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 September 30, 2001
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 September 30, 2001
Common Stock, $2.50 par value 290,929,293
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)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
Sales $3,308 $3,590 $9,875 $10,434
Cost of goods sold 2,176 2,074 6,338 6,031
------ ------ ------ -------
Gross profit 1,132 1,516 3,537 4,403
Selling, general and
administrative expenses 661 621 1,864 1,822
Research and development costs 197 197 572 606
Goodwill amortization 37 38 116 113
Restructuring costs and other 35 - 371 -
------ ------ ------ -------
Earnings from operations 202 660 614 1,862
Interest expense 52 48 171 127
Other (expense) income (18) 22 (2) 103
------ ------ ------ -------
Earnings before income taxes 132 634 441 1,838
Provision for income taxes 36 216 159 625
------ ------ ------ -------
NET EARNINGS $ 96 $ 418 $ 282 $ 1,213
====== ====== ====== =======
Basic earnings per share $ .33 $ 1.37 $ .97 $ 3.93
====== ====== ====== =======
Diluted earnings per share $ .33 $ 1.36 $ .97 $ 3.91
====== ====== ====== =======
Earnings used in basic and
diluted earnings per share $ 96 $ 418 $ 282 $ 1,213
Number of common shares used in
basic earnings per share 290.9 305.4 290.5 308.5
Incremental shares from
assumed conversion of options 0.4 2.3 0.5 2.1
------ ------ ------ -------
Number of common shares used in
diluted earnings per share 291.3 307.7 291.0 310.6
====== ====== ====== =======
Cash dividends per share $ .44 $ .44 $ 1.32 $ 1.32
====== ====== ====== =======
CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
Retained earnings at beginning
of period $7,799 $7,517 $7,869 $ 6,995
Net earnings 96 418 282 1,213
Cash dividends declared (128) (133) (384) (406)
------ ------ ------ ------
Retained earnings
at end of period $7,767 $7,802 $7,767 $7,802
====== ====== ====== ======
- ------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
3
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
Sept. 30, Dec. 31,
2001 2000
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 252 $ 246
Receivables 2,724 2,653
Inventories 1,462 1,718
Deferred income taxes 534 575
Other 281 299
------- -------
Total current assets 5,253 5,491
------- -------
PROPERTIES
Land, buildings and equipment at cost 13,063 12,963
Less: Accumulated depreciation 7,329 7,044
------- -------
Net properties 5,734 5,919
------- -------
OTHER ASSETS
Goodwill (net of accumulated amortization
of $925 and $778) 954 947
Long-term receivables and other
noncurrent assets 1,902 1,767
Deferred income taxes 67 88
------- -------
TOTAL ASSETS $13,910 $14,212
======= =======
- ------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payables $ 3,011 $ 3,275
Short-term borrowings 1,701 2,206
Taxes - income and other 513 572
Dividends payable 128 128
Deferred income taxes 36 34
------- -------
Total current liabilities 5,389 6,215
OTHER LIABILITIES
Long-term borrowings 1,792 1,166
Postemployment liabilities 2,592 2,610
Other long-term liabilities 747 732
Deferred income taxes 75 61
------- -------
Total liabilities 10,595 10,784
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 847 871
Retained earnings 7,767 7,869
Accumulated other comprehensive loss (508) (482)
------- -------
9,084 9,236
Less: Treasury stock at cost 5,769 5,808
------- -------
Total shareholders' equity 3,315 3,428
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $13,910 $14,212
======= =======
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The accompanying notes are an integral part of these consolidated
financial statements.
4
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Nine Months Ended
September 30
-----------------
2001 2000
Cash flows relating to operating activities:
Net earnings $ 282 $1,213
Adjustments to reconcile to
net cash provided by operating activities:
Depreciation and amortization 686 653
Restructuring costs and other charges 488 16
Provision for deferred taxes 78 211
Gain on sales of assets - (139)
Increase in receivables (114) (327)
Decrease (increase) in inventories 165 (475)
Decrease in liabilities excluding borrowings (563) (626)
Other items, net 44 (103)
------ ------
Total adjustments 784 (790)
------ ------
Net cash provided by operating
activities 1,066 423
------ ------
Cash flows relating to investing activities:
Additions to properties (531) (590)
Proceeds from sales of assets - 216
Acquisitions, net of cash acquired (246) (62)
Sales of marketable securities 37 82
Purchases of marketable securities (42) (71)
------ ------
Net cash used in investing activities (782) (425)
------ ------
Cash flows relating to financing activities:
Net (decrease) increase in borrowings
with original maturity of
90 days or less (448) 442
Proceeds from other borrowings 1,768 1,521
Repayment of other borrowings (1,188) (1,091)
Dividends to shareholders (384) (411)
Exercise of employee stock options 21 33
Stock repurchase programs (44) (634)
------ ------
Net cash used in financing activities (275) (140)
------ ------
Effect of exchange rate changes on cash (3) (14)
------ ------
Net increase (decrease) in cash and cash
equivalents 6 (156)
Cash and cash equivalents, beginning of year 246 373
------ ------
Cash and cash equivalents, end of quarter $ 252 $ 217
====== ======
- -------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
5
Eastman Kodak Company and Subsidiary Companies
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The consolidated interim financial statements are unaudited, and certain
information and footnote disclosure related thereto normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted in
accordance with Rule 10-01 of Regulation S-X. In the opinion of
management, the accompanying unaudited consolidated financial statements
were prepared following the same policies and procedures used in the
preparation of the audited financial statements and reflect all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position of Eastman Kodak Company (the
Company). The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year. These
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31,
2000.
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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 31.
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NOTE 3: RESTRUCTURING PROGRAMS AND COST REDUCTION
The following table summarizes activity with respect to the
restructuring charges in the second and third quarters of 2001:
(in millions)
Long-term
Assets &
Severance Inventory Other
------------------- --------- ---------
Number of
Employees Reserve Reserve Reserve Total
--------- ------- ------- ------- -----
2001 charges 2,700 $ 134 $ 77 $ 158 $ 369
2001 utilization (1,000) (15) (77) (158) (250)
-------- ----- ----- ----- -----
Ending balance at
September 30, 2001 1,700 $ 119 $ - $ - $ 119
======== ===== ===== ===== =====
During the second quarter of 2001, the Company recorded a pre-tax
restructuring charge of $316 million primarily for the rationalization
of the U.S. photofinishing business, the elimination of excess
manufacturing capacity, the exit of certain businesses and reductions in
selling, general, and administrative positions worldwide. The Company
recorded $57 million of the $316 million provision as costs of goods
sold related to inventory write-downs. The remaining $259 million was
recorded for employee severance payments, business exit costs and write-
offs of capital assets, goodwill and investments and is included in the
"Restructuring costs and other" component in the accompanying
Consolidated Statement of Earnings.
In the second quarter, approximately $127 million of the restructuring
charge of $316 million was for employee severance covering 2,400
worldwide positions. The geographic breakdown includes approximately
1,100 employees in the U.S. and Canada and 1,300 throughout the rest of
the world. The 2,400 personnel were associated with the realignment of
manufacturing (600), service and photofinishing operations (700), R&D
(150) and administrative (950) functions in various locations of the
Company's worldwide operations. The remaining $189 million of the $316
million charge covers capital write-offs, business exit costs and other
asset impairments.
