesses/assets 21 18
Acquisitions, net of cash acquired (88) (6)
Investments in unconsolidated affiliates (54) (96)
Marketable securities - purchases (62) (78)
Marketable securities - sales 62 61
------ ------
Net cash used in investing activities (474) (463)
------ ------
Cash flows relating to financing activities:
Net increase (decrease) in borrowings
with original maturity of 90 days or less 52 (69)
Proceeds from other borrowings 865 625
Repayment of other borrowings (641) (1,015)
Dividend payments (258) (262)
Exercise of employee stock options 12 2
------ ------
Net cash provided by (used in) financing
activities 30 (719)
------ ------
Effect of exchange rate changes on cash 15 (5)
------ ------
Net increase in cash and cash equivalents 414 113
Cash and cash equivalents, beginning of year 569 448
------ ------
Cash and cash equivalents, end of quarter $ 983 $ 561
====== ======
- -----------------------------------------------------------------
Exhibit 99.2
Eastman Kodak Company Financial Discussion Document
Third Quarter 2003 Results
2003 Compared with 2002
Third quarter, 2003 presentation reflects the adoption of the
Securities and Exchange Commission's final rules under "Conditions for
Use of Non-GAAP Financial Measures," which requires that financial
information be presented on a basis that conforms with generally
accepted accounting principles (GAAP) in the U.S. As a result, the
financial discussion which follows reflects the company's results from
continuing operations on an "as reported" or "GAAP" basis. However,
the Company also believes that presenting income from continuing
operations excluding non-operational items is an important additional
measure of performance that can be used for comparing results between
reporting periods. Accordingly, the Company has included analysis
based on non-GAAP financial measures in the discussion below.
New Kodak Operating Model and Change in Reporting Structure:
On August 21, 2003, the Company introduced an organizational
realignment, which will become effective January 1, 2004, thus
changing the corporate segment reporting structure beginning with the
first quarter, 2004. The intent of these changes is to accelerate
growth in commercial and consumer digital imaging markets.
Kodak currently reports financial information for three reportable
segments (Photography, Health Imaging, and Commercial Imaging), and
All Other. The bridge from the previous segment reporting to the new
reporting structure is outlined below:
-- Digital and Film Imaging Systems Segment: correlates to the
current Photography Segment and is comprised of Consumer and
Professional Imaging products and services, Entertainment
Imaging products and services, and Digital and Applied Imaging
products and services.
-- Health Imaging Segment remains unchanged.
-- Commercial Imaging Segment: comprised of Document Imaging
products and services, Commercial and Government Systems
products and services, Services and Support, and Optics.
-- Commercial Printing Segment: comprised of NexPress (Kodak's
50/50 joint venture with Heidelberg), Kodak Polychrome
Graphics (Kodak's 50/50 joint venture with Sun Chemical), and
the graphics and wide format inkjet businesses. All of the
above were formerly included in Commercial Imaging.
-- All Other includes Kodak's Display and Components business for
OLED (Organic Light Emitting Diode) and sensors. Also included
within All Other are small, miscellaneous businesses, which
generate sales and earnings for the Company.
Third Quarter
Consolidated Revenues:
Net worldwide sales were $3.447 billion for the third quarter of
2003 as compared with $3.352 billion for the third quarter of 2002,
representing an increase of $95 million or 3% as reported, or a
decrease of 1% excluding the favorable impact of exchange. The
increase in net sales was comprised of:
-- Volume: increases in volume contributed approximately 4
percentage points to third quarter sales driven primarily by
consumer digital cameras and entertainment print films.
-- Price/Mix: declines in price/mix reduced third quarter sales
by approximately 5 percentage points, primarily driven by
consumer film and consumer digital cameras.
-- Exchange: favorable exchange of approximately 4 percentage
points partially offset the negative impacts of price/mix.
Net sales in the U.S. were $1.496 billion for the third quarter of
2003 as compared with $1.537 billion for the prior year quarter,
representing a decrease of $41 million, or 3%. Net sales outside the
U.S. were $1.951 billion for the current quarter as compared with
$1.815 billion for the third quarter of 2002, representing an increase
of $136 million, or 7% as reported, or unchanged excluding the
favorable impact of exchange.
Non-U.S. Revenues:
The Company's operations outside the U.S. are reported in three
regions: (1) the Europe, Africa and Middle East region ("EAMER"), (2)
the Asia Pacific region and (3) the Canada and Latin America region.
Net sales in the EAMER region were $1.039 billion for the third
quarter of 2003 as compared with $973 million for the prior year
quarter, representing an increase of $66 million or 7% as reported, or
a decrease of 2% excluding the favorable impact of exchange.
Net sales in the Asia Pacific region were $591 million for the
current quarter as compared with $557 million for the prior year
quarter, representing an increase of $34 million, or 6% as reported,
or an increase of 1% excluding the favorable impact of exchange.
Net sales in the Canada and Latin America region were $321 million
in the current quarter as compared with $285 million for the third
quarter of 2002, representing an increase of $36 million, or 13% as
reported, or an increase of 7% excluding the favorable impact of
exchange.
Emerging Markets:
The Company's major emerging markets include China, Brazil,
Mexico, Russia, India, Korea, Hong Kong and Taiwan. Net sales in
emerging markets were $677 million for the third quarter of 2003 as
compared with $633 million for the prior year quarter, representing an
increase of $44 million, or 7% as reported, or an increase of 4%
excluding the favorable impact of exchange. The emerging market
portfolio accounted for approximately 20% of Kodak's worldwide sales
and 35% of Kodak's non-U.S. sales in the quarter. Sales growth in
India, Russia, and China of 23%, 15%, and 14%, respectively, was
partially offset by declines in Mexico of 8%.
