Exhibit 99.2
Eastman Kodak Company Financial Discussion Document
Third Quarter 2003 Results
2003 Compared with 2002
Third quarter, 2003 presentation reflects the adoption of the
Securities and Exchange Commission's final rules under "Conditions for
Use of Non-GAAP Financial Measures," which requires that financial
information be presented on a basis that conforms with generally
accepted accounting principles (GAAP) in the U.S. As a result, the
financial discussion which follows reflects the company's results from
continuing operations on an "as reported" or "GAAP" basis. However,
the Company also believes that presenting income from continuing
operations excluding non-operational items is an important additional
measure of performance that can be used for comparing results between
reporting periods. Accordingly, the Company has included analysis
based on non-GAAP financial measures in the discussion below.
New Kodak Operating Model and Change in Reporting Structure:
On August 21, 2003, the Company introduced an organizational
realignment, which will become effective January 1, 2004, thus
changing the corporate segment reporting structure beginning with the
first quarter, 2004. The intent of these changes is to accelerate
growth in commercial and consumer digital imaging markets.
Kodak currently reports financial information for three reportable
segments (Photography, Health Imaging, and Commercial Imaging), and
All Other. The bridge from the previous segment reporting to the new
reporting structure is outlined below:
-- Digital and Film Imaging Systems Segment: correlates to the
current Photography Segment and is comprised of Consumer and
Professional Imaging products and services, Entertainment
Imaging products and services, and Digital and Applied Imaging
products and services.
-- Health Imaging Segment remains unchanged.
-- Commercial Imaging Segment: comprised of Document Imaging
products and services, Commercial and Government Systems
products and services, Services and Support, and Optics.
-- Commercial Printing Segment: comprised of NexPress (Kodak's
50/50 joint venture with Heidelberg), Kodak Polychrome
Graphics (Kodak's 50/50 joint venture with Sun Chemical), and
the graphics and wide format inkjet businesses. All of the
above were formerly included in Commercial Imaging.
-- All Other includes Kodak's Display and Components business for
OLED (Organic Light Emitting Diode) and sensors. Also included
within All Other are small, miscellaneous businesses, which
generate sales and earnings for the Company.
Third Quarter
Consolidated Revenues:
Net worldwide sales were $3.447 billion for the third quarter of
2003 as compared with $3.352 billion for the third quarter of 2002,
representing an increase of $95 million or 3% as reported, or a
decrease of 1% excluding the favorable impact of exchange. The
increase in net sales was comprised of:
-- Volume: increases in volume contributed approximately 4
percentage points to third quarter sales driven primarily by
consumer digital cameras and entertainment print films.
-- Price/Mix: declines in price/mix reduced third quarter sales
by approximately 5 percentage points, primarily driven by
consumer film and consumer digital cameras.
-- Exchange: favorable exchange of approximately 4 percentage
points partially offset the negative impacts of price/mix.
Net sales in the U.S. were $1.496 billion for the third quarter of
2003 as compared with $1.537 billion for the prior year quarter,
representing a decrease of $41 million, or 3%. Net sales outside the
U.S. were $1.951 billion for the current quarter as compared with
$1.815 billion for the third quarter of 2002, representing an increase
of $136 million, or 7% as reported, or unchanged excluding the
favorable impact of exchange.
Non-U.S. Revenues:
The Company's operations outside the U.S. are reported in three
regions: (1) the Europe, Africa and Middle East region ("EAMER"), (2)
the Asia Pacific region and (3) the Canada and Latin America region.
Net sales in the EAMER region were $1.039 billion for the third
quarter of 2003 as compared with $973 million for the prior year
quarter, representing an increase of $66 million or 7% as reported, or
a decrease of 2% excluding the favorable impact of exchange.
Net sales in the Asia Pacific region were $591 million for the
current quarter as compared with $557 million for the prior year
quarter, representing an increase of $34 million, or 6% as reported,
or an increase of 1% excluding the favorable impact of exchange.