During the third quarter of 2001, the Company continued its cost
reduction actions and recorded a pre-tax restructuring charge of $53
million primarily for the rationalization of the worldwide
photofinishing business, the elimination of excess manufacturing
capacity, the exit of certain businesses and reductions in selling,
general and administrative positions worldwide. The Company included
$41 million of the $53 million provision in the "Cost of goods sold"
component in the accompanying Consolidated Statement of Earnings,
representing a $20 million inventory write-down associated with product
line discontinuances and $21 million related to accelerated
depreciation on assets presently used in operations which will be
disposed of through abandonment within the first six months of 2002.
7
Of the remaining $12 million in restructuring charges that were
included in the "Restructuring and other costs" component in the
accompanying Consolidated Statement of Earnings, approximately $7
million represents employee severance covering approximately 300
worldwide positions. The geographic breakdown was comprised of
approximately 10 employees in U.S. and Canada and 290 employees
throughout the rest of the world. The 300 personnel were associated
with the realignment of manufacturing (200), service and photofinishing
(60) and administrative (40) functions in various locations within the
Company's worldwide operations. The remaining $5 million of the $53
million charge represents capital write-offs.
Due to the prolonged economic weakness in the U.S. and abroad, the
Company will continue its cost reduction efforts in the fourth quarter,
which are expected to result in additional worldwide employment
reductions of 3,500 to 4,000. The anticipated fourth quarter severance
charge is expected to total approximately $200 million, with non-
personnel related expenses possibly increasing the amount of the total
charge to be recorded. Including the fourth quarter restructuring
activity, the Company will have completed or initiated cost actions
that are expected to result in total employment reductions in the range
of 6,500 to 7,500.
- ------------------------------------------------------------------------
NOTE 4: OTHER CHARGES
In the second quarter, the Company recorded a $77 million pre-tax charge
associated with the bankruptcy of the Wolf Camera Inc. consumer retail
business. This amount is reflected in the "Restructuring costs and
other" component in the accompanying Consolidated Statement of Earnings.
In the third quarter, the Company recorded a $42 million pre-tax charge
representing the write-off of certain lease residuals, receivables and
capital assets resulting primarily from technology changes in the
transition from optical to digital photofinishing equipment within the
Company's onsite photofinishing operations. The charges for the lease
residuals and capital assets totaling $19 million have been included in
the "Cost of goods sold" component in the accompanying Consolidated
Statement of Earnings. The remaining $23 million has been included in
the "Restructuring costs and other" component in the accompanying
Consolidated Statement of Earnings.
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8
NOTE 5: INCOME TAXES
The operational effective tax rates (excluding the impact of
restructuring activity) for the quarters ended September 30, 2001 and
2000 were approximately 33% and 34%, respectively. The 1% decline in
the rate is primarily attributable to the Company's operations in lower
tax jurisdictions outside the U.S. The reported effective tax rate for
the quarter ended September 30, 2001 of approximately 27% is
attributable to an $11 million tax benefit related to favorable tax
settlements reached during the quarter, partially offset by the tax
effects of certain third quarter restructuring costs which do not
provide a tax benefit to the Company. The reported effective tax rates
(including restructuring activity) for the three quarters ended
September 30, 2001 and 2000 were 36% and 34%, respectively. The 2%
increase in the Company's reported effective tax rate from 2000 to 2001
is primarily attributable to certain restructuring costs recorded in the
second and third quarters of 2001 which do not provide a tax benefit to
the Company, partially offset by the $11 million tax benefit related to
favorable tax settlements reached in the third quarter.
- ------------------------------------------------------------------------
NOTE 6: EARNINGS PER SHARE
Options to purchase 41.9 million and 24.7 million shares of common stock
at weighted average per share prices of $62.60 and $70.22 for the three
months ended September 30, 2001 and 2000, respectively, and options to
purchase 39.7 million and 24.6 million shares of common stock at
weighted average per share prices of $63.64 and $70.24 for the nine
months ended September 30, 2001 and 2000, respectively, were outstanding
during the periods presented but were not included in the computation of
diluted earnings per share because the options' exercise price was
greater than the average market price of the common shares for the
respective periods.
- ------------------------------------------------------------------------
NOTE 7: COMMON STOCK
$2.50 par value, 950 million shares authorized, 391 million shares
issued at September 30, 2001 and December 31, 2000. Treasury stock at
cost consists of approximately 100 million shares at September 30, 2001
and 101 million at December 31, 2000.
- ------------------------------------------------------------------------
9
NOTE 8: COMPREHENSIVE INCOME
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
Net income $ 96 $ 418 $ 282 $1,213
Unrealized holding losses
on marketable securities (2) (35) (14) (79)
Unrealized gains (losses)
from hedging activity 0 1 26 (4)
Currency translation
adjustments 83 (114) (39) (231)
---- ----- ----- -----
Total comprehensive income $177 $ 270 $ 255 $ 899
==== ===== ===== =====
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NOTE 9: DEBT ISSUANCE
During the second quarter, the Company issued Medium-Term Notes
consisting of floating-rate notes in the amount of $150 million maturing
on September 16, 2002 and 6.375% fixed-rate notes in the amount of $500
million maturing on June 15, 2006.
- ------------------------------------------------------------------------
NOTE 10: ACQUISITIONS
On June 4, 2001, the Company completed its acquisition of Ofoto, Inc.
The purchase price of this stock acquisition was approximately $58
million in cash. The acquisition was accounted for as a purchase with
$10 million allocated to tangible net assets, $37 million allocated to
goodwill and $11 million allocated to other intangible assets. The
acquisition of Ofoto will accelerate Kodak's growth in the online
photography market and help drive more rapid adoption of digital and
online services. Ofoto offers digital processing of digital images and
traditional film, top-quality prints, private online image storage,
sharing, editing and creative tools, frames, cards and other
merchandise.
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10
NOTE 11: SEGMENT INFORMATION
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
Sales:
Consumer Imaging $1,781 $1,941 $5,111 $ 5,563
Health Imaging 545 543 1,692 1,630
Kodak Professional 370 427 1,129 1,275
Other Imaging 612 679 1,943 1,966
------ ------ ------ -------
Consolidated total $3,308 $3,590 $9,875 $10,434
====== ====== ====== =======
Earnings (loss) from
operations:
Consumer Imaging $ 210 $ 373 $ 623 $ 1,014
Health Imaging 51 141 257 388
Kodak Professional 40 81 146 212
Other Imaging (4) 65 76 204
------ ------ ------ -------
Total of segments 297 660 1,102 1,818
Restructuring (costs and
asset impairments) and
other charges and credits (95) - (411) 44
Wolf charge - - (77) -
------ ------ ------ -------
Consolidated total $ 202 $ 660 $ 614 $ 1,862
====== ====== ====== =======
Net earnings (loss):
Consumer Imaging $ 136 $ 267 $ 418 $ 739
Health Imaging 35 98 176 270
Kodak Professional 19 34 79 96
Other Imaging (4) 49 61 149
------ ------ ------ -------
Total of segments 186 448 734 1,254
Restructuring (costs and
asset impairments) and
other charges and credits (95) - (411) 44
Wolf charge - - (77) -
Interest expense (52) (48) (171) (127)
Other corporate items 1 4 5 22
Income tax effects on
above items and taxes
not allocated to segments 56 14 202 20
------ ------ ------ -------
Consolidated total $ 96 $ 418 $ 282 $ 1,213
====== ====== ====== =======
11
NOTE 12: NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that all business combinations be accounted for
under the purchase method and that certain acquired intangible assets in
a business combination be recognized as assets apart from goodwill.
