Eastman Kodak Company Financial Discussion Document
First Quarter 2003 Results
2003 COMPARED WITH 2002
First quarter, 2003 presentation reflects the adoption of the
Securities and Exchange Commission's final rules under "Conditions for
Use of Non-GAAP Financial Measures", which requires that financial
information be presented on a basis that conforms with generally
accepted accounting principles (GAAP) in the U.S. As a result, the
financial discussion which follows reflects the company's results from
continuing operations on an "as reported" or "GAAP" basis. However,
the Company also believes that presenting income from continuing
operations excluding non-operational items is an important additional
measure of performance that can be used for comparing results between
reporting periods.
First Quarter
Consolidated Revenues:
Net worldwide sales were $2.740 billion for the first quarter of
2003 as compared with $2.706 billion for the first quarter of 2002,
representing an increase of $34 million, or 1% as reported, a decrease
of 4% excluding the favorable impact of exchange. The increase in net
sales was comprised of:
-- Volume: remained essentially unchanged year over year.
-- Price/Mix: price/mix reduced first quarter sales by
approximately 4.0 percentage points, primarily driven by
consumer film and consumer digital cameras.
-- Exchange: favorable exchange of approximately 5.0 percentage
points offset the negative impacts of price/mix.
Net sales in the U.S. were $1.149 billion for the first quarter of
2003 as compared with $1.247 billion for the prior year quarter,
representing a decrease of $98 million, or 8%. Net sales outside the
U.S. were $1.591 billion for the current quarter as compared with
$1.459 billion for the first quarter of 2002, representing an increase
of $132 million, or 9% as reported, a decrease of 1% excluding the
favorable impact of exchange.
Non-U.S. Revenues:
The Company's operations outside the U.S. are reported in three
regions: (1) the Europe, Africa and Middle East region ("EAMER"), (2)
the Asia Pacific region and (3) the Canada and Latin America region.
Net sales in the EAMER region were $795 million for the first
quarter of 2003 as compared with $716 million for the prior year
quarter, representing an increase of $79 million or 11% as reported, a
decrease of 4% excluding the favorable impact of exchange.
Net sales in the Asia Pacific region were $548 million for the
current quarter as compared with $504 million for the prior year
quarter, representing an increase of $44 million, or 9% as reported,
an increase of 3% excluding the favorable impact of exchange.
Net sales in the Canada and Latin America region were $248 million
in the current quarter as compared with $239 million for the first
quarter of 2002, representing an increase of $9 million, or 4% as
reported, an increase of 2% excluding the favorable impact of
exchange.
Emerging Markets:
The Company's major emerging markets include China, Brazil, India,
Mexico, Russia, Korea, Hong Kong and Taiwan. Net sales in emerging
markets were $578 million for the first quarter of 2003 as compared
with $545 million for the prior year quarter, representing an increase
of $33 million, or 6% as reported, or 4% excluding the favorable
impact of exchange. The emerging market portfolio accounted for
approximately 21% of Kodak's worldwide sales and 36% of Kodak's
non-U.S. sales in the quarter. Sales growth in China, Russia and India
of 28%, 40% and 14%, respectively, was partially offset by declines in
Brazil and Mexico of 23% and 5%, respectively.
The growth in China resulted from strong business performance for
all Kodak's operations in that region. The increase in sales in Russia
is the result of new channel expansion for Kodak products and services
and the continued success of camera seeding programs. The declines in
Brazil and Mexico are reflective of continued economic weakness in
those emerging market countries.
Gross Profit:
GAAP:
Gross profit was $824 million for the first quarter of 2003 as
compared with $860 million for the first quarter of 2002, representing
a decrease of $36 million, or 4%. The gross profit margin was 30.1% in
the current quarter as compared with 31.8% in the prior year quarter.
The 1.7 percentage point decrease was primarily attributable to:
-- Price/Mix: price/mix declines reduced gross profit margins by
approximately 4.0 percentage points. These declines relate
primarily to consumer film and consumer digital cameras.
-- Productivity/Cost: manufacturing productivity/cost favorably
impacted gross profit margins by approximately 1.0 percentage
point.
-- Exchange: favorably impacted gross profit margins by
approximately 1.0 percentage point.
Operational:
Excluding accelerated depreciation of $14 million resulting from
the Company's focused cost reduction actions, gross profit on an
operational basis was $838 million for the first quarter of 2003 as
compared with $860 million for the first quarter of 2002, representing
a decrease of $22 million, or 3%. The gross profit margin was 30.6% in
the current quarter as compared with 31.8% in the prior year quarter.
The 1.2 percentage point decrease was primarily attributable to:
-- Price/Mix: price/mix declines reduced gross profit margins by
approximately 4.0 percentage points.