Net sales in the Canada and Latin America region were $321 million
in the current quarter as compared with $285 million for the third
quarter of 2002, representing an increase of $36 million, or 13% as
reported, or an increase of 7% excluding the favorable impact of
exchange.
Emerging Markets:
The Company's major emerging markets include China, Brazil,
Mexico, Russia, India, Korea, Hong Kong and Taiwan. Net sales in
emerging markets were $677 million for the third quarter of 2003 as
compared with $633 million for the prior year quarter, representing an
increase of $44 million, or 7% as reported, or an increase of 4%
excluding the favorable impact of exchange. The emerging market
portfolio accounted for approximately 20% of Kodak's worldwide sales
and 35% of Kodak's non-U.S. sales in the quarter. Sales growth in
India, Russia, and China of 23%, 15%, and 14%, respectively, was
partially offset by declines in Mexico of 8%.
The increase in sales in Russia is the result of continued growth
from Kodak Express and the Company's efforts to expand the
distribution channels for Kodak products and services.
Sales increases in India were driven by the continued success from
the Company's efforts to increase the level of camera ownership and to
increase the number of Photoshop retail stores.
Sales increases in China resulted from strong business performance
for all Kodak's operations in that region and a return to more normal
levels of industry growth in consumer imaging post SARS. Declines in
Mexico are reflective of continued economic weakness.
Gross Profit:
GAAP:
Gross profit was $1.127 billion for the third quarter of 2003 as
compared with $1.290 billion for the third quarter of 2002,
representing a decrease of $163 million, or 13%. The gross profit
margin was 32.7% in the current quarter as compared with 38.5% in the
prior year quarter. The 5.8 percentage point decrease was primarily
attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 5 percentage points. These
declines relate primarily to consumer film and photofinishing
and consumer digital cameras.
-- Manufacturing Cost: manufacturing cost negatively impacted
gross profit margins by approximately 1 percentage point
primarily as a result of $33 million of charges for
accelerated depreciation associated with ongoing focused cost
reduction programs.
-- Exchange: favorably impacted gross profit margins by
approximately .5 percentage point.
Operational:
Excluding charges of $33 million relating to accelerated
depreciation, gross profit on an operational basis was $1.160 billion
for the third quarter of 2003 as compared with $1.290 billion for the
third quarter of 2002, representing a decrease of $130 million, or
10%. The gross profit margin was 33.7% in the current quarter as
compared with 38.5% in the prior year quarter. The 4.8 percentage
point decrease was primarily attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 5 percentage points.
-- Manufacturing/Cost: manufacturing cost remained unchanged.
-- Exchange: favorably impacted gross profit margins by
approximately .5 percentage point.
Selling, General and Administrative Expenses:
GAAP:
Selling, general and administrative expenses (SG&A) were $639
million for the third quarter of 2003 as compared with $631 million
for the prior year quarter, representing an increase of $8 million, or
1%. SG&A decreased as a percentage of sales from 18.8% for the third
quarter of 2002 to 18.5% for the current quarter. The increase in SG&A
is primarily attributable to the following:
-- Unfavorable exchange of $22 million.
-- A charge of $8 million for a donation to Infotonics.
These increases were partially offset by:
-- A charge of $13 million in the prior year quarter relating to
strategic asset writedowns.
-- SG&A cost reductions resulting from the ongoing focused cost
reduction actions.
Operational:
Excluding the charges noted above, SG&A expenses on an operational
basis were $631 million for the third quarter of 2003 as compared with
$618 million for the prior year quarter, representing an increase of
$13 million, or 2%. The increase in SG&A is primarily attributable to
unfavorable exchange of $22 million, which was partially offset by the
impact from the ongoing focused cost reduction actions. As a
percentage of sales, SG&A decreased from 18.4% for the third quarter
of 2002 to 18.3% for the current quarter.
