1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-87
EASTMAN KODAK COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 16-0417150
(State of incorporation) (IRS Employer
Identification No.)
343 STATE STREET, ROCHESTER, NEW YORK 14650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 716-724-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class March 31, 1999
Common Stock, $2.50 par value 321,709,990
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share data)
First Quarter
1999 1998
Sales $3,100 $2,911
Cost of goods sold 1,869 1,585
------ ------
Gross profit 1,231 1,326
Selling, general and
administrative expenses 746 753
Research and development costs 207 223
------ -----
Earnings from operations 278 350
Interest expense 30 24
Other income (charges) 41 15
------ -----
Earnings before income taxes 289 341
Provision for income taxes 98 116
------ -----
NET EARNINGS $ 191 $ 225
====== =====
Basic earnings per share $ .59 $ .70
====== =====
Diluted earnings per share $ .59 $ .69
====== =====
Earnings used in basic and
diluted earnings per share $ 191 $ 225
Number of common shares used in
basic earnings per share 322.2 323.0
Incremental shares from
assumed conversion of options 3.0 3.4
------ -----
Number of common shares used in
diluted earnings per share 325.2 326.4
====== =====
CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
Retained earnings at beginning
of period $6,163 $5,343
Net earnings 191 225
Cash dividends declared (142) (142)
------ ------
Retained Earnings
at end of period $6,212 $5,426
====== ======
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The accompanying notes are an integral part of these financial statements.
3
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
March 31, Dec. 31,
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 338 $ 457
Marketable securities 46 43
Receivables 2,497 2,527
Inventories 1,453 1,424
Deferred income tax charges 870 855
Other 350 293
------- -------
Total current assets 5,554 5,599
------- -------
PROPERTIES
Land, buildings and equipment at cost 13,333 13,482
Less: Accumulated depreciation 7,555 7,568
------- -------
Net properties 5,778 5,914
------- -------
OTHER ASSETS
Goodwill (net of accumulated amortization
of $594 and $534) 1,103 1,232
Long-term receivables and other
noncurrent assets 1,790 1,705
Deferred income tax charges 280 283
------- -------
TOTAL ASSETS $14,505 $14,733
======= =======
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payables $ 3,448 $ 3,906
Short-term borrowings 1,863 1,518
Taxes - income and other 699 593
Dividends payable 142 142
Deferred income tax credits 16 19
------- -------
Total current liabilities 6,168 6,178
OTHER LIABILITIES
Long-term borrowings 481 504
Postemployment liabilities 2,952 2,962
Other long-term liabilities 958 1,032
Deferred income tax credits 71 69
------- -------
Total liabilities 10,630 10,745
SHAREHOLDERS' EQUITY
Common stock at par* 978 978
Additional paid in capital 898 902
Retained earnings 6,212 6,163
Accumulated other comprehensive loss (193) (111)
------- -------
7,895 7,932
Less: Treasury stock at cost* 4,020 3,944
------- -------
Total shareholders' equity 3,875 3,988
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,505 $14,733
======= =======
* Common stock: $2.50 par value, 950 million shares authorized,
391 million shares issued at March 31, 1999 and December 31,
1998. Treasury stock at cost consists of approximately 70
million shares at March 31, 1999 and 68 million shares at
December 31, 1998.
Total comprehensive income was $109 million and $214 million for
the quarters ended March 31, 1999 and March 31, 1998,
respectively.
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The accompanying notes are an integral part of these financial
statements.
4
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
First Quarter
1999 1998
Cash flows from operating activities:
Net earnings $ 191 $ 225
Adjustments to reconcile to
net cash used in operating activities:
Depreciation and amortization 229 194
Asset impairment and other charges 103 -
(Benefit) provision for deferred taxes (13) 4
Loss on sale/retirement of properties 3 15
(Increase) decrease in receivables (38) 46
Increase in inventories (95) (207)
Decrease in liabilities excluding borrowings (311) (296)
Other items, net (179) (119)
------ ------
Total adjustments (301) (363)
------ ------
Net cash used in operating activities (110) (138)
------ ------
Cash flows from investing activities:
Additions to properties (135) (153)
Proceeds from sale of assets 13 6
Acquisitions, net of cash acquired - (228)
Cash flows related to sales of businesses (12) -
Marketable securities - purchases (26) -
Marketable securities - sales 25 -
------ ------
Net cash used in investing activities (135) (375)
------ ------
Cash flows from financing activities:
Net increase in borrowings
with original maturity of
90 days or less 362 510
Proceeds from other borrowings 329 264
Repayment of other borrowings (337) (321)
Dividends to shareholders (142) (143)
Exercise of employee stock options 6 13
Stock repurchases (86) (47)
------ ------
Net cash provided by financing activities 132 276
------ ------
Effect of exchange rate changes on cash (6) (2)
------ ------
Net decrease in cash and cash equivalents (119) (239)
Cash and cash equivalents, beginning of year 457 728
------ ------
Cash and cash equivalents, end of quarter $ 338 $ 489
====== ======
The following transactions are not reflected in the Consolidated
Statement of Cash Flows:
(in millions)
First Quarter
1999 1998
Liabilities assumed in acquisitions $ - $136
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The accompanying notes are an integral part of these financial statements.