SFAS No. 142 requires that ratable amortization of goodwill be replaced
with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June
30, 2001 and for all business combinations accounted for by the purchase
method for which the date of acquisition is after June 30, 2001. The
provisions of SFAS No. 142 will be effective for fiscal years beginning
after December 15, 2001, and will thus be adopted by the Company, as
required, in fiscal year 2002. The impact of SFAS No. 141 and SFAS No.
142 on the Company's financial statements has not yet been determined.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets to be held and used, to be disposed of other than by
sale and to be disposed of by sale. Although the Statement retains
certain of the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," it supersedes SFAS No. 121 and Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the
disposal of a segment of a business. SFAS No. 144 also amends
Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Statement
is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years,
and will thus be adopted by the Company, as required, on January 1,
2002. The impact of SFAS No. 144 on the Company's financial statements
has not yet been determined.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
(in millions, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
2001 2000 Change 2001 2000 Change
Sales $3,308 $3,590 - 8% $9,875 $10,434 - 5%
Earnings from operations 202 660 -69 614 1,862 -67
Net earnings 96 418 -77 282 1,213 -77
Basic earnings per share .33 1.37 -76 .97 3.93 -75
Diluted earnings per share .33 1.36 -76 .97 3.91 -75
2001
The Company's results for the nine months ended September 30, 2001
included the following:
In line with the announcement on April 17, 2001, Kodak has implemented a
series of cost reduction actions, resulting in pre-tax charges totaling
$316 million ($233 million after tax) or $.80 per share in the second
quarter. The components of restructuring in the second quarter include
$127 million for employee severance covering approximately 2,400
worldwide positions and $189 million for asset impairments, capital
write-offs, and business exits. The geographic breakdown includes
approximately 1,100 employees in the U.S. and Canada and 1,300
throughout the rest of the world.
The Company's cost reduction actions continued in the third quarter,
resulting in a pre-tax restructuring charge of $53 million ($41 million
after tax) or $.14 per share. The components of restructuring in the
third quarter include $7 million for employee severance covering
approximately 300 employees, 10 of whom were located in the U.S. and
Canada with the remaining 290 located throughout the rest of the world.
The remaining $46 million relates to inventory write-downs, accelerated
depreciation, and capital write-offs. As announced on October 24, 2001,
additional restructuring charges will be recorded in the fourth quarter.
(See Note 3.)
Pre-tax charges of approximately $77 million ($52 million after tax) for
write-offs associated with the Wolf Camera Inc. bankruptcy filing were
recorded in the second quarter.
Pre-tax charges of approximately $9 million ($6 million after tax),
associated with the exit of one of the Company's equipment manufacturing
facilities located in Rochester, New York, were recorded in each of the
first two quarters. The costs for this effort, which began in 1999,
related to relocation of certain manufacturing operations. This program
is now complete.
13
Pre-tax charges of approximately $42 million ($26 million after tax)
relating to asset impairments associated with one of the Company's
photofinishing operations were recorded in the third quarter.
An $11 million tax benefit or $.04 per share related to favorable tax
settlements reached during the third quarter was recorded in the third
quarter.
Excluding the above, year-to-date net earnings would have been $634
million, while basic and diluted earnings per share would have been
$2.18.
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14
Sales by Operating Segment
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
2001 2000 Change 2001 2000 Change
Consumer Imaging
Inside the U.S. $ 842 $ 970 -13% $2,509 $ 2,782 -10%
Outside the U.S. 939 971 - 3 2,602 2,781 - 6
------ ------ --- ------ ------- ---
Total Consumer Imaging 1,781 1,941 - 8 5,111 5,563 - 8
------ ------ --- ------ ------- ---
Health Imaging
Inside the U.S. 267 270 - 1 818 779 + 5
Outside the U.S. 278 273 + 2 874 851 + 3
------ ------ --- ------ ------- ---
Total Health Imaging 545 543 0 1,692 1,630 + 4
------ ------ --- ------ ------- ---
Kodak Professional
Inside the U.S. 155 189 -18 466 524 -11
Outside the U.S. 215 238 -10 663 751 -12
------ ------ --- ------ ------- ---
Total Kodak Professional 370 427 -13 1,129 1,275 -11
------ ------ --- ------ ------- ---
Other Imaging
Inside the U.S. 318 336 - 5 1,017 963 + 6
Outside the U.S. 294 343 -14 926 1,003 - 8
------ ------ --- ------ ------- ---
Total Other Imaging 612 679 -10 1,943 1,966 - 1
------ ------ --- ------ ------- ---
Total Sales $3,308 $3,590 - 8% $9,875 $10,434 - 5%
====== ====== === ====== ======= ===
- ------------------------------------------------------------------------
Earnings (Loss) from Operations by Operating Segment
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
2001 2000 Change 2001 2000 Change
Consumer Imaging $210 $373 -44% $ 623 $1,014 -39%
Percent of Sales 11.8% 19.2% 12.2% 18.2%
Health Imaging $ 51 $141 -64% $ 257 $ 388 -34%
Percent of Sales 9.4% 26.0% 15.2% 23.8%
Kodak Professional $ 40 $ 81 -51% $ 146 $ 212 -31%
Percent of Sales 10.8% 19.0% 12.9% 16.6%
Other Imaging $ (4) $ 65 $ 76 $ 204 -63%
Percent of Sales (.7%) 9.6% 3.9% 10.4%
---- ---- --- ------ ------ ---
Total of segments $297 $660 -55% $1,102 $1,818 -39%
Percent of Sales 9.0% 18.4% 11.2% 17.4%
Restructuring (costs and
asset impairments) and
other charges and credits (95) - (411) 44
Wolf charge - - (77) -
---- ---- --- ------ ------ ---
Total Earnings from
Operations $202 $660 -69% $ 614 $1,862 -67%
==== ==== === ====== ====== ===
Percent of Sales 6.1% 18.4% 6.2% 17.8%
- ------------------------------------------------------------------------
15
Net Earnings (Loss) by Operating Segment
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- --------------------
2001 2000 Change 2001 2000 Change
Consumer Imaging $136 $267 -49% $418 $ 739 -43%
Percent of Sales 7.6% 13.8% 8.2% 13.3%
Health Imaging $ 35 $ 98 -64% $176 $ 270 -35%
Percent of Sales 6.4% 18.0% 10.4% 16.6%
Kodak Professional $ 19 $ 34 -44% $ 79 $ 96 -18%
Percent of Sales 5.1% 8.0% 7.0% 7.5%
Other Imaging $ (4) $ 49 $ 61 $ 149 -59%
Percent of Sales (.7%) 7.2% 3.1% 7.6%
---- ---- --- ---- ------ ---
Total of segments $186 $448 -58% $734 $1,254 -41%
Percent of Sales 5.6% 12.5% 7.4% 12.0%
Restructuring (costs and
asset impairments) and
other charges and credits (95) - (411) 44
Wolf charge - - (77) -
Interest expense (52) (48) (171) (127)
Other corporate items 1 4 5 22
Income tax effects on
above items and taxes
not allocated to
segments 56 14 202 20
---- ---- --- ---- ------ ---
Total Net Earnings $ 96 $418 -77% $282 $1,213 -77%
==== ==== === ==== ====== ===
Percent of Sales 2.9% 11.6% 2.9% 11.6%
- ------------------------------------------------------------------------
COSTS AND EXPENSES
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
2001 2000 Change 2001 2000 Change
Gross profit $1,132 $1,516 -25% $3,537 $4,403 -20%
Percent of Sales 34.2% 42.2% 35.8% 42.2%
Selling, general and
administrative expenses $ 661 $ 621 + 6% $1,864 $1,822 + 2%
Percent of Sales 20.0% 17.3% 18.9% 17.5%
Research and development
costs $ 197 $ 197 0% $ 572 $ 606 - 6%
Percent of Sales 6.0% 5.5% 5.8% 5.8%
Goodwill amortization $ 37 $ 38 - 3% $ 116 $ 113 + 3%
Percent of Sales 1.1% 1.1% 1.2% 1.1%
- ------------------------------------------------------------------------
16
2001 COMPARED WITH 2000
Third Quarter
Consolidated
Reported third quarter revenues were $3.308 billion, down 8% from the
previous year, down 6% when adjusted for the impact of exchange.