Research and Development Costs:
Research and development costs (R&D) were $194 million for the
third quarter of 2003 as compared with $188 million for the third
quarter of 2002, representing an increase of $6 million, or 3%. R&D as
a percentage of sales remained unchanged at 5.6%. The net increase in
R&D is related to technology acquisitions.
Cost Reduction Plans:
As announced in the fourth quarter of 2002 and the first and third
quarters of 2003, Kodak has implemented a series of cost reduction
actions resulting in pre-tax charges totaling $185 million or $.44 per
share in the third quarter. The components of restructuring in the
third quarter include $146 million for employee severance relating to
the elimination of approximately 2,825 positions and $6 million
associated with exit costs and asset impairments. In addition, the
Company recorded accelerated depreciation of $33 million during the
quarter associated with assets to be disposed of in connection with
the relocation of certain manufacturing operations.
All actions contemplated under the cost reduction programs
announced in the fourth quarter of 2002 and the first quarter of 2003
have been completed. The Company anticipates completing the remaining
initiatives originally contemplated under the cost reduction program
announced in the third quarter of 2003 by the end of the second
quarter of 2004. As a result of these initiatives, an additional 2,300
to 3,800 positions will be eliminated throughout the world by the end
of the second quarter of 2004. The estimated cost to complete these
remaining initiatives will be in the range of $200 million to $300
million. The Company still expects the 2004 cost savings as a result
of all actions contemplated under this cost reduction program to be
$275 million to $325 million, with annual savings of $300 million to
$400 million thereafter.
Currently, the Company is being adversely impacted by negative
global economic conditions and a progressing digital transition. As
the company continues to adjust its operating model in light of
changing business conditions, it is probable that ongoing cost
reduction activities will be required from time to time.
Earnings From Operations:
GAAP:
Earnings from operations (EFO) for the third quarter of 2003 were
$142 million as compared with $480 million for the third quarter of
2002, representing a decrease of $338 million, or 70%. This decrease
is attributable to the reasons indicated above.
Operational:
Excluding charges or credits for cost reduction actions in both
the current and prior year quarters, charges relating to a charitable
contribution during the current quarter, and a charge for strategic
asset writedowns in the prior year quarter, EFO on an operational
basis for the third quarter of 2003 were $335 million as compared with
$484 million for the third quarter of 2002, representing a decrease of
$149 million, or 31%. The decrease in earnings from operations is
attributable to the reasons indicated above.
Below EFO:
GAAP:
Interest expense for the third quarter of 2003 was $33 million as
compared with $40 million for the prior year quarter, representing a
decrease of $7 million, or 18%. The decrease in interest expense is
primarily attributable to lower interest rates in the third quarter of
2003 relative to the prior year quarter.
The other charges component includes principally investment
income, income and losses from equity investments, foreign exchange
and gains and losses on the sales of assets and investments. Other
charges for the current quarter were $9 million as compared with other
charges of $21 million for the third quarter of 2002. The improvement
is primarily attributable to increased income from the Company's
equity investment in Kodak Polychrome Graphics, reduced losses from
the Company's equity investment in the Phogenix joint venture due to
its dissolution, and reduced losses from the Company's equity
investment in the NexPress joint venture.
Corporate Tax Rate:
GAAP:
The Company's estimated annual effective tax rate from continuing
operations for 2003 decreased from 24% to 19% in the current quarter.
This decrease is primarily attributable to an expected increase in
benefits from the utilization of foreign tax credits.
The Company's estimated annual effective tax rate from continuing
operations decreased from 29% for the prior year third quarter to 19%
for the third quarter of 2003. This decrease is primarily attributable
to further expected increased earnings from operations in certain
lower-taxed jurisdictions outside the U.S. relative to total
consolidated earnings and an expected increase in benefits from the
utilization of foreign tax credits.