5
Eastman Kodak Company and Subsidiary Companies
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company in
accordance with the accounting policies stated in the 1998 Annual Report
and should be read in conjunction with the Notes to Financial Statements
appearing therein. In the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation have been included in the financial statements. Certain
reclassifications of 1998 financial statement and related footnote amounts
have been made to conform with the 1999 presentation. The financial
statements are based in part on estimates and have not been audited by
independent accountants. Independent accountants will audit the annual
statements.
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NOTE 2: COMMITMENTS AND CONTINGENCIES
The Company and its subsidiary companies are involved in lawsuits, claims,
investigations and proceedings, including product liability, commercial,
environmental, and health and safety matters, which are being handled and
defended in the ordinary course of business. There are no such matters
pending that the Company and its General Counsel expect to be material in
relation to the Company's business, financial position or results of
operations. Refer to Item 1, Legal Proceedings, on page 20.
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NOTE 3: DIVESTITURES
The Company and Heidelberger Druckmaschinen AG ("Heidelberg") announced on
March 17, 1999 an agreement under which Kodak will sell its digital
printer, copier-duplicator, and roller assembly operations primarily
associated with its Office Imaging business to Heidelberg, which will
include operations in Rochester, NY, Muehlhausen, Germany and Tijuana,
Mexico. The transaction is expected to be completed in May 1999 but will
be effective as of April 1, 1999, as all economic benefit and risk transfer
to the buyer on that date. The transaction will not have a material effect
on the Company's 1999 earnings.
The Company and Heidelberg also announced an agreement to expand their
joint venture company, NexPress, to include the black-and-white
electrophotographic business. The Company will contribute research and
development resources to NexPress, as well as its toner and developer
operations in Rochester and Kirkby, England. Kodak and Heidelberg
established the NexPress joint venture in September 1997 for the purpose of
developing and marketing new digital color printing solutions for the
graphic arts industry. In connection with these arrangements, the Company
will serve as a supplier both to Heidelberg and NexPress for consumables
such as photoconductors and raw materials for toner/developer
manufacturing.
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NOTE 4: SUBSEQUENT EVENT
On April 15, 1999 the Board of Directors authorized a new stock repurchase
program for up to $2 billion of the Company's outstanding common stock.
The Company plans to buy shares on the open market from time to time,
depending on market conditions, and expects to complete this repurchase
program over no more than a four-year period.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
(in millions, except per share data)
First Quarter
1999 1998 Change
Sales $3,100 $2,911 + 6%
Earnings from operations 278 350 -21
Net earnings 191 225 -15
Basic earnings per share .59 .70 -16
Diluted earnings per share .59 .69 -14
1999
Sales for the first quarter were positively impacted by strong volume gains
for consumer films in both the U.S. and worldwide and a return to sales
growth in a number of emerging markets. Net earnings for the first quarter
were reduced by after-tax charges totaling $68 million or $.21 per share
related to portfolio adjustments to exit non-strategic or under-performing
businesses and product lines. Excluding these charges, first quarter net
earnings were $259 million or $.80 per share as compared to $237 million or
$.73 per share in the prior period, excluding an after-tax charge of $12
million for a litigation settlement.
Portfolio actions taken by the Company in the first quarter resulted in the
following charges: (1) A pre-tax charge of $51 million ($34 million after-
tax) as a result of the Company's decision to exit the Eastman Software
business. This charge consisted of amounts recorded for impaired assets,
including goodwill ($39 million) and severance payments to restructure the
operation prior to sale ($12 million). (2) A pre-tax charge of $32 million
($21 million after-tax) to write down existing inventories to net
realizable value, fund employee severance payments and provide for other
contractual obligations associated with the Company's decision to exit the
Entertainment Imaging sticker print kiosk product line. (3) A pre-tax
charge of $20 million ($13 million after-tax) for the write-off of an
investment in CalComp Corporation relating to the development of a
particular ink-jet printing technology which was determined to be
unrecoverable.