Exchange had a $69 million negative impact (-2%) in the quarter due to
unfavorable effects from Europe, Asia, and Canada.
Adjusting for portfolio changes, revenues decreased 9%. The principal
portfolio adjustments relate to the August 2000 divestiture of Eastman
Software, the February 2001 acquisition of substantially all of Bell
and Howell's Imaging business and contributions from the Kodak Diamic
Ltd. joint venture with Mitsubishi, which was formed January 1, 2001.
Combined, portfolio changes contributed $45 million of revenues in the
third quarter of 2001. Adjusting for portfolio changes and exchange,
revenues were down 7% on a year-over-year basis.
Emerging Markets sales were down 5%. The Emerging Market portfolio
accounted for approximately 17% of Kodak's worldwide sales in the
quarter. Sales growth in Greater Russia (+19%) was offset by declines
in Greater China (-12%), Asia Area (-3%), Latin America (-5%), and
Eastern Europe, Africa and the Middle East (-7%).
The declines are reflective of general economic weakening in many
Emerging Market countries. The revenue decline in China (-1%) has
eased due to progress in stemming irregular trade flows and
improvements in reducing channel inventories. However, Taiwan and Hong
Kong continue to be impacted by adverse economic conditions. Brazil
also continues to be impacted by adverse economic conditions,
particularly in the consumer businesses.
Third quarter gross profit declined by 8.0 percentage points, from
42.2% to 34.2%, year over year. Excluding both the restructuring
charges and charges associated with the photofinishing operation in
2001 and the relocation expenses in 2000, gross profit declined by 6.7
percentage points, from 42.7% to 36.0%, year over year. Reductions in
gross profit were due to lower manufacturing productivity driven by the
Company's efforts to reduce inventory levels, lower fixed cost
absorption in photofinishing operations, and higher service costs.
Year-over-year price declines, primarily in Health Imaging and Consumer
Imaging, further reduced gross profit. Gross profit was also adversely
affected by product and geographic mix changes in many of the Company's
key segments.
SG&A increased approximately 6% from $621 million in the third quarter
of 2000 to $661 million in the third quarter of 2001 and increased as a
percent of sales from 17.3% to 20.0%. SG&A excluding advertising
increased from $437 million to $492 million and increased from 12.2% to
14.9% as a percentage of sales. In the quarter, SG&A increased
principally due to acquisitions that had SG&A rates higher than Kodak's
average rate.
17
R&D remained unchanged year over year in the third quarter at $197
million, but increased as a percent of sales from 5.5% to 6.0%.
Earnings from operations were $202 million, compared with $660 million
in the comparable 2000 quarter. This decline primarily reflects
charges associated with the restructuring program and other charges
associated with one of Kodak's photofinishing operations as well as the
lower gross profit margin and higher SG&A costs discussed previously.
Net earnings were $96 million, or $.33 per share, compared with $418
million, or $1.36 per share in the third quarter of 2000. Excluding
restructuring and other charges of $.23 per share and an income tax
benefit of $.04 per share, net earnings for the third quarter of 2001
were $.52 per share. Excluding charges of $.04 per share related to
the exit of an equipment manufacturing facility, net earnings in the
third quarter of 2000 were $1.40 per share. Earnings were further
reduced by higher SG&A costs, lower gross profit margins and the
adverse effects of foreign exchange.
The effective tax rates, excluding restructuring costs, were 33% for
the third quarter of 2001 and 34% for the third quarter of 2000. The
1% decline in the Company's effective tax rate is primarily
attributable to the Company's operations in lower tax jurisdictions
outside the U.S. The reported effective rate for the third quarter
2001 of 27% is attributable to an $11 million tax benefit related to
favorable tax settlements reached in the quarter, partially offset by
the tax effects of certain third quarter restructuring costs which do
not provide a tax benefit to the Company.
18
Consumer Imaging
Worldwide Consumer Imaging sales in the third quarter declined 8% as
reported, down 6% when adjusted for unfavorable exchange. U.S. sales
declined 13% and sales outside the U.S. declined 3% as reported, flat
year over year excluding exchange.
Adjusted for the impact of portfolio and unfavorable exchange,
worldwide Consumer Imaging year-over-year sales declined by 8%. A
significant portion of the year-over-year Consumer Imaging sales
decline continues to be attributed to a decrease in revenue associated
with U.S. on-site photofinishing equipment placements.
From a geographic perspective, the segment experienced weak sales
performance in most areas of the world including the U.S. (-13%),
Western Europe (-5%), and Emerging Markets (-4%). On a regional basis,
Latin American Region was -5%, Greater China region was -12%, while
Greater Russia continued to show strong growth of +21%.
Worldwide film sales to dealers (including 35mm film, Advantix film,
one-time-use cameras) in the third quarter declined by 10%, reflecting
5% volume declines, 3% price/mix declines and 2% unfavorable exchange.
U.S. film sales to dealers decreased by 15%, reflecting a 16% volume
decrease and price/mix increase of 1%. Outside the U.S., film sales to
dealers declined by 5%, reflecting a 1% volume increase, negative 2%
price/mix and 4% unfavorable exchange.
During the third quarter, Kodak's differentiated higher value MAX and
Advantix films captured over 68% of Kodak's total consumer roll film
revenues. This value mix is up approximately 3 percentage points
versus the second quarter 2001. It is expected that the new U.S. film
packaging, supported by advertising, will continue to increase the MAX
mix throughout the remainder of the year.
Worldwide paper volume in the third quarter declined approximately 3%
year over year, with both U.S. and international prices trending lower.