During the third quarter of 2003, the Company recorded a tax
benefit on a GAAP basis of $22 million, representing an effective tax
benefit rate from continuing operations of approximately 22%. The
effective tax benefit rate of 22% for the quarter differs from the
estimated annual effective tax rate of 19% due to the recording of
discrete period tax benefits of $77 million, or $.27 per share, in
connection with (1) the year-to-date impact through June 30, 2003 of
the decrease in the estimated annual effective tax rate from
continuing operations from 24% to 19% ($14 million, or $.05 per share)
and (2) the following discrete period items ($63 million, or $.22 per
share) that occurred in the third quarter and which are taxed in
jurisdictions that, when aggregated, have tax rates greater than the
estimated annual effective tax rate:
-- A $185 million charge for focused cost reduction actions; and
-- An $8 million charge for a donation to Infotonics.
Operational:
As indicated above, the Company's estimated annual effective tax
rate from continuing operations decreased from 24% to 19% in the
current quarter. This decrease in the rate contributed $.10 cents per
share to both the operational and GAAP earnings for the quarter as
follows: (1) a $.05 per share adjustment to reflect the impact of the
decrease in the rate on year-to-date earnings through June 30, 2003
and (2) a $.05 per share amount to reflect the impact of the decrease
in the rate on third quarter earnings.
Earnings from Continuing Operations:
GAAP:
Earnings from continuing operations for the third quarter of 2003
were $122 million, or $.42 per diluted share, as compared with
earnings from continuing operations for the third quarter of 2002 of
$336 million, or $1.16 per diluted share, representing a decrease of
$214 million year over year. This decrease in earnings from continuing
operations is attributable to the reasons described above.
Operational:
Earnings from continuing operations on an operational basis for
the third quarter of 2003 were $252 million, or $.88 per diluted
share, as compared with earnings from continuing operations on an
operational basis for the third quarter of 2002 of $306 million, or
$1.05 per diluted share, representing a decrease of $54 million, or
18%. Third quarter operational earnings from continuing operations for
2003 exclude the following after-tax items:
-- A charge of $125 million ($185 million pre-tax), or $.44 per
share, resulting from previously announced cost reduction
initiatives. Of the pre-tax charge, $152 million is recorded
in "Restructuring Costs and Other" and $33 million of
accelerated depreciation associated with the relocation of
certain manufacturing operations is recorded in "Cost of Goods
Sold" (COGS).
-- A charge of $5 million ($8 million pre-tax) or $.02 per share
relating to a donation to Infotonics, a technology enterprise,
for research purposes. The pre-tax charge of $8 million is
included in SG&A.
Earnings from Discontinued Operations:
The company did not have earnings or loss from discontinued
operations in the third quarter of 2003. In the third quarter of 2002,
a loss from discontinued operations of $.01 per diluted share was
reported.
Year-over-Year Comparison of Reported and Operational Earnings
(Amounts in millions of dollars)
- ----------------------------------------------------------------------
3Q 03 as Excluded 3Q 03 3Q 02 as Excluded 3Q 02
Reported Items Opera- Reported Items Opera-
tional tional
--------------------------------------------------
Sales $3,447 $3,447 $3,352 $3,352
COGS 2,320 (33)(a) 2,287 2,062 2,062
--------- ---------------- -------
Gross Profit 1,127 1,160 1,290 1,290
SG&A 639 (8)(b) 631 631 (13)(e) 618
R&D 194 194 188 188
Restructuring costs
(credits) and other 152 (152)(c) - (9) 9(f) -
--------- ---------
EFO 142 335 480 484
Interest Expense 33 33 40 40
Other Charges 9 9 21 (8)(g) 13
--------- ---------------- -------
Below EFO (42) (42) (61) (53)
Earnings Before
Taxes 100 293 419 431
(Benefit) Provision
for Taxes (22) 63(d) 41 83 42(h) 125
--------- ---------------- -------
Earnings - Cont.
Ops. 122 252 336 306
Earnings (Loss)
Disc. Ops. - - (2) 2(i) -
Net Earnings $122 252 334 306
Diluted EPS - Cont.