During the first quarter, the Company also announced an agreement to sell
its digital printer, copier/duplicator and roller assembly operations
primarily associated with the Office Imaging business to Heidelberg
effective April 1, 1999 (see Note 3, Divestitures). In addition, the
Company announced a new stock repurchase program for up to $2 billion of
the Company's outstanding common stock (see Note 4, Subsequent Event).
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8
Sales by Operating Segment
(in millions)
First Quarter
1999 1998 Change
Consumer Imaging
Inside the U.S. $ 677 $ 601 +13%
Outside the U.S. 792 810 - 2
------ ------ ---
Total Consumer Imaging 1,469 1,411 + 4
------ ------ ---
Kodak Professional
Inside the U.S. 166 176 - 6
Outside the U.S. 283 267 + 6
------ ------ ---
Total Kodak Professional 449 443 + 1
------ ------ ---
Health Imaging
Inside the U.S. 221 161 +37
Outside the U.S. 300 209 +44
------ ------ ---
Total Health Imaging 521 370 +41
------ ------ ---
Other Imaging
Inside the U.S. 324 371 -13
Outside the U.S. 337 316 + 7
------ ------ ---
Total Other Imaging 661 687 - 4
------ ------ ---
Total Sales $3,100 $2,911 + 6%
====== ====== ===
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Earnings (loss) from Operations by Operating Segment
(in millions)
First Quarter
1999 1998 Change
Consumer Imaging $141 $ 94 +50%
Percent of Sales 9.6% 6.7%
Kodak Professional $ 62 $ 72 -14%
Percent of Sales 13.8% 16.3%
Health Imaging $100 $ 96 + 4%
Percent of Sales 19.2% 25.9%
Other Imaging $(25) $ 88
Percent of Sales (3.8%) 12.8%
---- ---- ---
Total Earnings from Operations $278 $350 -21%
==== ==== ====
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Net Earnings (Loss) by Operating Segment
(in millions)
First Quarter
1999 1998 Change
Consumer Imaging $105 $ 70 +50%
Percent of Sales 7.1% 5.0%
Kodak Professional $ 52 $ 48 + 8%
Percent of Sales 11.6% 10.8%
Health Imaging $ 67 $ 54 +24%
Percent of Sales 12.9% 14.6%
Other Imaging $(16) $ 66
Percent of Sales (2.4%) 9.6%
---- ------ ---
Total of segments $208 $238 -13%
Percent of Sales 6.7% 8.2%
Interest expense (30) (24)
Corporate interest income 4 4
Income tax effects on
above items and taxes
not allocated to
segments 9 7
---- ----
Total Net Earnings $191 $225
==== ====
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COSTS AND EXPENSES
(in millions)
First Quarter
1999 1998 Change
Gross profit $1,231 $1,326 - 7%
Percent of Sales 39.7% 45.6%
Selling, general and
administrative expenses $ 746 $ 753 - 1%
Percent of Sales 24.1% 25.9%
Research and development costs $ 207 $ 223 - 7%
Percent of Sales 6.7% 7.7%
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1999 COMPARED WITH 1998
First Quarter
Consolidated
First quarter 1999 sales increased 6% compared with the first quarter of
1998, driven primarily by higher unit volumes, particularly in consumer
films, papers and digital cameras, and the inclusion of sales from the
medical imaging business acquired from Imation. These factors were only
partially offset by lower effective selling prices, declines in the Office
Imaging business and the divestiture of certain elements of Consumer
Imaging's retail operations in 1998. Currency changes against the dollar
favorably affected sales by $34 million in the first quarter of 1999
compared with the first quarter of 1998.
10
Sales in emerging markets, which account for about 17% of the Company's
sales, were down 1%. Sales were strong in China, Korea, Mexico and India,
but declines were experienced in Russia, Brazil and Taiwan. China sales in
particular benefited from ongoing share gains in the market as well as the
expansion of distribution into additional geographies within the country.
Gross profit decreased 7%, from 45.6% of sales to 39.7% of sales.
Excluding the portfolio adjustments discussed above, gross profit margins
declined from 45.6% to 42.7% year over year, while remaining essentially
flat on a quarter sequential basis. The largest contributors to this year
over year margin decline were lower prices, increased goodwill
amortization, and the integration of the lower-margin medical imaging
business acquired from Imation, partially offset by increased manufacturing
productivity.
Selling, general and administrative (SG&A) expenses decreased 1%, from
25.9% of sales to 24.1% of sales. Excluding the portfolio adjustments
discussed above, SG&A expenses decreased 3%, from 25.9% of sales to 23.7%
of sales. These reductions reflect continued cost reduction efforts and
the impact of approximately $25 million in advertising costs associated
with the winter Olympics recorded in the first quarter of 1998, partially
offset by additional SG&A costs associated with the Imation acquisition.