In the quarter, SG&A expenses for the segment increased 2%, from $364
million to $370 million, and increased as a percent of sales from 18.8%
to 20.8%, reflecting higher bad debt reserves. Advertising declined on
a year over year basis due to increased advertising spend in the year
ago quarter related to the Olympics. R&D declined 3%, from $80 million
to $78 million year over year.
In the third quarter, Consumer Imaging earnings from operations
decreased by $163 million year over year, reflecting the combined
effects of sales declines and reduced gross profit margin rates. Net
earnings decreased 49% or $131 million, from $267 million in 2000 to
$136 million in 2001.
19
Health Imaging
During the third quarter, worldwide sales in the Health Imaging segment
were flat year over year, but increased 3% when adjusted for the impact
of exchange. U.S. sales decreased 1%, while sales outside the U.S.
increased 2% as reported, up 6% excluding exchange. Sales in emerging
markets were up 1%, or 3% adjusted for exchange.
Sales of digital products (including laser printers, digital media,
digital capture equipment and Picture Archiving and Communications
Systems (PACS)) increased 11% year over year. Placements of DryView
laser imagers increased 39% over last year. DryView media sales
increased 32% year over year, while sales of digital capture and PACS
products increased over 90%. Wet laser imaging sales continued their
expected declines from last year.
Sales of traditional products, including analog film, equipment,
chemistry and services declined 10% year over year, down 8% when
adjusted for the impact of exchange. For traditional analog film
(excluding specialty films), year-over-year sales declined 14%,
reflecting slight volume decreases, negative price and unfavorable
exchange. Dental sales declined slightly while sales of Mammography
and Oncology were flat versus last year.
In the quarter, SG&A expenses for the segment were up 8%, from $83
million to $90 million, and increased as a percent of sales from 15.3%
last year to 16.5% this year, primarily as a result of the ramp-up in
digital product sales capabilities. R&D expenses amounted to 7.5% of
sales, up from 6.4% last year. The increase in R&D spending is focused
on accelerating digital product development.
Earnings from operations declined from $141 million to $51 million,
reflecting the combined effects of traditional product sales declines,
foreign exchange, reduced gross profit margins and costs related to new
digital product introductions. Net earnings decreased 64% or $63
million, from $98 million in 2000 to $35 million in 2001.
Kodak Professional
Kodak Professional worldwide third quarter revenues declined 13% from
the previous year, 11% when adjusted for unfavorable exchange. Overall
sales declines were seen in most product categories, including color
negative film and paper, color reversal film and paper, and graphics
films, as a result of ongoing digital substitution, continued economic
weakness in markets worldwide, and disruptions caused by the events of
September 11th. Sales increases were recorded worldwide for inkjet
systems, and for professional paper in Emerging Markets during the
quarter.
In the quarter, SG&A expenses for the Kodak Professional segment
decreased 6% year over year, from $69 million to $65 million, resulting
from effective expense management. R&D spending declined from $32
million to $28 million.
20
Kodak Professional earnings from operations decreased from $81 million
to $40 million year over year, reflecting the combined effects of sales
declines and reduced gross profit margins. Net earnings decreased 44%
or $15 million, from $34 million in 2000 to $19 million in 2001.
The Kodak Polychrome Graphics (KPG) joint venture contributed positive
earnings to Kodak's "other income and charges" line during the third
quarter. On October 18, 2001, KPG announced its intention to acquire
Imation's color proofing and software businesses. Imation's portfolio
of products is intended to complement and expand KPG's offerings in the
marketplace.
Other Imaging
Third quarter Other Imaging segment sales decreased 10% year over year,
or 8% when adjusted for unfavorable exchange. Excluding the impact of
portfolio and foreign exchange, sales decreased 10%.
Contributors to segment sales declines in the quarter included the
Entertainment Imaging business, where continued economic weakness in
the U.S. caused declines in the number of television commercials
produced. In addition, a number of motion picture film releases and
television show productions have either been postponed or cancelled due
to the events of September 11th. In the Digital and Applied Imaging
(D&AI) business, a reduction in sales during the quarter reflected the
transition from non-EasyShare to EasyShare digital camera models. In
addition, D&AI experienced sales declines as a result of portfolio
actions, which impacted their revenues in the quarter. In the
Commercial and Government Systems business, revenues declined mid-
single digits due to supplier pullback for components used in consumer
electronics products and the impact of flight restrictions on the
aerial imaging industry following the September 11th attacks.
Third quarter consumer digital camera revenue growth declined year over
year. While digital camera unit volumes were flat, price/mix impacted
revenues due to ongoing price erosion in the category and Kodak's
strategy shift, which focuses on mass-market distribution channels.
Consumer digital camera market share increased from year-end 2000
levels, while declining from second quarter levels. Kodak has
maintained its third place position in the U.S. market as a result of
pricing initiatives and increasingly strong market acceptance of the
new EasyShare consumer digital camera system.
In the third quarter, Kodak's inkjet paper business continued to grow
strong double digits and Ofoto continued to show strong order growth.
In the quarter, SG&A expenses for the Other Imaging segment increased
year over year, from $106 million to $134 million, principally due to
acquisitions with higher SG&A rates than the segment average. SG&A
increased from 15.6% to 21.9% as a percent of sales.
21
Losses from operations for the Other Imaging segment were $4 million
versus earnings of $65 million in the year ago quarter. The loss
experienced in the quarter is primarily the result of earnings declines
from most of the "Other Imaging" businesses. Net earnings decreased
$53 million, from $49 million in 2000 to a loss of $4 million in 2001.
Year to date
Consolidated
Sales for the nine months ended September 30, 2001 were $9.875 billion,
representing a 5% decrease from the comparable 2000 period. Adjusting
for portfolio changes, revenues decreased 6%. Exchange had a $285
million negative impact on the year-to-date period. When adjusted for
both portfolio changes and currency movement, sales decreased 4% from
the comparable 2000 period. Reported U.S. sales were approximately
$4.810 billion, 5% lower than 2000. Sales outside the U.S. were
approximately $5.065 billion, representing a 6% decline year over year,
as reported. Excluding the unfavorable impact of foreign exchange,
sales outside the U.S. declined by 1% year over year.
Sales in Emerging Markets, which accounted for 18% of the Company's nine-
month sales, decreased 5% from the comparable 2000 period. The Emerging
Market portfolio showed growth in Greater Russia (+18%), but declines in
Greater China (-8%), Asia Area (-6%), Latin America (-3%), and Eastern
Europe, Africa, and the Middle East (-8%). The declines are reflective
of general economic weakening in many Emerging Market countries.
Gross profit decreased 20% in the year-to-date period, from 42.2% of
sales to 35.8% of sales. These margins reflect a decline in
productivity due to a combination of lower sales and inventory reduction
initiatives and the negative impact of price, mix, and exchange. 2001
gross profit includes inventory write-downs of $91 million and
accelerated depreciation of $26 million related to the Company's
restructuring program and other asset impairments, and accelerated
depreciation and relocation costs of approximately $18 million. 2000
gross profit included accelerated depreciation and relocation costs of
approximately $41 million. Excluding these charges, gross profit
declined 17%.
SG&A expenses increased from $1.822 billion to $1.864 billion,
representing an increase as a percent of sales from 17.5% to 18.9%.