The increase in sales in Russia is the result of continued growth
from Kodak Express and the Company's efforts to expand the
distribution channels for Kodak products and services.
Sales increases in India were driven by the continued success from
the Company's efforts to increase the level of camera ownership and to
increase the number of Photoshop retail stores.
Sales increases in China resulted from strong business performance
for all Kodak's operations in that region and a return to more normal
levels of industry growth in consumer imaging post SARS. Declines in
Mexico are reflective of continued economic weakness.
Gross Profit:
GAAP:
Gross profit was $1.127 billion for the third quarter of 2003 as
compared with $1.290 billion for the third quarter of 2002,
representing a decrease of $163 million, or 13%. The gross profit
margin was 32.7% in the current quarter as compared with 38.5% in the
prior year quarter. The 5.8 percentage point decrease was primarily
attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 5 percentage points. These
declines relate primarily to consumer film and photofinishing
and consumer digital cameras.
-- Manufacturing Cost: manufacturing cost negatively impacted
gross profit margins by approximately 1 percentage point
primarily as a result of $33 million of charges for
accelerated depreciation associated with ongoing focused cost
reduction programs.
-- Exchange: favorably impacted gross profit margins by
approximately .5 percentage point.
Operational:
Excluding charges of $33 million relating to accelerated
depreciation, gross profit on an operational basis was $1.160 billion
for the third quarter of 2003 as compared with $1.290 billion for the
third quarter of 2002, representing a decrease of $130 million, or
10%. The gross profit margin was 33.7% in the current quarter as
compared with 38.5% in the prior year quarter. The 4.8 percentage
point decrease was primarily attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 5 percentage points.
-- Manufacturing/Cost: manufacturing cost remained unchanged.
-- Exchange: favorably impacted gross profit margins by
approximately .5 percentage point.
Selling, General and Administrative Expenses:
GAAP:
Selling, general and administrative expenses (SG&A) were $639
million for the third quarter of 2003 as compared with $631 million
for the prior year quarter, representing an increase of $8 million, or
1%. SG&A decreased as a percentage of sales from 18.8% for the third
quarter of 2002 to 18.5% for the current quarter. The increase in SG&A
is primarily attributable to the following:
-- Unfavorable exchange of $22 million.
-- A charge of $8 million for a donation to Infotonics.
These increases were partially offset by:
-- A charge of $13 million in the prior year quarter relating to
strategic asset writedowns.
-- SG&A cost reductions resulting from the ongoing focused cost
reduction actions.
Operational:
Excluding the charges noted above, SG&A expenses on an operational
basis were $631 million for the third quarter of 2003 as compared with
$618 million for the prior year quarter, representing an increase of
$13 million, or 2%. The increase in SG&A is primarily attributable to
unfavorable exchange of $22 million, which was partially offset by the
impact from the ongoing focused cost reduction actions. As a
percentage of sales, SG&A decreased from 18.4% for the third quarter
of 2002 to 18.3% for the current quarter.
Research and Development Costs:
Research and development costs (R&D) were $194 million for the
third quarter of 2003 as compared with $188 million for the third
quarter of 2002, representing an increase of $6 million, or 3%. R&D as
a percentage of sales remained unchanged at 5.6%. The net increase in
R&D is related to technology acquisitions.
Cost Reduction Plans:
As announced in the fourth quarter of 2002 and the first and third
quarters of 2003, Kodak has implemented a series of cost reduction
actions resulting in pre-tax charges totaling $185 million or $.44 per
share in the third quarter. The components of restructuring in the
third quarter include $146 million for employee severance relating to
the elimination of approximately 2,825 positions and $6 million
associated with exit costs and asset impairments. In addition, the
Company recorded accelerated depreciation of $33 million during the
quarter associated with assets to be disposed of in connection with
the relocation of certain manufacturing operations.
All actions contemplated under the cost reduction programs
announced in the fourth quarter of 2002 and the first quarter of 2003
have been completed. The Company anticipates completing the remaining
initiatives originally contemplated under the cost reduction program
announced in the third quarter of 2003 by the end of the second
quarter of 2004. As a result of these initiatives, an additional 2,300
to 3,800 positions will be eliminated throughout the world by the end
of the second quarter of 2004. The estimated cost to complete these
remaining initiatives will be in the range of $200 million to $300
million. The Company still expects the 2004 cost savings as a result
of all actions contemplated under this cost reduction program to be
$275 million to $325 million, with annual savings of $300 million to
$400 million thereafter.
Currently, the Company is being adversely impacted by negative
global economic conditions and a progressing digital transition. As
the company continues to adjust its operating model in light of
changing business conditions, it is probable that ongoing cost
reduction activities will be required from time to time.
Earnings From Operations:
GAAP:
Earnings from operations (EFO) for the third quarter of 2003 were
$142 million as compared with $480 million for the third quarter of
2002, representing a decrease of $338 million, or 70%. This decrease
is attributable to the reasons indicated above.
Operational:
Excluding charges or credits for cost reduction actions in both
the current and prior year quarters, charges relating to a charitable
contribution during the current quarter, and a charge for strategic
asset writedowns in the prior year quarter, EFO on an operational
basis for the third quarter of 2003 were $335 million as compared with
$484 million for the third quarter of 2002, representing a decrease of
$149 million, or 31%. The decrease in earnings from operations is
attributable to the reasons indicated above.