Research and development (R&D) expenses decreased 7%, from 7.7% of sales to
6.7% of sales, due to employment reductions and productivity improvements.
Earnings from operations decreased 21% from the prior year period.
Excluding the $103 million of charges for portfolio adjustments, earnings
from operations were $381 million for the 1999 first quarter, an increase
of 9% compared with $350 million during the first quarter of 1998.
Earnings from operations benefited from the first quarter revenue growth
and cost savings resulting from R&D, SG&A and manufacturing productivity,
partially offset by lower effective selling prices and increased goodwill
amortization.
Other income increased from $15 million to $41 million from the prior year
period. Excluding the litigation settlement charge recorded in 1998, other
income increased 24% from $33 million to $41 million primarily as a result
of a higher earnings contribution from the Kodak Polychrome Graphics joint
venture and the favorable effects of foreign exchange. Interest expense
increased 25% from the prior year period to $30 million, as a result of
higher average borrowings.
Net earnings decreased 15% to $191 million from $225 million a year ago.
Excluding the $68 million of after-tax charges for portfolio adjustments in
1999 and the litigation charge in 1998, net earnings increased 9% to $259
million from $237 million a year ago, primarily as a result of increases in
earnings from operations. The effective tax rate was 34% in the first
quarter of both 1999 and 1998.
11
Net savings under the Company's $1.2 billion cost reduction program totaled
approximately $80 million in the first quarter of 1999, essentially even
with the fourth quarter 1998 savings. While the Company achieved
manufacturing productivity during the quarter, improvements in SG&A and R&D
accounted for more than half of the net cost savings. The net cost
performance for the Company in the first quarter was impacted by planned
increases in spending in a number of investment areas, notably
manufacturing operations in China, the Imation acquisition integration, the
Enterprise Resource Planning systems installation and digitization
initiatives. The Company anticipates achieving a full year net cost
savings of $470 million in 1999, to bring the total two-year savings under
this program to $1.2 billion.
Headcount at March 31, 1999 was approximately 83,000, down from 86,200 at
year-end 1998 and 8,000 lower than at March 31, 1998. During the first
quarter of 1999, approximately 1,500 employees left the Company under the
1996 and 1997 restructuring programs. The balance of the reduction from
year-end 1998 is the net effect of adding former Imation staff, seasonal
staffing reductions in the photofinishing business and separations in the
Office Imaging business. The transfer of approximately 1,500 Office
Imaging employees to Heidelberg and NexPress will occur in the second
quarter in connection with the sale of the business. Since the beginning
of the fourth quarter of 1997, approximately 14,200 employees have left the
Company under the 1996 and 1997 restructuring programs.
Consumer Imaging
Sales in the Consumer Imaging segment increased 4% from the prior year
first quarter. Excluding the sales of divested retail operations worldwide
which were included in the year-ago comparison, sales increased 8%. Sales
inside the U.S. increased 13% as reported, and increased 22% after
excluding divested operations, while sales outside the U.S. decreased 2%.
Worldwide sales gains for the segment are attributed to a number of
positive factors. Worldwide film sales increased 9%, reflecting 12% volume
increases which were partially offset by a 4% price decline and the
favorable effects of foreign currency rate changes. U.S. film sales
increased 17%, reflecting volume growth of 28%, partially offset by an 8%
year-over-year decline in selling prices. On a sequential basis, U.S.
consumer film prices have increased somewhat since the fourth quarter of
1998. U.S. sales to dealers were influenced by the comparison with the
year-ago quarter, when sales and volumes declined by 18%. While all three
categories of film (35mm, Advantix, One Time Use) grew in the current year
quarter, the largest percentage increases were reported by Advantix and One
Time Use. Outside the U.S., film sales increased 3%, reflecting 5% volume
gains and the favorable effects of foreign currency rate changes, partially
offset by lower effective selling prices.
Worldwide Advantix film sales increased 60%, as higher unit volumes and the
favorable effects of foreign currency rate changes were only partially
offset by lower effective selling prices. U.S. sales increased 46%, as
higher unit volumes were partially offset by lower effective selling
prices. Outside the U.S., sales increased 80%, as higher unit volumes and
the favorable effects of foreign currency rate changes were partially
offset by lower effective selling prices.