SG&A excluding advertising expenses also increased as a percent of
sales, from 12.7% to 14.4%, principally due to lower sales and the
impact of portfolio changes.
R&D expenditures decreased from $606 million to $572 million and
remained flat as a percentage of sales at 5.8%. Included in R&D expense
for 2000 were in-process R&D charges of approximately $10 million.
22
Earnings from operations decreased 67%. Included in earnings from
operations in 2001 are charges totaling $506 million related to
restructuring, asset impairments associated with a photofinishing
operation, Wolf Camera, and the exit of a manufacturing facility.
Earnings from operations in 2000 included charges of approximately $41
million for accelerated depreciation and relocation expenses partially
offset by other charges and credits which increased earnings from
operations by approximately $13 million. Year-over-year currency
movements had a $73 million negative impact on earnings from operations.
Interest expense increased 35% from the prior period due to higher
average borrowing rates. Other income (charges) decreased $105 million
primarily due to an increased investment related to the Phogenix joint
venture and lower gains on the sale of stock investments and property
sales.
Net earnings decreased 77%, from $1,213 million to $282 million, for the
nine months ended September 30, 2000 and September 30, 2001,
respectively. Earnings per share decreased 75% from the nine-month
period of 2000. Earnings per share decreased 46% when adjusted for
special charges in 2001 discussed above and accelerated depreciation and
relocation expenses associated with an equipment manufacturing facility
in 2000. The effective tax rate was 33% in 2001 and 34% in 2000.
Consumer Imaging
Year-to-date sales in the Consumer Imaging segment decreased 8% year
over year, or 6% excluding unfavorable foreign exchange movement. U.S.
sales decreased 10% while sales outside the U.S. decreased 6%, or 1%
excluding the effect of exchange movements.
Worldwide film sales (including 35mm film, Advantix film, and one-time-
use cameras) decreased 6% over the first nine months of 2000. This was
due to a 2% volume decrease, 1% lower prices, and a negative foreign
exchange movement of 3%. U.S. film sales decreased 4% due to a volume
decrease. Outside the U.S., film sales to dealers decreased 8%,
reflecting 1% lower volumes and negative price and exchange movements of
2% and 5%, respectively.
Worldwide paper sales decreased 11% for the nine months ended September
30, 2001 over the comparable prior-year period. This decrease reflects
3% volume declines, 5% lower prices, and a negative impact on currency
of 3%. U.S. paper sales decreased 10%, reflecting volume declines of 4%
and price declines of 6%. Outside the U.S., paper sales declined 11%,
with slight volume declines and negative price and exchange movements of
4% each.
SG&A expenses for the segment decreased 2%, from $1,043 million to
$1,025 million, reflecting the benefits of the Company's cost reduction
efforts, but increased as a percent of sales from 18.7% to 20.1%.
Excluding advertising expenses, SG&A expenses increased 7%, from 11.7%
of sales to 13.5%. R&D expenses decreased 9%, from $244 million to $223
million, and remained flat as a percentage of sales.
23
Earnings from operations decreased 39%, as the benefits of cost
reductions were more than offset by unfavorable exchange, lower
effective selling prices, and lower manufacturing volumes. Net earnings
were $418 million, which reflects a 43% decline from the prior-year
period.
Health Imaging
Sales in the Health Imaging segment increased 4% from the prior year-to-
date period, or 7% excluding the adverse effect of currency movements.
Increased sales of DryView media more than offset an expected decrease
in wet laser imaging sales. Sales inside the U.S. increased 5%, while
sales outside the U.S. increased 3%. Excluding the adverse effect of
foreign currency movement, sales outside the U.S. increased 9%.
SG&A expenses for the segment increased 7%, from $258 million to $275
million, and increased as a percentage of sales from 15.8% to 16.3%.
Excluding advertising expenses, SG&A expenses increased 8%, from 14.7%
of sales to 15.2%. R&D expenses increased 12%, from 6.3% of sales to
6.7%.
Earnings from operations decreased 34%, primarily due to price declines,
the impact of changes in product mix and the negative impact of
exchange. Segment net earnings decreased 35%, from $270 million to $176
million, for the nine months ended September 30, 2000 and September 30,
2001, respectively.
Kodak Professional
Sales in the Kodak Professional segment decreased 11% from the first
nine months of 2000. While sales declined in most categories, including
color reversal film and graphics films, Kodak Professional experienced
an increase in sales for both scanners and inkjet printers and media.
Sales were impacted by ongoing digital substitution and continued
economic weakness. U.S. revenues decreased 11% and revenues outside the
U.S. decreased 12%, or 8% excluding the unfavorable impact of foreign
exchange.
SG&A expenses for the segment decreased 11%, but increased as a
percentage of sales from 17.3% to 17.4%. Excluding advertising
expenses, SG&A expenses decreased 8%, but increased as a percentage of
sales from 14.9% of sales to 15.4%. R&D expenses decreased 20%, from
7.8% of sales to 7.1%.
Earnings from operations decreased 31%, from $212 million to $146
million, primarily due to lower gross profit margins driven by adverse
pricing and product mix, lower sales volume, and unfavorable exchange.
Net earnings declined 18%, from $96 million to $79 million, for the nine
months ended September 30, 2000 and September 30,2001, respectively.
24
Other Imaging
Sales in the Other Imaging segment decreased 1% from the prior year-to-
date period. Adjusting for the impact of portfolio changes, segment
sales decreased 3%. While most of the segment's businesses experienced
declines, digital cameras unit volumes increased 20%.
SG&A expenses for the segment increased 22%, from 15.3% of sales to
18.9%. Excluding advertising expenses, SG&A expenses increased 21%,
from 12.5% of sales to 15.3%. Year-to-date 2000 SG&A expenses included
other charges of approximately $23 million, primarily related to Eastman
Software and PictureVision. R&D expenses decreased 3%, from 8.1% of
sales to 8.0%.
Earnings from operations were $76 million, $128 million lower than the
prior-year period. 2001 earnings from operations include charges of
approximately $4 million for accelerated depreciation and relocation
expenses. 2000 earnings from operations included charges of
approximately $8 million for accelerated depreciation and relocation
expenses, and other charges of approximately $40 million, primarily
related to Eastman Software and PictureVision. Aside from these
charges, earnings from operations reflect higher SG&A costs in 2001.
Net earnings for the segment were $61 million, a decrease of $88 million
over the prior year.
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RESTRUCTURING PROGRAMS AND COST REDUCTION
The following table summarizes activity with respect to the
restructuring charges in the second and third quarters of 2001:
(in millions)
Long-term
Assets &
Severance Inventory Other
------------------- --------- ---------
Number of
Employees Reserve Reserve Reserve Total
--------- ------- ------- ------- -----
2001 charges 2,700 $ 134 $ 77 $ 158 $ 369
2001 utilization (1,000) (15) (77) (158) (250)
-------- ----- ----- ----- -----
Ending balance at
September 30, 2001 1,700 $ 119 $ - $ - $ 119
======== ===== ===== ===== =====
During the second quarter of 2001, the Company recorded a pre-tax
restructuring charge of $316 million primarily for the rationalization
of the U.S. photofinishing business, the elimination of excess
manufacturing capacity, the exit of certain businesses and reductions in
selling, general, and administrative positions worldwide. The Company
recorded $57 million of the $316 million provision as costs of goods
sold related to inventory write-downs. The remaining $259 million was
recorded for employee severance payments, business exit costs and write-
offs of capital assets, goodwill and investments and is included in the
"Restructuring costs and other" component in the accompanying
Consolidated Statement of Earnings.