Below EFO:
GAAP:
Interest expense for the third quarter of 2003 was $33 million as
compared with $40 million for the prior year quarter, representing a
decrease of $7 million, or 18%. The decrease in interest expense is
primarily attributable to lower interest rates in the third quarter of
2003 relative to the prior year quarter.
The other charges component includes principally investment
income, income and losses from equity investments, foreign exchange
and gains and losses on the sales of assets and investments. Other
charges for the current quarter were $9 million as compared with other
charges of $21 million for the third quarter of 2002. The improvement
is primarily attributable to increased income from the Company's
equity investment in Kodak Polychrome Graphics, reduced losses from
the Company's equity investment in the Phogenix joint venture due to
its dissolution, and reduced losses from the Company's equity
investment in the NexPress joint venture.
Corporate Tax Rate:
GAAP:
The Company's estimated annual effective tax rate from continuing
operations for 2003 decreased from 24% to 19% in the current quarter.
This decrease is primarily attributable to an expected increase in
benefits from the utilization of foreign tax credits.
The Company's estimated annual effective tax rate from continuing
operations decreased from 29% for the prior year third quarter to 19%
for the third quarter of 2003. This decrease is primarily attributable
to further expected increased earnings from operations in certain
lower-taxed jurisdictions outside the U.S. relative to total
consolidated earnings and an expected increase in benefits from the
utilization of foreign tax credits.
During the third quarter of 2003, the Company recorded a tax
benefit on a GAAP basis of $22 million, representing an effective tax
benefit rate from continuing operations of approximately 22%. The
effective tax benefit rate of 22% for the quarter differs from the
estimated annual effective tax rate of 19% due to the recording of
discrete period tax benefits of $77 million, or $.27 per share, in
connection with (1) the year-to-date impact through June 30, 2003 of
the decrease in the estimated annual effective tax rate from
continuing operations from 24% to 19% ($14 million, or $.05 per share)
and (2) the following discrete period items ($63 million, or $.22 per
share) that occurred in the third quarter and which are taxed in
jurisdictions that, when aggregated, have tax rates greater than the
estimated annual effective tax rate:
-- A $185 million charge for focused cost reduction actions; and
-- An $8 million charge for a donation to Infotonics.
Operational:
As indicated above, the Company's estimated annual effective tax
rate from continuing operations decreased from 24% to 19% in the
current quarter. This decrease in the rate contributed $.10 cents per
share to both the operational and GAAP earnings for the quarter as
follows: (1) a $.05 per share adjustment to reflect the impact of the
decrease in the rate on year-to-date earnings through June 30, 2003
and (2) a $.05 per share amount to reflect the impact of the decrease
in the rate on third quarter earnings.
Earnings from Continuing Operations:
GAAP:
Earnings from continuing operations for the third quarter of 2003
were $122 million, or $.42 per diluted share, as compared with
earnings from continuing operations for the third quarter of 2002 of
$336 million, or $1.16 per diluted share, representing a decrease of
$214 million year over year. This decrease in earnings from continuing
operations is attributable to the reasons described above.
Operational:
Earnings from continuing operations on an operational basis for
the third quarter of 2003 were $252 million, or $.88 per diluted
share, as compared with earnings from continuing operations on an
operational basis for the third quarter of 2002 of $306 million, or
$1.05 per diluted share, representing a decrease of $54 million, or
18%. Third quarter operational earnings from continuing operations for
2003 exclude the following after-tax items:
-- A charge of $125 million ($185 million pre-tax), or $.44 per
share, resulting from previously announced cost reduction
initiatives. Of the pre-tax charge, $152 million is recorded
in "Restructuring Costs and Other" and $33 million of
accelerated depreciation associated with the relocation of
certain manufacturing operations is recorded in "Cost of Goods
Sold" (COGS).
-- A charge of $5 million ($8 million pre-tax) or $.02 per share
relating to a donation to Infotonics, a technology enterprise,
for research purposes. The pre-tax charge of $8 million is
included in SG&A.
Earnings from Discontinued Operations:
The company did not have earnings or loss from discontinued
operations in the third quarter of 2003. In the third quarter of 2002,
a loss from discontinued operations of $.01 per diluted share was
reported.
Year-over-Year Comparison of Reported and Operational Earnings
(Amounts in millions of dollars)
- ----------------------------------------------------------------------
3Q 03 as Excluded 3Q 03 3Q 02 as Excluded 3Q 02
Reported Items Opera- Reported Items Opera-
tional tional
--------------------------------------------------
Sales $3,447 $3,447 $3,352 $3,352
COGS 2,320 (33)(a) 2,287 2,062 2,062
--------- ---------------- -------
Gross Profit 1,127 1,160 1,290 1,290
SG&A 639 (8)(b) 631 631 (13)(e) 618
R&D 194 194 188 188
Restructuring costs
(credits) and other 152 (152)(c) - (9) 9(f) -
--------- ---------
EFO 142 335 480 484
Interest Expense 33 33 40 40
Other Charges 9 9 21 (8)(g) 13
--------- ---------------- -------
Below EFO (42) (42) (61) (53)
Earnings Before
Taxes 100 293 419 431
(Benefit) Provision
for Taxes (22) 63(d) 41 83 42(h) 125
--------- ---------------- -------
Earnings - Cont.