12
Worldwide color paper sales increased 8%, reflecting 10% volume growth and
the favorable effects of foreign currency rate changes which were partially
offset by lower effective selling prices. U.S. color paper sales were
particularly strong, up 17% both in sales and volumes on essentially flat
prices. Outside the U.S., color paper sales were up 4%, with 7% volume
gains partially offset by a combination of lower price and positive foreign
exchange.
SG&A expenses for the segment decreased 9%, from 32.0% of sales to 27.9% of
sales. Excluding advertising expenses, SG&A expenses decreased 7%, from
23.0% of sales to 20.7% of sales. Research and development expenses
decreased 9%, from 6.6% of sales to 5.8% of sales.
Earnings from operations and net earnings for the segment increased 50%, as
higher unit volumes, manufacturing productivity and the favorable effects
of foreign currency rate changes were partially offset by lower effective
selling prices. The improved earnings contribution for the segment was
driven largely by Advantix film, worldwide photofinishing operations and
color paper.
Kodak Professional
Sales in the Kodak Professional segment increased 1%, driven primarily by
higher unit volumes in graphics, commercial digital capture and portrait
and social businesses. Sales inside the U.S. decreased 6%, while sales
outside the U.S. increased 6%. Growth in the segment was led by the
successful launch of the new Portra family of films and papers and strong
sales of high-end digital cameras.
SG&A expenses decreased 8%, from 20.5% of sales to 18.7% of sales.
Excluding advertising expenses, SG&A expenses decreased 9%, from 18.3% of
sales to 16.5% of sales. Research and development expenses decreased 9%,
from 10.4% of sales to 9.4% of sales.
Earnings from operations decreased 14% from the prior year period.
Excluding the charge associated with the ink-jet investment, earnings from
operations for the segment increased 14% from the first quarter of 1998 as
a result of manufacturing productivity and the positive impact of lower
SG&A and R&D, reflecting continued cost reduction efforts. Net earnings
for the segment increased 8% from the first quarter of 1998. Excluding the
ink-jet investment charge, net earnings increased 35% as a result of a
higher earnings contribution from the Kodak Polychrome Graphics joint
venture.
Health Imaging
Sales in the Health Imaging segment increased 41% from the first quarter of
1998. Excluding the impact of the acquired Imation medical business,
worldwide sales were up 4% as higher unit volumes were partially offset by
lower effective selling prices. Sales inside the U.S. increased 37%, while
sales outside the U.S. increased 44%.
Worldwide analog film sales increased 3%, reflecting volume growth of 9%
partially offset by lower effective selling prices. In the U.S., analog
film sales decreased 11%, due to lower effective selling prices. Outside
the U.S., analog film sales increased 11%, reflecting 13% volume gains,
partially offset by a 4% price/mix decline and slightly positive exchange.
13
SG&A expenses increased 58%, from 19.2% of sales to 21.5% of sales,
primarily due to the inclusion of the Imation medical imaging business
which carries a higher average SG&A rate compared with the Kodak Health
Imaging business. Excluding advertising expenses, SG&A expenses increased
59%, from 18.4% of sales to 20.7% of sales. Research and development
expenses decreased 11%, from 7.3% of sales to 5.8% of sales.
Earnings from operations increased 4%, largely due to sales volume
increases which were partially offset by price declines and the inclusion
of the lower-margin Imation medical imaging business. Excluding from 1998
an after-tax charge of $12 million for litigation, net earnings increased
2%.
Other Imaging
Sales in the Other Imaging segment decreased 4% from the first quarter of
1998, as higher unit volumes in Digital & Applied Imaging and Business
Imaging Systems were more than offset by volume declines in the Office
Imaging business, as well as slight sales declines in Entertainment
Imaging. Sales inside the U.S. decreased 13%, while sales outside the U.S.
increased 7%. Sales in Business Imaging Systems increased, due to strong
growth in the document scanner and services businesses. In addition, sales
of high volume digital cameras more than doubled compared to the prior year
first quarter.
SG&A expenses increased 1%, from 20.2% of sales to 21.2% of sales.
Excluding advertising expenses and the severance charges recorded for the
Eastman Software business, SG&A expenses decreased 6%, from 17.8% of sales
to 17.4% of sales. Research and development expenses decreased 12%, from
8.3% of sales to 7.6% of sales.
Earnings from operations for the segment declined $113 million, to a loss
of $25 million, primarily due to the charges associated with exiting the
Eastman Software business and sticker print kiosk product line. Excluding
these charges, earnings from operations decreased 34%, due to significant
declines in the Office Imaging business, earnings declines in Entertainment
Imaging as a result of lower sales from a general industry slow-down and a
lower earnings contribution in Digital & Applied Imaging principally due to
increased digital camera costs associated with the increased value of the
yen, higher expenditures in support of market growth and lower average
camera prices. Excluding portfolio adjustments, net earnings decreased
41%, primarily due to lower earnings from operations as discussed above.