-- Productivity/Cost: manufacturing productivity/cost favorably
impacted gross profit margins by approximately 2.0 percentage
points.
-- Exchange: favorably impacted gross profit margins by 1.0
percentage point.
Selling, General and Administrative Expenses:
GAAP:
Selling, general and administrative expenses (SG&A) were $566
million for the first quarter of 2003 as compared with $540 million
for the prior year quarter, representing an increase of $26 million,
or 5%. SG&A increased as a percentage of sales from 20.0% for the
first quarter of 2002 to 20.7% for the current quarter. The increase
in SG&A is primarily attributable to a charge of $12 million relating
to an intellectual property settlement and unfavorable exchange of $28
million, partially offset by cost reduction actions.
Operational:
Excluding the $12 million charge relating to the intellectual
property settlement, SG&A expenses on an operational basis were $554
million for the first quarter of 2003 as compared with $540 million
for the prior year quarter, representing an increase of $14 million,
or 3%. The increase in SG&A is primarily attributable to unfavorable
exchange of $28 million, partially offset by cost reduction actions.
As a percentage of sales, SG&A remained essentially unchanged.
Research and Development Costs:
GAAP:
Research and Development costs (R&D) were $194 million for the
first quarter of 2003 as compared with $187 million for the first
quarter of 2002, representing an increase of $7 million, or 4%. R&D
increased as a percentage of sales from 6.9% for the first quarter of
2002 to 7.1% for the current quarter. The net increase in R&D is the
result of a $21 million R&D charge relating to the company's purchase
of rights to certain print technology that is currently in development
and not yet ready for commercialization. This technology qualifies as
in-process R&D and, therefore, was written off in the quarter. This
in-process R&D charge was offset primarily by cost savings realized
from position eliminations associated with the prior year's cost
reduction programs.
Operational:
Excluding $21 million for in-process R&D charges, R&D expenses on
an operational basis were $173 million for the first quarter of 2003
as compared with $187 million for the first quarter of 2002,
representing a decrease of $14 million, or 7%. As a percentage of
sales, R&D decreased from 6.9% in the first quarter of 2002 to 6.3% in
the current quarter due to cost savings realized from position
eliminations associated with the prior year's cost reduction programs.
Focused Cost Reductions:
During the first quarter of 2003, as part of its continuing
focused cost-reduction efforts, the Company announced that it intended
to reduce head count by 2,300 to 2,900 during the year, of which 500
to 700 were remaining actions from the fourth quarter of 2002 relating
primarily to the relocation of certain manufacturing activities and
elimination of positions in R&D and global manufacturing. The
remaining 1,800 to 2,200 positions represent new initiatives primarily
relating to the rationalization of the Company's photofinishing
operations in the U.S. and EAMER.
The total net restructuring charge recorded in the first quarter
of 2003 was $32 million, which was primarily comprised of severance
charges relating to the elimination of 875 positions. Of the 875
positions, 425 positions relate to the actions announced in the first
quarter of 2003 and 450 positions relate to the actions announced in
the fourth quarter of 2002. In addition, during the quarter, the
company recorded accelerated depreciation of $14 million associated
with assets to be disposed of in connection with the relocation of
certain manufacturing operations.
Earnings From Operations:
GAAP:
Earnings from operations (EFO) for the first quarter of 2003 were
$32 million as compared with $133 million for the first quarter of
2002, representing a decrease of $101 million, or 76%. This decrease
is attributable to the reasons indicated above.
Operational:
Excluding restructuring, accelerated depreciation, an in-process
R&D charge and an intellectual property settlement, EFO on an
operational basis for the first quarter of 2003 were $111 million as
compared with $133 million for the first quarter of 2002, representing
a decrease of $22 million, or 17%. The decrease in earnings from
operations was primarily the result of lower gross profit margins
caused by unfavorable price/mix not fully offset by favorable
productivity.
Below EFO:
Interest expense for the first quarter of 2003 was $37 million as
compared with $44 million for the prior year quarter, representing a
decrease of $7 million, or 16%. The decrease in interest expense is
primarily attributable to lower average borrowing levels and lower
interest rates in the first quarter of 2003 relative to the prior year
quarter.
The other charges component includes principally investment
income, income and losses from equity investments, foreign exchange
and gains and losses on the sales of assets and investments. Other
charges for the current quarter were $21 million as compared with
other charges of $31 million for the first quarter of 2002. The
decrease is primarily attributable to reduced losses on foreign
exchange.
Corporate Tax Rate:
The Company's effective tax rate from continuing operations,
excluding the non-operational items described below, decreased from
29% for the prior year quarter to 26% for the first quarter of 2003.