Ops. 122 252 336 306
Earnings (Loss)
Disc. Ops. - - (2) 2(i) -
Net Earnings $122 252 334 306
Diluted EPS - Cont.
Ops. $0.42 $0.88 $1.16 $1.05
Total Diluted EPS $0.42 $1.15
- ----------------------------------------------------------------------
Items excluded from Earnings on an operational basis:
a - Accelerated depreciation of $33 million in connection with
focused cost reduction actions.
b - Charge for charitable contribution to Infotonics.
c - Charge for focused cost reduction actions.
d - The tax impacts associated with the above-mentioned excluded
items.
e - Strategic asset write-downs.
f - Reversal related to previous focused cost reduction actions.
g - Charge for non-strategic asset write-downs.
h - Tax benefit of $46 million related to the consolidation of the
photofinishing operations in Japan and the loss realized from
the liquidation of a subsidiary as part of this consolidation,
and the tax impacts associated with the above-mentioned
excluded items.
i - Loss from discontinued operations.
As Percent of Sales:
3Q 03 as 3Q 03 3Q 02 as 3Q 02
Reported Operational Reported Operational
---------------------------------------------
Gross Profit 32.7% 33.7% 38.5% 38.5%
SG&A 18.5% 18.3% 18.8% 18.4%
SG&A w/o Advertising 14.1% 13.9% 14.0% 13.6%
R&D 5.6% 5.6% 5.6% 5.6%
EFO 4.1% 9.7% 14.3% 14.4%
Net Earnings 3.5% 7.3% 10.0% 9.1%
- ----------------------------------------------------------------------
Segment Results:
Photography
Revenues:
Net worldwide sales for the Photography segment were $2.475
billion for the third quarter of 2003 as compared with $2.409 billion
for the third quarter of 2002, representing an increase of $66
million, or 3% as reported, a decrease of 2% excluding the favorable
impact of exchange. The increase in net sales was comprised of:
-- Volume: volumes increased third quarter sales by approximately
4 percentage points. Volume increases for consumer digital
cameras and Entertainment Imaging products and services were
partially offset by volume declines for traditional consumer
products and services
-- Price/Mix: declines attributable to price/mix reduced third
quarter sales by approximately 5.5 percentage points driven by
consumer digital cameras and consumer film and photofinishing.
-- Exchange: favorable exchange of approximately 4.5 percentage
points partially offset the negative impacts of price/mix.
Photography segment net sales in the U.S. were $1.009 billion for
the current quarter as compared with $1.051 billion for the third
quarter of 2002, representing a decrease of $42 million, or 4%.
Photography segment net sales outside the U.S. were $1.466 billion for
the third quarter of 2003 as compared with $1.358 billion for the
prior year quarter, representing an increase of $108 million, or 8% as
reported, or unchanged excluding the favorable impact of exchange.
Consumer products and services revenues:
Net worldwide sales of consumer film products, including 35mm
film, Advantix film and one-time-use cameras (OTUC), decreased 12% in
the third quarter of 2003 as compared with the third quarter of 2002,
reflecting 12% volume declines, negative 4% price/mix and 4% favorable
exchange. Sales of the Company's consumer film products within the
U.S. decreased 23%, reflecting 20% volume declines and negative 3%
price/mix. Sales of the Company's consumer film products outside the
U.S. decreased 3%, reflecting 7% volume declines, negative 3%
price/mix, partially offset by 7% favorable exchange.
U.S. consumer film industry sell-through volumes decreased
approximately 6% in the third quarter of 2003 as compared with the
prior year quarter. Year to date U.S. consumer film industry volumes
decreased approximately 7% year over year.
A significant decrease in U.S. retailer inventories accounted for
the majority of Kodak's reduced sell-in volume during the quarter.
The Company's blended U.S. consumer film share decreased
approximately 1% on a volume basis relative to the third quarter of
2002. Management remains confident in maintaining approximate full
year, 2002 year-over-year U.S. market share as it has done for the
past several consecutive years.
Worldwide volumes of consumer color paper decreased mid single
digits in the third quarter of 2003 as compared with the third quarter
of 2002, with U.S. volumes declining low double digits and volumes
outside the U.S. decreasing slightly. Kodak will no longer report
sales trends for color negative paper because paper and other products
are typically bundled together as a "systems sell" for customer
contracting purposes.
Net worldwide sales for photofinishing services (excluding
equipment), including Qualex in the U.S. and Consumer Imaging Services
("CIS") outside the U.S. decreased 17% in the third quarter of 2003 as
compared with the third quarter of 2002, reflecting lower volumes and
negative price/mix, partially offset by favorable exchange. In the
U.S., photofinishing sales (including overnight and on-site) decreased
19%.
Net sales from the Company's consumer digital products and
services, which include Picture Maker kiosks/media and retail consumer
digital services revenue primarily from Picture CD and Retail.com,
increased 14% in the third quarter of 2003 as compared with the third
quarter of 2002, driven primarily by an increase in sales of kiosks
and related media and consumer digital services.
Net worldwide sales of consumer digital cameras increased 117% in
the third quarter of 2003 as compared with the prior year quarter,
primarily reflecting strong volume increases and favorable exchange
partially offset by negative price/mix. Sales continue to be driven by
strong consumer acceptance of the EasyShare digital camera system and
an expanding product line. In addition, Kodak's new Printer Dock
products experienced strong sales growth during the quarter. During
the quarter, consumer digital cameras were profitable on a fully
allocated basis.