Ops. $0.42 $0.88 $1.16 $1.05
Total Diluted EPS $0.42 $1.15
- ----------------------------------------------------------------------
Items excluded from Earnings on an operational basis:
a - Accelerated depreciation of $33 million in connection with
focused cost reduction actions.
b - Charge for charitable contribution to Infotonics.
c - Charge for focused cost reduction actions.
d - The tax impacts associated with the above-mentioned excluded
items.
e - Strategic asset write-downs.
f - Reversal related to previous focused cost reduction actions.
g - Charge for non-strategic asset write-downs.
h - Tax benefit of $46 million related to the consolidation of the
photofinishing operations in Japan and the loss realized from
the liquidation of a subsidiary as part of this consolidation,
and the tax impacts associated with the above-mentioned
excluded items.
i - Loss from discontinued operations.
As Percent of Sales:
3Q 03 as 3Q 03 3Q 02 as 3Q 02
Reported Operational Reported Operational
---------------------------------------------
Gross Profit 32.7% 33.7% 38.5% 38.5%
SG&A 18.5% 18.3% 18.8% 18.4%
SG&A w/o Advertising 14.1% 13.9% 14.0% 13.6%
R&D 5.6% 5.6% 5.6% 5.6%
EFO 4.1% 9.7% 14.3% 14.4%
Net Earnings 3.5% 7.3% 10.0% 9.1%
- ----------------------------------------------------------------------
Segment Results:
Photography
Revenues:
Net worldwide sales for the Photography segment were $2.475
billion for the third quarter of 2003 as compared with $2.409 billion
for the third quarter of 2002, representing an increase of $66
million, or 3% as reported, a decrease of 2% excluding the favorable
impact of exchange. The increase in net sales was comprised of:
-- Volume: volumes increased third quarter sales by approximately
4 percentage points. Volume increases for consumer digital
cameras and Entertainment Imaging products and services were
partially offset by volume declines for traditional consumer
products and services
-- Price/Mix: declines attributable to price/mix reduced third
quarter sales by approximately 5.5 percentage points driven by
consumer digital cameras and consumer film and photofinishing.
-- Exchange: favorable exchange of approximately 4.5 percentage
points partially offset the negative impacts of price/mix.
Photography segment net sales in the U.S. were $1.009 billion for
the current quarter as compared with $1.051 billion for the third
quarter of 2002, representing a decrease of $42 million, or 4%.
Photography segment net sales outside the U.S. were $1.466 billion for
the third quarter of 2003 as compared with $1.358 billion for the
prior year quarter, representing an increase of $108 million, or 8% as
reported, or unchanged excluding the favorable impact of exchange.
Consumer products and services revenues:
Net worldwide sales of consumer film products, including 35mm
film, Advantix film and one-time-use cameras (OTUC), decreased 12% in
the third quarter of 2003 as compared with the third quarter of 2002,
reflecting 12% volume declines, negative 4% price/mix and 4% favorable
exchange. Sales of the Company's consumer film products within the
U.S. decreased 23%, reflecting 20% volume declines and negative 3%
price/mix. Sales of the Company's consumer film products outside the
U.S. decreased 3%, reflecting 7% volume declines, negative 3%
price/mix, partially offset by 7% favorable exchange.
U.S. consumer film industry sell-through volumes decreased
approximately 6% in the third quarter of 2003 as compared with the
prior year quarter. Year to date U.S. consumer film industry volumes
decreased approximately 7% year over year.
A significant decrease in U.S. retailer inventories accounted for
the majority of Kodak's reduced sell-in volume during the quarter.
The Company's blended U.S. consumer film share decreased
approximately 1% on a volume basis relative to the third quarter of
2002. Management remains confident in maintaining approximate full
year, 2002 year-over-year U.S. market share as it has done for the
past several consecutive years.
Worldwide volumes of consumer color paper decreased mid single
digits in the third quarter of 2003 as compared with the third quarter
of 2002, with U.S. volumes declining low double digits and volumes
outside the U.S. decreasing slightly. Kodak will no longer report
sales trends for color negative paper because paper and other products
are typically bundled together as a "systems sell" for customer
contracting purposes.