The lower effective tax rate in the current year quarter as compared
with the prior year quarter is primarily attributable to expected
further increased earnings, relative to total earnings, in lower tax
rate jurisdictions.
During the first quarter of 2003, the Company recorded a tax
benefit of $23 million. The primary drivers of the tax benefit were
the following items that occurred in the first quarter and which were
treated on a discrete period basis:
-- A $46 million charge for focused cost reductions
-- A $21 million charge for in-process R&D
-- A $12 million charge for an intellectual property settlement
-- An $8 million tax benefit related to the donation of
intellectual property
Earnings (Loss) from Continuing Operations:
GAAP:
The loss from continuing operations for the first quarter of 2003
was $3 million, or $.01 per diluted share, as compared with earnings
from continuing operations for the first quarter of 2002 of $41
million, or $.14 per diluted share, representing a decrease of $44
million year over year. This decrease in earnings from continuing
operations is attributable to the reasons described above.
Operational:
Earnings from continuing operations on an operational basis for
the first quarter of 2003 were $39 million, or $.14 per diluted share,
as compared with earnings from continuing operations on an operational
and as reported basis for the first quarter of 2002 of $41 million, or
$.14 per diluted share, representing a decrease of $2 million, or 5%.
First quarter operational earnings from continuing operations for 2003
exclude the following after-tax items:
-- A charge of $30 million ($46 million pre-tax), or $.10 per
share, resulting from previously announced cost reduction
initiatives in the first quarter, of which $32 million are
recorded in "Restructuring costs and other". Accelerated
depreciation of $14 million associated with the relocation of
certain manufacturing operations is recorded in "Cost of goods
sold" (COGS).
-- A charge of $13 million ($21 million pre-tax) or $.05 per
share is recorded in "Research and development costs" (R&D)
and relates to the company's purchase of rights to print
technology that is currently in development and not yet ready
for commercialization. This technology qualifies as in-process
R&D.
-- A charge of $7 million ($12 million pre-tax) or $.03 is
recorded in SG&A and relates to an intellectual property
settlement.
These charges were partially offset by:
-- A tax benefit totaling $8 million, or $.03 per share relating
to the Company's donation of intellectual property.
Earnings (Loss) from Discontinued Operations:
Earnings from discontinued operations for the first quarter of
2003 were $.05 per diluted share, as compared with a loss from
discontinued operations for the first quarter of 2002 of $.01 per
diluted share.
During the quarter, the company reversed a tax reserve of $15
million through discontinued operations. The tax reserve was initially
established due to the uncertainty surrounding the ultimate
realizability of tax benefits that the Company would receive from
certain indemnification payments made in connection with the disposal
of a business. The reversal of the tax reserve was triggered by the
elimination of the uncertainty surrounding the realizability of such
benefits.
Net Earnings:
Net earnings for the first quarter of 2003 were $12 million, or
$.04 per diluted share as compared with net earnings for the first
quarter of 2002 of $39 million, or $.13 per diluted share,
representing a decrease of $27 million. This decrease is primarily
attributable to the reasons outlined above.
Year-over-Year Comparison of Reported and Operational Earnings
(Amounts in millions of dollars)
1Q 03 as Excluded 1Q 03 1Q 02 a
Reported Items Operational
------------------------------------
Sales $2,740 $2,740 $2,706
COGS 1,916 14 b 1,902 1,846
--------- -------------------
Gross Profit 824 838 860
SG&A 566 12 c 554 540
R&D 194 21 d 173 187
Restructuring costs and other 32 32 e - -
---------
EFO 32 111 133
Interest Expense (37) (37) (44)
Other Income/Charges (21) (21) (31)
--------- -------------------
Below EFO (58) (58) (75)
(Loss) Earnings Before Taxes (26) 53 58
(Benefit) Provision for Tax (23) 37f 14 17
--------- -------------------
(Loss) Earnings - Cont. Ops. (3) 39 41
Earnings (Loss) Disc. Ops. 15 (2)
--------- -------
Net Earnings $12 $39
Diluted EPS - Cont. Ops. ($0.01) $0.14 $0.14
Diluted EPS $0.04 $0.13
- ----------------------------------------------------------------------
Items Excluded from Earnings from Continuing Operations on an
Operational Basis
a - There were no excluded items in Q1 2002
b - Accelerated Depreciation in connection with focused cost
reductions of $14 million
c - Intellectual Property Settlement of $12 million
d - Charge for In-Process R&D of $21 million
e - Charge for focused cost reductions of $32 million
f - Tax Benefit for Donation of Intellectual Property of $8
million and the tax impacts associated with the
above-mentioned excluded items.