Kodak's U.S. consumer digital camera market share for the third
quarter of 2003 is on track to improve quarter sequentially as the
company benefits from a refresh of its product portfolio and a
transition to a new, expanded line of digital cameras. While complete
data for third quarter market share is not yet available, all
indications are that Kodak continues to hold one of the top U.S.
market share positions in channels reporting share data, although some
of Kodak's largest channels do not report share data.
Net worldwide sales of inkjet photo paper increased 33% in the
current quarter as compared with the third quarter of 2002. The
Company continued to maintain its top two market share position in the
United States. The double-digit revenue growth and the maintenance of
market share are primarily attributable to strong underlying market
growth, successful merchandising efforts and the continued growth and
acceptance of a new line of small format inkjet papers.
The Company's Ofoto business in the U.S. increased its sales 43%
in the third quarter of 2003 as compared with the prior year quarter.
Ofoto's sales represent less than 1% of the Company's consolidated net
worldwide sales for the third quarter of 2003. Ofoto now has almost 10
million members and continues to be the market leader in the online
photo services space.
Professional products and services revenues:
Net worldwide sales of professional film capture products
decreased 10% in the third quarter of 2003 as compared with the third
quarter of 2002, primarily reflecting declines in volume and negative
price/mix partially offset by favorable exchange. Sales declines
resulted primarily from the ongoing impact of digital transition. Net
worldwide sales of professional sensitized output increased 6% in the
third quarter of 2003 as compared with the prior year quarter
reflecting increases in volume and favorable exchange partially offset
by negative price/mix.
During the third quarter, worldwide sales increases were recorded
for digital cameras and digital writers.
Entertainment products and services revenues:
Net worldwide sales of origination and print film to the
entertainment industry increased 7%, primarily reflecting higher print
film volumes and favorable exchange partially offset by negative
price/mix. The new Vision 2 origination film continues to gain strong
customer acceptance.
Gross profit:
Gross profit for the Photography segment was $807 million for the
third quarter of 2003 as compared with $931 million for the prior year
quarter, representing a decrease of $124 million or 13%. The gross
profit margin was 32.6% in the current year quarter as compared with
38.7% in the prior year quarter. The 6.1 percentage point decline was
primarily attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 6.5 percentage points driven
by consumer digital cameras, and traditional consumer products
and services.
-- Manufacturing/Cost: manufacturing cost negatively impacted
gross profit margins by approximately .5 percentage points.
-- Exchange: favorably impacted gross profit margins by
approximately 1.0 percentage point.
SG&A:
In the third quarter, SG&A expenses for the Photography segment
increased $3 million, or 1%, from $482 million in the third quarter of
2002 to $485 million in the current quarter, but decreased as a
percentage of sales from 20.0% to 19.6%. The increase in SG&A is
attributable to unfavorable exchange of $18 million, mostly offset by
ongoing focused cost reduction actions.
R&D:
Third quarter R&D costs for the Photography segment decreased $7
million, or 6%, from $125 million in the third quarter of 2002 to $118
million in the current quarter and decreased as a percentage of sales
from 5.2% to 4.8%. The decrease in R&D was primarily attributable to
cost savings realized from position eliminations associated with
ongoing focused cost reduction programs.
EFO:
Earnings from operations for the Photography segment decreased
$120 million, from $324 million in the third quarter of 2002 to $204
million in the third quarter of 2003, primarily as a result of the
factors described above.
Health Imaging
On October 7, 2003, Kodak announced the completion of its
acquisition of PracticeWorks, Inc., a leading provider of dental
practice management software and digital radiographic imaging systems
for $468 million in cash and assumed net debt of approximately $18
million. As part of this transaction Kodak also acquired 100% of
PracticeWorks' Paris based subsidiary, Trophy Radiologie, S.A., a
developer and manufacturer of dental digital radiography equipment,
which PracticeWorks purchased in December 2002. The acquisition of
PracticeWorks and Trophy Radiologie is expected to contribute
approximately $215 million in sales to the Health Imaging business
during the first full year. It is anticipated that the transaction on
an operating basis will be slightly dilutive through 2005 and
accretive thereafter. This acquisition will enable Kodak to offer its
customers a full spectrum of dental imaging products and services from
traditional film to digital radiography and photography and is
expected to move Health Imaging into the leading position in the
dental practice management and dental digital radiographic markets.
Revenues:
Net worldwide sales for the Health Imaging segment were $571
million for the third quarter of 2003 as compared with $565 million
for the prior year quarter, representing an increase of $6 million, or
1% as reported, a decrease of 2% excluding the favorable impact of
exchange. The decrease in sales was comprised of:
-- Volume: Increases in volume contributed approximately 2.0
percentage points to third quarter sales, driven primarily by
volumes increases in digital media, digital capture equipment
and services.
-- Price/Mix: Decreases due to price/mix reduced third quarter
sales by approximately 4.0 percentage points, primarily driven
by digital media, digital capture equipment and analog medical
film.
-- Exchange: Favorable exchange impacted sales by approximately
3.0 percentage points.
Net sales in the U.S. were $251 million for the current quarter as
compared with $273 million for the third quarter of 2002, representing
a decrease of $22 million, or 8%. Net sales outside the U.S. were $320
million for the third quarter of 2003 as compared with $292 million
for the prior year quarter, representing an increase of $28 million,
or 10% as reported, or 3% excluding the favorable impact of exchange.