25
In the second quarter, approximately $127 million of the restructuring
charge of $316 million was for employee severance covering 2,400
worldwide positions. The geographic breakdown includes approximately
1,100 employees in the U.S. and Canada and 1,300 throughout the rest of
the world. The 2,400 personnel were associated with the realignment of
manufacturing (600), service and photofinishing operations (700), R&D
(150) and administrative (950) functions in various locations of the
Company's worldwide operations. The remaining $189 million of the $316
million charge covers capital write-offs, business exit costs and other
asset impairments.
During the third quarter of 2001, the Company continued its cost
reduction actions and recorded a pre-tax restructuring charge of $53
million primarily for the rationalization of the worldwide
photofinishing business, the elimination of excess manufacturing
capacity, the exit of certain businesses and reductions in selling,
general and administrative positions worldwide. The Company included
$41 million of the $53 million provision in the "Costs of goods sold"
component in the accompanying Consolidated Statement of Earnings,
representing a $20 million inventory write-down associated with product
line discontinuances and $21 million related to accelerated
depreciation on assets presently used in operations which will be
disposed of through abandonment within the first six months of 2002.
Of the remaining $12 million in restructuring charges that were
included in the "Restructuring and other costs" component in the
accompanying Consolidated Statement of Earnings, approximately $7
million represents employee severance covering approximately 300
worldwide positions. The geographic breakdown was comprised of
approximately 10 employees in U.S. and Canada and 290 employees
throughout the rest of the world. The 300 personnel were associated
with the realignment of manufacturing (200), service and photofinishing
(60) and administrative (40) functions in various locations within the
Company's worldwide operations. The remaining $5 million of the $53
million charge represents capital write-offs.
Due to the prolonged economic weakness in the U.S. and abroad, the
Company will continue its cost reduction efforts in the fourth quarter,
which are expected to result in additional worldwide employment
reductions of 3,500 to 4,000. The anticipated fourth quarter severance
charge is expected to total approximately $200 million, with non-
personnel related expenses possibly increasing the amount of the total
charge to be recorded. Including the fourth quarter restructuring
activity, the Company will have completed or initiated cost actions
that are expected to result in total employment reductions in the range
of 6,500 to 7,500. Total estimated pre-tax savings from severance and
other non-personnel actions will be approximately $400 million to $450
million for 2002.
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26
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that all business combinations be accounted for
under the purchase method and that certain acquired intangible assets in
a business combination be recognized as assets apart from goodwill.
SFAS No. 142 requires that ratable amortization of goodwill be replaced
with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June
30, 2001 and for all business combinations accounted for by the purchase
method for which the date of acquisition is after June 30, 2001. The
provisions of SFAS No. 142 will be effective for fiscal years beginning
after December 15, 2001, and will thus be adopted by the Company, as
required, in fiscal year 2002. The impact of SFAS No. 141 and SFAS No.
142 on the Company's financial statements has not yet been determined.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets to be held and used, to be disposed of other than by
sale and to be disposed of by sale. Although the Statement retains
certain of the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," it supersedes SFAS No. 121 and Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the
disposal of a segment of a business. SFAS No. 144 also amends
Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Statement
is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years,
and will thus be adopted by the Company, as required, on January 1,
2002. The impact of SFAS No. 144 on the Company's financial statements
has not yet been determined.
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27
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 as sub-units of the Euro. New public debt
will be issued in Euros and existing debt may be redenominated into
Euros. 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. Greece will now be part of the transition. The Company has
operations in all of these countries.
As a result of the Euro conversion, it is possible 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 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.
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. Under the 'no compulsion no
prohibition' rules, billing systems have been modified so that the
Company is now able to show total gross, value added tax, and net in
Euros on national currency invoices. This enables 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 in the affected countries were
the national currencies until May 2001 (except Germany and Austria
(October 2001)), when they changed to the Euro. Systems changes for
countries not on SAP (Finland and Greece) are also being implemented in
2001.
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28
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first nine months of
2001 was $l,066 million. Net earnings, adjusted for depreciation and
amortization and restructuring costs and other charges, provided $1,456
million of operating cash. Net cash provided by operating activities of
$1,066 million reflects a decrease in liabilities excluding borrowings
of $563 million and an increase in receivables of $114 million
(reflecting normal seasonal changes). Net cash used in investing
activities of $782 million for the first nine months of 2001 was
primarily to support capital expenditures and acquisitions. The Company
anticipates total capital spending of approximately $800 million in
2001, a 15% decrease from full year 2000 levels. Net cash used in
financing activities of $275 million for the first nine months of 2001
was primarily due to net increases in total borrowings of $132 million,
reduced by $384 million of dividend payments and $44 million for stock
repurchases.
Cash dividends per share of $.44, payable quarterly, were declared in
the third quarter of 2001 and 2000. Total cash dividends of $384
million and $406 million were declared in the first nine months of 2001
and 2000, respectively. On October 12, 2001, the Company announced its
decision to change the timing of its dividend payments from quarterly to
semi-annually. The dividend payments will now be made in July and
December to better align these disbursements with the seasonal cash flow
pattern of the business, which is more concentrated in the second half
of the year.
During the first quarter, the Company repurchased about 0.9 million
shares for approximately $44 million as part of the $2 billion share
repurchase program approved by the Board of Directors on April 16, 1999.
The cumulative program total to date is approximately 32 million shares
or $1.8 billion. As of March 2, 2001, the Company suspended the stock
repurchase program in a move designed to accelerate debt reduction and
increase financial flexibility to take advantage of acquisition
opportunities.
During the second quarter, the Company issued Medium-Term Notes
consisting of floating-rate notes in the amount of $150 million maturing
on September 16, 2002 and 6.375% fixed-rate notes in the amount of $500
million maturing on June 15, 2006.
The Company anticipates that its operating cash flow, along with
borrowings under its credit facility, will be sufficient to meet
anticipated future operating expenses, capital expenditures and debt
service obligations as they become due.
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29
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company, as a result of its global operating and financing
activities, is exposed to changes in foreign currency exchange rates,
commodity prices, and interest rates, which may adversely affect its
results of operations and financial position. In seeking to minimize
the risks and/or costs associated with such activities, the Company may
enter into derivative contracts. The fair value of these contracts is
reported in other current assets and/or current liabilities in the
Company's Statement of Financial Position.
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to
forecasted foreign currency denominated intercompany sales. At
September 30, 2001, the Company had cash flow hedges for the Euro, the
Canadian dollar, and the Australian dollar, with maturity dates ranging
from October 2001 to July 2002.
At September 30, 2001, the fair value of all open foreign currency
forward contracts was a pre-tax unrealized loss of $8 million, recorded
in other comprehensive income. Additionally, realized pre-tax losses of
$1 million, related to closed foreign currency contracts, have been
deferred in other comprehensive income. If all amounts deferred to
other comprehensive income related to these contracts were to be
realized, $9 million of pre-tax losses would be reclassified into cost
of goods sold over the next twelve months as the inventory transferred
in connection with the intercompany sale is sold to third parties.