As Percent of Sales:
1Q 03 as 1Q 03 1Q 02
Reported Operational
--------------------------
Gross Profit 30.1% 30.6% 31.8%
SG&A 20.7% 20.2% 20.0%
SG&A w/o Advertising 16.9% 16.4% 16.4%
R&D 7.1% 6.3% 6.9%
EFO 1.2% 4.1% 4.9%
Net Earnings (0.1%) 1.4% 1.5%
- ----------------------------------------------------------------------
Segment Results:
Photography
Revenues:
Net worldwide sales for the Photography segment were $1.798
billion for the first quarter of 2003 as compared with $1.814 billion
for the first quarter of 2002, representing a decrease of $16 million,
or 1% as reported, or 7% excluding the favorable impact of exchange.
The decrease in net sales was comprised of:
-- Volume: volume reduced first quarter sales by approximately
1.0 percentage point.
-- Price/Mix: declines in price/mix reduced first quarter sales
by approximately 6.0 percentage points.
-- Exchange: favorable exchange of 6.0 percentage points offset
the negative impacts of price/mix.
Photography segment net sales in the U.S. were $687 million for
the current quarter as compared with $799 million for the first
quarter of 2002, representing a decrease of $112 million, or 14%.
Photography segment net sales outside the U.S. were $1.111 billion for
the first quarter of 2003 as compared with $1.015 billion for the
prior year quarter, representing an increase of $96 million, or 9% as
reported, or a decrease of 1% excluding the favorable impact of
exchange.
Consumer products and services revenues:
Net worldwide sales of consumer film products, including 35mm
film, Advantix film and one-time-use cameras, decreased 9% in the
first quarter of 2003 as compared with the first quarter of 2002,
reflecting 7% volume declines, negative 8% price/mix, partially offset
by 5% favorable exchange. Sales of the Company's consumer film
products within the U.S. decreased 24%, reflecting 16% volume declines
and negative 9% price/mix. Consistent with film pricing trends for the
last several consecutive quarters, price/mix declines for U.S.
consumer film products in the first quarter were approximately 4% to
5%. In addition, price/mix was further impacted by contractual
payments to retailers, which were distributed over lower film volumes
during the quarter. This accounted for the balance of the negative
price/mix trend.
Sales of the Company's consumer film products outside the U.S.
increased 1%, reflecting 3% volume declines, negative 4% price mix,
offset by a 9% favorable exchange.
U.S. consumer film industry volume decreased 10% in the first
quarter of 2003 as compared with the prior year quarter due to a
combination of continuing economic weakness, the shift of Easter into
the second quarter of 2003, and continued digital substitution
impacts. The Company's blended U.S. consumer film share increased
slightly on a volume basis relative to the first quarter of 2002.
Net worldwide sales of consumer color paper decreased 3% in the
first quarter of 2003 as compared with the first quarter of 2002,
reflecting 6% volume declines and negative 4% price/mix, partially
offset by 7% favorable exchange. Net sales of consumer color paper in
the U.S. decreased 17%, reflecting 14% volume declines and negative 4%
price/mix. Net sales of consumer color paper outside the U.S.
increased 3%, reflecting 2% volume declines and negative 4% price/mix,
offset by 10% favorable exchange.
Net worldwide photofinishing sales, including Qualex in the U.S.
and Consumer Imaging Services ("CIS") outside the U.S., decreased 14%
in the first quarter of 2003 as compared with the first quarter of
2002, reflecting lower volumes and price, partially offset by
favorable exchange. In the U.S., Qualex's sales decreased 22%,
reflecting the effects of a continued weak film industry, consumer's
shifting preference to on-site processing, and the adverse impact of
several hundred store closures by a major U.S. retailer. CIS revenues
in Europe benefited from the full-quarter impact of the acquisitions
of (1) Spector Photo Group's wholesale photofinishing and distribution
activities in France, Germany, and Austria, (2) ColourCare Limited's
wholesale processing and printing operations in the United Kingdom and
(3) Percolor photofinishing operations in Spain.
Net sales from the Company's consumer digital products and
services, which include Picture Maker kiosks/media and consumer
digital services revenue primarily from Picture CD and Retail.com,
increased 3% in the first quarter of 2003 as compared with the first
quarter of 2002, driven primarily by an increase in sales of kiosks.
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs remained flat at approximately 8% for the
first quarter, essentially unchanged from the previous quarter but
increasing from the 6.9% rate recorded in the first quarter of 2002.
The growth was driven by continued consumer acceptance of Picture CD
and Retail.com.
Net worldwide sales of consumer digital cameras increased 36% in
the first quarter of 2003 as compared with the prior year quarter,
primarily reflecting strong increases in volume, partially offset by a
decline in price. Sales continue to be driven by strong consumer
acceptance of the EasyShare digital camera system.