Digital products and services revenues:
Net worldwide sales of digital products, which include laser
printers (DryView imagers and wet laser printers), digital media
(DryView and wet laser media), digital capture equipment (computed
radiography capture equipment and digital radiography equipment),
services and Picture Archiving and Communications Systems ("PACS"),
increased 4% in the third quarter of 2003 as compared with the prior
year quarter. The increase in digital product sales was primarily
attributable to higher volumes of digital capture equipment, digital
media and services and favorable exchange, partially offset by
negative price/mix.
Traditional products and services revenues:
Net worldwide sales of traditional products, including analog
film, equipment, chemistry and services, decreased 3% in the third
quarter of 2003 as compared with the third quarter of 2002 driven
primarily by lower volumes and negative price/mix for traditional
products.
Gross profit:
Gross profit for the Health Imaging segment was $250 million for
the third quarter of 2003 as compared with $246 million in the prior
year quarter, representing an increase of $4 million, or 2%. The gross
profit margin was 43.8% in the current quarter as compared with 43.5%
in the third quarter of 2002. The increase in the gross profit margin
of 0.3 percentage points was principally attributable to:
-- Manufacturing Cost: a decrease in manufacturing cost increased
gross profit margins by approximately 2.0 percentage points,
primarily due to favorable manufacturing and service
productivity.
-- Price/Mix: Price/mix negatively impacted gross profit margins
by approximately 3.0 percentage points due to lower prices for
digital media, digital capture equipment and analog medical
film.
-- Exchange: favorable exchange added 1.0 percentage point to the
gross profit rate.
SG&A:
SG&A expenses for the Health Imaging segment increased $7 million,
or 9%, from $82 million in the third quarter of 2002 to $89 million
for the current quarter, and increased as a percentage of sales from
14.6% to 15.6%. The increase in SG&A expenses is primarily
attributable to the unfavorable effects of foreign exchange and
increased spending to drive growth.
R&D:
Third quarter R&D costs increased $6 million from $37 million to
$43 million and increased as a percentage of sales from 6.6% for the
third quarter of 2002 to 7.5% for the current quarter. R&D expenses
increased in the third quarter as the segment increased spending to
drive growth in selected areas of the product portfolio.
EFO:
Earnings from operations for the Health Imaging segment decreased
$9 million, or 7%, from $126 million for the prior year quarter to
$117 million for the third quarter of 2003 while the operating
earnings margin rate decreased 1.8 percentage points to 20.5% from
22.3% for the prior year quarter. The decrease in operating earnings
is attributable to the reasons described above.
Commercial Imaging
Revenues:
Net worldwide sales for the Commercial Imaging segment were $373
million for the third quarter of 2003 as compared with $352 million
for the prior year quarter, representing an increase of $21 million,
or 6% as reported, or an increase of 3% excluding the favorable impact
of exchange. The increase in net sales was primarily comprised of:
-- Volume: increases in volume contributed approximately 5.0
percentage points to third quarter sales driven by Imaging
Services and document scanners.
-- Price/Mix: price/mix negatively impacted sales by
approximately 2.0 percentage points driven by graphics
products.
-- Exchange: favorable exchange contributed approximately 3.0
percentage points to third quarter sales.
Net sales in the U.S. were $223 million for the current year
quarter as compared with $200 million for the prior year quarter,
representing an increase of $23 million, or 12%. Net sales outside the
U.S. were $150 million in the third quarter of 2003 as compared with
$152 million for the prior year quarter, representing a decrease of $2
million or 1% as reported, a decrease of 7% excluding the favorable
impact of exchange.
Net worldwide sales of graphic arts products to Kodak Polychrome
Graphics ("KPG"), an unconsolidated joint venture affiliate in which
the Company has a 50% ownership interest, decreased 14% in the current
quarter as compared with the third quarter of 2002, primarily
reflecting volume and negative price/mix in graphic arts film. This
reduction resulted largely from digital technology transition and the
effect of continuing economic weakness in the commercial printing
market.
Despite continued weakness in the global economy, KPG's earnings
performance continues to improve driven primarily by its leading
position in the growth segments of digital proofing and digital
printing plates, coupled with favorable foreign exchange. KPG's
operating profit has been positive for 13 consecutive quarters and
continued to contribute positively to Kodak's "Other Charges" during
the third quarter of 2003.
NexPress, the unconsolidated joint venture between Kodak and
Heidelberg in which the Company has a 50% ownership interest,
continues to experience good customer acceptance on its sales of
NexPress 2100 Digital Production Color Presses despite a weak printing
market, with average monthly page volumes for these units running
higher than planned.
Gross profit:
Gross profit for the Commercial Imaging segment was $93 million
for the third quarter of 2003 as compared with $109 million in the
prior year quarter, representing a decrease of $16 million, or 15%.
The gross profit margin was 24.9% in the current quarter as compared
with 31.0% in the prior year quarter. The decrease in the gross profit
margin of 6.1 percentage points was primarily attributable to:
-- Price/Mix: declines due to price/mix reduced gross profit
margins by approximately 1.5 percentage point driven by
graphics products.
-- Manufacturing Cost: an increase in manufacturing cost reduced
gross profit margins by approximately 4.0 percentage points.
-- Exchange: unfavorable exchange reduced gross profit margins by
approximately .5 percentage point.
SG&A:
SG&A expenses for the Commercial Imaging segment remained
unchanged at $49 million for the current quarter as compared with the
third quarter of 2002, but decreased as a percentage of sales from
13.9% to 13.1%.