Net worldwide sales for photofinishing services (excluding
equipment), including Qualex in the U.S. and Consumer Imaging Services
("CIS") outside the U.S. decreased 17% in the third quarter of 2003 as
compared with the third quarter of 2002, reflecting lower volumes and
negative price/mix, partially offset by favorable exchange. In the
U.S., photofinishing sales (including overnight and on-site) decreased
19%.
Net sales from the Company's consumer digital products and
services, which include Picture Maker kiosks/media and retail consumer
digital services revenue primarily from Picture CD and Retail.com,
increased 14% in the third quarter of 2003 as compared with the third
quarter of 2002, driven primarily by an increase in sales of kiosks
and related media and consumer digital services.
Net worldwide sales of consumer digital cameras increased 117% in
the third quarter of 2003 as compared with the prior year quarter,
primarily reflecting strong volume increases and favorable exchange
partially offset by negative price/mix. Sales continue to be driven by
strong consumer acceptance of the EasyShare digital camera system and
an expanding product line. In addition, Kodak's new Printer Dock
products experienced strong sales growth during the quarter. During
the quarter, consumer digital cameras were profitable on a fully
allocated basis.
Kodak's U.S. consumer digital camera market share for the third
quarter of 2003 is on track to improve quarter sequentially as the
company benefits from a refresh of its product portfolio and a
transition to a new, expanded line of digital cameras. While complete
data for third quarter market share is not yet available, all
indications are that Kodak continues to hold one of the top U.S.
market share positions in channels reporting share data, although some
of Kodak's largest channels do not report share data.
Net worldwide sales of inkjet photo paper increased 33% in the
current quarter as compared with the third quarter of 2002. The
Company continued to maintain its top two market share position in the
United States. The double-digit revenue growth and the maintenance of
market share are primarily attributable to strong underlying market
growth, successful merchandising efforts and the continued growth and
acceptance of a new line of small format inkjet papers.
The Company's Ofoto business in the U.S. increased its sales 43%
in the third quarter of 2003 as compared with the prior year quarter.
Ofoto's sales represent less than 1% of the Company's consolidated net
worldwide sales for the third quarter of 2003. Ofoto now has almost 10
million members and continues to be the market leader in the online
photo services space.
Professional products and services revenues:
Net worldwide sales of professional film capture products
decreased 10% in the third quarter of 2003 as compared with the third
quarter of 2002, primarily reflecting declines in volume and negative
price/mix partially offset by favorable exchange. Sales declines
resulted primarily from the ongoing impact of digital transition. Net
worldwide sales of professional sensitized output increased 6% in the
third quarter of 2003 as compared with the prior year quarter
reflecting increases in volume and favorable exchange partially offset
by negative price/mix.
During the third quarter, worldwide sales increases were recorded
for digital cameras and digital writers.
Entertainment products and services revenues:
Net worldwide sales of origination and print film to the
entertainment industry increased 7%, primarily reflecting higher print
film volumes and favorable exchange partially offset by negative
price/mix. The new Vision 2 origination film continues to gain strong
customer acceptance.
Gross profit:
Gross profit for the Photography segment was $807 million for the
third quarter of 2003 as compared with $931 million for the prior year
quarter, representing a decrease of $124 million or 13%. The gross
profit margin was 32.6% in the current year quarter as compared with
38.7% in the prior year quarter. The 6.1 percentage point decline was
primarily attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 6.5 percentage points driven
by consumer digital cameras, and traditional consumer products
and services.
-- Manufacturing/Cost: manufacturing cost negatively impacted
gross profit margins by approximately .5 percentage points.
-- Exchange: favorably impacted gross profit margins by
approximately 1.0 percentage point.
SG&A:
In the third quarter, SG&A expenses for the Photography segment
increased $3 million, or 1%, from $482 million in the third quarter of
2002 to $485 million in the current quarter, but decreased as a
percentage of sales from 20.0% to 19.6%. The increase in SG&A is
attributable to unfavorable exchange of $18 million, mostly offset by
ongoing focused cost reduction actions.