Completing the planned exit from the Eastman Software business would
provide a positive impact to Other Imaging segment earnings post exit, as
it contributed an $18 million loss in the first quarter. In the interim,
restructuring actions taken by the Company in the first quarter are
expected to reduce its quarterly loss going forward.
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14
YEAR 2000
In 1996, the Company established a formal global program office to assess
the impact of the Year 2000 issue on the software and hardware utilized in
the Company's internal operations and included in its product offerings to
customers. The assessment addresses software applications, systems
software, information technology (IT) infrastructure, embedded
manufacturing control technology, and products and services.
Representatives of the global program office and operating divisions meet
monthly with the Chief Financial Officer to monitor program status and
address issues. In June 1998, an independent third party completed a
comprehensive review of the Company's overall Year 2000 program. Since
October 1998, senior line management has presented status reports to the
Board of Directors on a bi-monthly basis.
The project phases include: inventorying affected technology and assessing
the impact of the Year 2000 issue; developing solution plans; modification;
testing and certification; implementation; and developing contingency
plans. All components of software and hardware of the Company are
presently in various phases. The Company expects to have its mission-
critical IT systems and server infrastructure, along with the manufacturing
control systems, tested and fully compliant by mid-year 1999. The Company
also expects that actively supported products and services, which are
presently in the first five phases, will be compliant by the end of August
1999. The product commercialization process has been modified so that it
will produce compliant products.
During the first quarter of 1999, the project team continued to increase
its global mission-critical IT compliance, used mainframe test facilities
to simulate remaining mission-critical formal applications, completing a
large portion of remediation and solution plans for the Company's U.S.
server network, and allocated resources to support the remaining 1999
workplan. The business unit project teams continue to make significant
progress in remediation of products and services, and in compliance of
operating divisions and third parties.
The Company relies on third-party suppliers for many systems, products and
services including telecommunications and data center support. The Company
will be adversely impacted if these suppliers do not make necessary changes
to their own systems and products successfully and in a timely manner. The
Company has a formalized comprehensive supplier compliance program in
place. As a third-party supplier to other companies, the Company has
posted its own product compliance plan on its Internet web site
(www.kodak.com/go/year2000), which was enhanced during the last six months
to support customer and business partner inquiries.
Costs of software and hardware remediation were $13 million in 1997, $27
million in 1998, and are estimated to be $12 million and $6 million in 1999
and 2000, respectively. These remediation efforts, almost entirely for
software, will not materially increase the Company's spending on
information technology because some normal development and maintenance work
has been postponed. Furthermore, some non-compliant systems will be
eliminated in 1999 as the Company installs Year 2000 compliant globally
deployed ERP/SAP software in connection with its enterprise resource
planning project. A charge for the total cost of customer product
modification of $20 million was accrued in 1997. At March 31, 1999, the
Company had a reserve of $6 million to cover remaining product
modifications.
15
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be "worst-case scenarios" in which the
Company would be unable to take customer orders, manufacture and ship
products, invoice customers or collect payments. In addition, the Company
could be subject to litigation for Year 2000-related product failure,
including equipment shutdown or failure to properly date business or
medical records, and for health, environmental and safety issues relating
to its facilities. The amount of potential liability and lost revenue
cannot be reasonably estimated.
The Company has contingency plans for some mission-critical applications
and is working on plans for others. For example, plans for the U.S.
payroll system have been in place since January 1998, while detailed plans
for sensitized goods manufacturing will be completed by mid-year 1999. An
Executive Steering Committee is closely monitoring the progress of
enterprise and business process contingency plans involving, among other
actions, manual workarounds, increased inventories and extra staffing.
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THE EURO
The Treaty on European Union provided that an economic and monetary union
(EMU) be established in Europe whereby a single European currency, the
euro, replaces the currencies of participating member states. The euro was
introduced on January 1, 1999, at which time the value of participating
member state currencies was irrevocably fixed against the euro and the
European Currency Unit (ECU) was replaced at the rate of one euro to one
ECU. For the three-year transitional period ending December 31, 2001, the
national currencies of member states will continue to circulate but be sub-
units of the euro. New public debt will be issued in euro and existing
debt may be re-denominated into euro. At the end of the transitional
period, euro banknotes and coins will be issued, and the national
currencies of the member states will cease to be legal tender no later than
June 30, 2002. The countries that adopted the euro on January 1, 1999 are
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, and Spain. Other countries are expected to follow
later. The Company has operations in all of these countries.