In line with normal seasonal trends, Kodak's U.S. consumer digital
camera market share declined modestly during the first quarter of 2003
on a quarter sequential basis. While complete data for first quarter
consumer digital market share is not yet available, all indications
are that Kodak continues to hold one of the top three U.S. market
share positions.
Net worldwide sales of inkjet photo paper increased 51% in the
current quarter as compared with the first quarter of 2002. The
Company maintained its top two market share position in the United
States quarter sequentially. The double-digit revenue growth and the
maintenance of market share are primarily attributable to strong
underlying market growth, and Kodak's introduction of a new product
line of small format inkjet papers.
The Company's Ofoto business increased its sales 86% in the first
quarter of 2003 as compared with the prior year quarter. Ofoto now has
7.5 million members and is consistently achieving a repeat customer
purchase rate of greater than 50%.
Professional products and services revenues:
Net worldwide sales of professional sensitized films, including
color negative, color reversal and commercial black and white films
decreased 7% in the first quarter of 2003 as compared with the first
quarter of 2002, primarily reflecting declines in volume. Net
worldwide sales of professional sensitized paper were unchanged in the
first quarter of 2003 as compared with the first quarter of 2002.
Sales declines resulted primarily from the combined impacts of ongoing
digital substitution and continued economic weakness in markets
worldwide.
During the first quarter, worldwide sales increases were recorded
for digital writers, scanners, digital systems and solutions, and
thermal media and equipment.
Entertainment products and services revenues:
Net worldwide sales of origination and print film to the
entertainment industry increased 18%, reflecting higher print film
volumes due to a strong industry motion picture release schedule in
North America and favorable exchange. The new Vision 2 origination
film continues to gain strong customer acceptance.
Gross profit:
Gross profit for the Photography segment was $502 million for the
first quarter of 2003 as compared with $550 million for the prior year
quarter, representing a decrease of $48 million or 9%. The gross
profit margin was 27.9% in the current year quarter as compared with
30.3% in the prior year quarter. The 2.4 percentage point decline was
primarily attributable to:
-- Price/Mix: declines in price/mix reduced gross profit margins
by approximately 5.0 percentage points.
-- Productivity/Cost: increases in manufacturing
productivity/cost favorably impacted gross profit margins by
approximately 2.0 percentage points.
-- Exchange: favorably impacted gross profit margins by
approximately 1.0 percentage point.
SG&A:
In the first quarter, SG&A expenses for the Photography segment
increased $13 million, or 3%, from $406 million in the first quarter
of 2002 to $419 million in the current quarter, and increased as a
percentage of sales from 22.4% to 23.3%. Excluding the unfavorable
impact of exchange, SG&A decreased due to cost reduction actions
implemented during the quarter.
R&D:
GAAP:
First quarter R&D costs for the Photography segment decreased $1
million, or 1%, from $129 million in the first quarter of 2002 to $128
million in the current quarter and remained unchanged as a percentage
of sales at 7.1%. The decrease in R&D was primarily attributable to
cost savings realized from position eliminations associated with the
prior year's cost reduction programs, which were almost fully offset
by the $21 million charge for purchased in-process R&D.
Operational:
Excluding the $21 million charge for purchased in-process R&D,
first quarter R&D expenses on an operating basis for the Photography
segment decreased $22 million, or 17%, from $129 million to $107
million and decreased as a percentage of sales from 7.1% in the prior
year quarter to 6.0% in the first quarter of 2003. The decrease in R&D
cost is primarily attributable to cost savings realized from employee
reductions associated with the prior year's cost reduction programs.
EFO:
GAAP:
Earnings from operations for the Photography segment decreased $62
million, from $16 million in the first quarter of 2002 to a loss from
operations of $46 million in the first quarter of 2003, primarily as a
result of the factors described above.
Operational:
Excluding $21 million for in-process R&D charges, earnings from
operations for the Photography segment on an operational basis
decreased $41 million, from $16 million in the first quarter of 2002
to a loss of $25 million in the first quarter of 2003, primarily as a
result of the factors described above.
Health Imaging
Revenues:
Net worldwide sales for the Health Imaging segment were $549
million for the first quarter of 2003 as compared with $521 million
for the prior year quarter, representing an increase of $28 million,
or 5% as reported, a decrease of 1% excluding the favorable impact of
exchange. The increase in sales was comprised of:
-- Volume: increases in volume contributed approximately 1.0
percentage point to first quarter sales, driven primarily by
digital media, digital capture equipment and equipment
services.
-- Price/Mix: decreases in price/mix reduced first quarter sales
by approximately 2.0 percentage points, primarily driven by
digital media and analog medical film.
-- Exchange: favorable exchange impacted sales by approximately
6.0 percentage points.