R&D:
Third quarter R&D costs for the Photography segment decreased $7
million, or 6%, from $125 million in the third quarter of 2002 to $118
million in the current quarter and decreased as a percentage of sales
from 5.2% to 4.8%. The decrease in R&D was primarily attributable to
cost savings realized from position eliminations associated with
ongoing focused cost reduction programs.
EFO:
Earnings from operations for the Photography segment decreased
$120 million, from $324 million in the third quarter of 2002 to $204
million in the third quarter of 2003, primarily as a result of the
factors described above.
Health Imaging
On October 7, 2003, Kodak announced the completion of its
acquisition of PracticeWorks, Inc., a leading provider of dental
practice management software and digital radiographic imaging systems
for $468 million in cash and assumed net debt of approximately $18
million. As part of this transaction Kodak also acquired 100% of
PracticeWorks' Paris based subsidiary, Trophy Radiologie, S.A., a
developer and manufacturer of dental digital radiography equipment,
which PracticeWorks purchased in December 2002. The acquisition of
PracticeWorks and Trophy Radiologie is expected to contribute
approximately $215 million in sales to the Health Imaging business
during the first full year. It is anticipated that the transaction on
an operating basis will be slightly dilutive through 2005 and
accretive thereafter. This acquisition will enable Kodak to offer its
customers a full spectrum of dental imaging products and services from
traditional film to digital radiography and photography and is
expected to move Health Imaging into the leading position in the
dental practice management and dental digital radiographic markets.
Revenues:
Net worldwide sales for the Health Imaging segment were $571
million for the third quarter of 2003 as compared with $565 million
for the prior year quarter, representing an increase of $6 million, or
1% as reported, a decrease of 2% excluding the favorable impact of
exchange. The decrease in sales was comprised of:
-- Volume: Increases in volume contributed approximately 2.0
percentage points to third quarter sales, driven primarily by
volumes increases in digital media, digital capture equipment
and services.
-- Price/Mix: Decreases due to price/mix reduced third quarter
sales by approximately 4.0 percentage points, primarily driven
by digital media, digital capture equipment and analog medical
film.
-- Exchange: Favorable exchange impacted sales by approximately
3.0 percentage points.
Net sales in the U.S. were $251 million for the current quarter as
compared with $273 million for the third quarter of 2002, representing
a decrease of $22 million, or 8%. Net sales outside the U.S. were $320
million for the third quarter of 2003 as compared with $292 million
for the prior year quarter, representing an increase of $28 million,
or 10% as reported, or 3% excluding the favorable impact of exchange.
Digital products and services revenues:
Net worldwide sales of digital products, which include laser
printers (DryView imagers and wet laser printers), digital media
(DryView and wet laser media), digital capture equipment (computed
radiography capture equipment and digital radiography equipment),
services and Picture Archiving and Communications Systems ("PACS"),
increased 4% in the third quarter of 2003 as compared with the prior
year quarter. The increase in digital product sales was primarily
attributable to higher volumes of digital capture equipment, digital
media and services and favorable exchange, partially offset by
negative price/mix.
Traditional products and services revenues:
Net worldwide sales of traditional products, including analog
film, equipment, chemistry and services, decreased 3% in the third
quarter of 2003 as compared with the third quarter of 2002 driven
primarily by lower volumes and negative price/mix for traditional
products.
Gross profit:
Gross profit for the Health Imaging segment was $250 million for
the third quarter of 2003 as compared with $246 million in the prior
year quarter, representing an increase of $4 million, or 2%. The gross
profit margin was 43.8% in the current quarter as compared with 43.5%
in the third quarter of 2002. The increase in the gross profit margin
of 0.3 percentage points was principally attributable to:
-- Manufacturing Cost: a decrease in manufacturing cost increased
gross profit margins by approximately 2.0 percentage points,
primarily due to favorable manufacturing and service
productivity.