As a result of the euro conversion, it is probable that selling prices of
the Company's products and services will experience downward pressure, as
current price variations among countries are reduced due to easy
comparability of euro prices across countries. Prices will tend to
harmonize, although value added taxes and transportation costs will still
justify price differentials. Adoption of the euro will probably accelerate
existing market and pricing trends including pan-European buying and
general price erosion.
On the other hand, currency exchange and hedging costs will be
significantly reduced; lower prices and pan-European buying will benefit
the Company in its purchasing endeavors; the number of banks and suppliers
needed will be reduced; there will be less variation in payment terms; and
it will be easier for the Company to expand into new marketing channels
such as mail order and Internet marketing.
16
The Company is in the process of making changes in areas such as marketing
and pricing, purchasing, contracts, payroll, taxes, cash management and
treasury operations. Billing systems have been modified so that, in 1999,
the Company will be able to show total gross, value added tax, and net in
euros on national currency invoices, to enable customers to pay in the new
euro currency if they wish to do so. Countries that have installed ERP/SAP
software in connection with the Company's enterprise resource planning
project are able to invoice and receive payments in euros as well as in
other currencies. Systems for pricing, payroll and expense reimbursements
will continue to use national currencies until year-end 2001. The
functional currencies of the Company's operations in affected countries
will remain the national currencies until approximately mid-year 2001, when
they will change to the euro. By that time, all affected countries will
have converted to the new ERP/SAP software.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the first quarter of 1999 was
$110 million. Net earnings, adjusted for depreciation and amortization and
asset impairment and other charges, provided $523 million of operating
cash. This was offset by decreases in liabilities (excluding borrowings)
of $311 million related primarily to severance payments for restructuring
programs and litigation settlement payments for amounts accrued in prior
years as well as other changes in working capital. Net cash used in
investing activities of $135 million for the first quarter of 1999 was
utilized primarily for capital expenditures. The Company anticipates total
capital spending of approximately $1.2 billion in 1999, with the majority
of the spending relating to the Company's China manufacturing operations,
productivity improvements and ongoing environmental and safety spending.
Net cash provided by financing activities of $132 million for the first
quarter of 1999 was primarily due to net increases in total borrowings of
$354 million, reduced by $142 million of dividend payments and $86 million
for stock repurchases.
Cash dividends per share of $.44, payable quarterly, were declared in the
first quarter of 1999 and 1998. Total cash dividends of $142 million and
$143 million were paid in the first quarter of 1999 and 1998, respectively.
Net working capital (excluding short-term borrowings) at the end of the
quarter was $1,249 million, compared with $939 million at year-end 1998.
This increase is due to the strong sales performance in the first quarter
of 1999, coupled with the seasonality of the Company's operating cash flow.
On April 15, 1999, the Company's Board of Directors authorized a new stock
repurchase program for up to $2 billion of the Company's outstanding stock.
This program is the third since 1995, and brings the total repurchases
authorized under the three programs to $5 billion. In the first quarter of
1999, the Company repurchased $86 million of outstanding shares under the
$2 billion program initiated in 1996, bringing the total repurchased under
that program to $1,817 million. The Company intends to accelerate its
repurchase activity.
17
On April 14, 1999, the Company announced a series of worldwide
environmental goals to provide for greater reductions in emissions, waste
generated, water usage and energy consumption, preservation of natural
resources and improvements to the Company's environmental management
system. These goals will result in spending, primarily capital in nature,
of approximately $100 million over the next five years.
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OTHER
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement requires
that an entity recognize all derivatives as either assets or liabilities
and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This
Statement must be adopted by the Company by the year 2000, but may be
adopted in any earlier fiscal quarter, and is not to be
applied retroactively. If the Company had adopted SFAS No. 133 in the
first quarter of 1999, the impact would not have been material to its
results of operations or financial position. The Company has not yet
determined when it will adopt this Statement.
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18
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in nature, or
"forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements in this Form 10-
Q relate to the Company's Year 2000 compliance efforts, including
expectations about compliance timetables and costs. Also, references to
the Company's $1.2 billion cost reduction initiative and to expected
savings in 1999 are forward-looking statements.