Net sales in the U.S. were $238 million for the current quarter as
compared with $248 million for the first quarter of 2002, representing
a decrease of $10 million, or 4%. Net sales outside the U.S. were $311
million for the first quarter of 2003 as compared with $273 million
for the prior year quarter, representing an increase of $38 million,
or 14% as reported, or 2% excluding the favorable impact of exchange.
Digital products and services revenues:
Net worldwide sales of digital products, which include laser
printers (DryView imagers and wet laser printers), digital media
(DryView and wet laser media), digital capture equipment (computed
radiography capture equipment and digital radiography equipment),
services and Picture Archiving and Communications Systems ("PACS"),
increased 11% in the first quarter of 2003 as compared with the prior
year quarter. The increase in digital product sales was primarily
attributable to higher volumes of digital media, digital capture
equipment and equipment services. Service revenues increased due to an
increase in digital equipment service contracts during the current
quarter.
Traditional products and services revenues:
Net worldwide sales of traditional products, including analog
film, equipment, chemistry and services, decreased 2% in the first
quarter of 2003 as compared with the first quarter of 2002 driven
primarily by lower specialty films volumes. Traditional analog film
products (excluding specialty films) increased 2% due to favorable
exchange. In the quarter, traditional analog film volumes increased
slightly, but were more than offset by unfavorable price.
Gross profit:
Gross profit for the Health Imaging segment was $229 million for
the first quarter of 2003 as compared with $195 million in the prior
year quarter, representing an increase of $34 million, or 17%. The
gross profit margin was 41.7% in the current quarter as compared with
37.4% in the first quarter of 2002. The increase in the gross profit
margin of 4.3 percentage points was principally attributable to:
-- Price/Mix: price/mix negatively impacted gross profit margins
by 1.5 percentage points due to lower prices for digital
media, analog film and laser printers.
-- Productivity/Cost: manufacturing productivity/cost favorably
impacted gross profit margins by 4.5 percentage points,
primarily due to favorable media and equipment manufacturing
productivity led by DryView digital media and digital capture
equipment, complemented by lower service costs and improved
supply chain management.
-- Exchange: favorable exchange added approximately 1.0
percentage point to the gross profit rate.
SG&A:
SG&A expenses for the Health Imaging segment decreased $1 million,
or 1%, from $83 million in the first quarter of 2002 to $82 million
for the current quarter, and decreased as a percentage of sales from
16.0% to 14.9% . The decrease in SG&A expenses is primarily
attributable to expense management.
R&D:
First quarter R&D costs increased 8% from $36 million to $39
million and increased as a percentage of sales from 6.9% for the first
quarter of 2002 to 7.1% for the current quarter. R&D expenses
increased in the first quarter as the segment increased spending to
drive growth in selected areas of the product portfolio.
EFO:
Earnings from operations for the Health Imaging segment increased
$33 million, or 43%, from $76 million for the prior year quarter to
$109 million for the first quarter of 2003 while the operating
earnings margin rate increased 5.3 percentage points to 19.9% from
14.6% for the prior year quarter. The increase in operating earnings
reflects the combined effects of gross profit margin improvements and
decreases in SG&A.
Commercial Imaging
Revenues:
Net worldwide sales for the Commercial Imaging segment were $372
million for the first quarter of 2003 as compared with $347 million
for the prior year quarter, representing an increase of $25 million,
or 7% as reported, an increase of 4% excluding the favorable impact of
exchange. The increase in net sales was primarily comprised of:
-- Volume: increases in volume contributed approximately 6.0
percentage points to first quarter sales driven by Imaging
Services.
-- Price/Mix: price/mix declines subtracted approximately 2.0
percentage points from first quarter sales.
-- Exchange: favorable exchange contributed approximately 3.0
percentage points to first quarter sales.
Net sales in the U.S. were $213 million for the current year
quarter as compared with $189 million for the prior year quarter,
representing an increase of $24 million, or 13%. Net sales outside the
U.S. were $159 million in the first quarter of 2003 as compared with
$158 million for the prior year quarter, representing an increase of
$1 million or 1% as reported, a decrease of 6% excluding the favorable
impact of exchange.
Net worldwide sales of graphic arts products to Kodak Polychrome
Graphics ("KPG"), an unconsolidated joint venture affiliate in which
the Company has a 50% ownership interest, decreased 16% in the current
quarter as compared with the first quarter of 2002, primarily
reflecting volume declines in graphic arts film. This reduction
resulted largely from digital technology substitution and the effect
of continuing economic weakness in the commercial printing market. The
Company's equity in the earnings of KPG contributed positive results
to "Other charges" during the first quarter of 2003, which were not
material to the Company's results from operations.