During the third quarter of 2001, a pre-tax gain of less than $1 million
was reclassified from other comprehensive income to cost of goods sold
($10 million pre-tax loss year to date). Hedge ineffectiveness was
insignificant.
The Company does not apply hedge accounting to the foreign currency
forward contracts used to offset currency-related changes in the fair
value of foreign currency denominated assets and liabilities. These
contracts are marked to market through earnings at the same time that
the exposed assets and liabilities are remeasured through earnings (both
in other income). The majority of the contracts held by the Company are
denominated in Euros, Australian dollars, Chinese renminbi, Swiss
francs, and Canadian dollars.
A sensitivity analysis indicates that if foreign currency exchange rates
at September 30, 2001 and 2000 increased 10%, the Company would incur
losses of $28 million and $67 million on foreign currency forward
contracts outstanding at September 30, 2001 and 2000, respectively. Such
losses would be substantially offset by gains from the revaluation or
settlement of the underlying positions hedged.
The Company has entered into silver forward contracts that are
designated as cash flow hedges of price risk related to forecasted
worldwide silver purchases. The Company used silver forward contracts
to minimize virtually all of its exposure to increases in silver prices
in 2000 and 2001. At September 30, 2001, the Company had open forward
contracts, with maturity dates ranging from October 2001 to June 2002,
hedging virtually all of its planned silver requirements through June
2002.
30
At September 30, 2001, the fair value of open silver forward contracts
was a pre-tax unrealized net gain of $1 million, recorded in other
comprehensive income. If this amount were to be realized, $1 million of
this net gain would be reclassified into cost of goods sold during the
fourth quarter of 2002. During the third quarter of 2001, a realized
pre-tax loss of $11 million was recorded in cost of goods sold ($25
million pre-tax loss year to date). At September 30, 2001, realized pre-
tax losses of $9 million, related to closed silver contracts, were
recorded in other comprehensive income. These losses will be
reclassified into cost of goods sold as silver-containing products are
sold, all within the next twelve months. Hedge ineffectiveness was
insignificant.
A sensitivity analysis indicates that, based on broker-quoted termination
values, if the price of silver decreased 10% from spot rates at September
30, 2001 and 2000, the fair value of silver forward contracts would be
reduced by $17 million and $29 million, respectively. Such losses in
fair value, if realized, would be offset by lower costs of manufacturing
silver-containing products.
The Company is exposed to interest rate risk primarily through its
borrowing activities and, to a lesser extent, through investments in
marketable securities. The Company utilizes U.S. dollar denominated and
foreign currency denominated borrowings to fund its working capital and
investment needs. The majority of short-term and long-term borrowings
are in fixed-rate instruments. There is inherent 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 predictable
because of the variability of future interest rates and business
financing requirements.
In July 2001, the Company entered into an interest rate swap agreement
designated as a cash flow hedge of the LIBOR-based floating-rate interest
payments on $150 million of debt issued June 26, 2001 and maturing
September 16, 2002. The swap effectively converts interest expense on
that debt to a fixed annual rate of 4.06%.
At September 30, 2001, the fair value of the swap was a pre-tax loss of $2
million, recorded in other comprehensive income. If this amount were to
be realized, all of this loss would be reclassified into interest expense
within the next twelve months. During the third quarter of 2001, less
than $1 million was charged to interest expense related to the swap.
There was no hedge ineffectiveness.
Using a yield-to-maturity analysis, if September 30, 2001 interest rates
increased 10% (about 43 basis points) with the current period's level of
debt, there would be decreases in fair value of short-term and long-term
borrowings of $1 million and $27 million, respectively. If September 30,
2000 interest rates increased 10% (about 62 basis points) with the
September 30, 2000 level of debt, there would be decreases in fair value
of short-term and long-term borrowings of $2 million and $22 million,
respectively.
31
The Company's financial instrument counterparties are high-quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk
by requiring specific minimum credit standards and diversification of
counterparties. The Company has procedures to monitor the credit
exposure amounts. The maximum credit exposure at September 30, 2001 was
not significant to the Company.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 29, 2001, the Company and the U.S. Environmental Protection Agency,
Region 2 (EPA), reached a settlement of an administrative enforcement
action initiated by the EPA on October 6, 2000, alleging violations of air
monitoring requirements under the Resource Conservation and Recovery Act
(RCRA), the law that regulates the management of hazardous waste. These
issues arose as the result of an inspection conducted by the EPA at the
Company's Kodak Park manufacturing facility in Rochester, New York in May
1999. The complaint, alleging six counts of failing to test and monitor
certain valves, containers, and pumps at Kodak Park, sought a penalty of
$303,064 and an Order requiring the Company to come into compliance.
Although the Company did not dispute the allegations with respect to some
equipment, many of the EPA's allegations were based on a more expansive
interpretation of the applicability of the hazardous waste program to
equipment that the Company believed to be process equipment (and therefore
exempt). The settlement redefines the boundary of equipment to which the
hazardous waste regulations apply in a manner that preserves the Company's
manufacturing flexibility and addresses EPA's regulatory issues, requires
the Company to come into compliance for the additional equipment, and
imposes a penalty of $175,000.
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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 33.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed for the
quarter ended September 30, 2001.
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32
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.
EASTMAN KODAK COMPANY
(Registrant)
Date November 9, 2001
Robert P. Rozek
Controller
33
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit
Number Page
(10) T. Eastman Kodak Company Executive Protection Plan,
effective July 25, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.) 34
34
Exhibit (10) T.
EASTMAN KODAK COMPANY EXECUTIVE PROTECTION PLAN
Effective July 25, 2001, Exhibit A of the Eastman Kodak Company Executive
Protection Plan was amended to add Patricia F. Russo as a Tier I Employee
and Section 2.15 of the Plan was amended in its entirety to read as
follows:
2.15 Qualifying Termination
"Qualifying Termination" means for all Participants other than Kodak's
Chief Executive Officer and President: (a) a termination of the
Participant's employment by the Employer other than for Cause, or (b)
a termination of the Participant's employment by such Participant for
Good Reason. In the case of Kodak's Chief Executive Officer,
"Qualifying Termination" means: (a) a termination of the Chief
Executive Officer's employment by the Employer other than for Cause,
or (b) a termination of the Chief Executive Officer's employment by
the Chief Executive Officer for Good Reason or (c) a voluntary
termination of employment by the Chief Executive Officer for any
reason (or no reason at all) during the 30-day period commencing 23
months after the date of a Change in Control. In the case of Kodak's
President, "Qualifying Termination" means: (a) a termination of the
President's employment by the Employer other than for Cause, or (b) a
termination of the President's employment by the President for Good
Reason or (c) a voluntary termination of employment by the President
for any reason (or no reason at all) during the 30-day period
commencing 23 months after the date of a Change in Control.
Termination of a Participant's employment on account of Participant's
death or on account of Participant's disability, as defined under the
Employer's long-term disability plan, shall not be treated as a
Qualifying Termination.