R&D:
Third quarter R&D costs for the Commercial Imaging segment
decreased $7 million, or 39%, from $18 million in the third quarter of
2002 to $11 million for the current quarter, and decreased as a
percentage of sales from 5.1% to 2.9% in the current quarter.
EFO:
Earnings from operations for the Commercial Imaging segment
decreased $9 million, or 21%, from $42 million in the third quarter of
2002 to $33 million in the current quarter primarily as a result of
declining margin contributions from traditional graphic arts products.
All Other
Revenues:
Net worldwide sales for All Other were $28 million for the third
quarter of 2003 as compared with $26 million for the third quarter of
2002, representing an increase of $2 million, or 8%.
SK Display Corporation, the OLED manufacturing joint venture
between Kodak and Sanyo, continues production scale-up with the goal
of supplying production quantity OLED screens to the marketplace
throughout the remainder of 2003.
EFO:
The loss from operations for All Other was $19 million in the
current quarter as compared with the loss from operations of $8
million in the third quarter of 2002 primarily driven by increased
levels of investment for Kodak's Display business.
Balance Sheet:
Cash Flow:
Kodak defines free cash flow as net cash provided by continuing
operations, (as determined under generally accepted accounting
principles in the U.S.- U.S. GAAP), plus proceeds from the sale of
assets minus capital expenditures, acquisitions and investments in
unconsolidated affiliates. Kodak's definition of operating cash flow
equals free cash flow less dividends.
Operating cash flow during the third quarter of 2003 was positive
$243 million, $102 million lower than the positive $345 million
generated in the year ago quarter. This variance can be attributed
primarily to lower earnings from continuing operations. With third
quarter operating cash flow of $243 million and a $258 million
dividend payment in July 2003, free cash flow for the third quarter
2003 was equal to $501 million.
Net cash provided by (used in) continuing operations, investing
activities and financing activities, as determined under GAAP in the
third quarter of 2003 were $610 million, ($108) million and ($360)
million, respectively. The table below reconciles the net cash
provided by continuing operations as determined under U.S. GAAP to
Kodak's definition of operating cash flow for the third quarter of
2003:
($ millions)
- ----------------------------------------------------------------
Net cash provided by continuing operations $610
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Additions to properties (117)
- ----------------------------------------------------------------
Net proceeds from sales of businesses / assets 21
- ----------------------------------------------------------------
Acquisitions, net of cash acquired -
- ----------------------------------------------------------------
Investments in unconsolidated affiliates (13)
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Free cash flow (continuing operations) 501
- ----------------------------------------------------------------
Dividends (258)
- ----------------------------------------------------------------
Operating cash flow (continuing operations) $243
- ----------------------------------------------------------------
The Company previously provided guidance for full year, 2003
operating cash flow (before acquisitions) of approximately $500
million. Kodak's current estimate for operating cash flow (before
acquisitions) is approximately $700 million for full year 2003,
reflecting improved earnings and the recently announced change in
dividend payment. (Reconciliation to comparable GAAP measure can be
found at www.kodak.com.)
Dividend:
The Company has a dividend policy whereby it makes semi-annual
payments, which, when declared, will be paid on the Company's 10th
business day each July and December to shareholders of record on the
first business day of the preceding month. On April 15, 2003, the
Company's Board of Directors declared a semi-annual cash dividend of
$0.90 per share on the outstanding common stock of the Company. This
dividend was paid on July 16, 2003 to shareholders of record at the
close of business on June 2, 2003.
On September 24, 2003, the Company's Board of Directors voted to
reduce the amount of the annual dividend to $0.50 per share. On that
same date, the Company's Board of Directors declared a semi-annual
cash dividend of $0.25 per share on the outstanding common stock of
the Company. This dividend will be paid on December 12, 2003 to
shareholders of record at the close of business on November 3, 2003.
Capital Spending:
Capital additions were $117 million in the third quarter of 2003,
which is $38 million lower than the year ago quarter and $8 million
lower quarter sequentially. The majority of the spending supported new
products, manufacturing productivity and quality improvements,
infrastructure improvements and ongoing environmental and safety
initiatives.
Receivables:
Days sales outstanding (DSO) of 43 days decreased approximately 7
days from third quarter, 2002 and decreased approximately 2 days
quarter sequentially. The DSO calculation includes the impact of
reclassifying rebates as an offset to receivables for the last four
quarters. Excluding the impact of rebate reclassification, the
operational improvement in DSO was 3 days year over year and unchanged
quarter sequentially. Kodak defines DSO: 4 quarter moving average net
trade receivables after rebate reclassification, divided by 12 months
of sales, multiplied by 365 days. Total receivables of $2.340 billion
comprised of trade ($2.011 billion) and miscellaneous ($329 million)
receivables at the end of the third quarter, 2003, increased $39
million from third quarter of 2002. This increase is driven by higher
sales in the third quarter and the impact of foreign exchange,
somewhat offset by a reduction in past due receivables. Accrued
customer rebates are classified as miscellaneous payables, however,
the majority of these are cleared through customer deductions. The
effect of offsetting these accrued customer rebates would reduce the
trade receivable balance by $488 million to $1.523 billion at the end
of the third quarter of 2003, and would reduce the trade receivable
balance by $338 million to $1.677 billion at the end of the third
quarter of 2002. Therefore, this results in a net trade receivables
reduction of $154 million.