Actual results may differ from those expressed or implied in forward-
looking statements. The Company believes that the forward-looking
statements contained in this report are subject to a number of risk
factors, including: the Company's ability to implement its product
strategies (including its category expansion and digitization strategies
and its plans for digital products and Advantix products), to develop its
business in emerging markets, and to assimilate acquisitions, including the
Imation acquisition, quickly; the speed and effectiveness with which the
Company completes the repositioning of its Office Imaging business; the
successful completion of other planned portfolio actions, including Eastman
Software; the inherent unpredictability of currency fluctuations;
competitive actions, including pricing; the ability to realize cost
reductions and operating efficiencies, including the ability to implement
headcount reduction programs in a timely manner, and the ability to
identify and to realize other cost-reduction opportunities; the nature and
pace of technology substitution; general economic and business conditions;
the ability of the Company to identify and address successfully Year 2000
issues in a timely manner, and at costs that are reasonably in line with
projections; and the ability of the Company's vendors to identify and
address successfully their own Year 2000 issues in a timely manner.
Any forward-looking statements in this report should be evaluated in light
of these important risk factors.
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19
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company, as a result of its global operating and financing activities,
is exposed to changes in foreign currency exchange rates, commodity prices,
and interest rates, which may adversely affect its results of operations
and financial position. In seeking to minimize the risks and/or costs
associated with such activities, the Company manages exposures to changes
in commodity prices, interest rates and foreign currency exchange rates.
The majority of foreign currency forward contracts held by the Company are
denominated in Australian, British, French, German, Irish and Dutch
currencies. If foreign currency exchange rates at March 31, 1999 and 1998
increased 10%, the Company would incur losses of $87 million and $94
million on foreign currency forward contracts outstanding at March 31, 1999
and 1998, respectively. Such losses would be substantially offset by gains
from the revaluation or settlement of the underlying positions hedged.
The Company has used silver option and forward contracts to minimize almost
all of its exposure to increases in silver prices in 1998 and continues to
do so in 1999. As of March 31, 1999, the Company had open forward
contracts hedging the majority of its planned silver requirements for 1999.
Based on broker-quoted termination values, if the price of silver decreased
10% from $5.03 and $6.44 per troy ounce at March 31, 1999 and 1998,
respectively, the fair value of silver forward contracts would be reduced
by $18 million and $10 million, respectively. Such losses in fair value,
if realized, would be offset by lower costs of manufacturing silver-
containing products. Increased silver price risk compared with March 31,
1998 is primarily attributable to a higher notional amount of silver
hedging contracts outstanding at March 31, 1999.
The Company is exposed to interest rate risk primarily through its
borrowing activities and less so through investments in marketable
securities. The Company utilizes U.S. dollar-denominated commercial paper
and borrowings as well as foreign currency-denominated borrowings to fund
its working capital and investment needs. The majority of short-term and
long-term borrowings and marketable securities are in fixed-rate
instruments. There is inherent roll-over risk for borrowings and
marketable securities as they mature and are renewed at current market
rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and business financing
requirements. Using a yield to maturity analysis, if March 31, 1999
interest rates increased 10% (about 52 basis points) with the March 31,
1999 level of short-term and long-term borrowings, there would be decreases
in fair value of short-term and long-term borrowings of $1 million and $10
million, respectively. If March 31, 1998 interest rates increased 10%
(about 60 basis points) with the March 31, 1998 level of debt and
marketable securities, there would be decreases in fair value of marketable
securities, short-term and long-term borrowings of $1 million, $3 million
and $11 million, respectively.
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20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 7, 1998, the Company received a proposed administrative Consent
Order seeking unspecified penalties and a compliance schedule from the New
York State Department of Environmental Conservation, to address alleged
violations of the Environmental Conservation Law and regulations at the
Company's Kodak Park manufacturing complex in Rochester, New York. The
violations alleged are primarily comprised of air, water, and hazardous
substance releases and incidents, largely accidental, that have been
reported by the Company to the Agency over the past five years. The
Company expects that it will be assessed a civil fine in excess of
$100,000. The entire matter is subject to negotiation, which can be
expected to result in an administrative settlement that will include a
penalty and a compliance schedule for implementation of maintenance,
upgrade, and reporting activities.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and financial statement schedules required as part of this
report are listed in the index appearing on page 21.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed for the quarter
ended March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EASTMAN KODAK COMPANY
(Registrant)
Date May 4, 1999
E. Mark Rajkowski
Controller
21
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit
(27) Financial Data Schedule - Submitted with the EDGAR filing
as a second document to this Form 10-Q.
5
0000031235
EASTMAN KODAK COMPANY
1,000,000
U.S. DOLLARS
3-MOS
DEC-31-1999
JAN-01-1999
MAR-31-1999
1.0
338
46
2497
185
1453
5554
13333
7555
14505
6168
481
0
0
978
2897
14505
3100
3100
1869
1869
912
0
30
289
98
191
0
0
0
191
.59
.59