NexPress, the unconsolidated joint venture between Kodak and
Heidelberg in which the Company has a 50% ownership interest, has sold
approximately 225 units of the NexPress 2100 Digital Production Color
Press through February, with average monthly page volumes for these
units running higher than planned.
Gross profit:
Gross profit for the Commercial Imaging segment was $107 million
for the first quarter of 2003 as compared with $109 million in the
prior year quarter, representing a decrease of $2 million, or 2%. The
gross profit margin was 28.8% in the current quarter as compared with
31.4% in the prior year quarter. The decrease in the gross profit
margin of 2.6 percentage points was primarily attributable to:
-- Price/Mix: price/mix impacts reduced gross profit margins by
approximately 2.0 percentage points due primarily to declining
contributions from traditional graphic arts and microfilm
products.
-- Productivity/Cost: manufacturing productivity/cost negatively
impacted gross profit margins by approximately 1.0 percentage
point.
SG&A:
SG&A expenses for the Commercial Imaging segment increased $1
million, or 2%, from $47 million for the first quarter of 2002 to $48
million for the current quarter, but decreased as a percentage of
sales from 13.5% to 12.9%. The primary contributor to the increase in
SG&A expense was the impact of unfavorable exchange.
R&D:
First quarter R&D costs for the Commercial Imaging segment
remained essentially unchanged from the prior year quarter at $14
million, but decreased as a percentage of sales from 4.0% in the prior
year quarter to 3.8% in the first quarter of 2003.
EFO:
Earnings from operations for the Commercial Imaging segment
decreased $4 million, or 8%, from $48 million in the first quarter of
2002 to $44 million in the first quarter of 2003.
All Other
Revenues:
Net worldwide sales for All Other were $21 million for the first
quarter of 2003 as compared with $24 million for the first quarter of
2002, representing a decrease of $3 million, or 13%.
SK Display Corporation, the OLED manufacturing joint venture
between Kodak and Sanyo, continued production scale-up with the goal
of supplying production quantity OLED screens to the marketplace
throughout the remainder of 2003.
EFO:
The loss from operations for All Other was $17 million in the
current quarter as compared with the loss from operations of $7
million in the first quarter of 2002.
Balance Sheet:
Cash Flow:
Kodak defines free cash flow as net cash provided by continuing
operations (as determined under generally accepted accounting
principles in the U.S.- U.S. GAAP), plus proceeds from the sale of
assets minus capital expenditures, acquisitions and investments in
unconsolidated affiliates. Kodak's definition of operating cash flow
equals free cash flow less dividends.
Operating cash flow on a continuing operations basis during the
first quarter of 2003 was negative $98 million, $52 million lower than
the negative $46 million used in the year ago quarter. Primary drivers
of the decrease include the Company's $54 million use of cash for the
acquisition of Burrell Labs, the $21 million purchase of in-process
R&D, and an inventory increase partially offset by a reduction in
accounts receivable.
Since the Company had no scheduled dividend payments in the first
quarter of 2003 or 2002, free cash flow and operating cash flow for
the current quarter are identical.
The table below reconciles the net cash provided by continuing
operations as determined under U.S. GAAP to Kodak's definition of
operating cash flow:
Reconciliation of Operating Cash Flow
1st Qtr. 2003
$ millions
Net cash provided by continuing operations $87
Additions to properties (111)
Acquisitions, net of cash acquired (54)
Investments in unconsolidated affiliates (20)
----------
Operating Cash Flow (Continuing Operations) $(98)
Dividend:
The Company has a dividend policy whereby it makes semi-annual
payments, which, when declared, will be paid on the Company's 10th
business day each July and December to shareholders of record on the
first business day of the preceding month. On April 15, 2003, the
Company's Board of Directors declared a semi-annual cash dividend of
$0.90 per share on the outstanding common stock of the Company. This
dividend will be payable on July 16, 2003 to shareholders of record at
the close of business on June 2, 2003.
Capital Spending:
Capital additions were $111 million in the first quarter of 2003,
with the majority of the spending supporting new products,
manufacturing productivity and quality improvements, infrastructure
improvements and ongoing environmental and safety initiatives.
Receivables:
Total receivables of $2.073 billion comprised of trade ($1.714
billion) and miscellaneous ($359 million) receivables at the end of
the first quarter, 2003, declined $129 million from first quarter
2002. This reduction is driven by strong operational improvements,
including the reduction of past-due receivables.
Accrued customer rebates are classified as miscellaneous payables,
however, the majority of these are cleared through customer
deductions. The effect of offsetting these accrued customer rebates
would reduce the trade receivable balance by $344 million to $1.370
billion.
Days sales outstanding (DSO) decreased approximately 11 days from
first quarter, 2002 and decreased approximately 2 days quarter
sequentially. The DSO calculation includes the impact of reclassifying
rebates as an offset to receivables for the last four quarters.