Inventory:
Days supply in inventory (DSI) improved by 4 days from the third
quarter 2002 and by over 2 days quarter sequentially. Inventory turns
improved by 0.2 turns to 5.7 turns since the end of the second quarter
2003. The DSI calculation is based on inventory before the LIFO
reserve. Including the impact of the LIFO reserve, DSI improved by
almost 1 day from the third quarter of 2002 and improved by over 1 day
quarter sequentially; inventory turns improved slightly at 7.5 turns
relative to the second quarter of 2003.
DSI is defined as four-quarter average inventory before the LIFO
reserve divided by 12 months COGS as reported, multiplied by 365 days.
Kodak defines inventory turns as 12 months COGS as reported divided by
four quarter average inventory before the LIFO reserve.
Kodak's inventories (after LIFO) increased $32 million year over
year and increased $12 million quarter sequentially.
Debt
Debt decreased by $100 million to $2.890 billion and cash
increased by $145 million to $983 million quarter sequentially. On a
debt less cash basis, net debt was $1.907 billion, a decrease of $274
million from third quarter, 2002 levels of $2.181 billion.
In October, 2003, the Company completed a $1.075 billion bond
offering made up of $500 million of 7.25% senior notes due 2013 and
$575 million of 3.375% convertible senior notes due 2033. The Company
has the right to call the convertible notes on or after 7 years and
holders of the notes have the right to put them at various times on or
after 7 years. The securities contain a number of conversion features,
which include substantive contingencies. The holders may convert their
securities, in whole or in part, into shares of the Company's common
stock under certain circumstances that are outlined in the Company's
Form 10-Q. Proceeds will be used to reduce the Company's commercial
paper balances and partially fund the acquisition of PracticeWorks
that was completed in October.
Equity amounted to $2.924 billion, an increase of $70 million
quarter sequentially, primarily due to earnings, offset by the
declaration of the semi-annual dividend in the third quarter, payable
in the fourth quarter.
Debt to total capital ratio was 49.7%, decreasing 1.5 percentage
points quarter sequentially and increasing 5 percentage points year
over year.
Foreign Exchange:
Year over year, the impact of foreign exchange on operating
activities during the third quarter was a positive $0.12 per share
whereas foreign exchange activities recorded in "Other Charges" had a
negative $0.01 per share impact. Therefore, the sum of the operational
and reportable exchange impacts increased earnings in the quarter by
$0.11 per share.
Earnings Outlook:
The Company expects full year operational earnings of $2.10 to
$2.20 per share and GAAP earnings of $1.15 to $1.30 per share.
Investment in China:
Kodak and China Lucky Film Corporation have signed a 20-year
agreement intended to expand each other's market opportunities. As
part of the agreement, Kodak will acquire 20% of Lucky Film
Corporation. Kodak estimates that the cost of the transaction will
total approximately $100 million in cash plus other assets, with the
majority of the cash outlay occurring in 2004.
Upcoming Meetings:
Kodak will host an investor function for members of the investment
community who will be attending the upcoming RSNA trade show in
Chicago. This function will be held on Tuesday, December 2, 2003 at
McCormick Place. Please contact Kodak Investor Relations for
additional details.
Safe Harbor Statement:
Operational items are non-GAAP financial measures as defined by
the Securities and Exchange Commission's final rules under "Conditions
for Use of Non-GAAP Financial Measures."
Certain statements in this press release may be forward looking in
nature, or "forward-looking statements" as defined in the United
States Private Securities Litigation Reform Act of 1995. For example,
references to the Company's 2003 revenue, earnings, cash flow
expectations and future focused cost reductions are forward-looking
statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent estimates as of October 22, 2003, and should not
be relied upon as representing estimates as of any subsequent date.
While the Company may elect to update forward-looking statements at
some point in the future, we specifically disclaim any obligation to
do so, even if estimates change. Forward-looking statements are
subject to a number of risk factors, including the successful:
-- Implementation of the Company's growth strategy as outlined on
September 25, 2003
-- Implementation of product strategies (including category
expansion, digitization, OLED, and digital products);
-- Implementation of intellectual property licensing
strategies;
-- Development and implementation of e-commerce strategies;
-- Completion of information systems upgrades, including SAP;
-- Completion of various portfolio actions;
-- Reduction of inventories;
-- Improvement in manufacturing productivity;
-- Improvement in receivables performance;
-- Reduction in capital expenditures;
-- Improvement in supply chain efficiency;
-- Implementation of future focused cost reductions,
including personnel reductions;
-- Development of the Company's business in emerging markets
like China, India, Brazil, Mexico, and Russia.
-- Development of efficient manufacturing techniques for new
products.
The forward-looking statements contained in this press release are
subject to the following additional risk factors:
-- Inherent unpredictability of currency fluctuations and raw
material costs;
-- Competitive actions, including pricing;
-- The nature and pace of technology substitution, including the
analog-to-digital shift;
-- Continuing customer consolidation and buying power;
-- General economic, geopolitical, public health and business
conditions.
-- Other factors disclosed previously and from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this press release should be
evaluated in light of these important risk factors.
CONTACT: Eastman Kodak Company
Media Contacts:
Gerard Meuchner, 585-724-4513
gerard.meuchner@kodak.com
Anthony Sanzio, 585-781-5481
anthony.sanzio@kodak.com
or
Investor Relations Contacts:
Don Flick, 585/724-4352
donald.flick@kodak.com
Patty Yahn-Urlaub, 585/724-4683
patty.yahn-urlaub@kodak.com
Roberto Trevino, 585/724-6791
roberto.trevino@kodak.com