Excluding the impact of rebate reclassification, the operational
improvement year over year in DSO was 5 days. Kodak defines DSO: 4
quarter moving average net trade receivables after rebate
reclassification, divided by 12 months of sales, multiplied by 365
days.
Inventory:
Kodak's inventories (after LIFO) increased $61 million year over
year and $135 million quarter sequentially. Contributors to this
sequential increase were a pre-build of one-time use cameras as the
Company prepares to shift production to China and Mexico, a seasonal
build, photofinishing equipment, and the effect of exchange.
Days supply in inventory (DSI) improved by more than 6 days from
the first quarter 2002 and was essentially flat quarter sequentially.
Inventory turns have also remained essentially flat at 5.4 turns since
the end of the fourth quarter 2002. The DSI calculation is based on
inventory before the LIFO reserve. Including the impact of the LIFO
reserve, DSI improved by more than 9 days from the first quarter of
2002 and was essentially flat quarter sequentially. Inventory turns
remained essentially flat at 7.3 turns relative to the fourth quarter
of 2002.
Kodak defines inventory turns as 12 months COGS as reported
divided by four quarter average inventory before the LIFO reserve. DSI
is defined as four-quarter average inventory before the LIFO reserve
divided by 12 months COGS as reported, multiplied by 365 days.
Debt to Capital Ratio:
Debt to total capital ratio was 48.6%, increasing 0.2 percentage
points quarter sequentially and decreasing 4.5 percentage points year
over year. Debt increased by $98 million to $2.704 billion and cash
increased by $28 million to $597 million quarter sequentially in
keeping with the Company's plans to maintain a somewhat higher cash
balance to ensure adequate operational liquidity. On a debt less cash
basis, net debt was $2.107 billion, a decrease of $0.7 billion from
first quarter, 2002 levels of $2.813 billion. Equity amounted to
$2.864 billion, an increase of $87 million quarter sequentially,
primarily due to exchange; and a decrease of $68 million year over
year.
Foreign Exchange:
Year over year, the impact of foreign exchange on operating
activities during the first quarter was a positive $.08 per share
whereas foreign exchange activities recorded in "other income" had a
positive $.04 per share impact. Therefore, the sum of the operational
and reportable exchange impacts increased earnings in the quarter by
$.12 per share.
Outlook for Second Quarter and Full Year 2003:
Significant volatility exists in the Company's operational
business estimates going forward. If current trends continue into the
second quarter, it is possible that second quarter operational
earnings could fall into the range of $.60 per share to $.80 per
share. However, if a pickup in consumer film consumption occurs, there
could be upside to this estimate. As a result, full year earnings from
this point in time are focused at the low end of the non-GAAP $2.35 to
$2.95 per share range provided by the Company in January.
Safe Harbor Statement:
Certain statements in this press release may be forward looking in
nature, or "forward-looking statements" as defined in the United
States Private Securities Litigation Reform Act of 1995. For example,
references to the Company's 2003 revenue, earnings and cash flow
expectations are forward-looking statements.
Actual results may differ from those expressed or implied in
forward-looking statements. The forward-looking statements contained
in this press release are subject to a number of risk factors,
including the successful:
-- Implementation of product strategies (including category
expansion, digitization, OLED, and digital products);
-- Implementation of intellectual property licensing strategies;
-- Development and implementation of e-commerce strategies;
-- Completion of information systems upgrades, including SAP;
-- Completion of various portfolio actions;
-- Reduction of inventories;
-- Improvement in manufacturing productivity;
-- Improvement in receivables performance;
-- Reduction in capital expenditures;
-- Improvement in supply chain efficiency;
-- Implementation of restructurings, including personnel
reductions;
-- Development of the Company's business in emerging markets like
China, India, Brazil, Mexico, and Russia.
The forward-looking statements contained in this press release are
subject to the following additional risk factors:
-- Inherent unpredictability of currency fluctuations and raw
material costs;
-- Competitive actions, including pricing;
-- The nature and pace of technology substitution, including the
analog-to-digital shift;
-- Continuing customer consolidation and buying power;
-- General economic and business conditions.
-- Other factors disclosed previously and from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this press release should be
evaluated in light of these important risk factors.
CONTACT: Eastern Kodak
Media Contacts:
Gerard Meuchner, 585/724-4513
gerard.meuchner@kodak.com
Anthony Sanzio, 585/781-5481
anthony.sanzio@kodak.com
Investor Relations Contacts:
Don Flick, 585/724-4352
donald.flick@kodak.com
Patty Yahn-Urlaub, 585/724-4683
patty.yahn-urlaub@kodak.com
Roberto Trevino, 585/724-6791
roberto.trevino@kodak.com