-- Price/Mix: Price/mix negatively impacted gross profit margins
by approximately 3.0 percentage points due to lower prices for
digital media, digital capture equipment and analog medical
film.
-- Exchange: favorable exchange added 1.0 percentage point to the
gross profit rate.
SG&A:
SG&A expenses for the Health Imaging segment increased $7 million,
or 9%, from $82 million in the third quarter of 2002 to $89 million
for the current quarter, and increased as a percentage of sales from
14.6% to 15.6%. The increase in SG&A expenses is primarily
attributable to the unfavorable effects of foreign exchange and
increased spending to drive growth.
R&D:
Third quarter R&D costs increased $6 million from $37 million to
$43 million and increased as a percentage of sales from 6.6% for the
third quarter of 2002 to 7.5% for the current quarter. R&D expenses
increased in the third quarter as the segment increased spending to
drive growth in selected areas of the product portfolio.
EFO:
Earnings from operations for the Health Imaging segment decreased
$9 million, or 7%, from $126 million for the prior year quarter to
$117 million for the third quarter of 2003 while the operating
earnings margin rate decreased 1.8 percentage points to 20.5% from
22.3% for the prior year quarter. The decrease in operating earnings
is attributable to the reasons described above.
Commercial Imaging
Revenues:
Net worldwide sales for the Commercial Imaging segment were $373
million for the third quarter of 2003 as compared with $352 million
for the prior year quarter, representing an increase of $21 million,
or 6% as reported, or an increase of 3% excluding the favorable impact
of exchange. The increase in net sales was primarily comprised of:
-- Volume: increases in volume contributed approximately 5.0
percentage points to third quarter sales driven by Imaging
Services and document scanners.
-- Price/Mix: price/mix negatively impacted sales by
approximately 2.0 percentage points driven by graphics
products.
-- Exchange: favorable exchange contributed approximately 3.0
percentage points to third quarter sales.
Net sales in the U.S. were $223 million for the current year
quarter as compared with $200 million for the prior year quarter,
representing an increase of $23 million, or 12%. Net sales outside the
U.S. were $150 million in the third quarter of 2003 as compared with
$152 million for the prior year quarter, representing a decrease of $2
million or 1% as reported, a decrease of 7% excluding the favorable
impact of exchange.
Net worldwide sales of graphic arts products to Kodak Polychrome
Graphics ("KPG"), an unconsolidated joint venture affiliate in which
the Company has a 50% ownership interest, decreased 14% in the current
quarter as compared with the third quarter of 2002, primarily
reflecting volume and negative price/mix in graphic arts film. This
reduction resulted largely from digital technology transition and the
effect of continuing economic weakness in the commercial printing
market.
Despite continued weakness in the global economy, KPG's earnings
performance continues to improve driven primarily by its leading
position in the growth segments of digital proofing and digital
printing plates, coupled with favorable foreign exchange. KPG's
operating profit has been positive for 13 consecutive quarters and
continued to contribute positively to Kodak's "Other Charges" during
the third quarter of 2003.
NexPress, the unconsolidated joint venture between Kodak and
Heidelberg in which the Company has a 50% ownership interest,
continues to experience good customer acceptance on its sales of
NexPress 2100 Digital Production Color Presses despite a weak printing
market, with average monthly page volumes for these units running
higher than planned.
Gross profit:
Gross profit for the Commercial Imaging segment was $93 million
for the third quarter of 2003 as compared with $109 million in the
prior year quarter, representing a decrease of $16 million, or 15%.
The gross profit margin was 24.9% in the current quarter as compared
with 31.0% in the prior year quarter. The decrease in the gross profit
margin of 6.1 percentage points was primarily attributable to:
-- Price/Mix: declines due to price/mix reduced gross profit
margins by approximately 1.5 percentage point driven by
graphics products.
-- Manufacturing Cost: an increase in manufacturing cost reduced
gross profit margins by approximately 4.0 percentage points.
-- Exchange: unfavorable exchange reduced gross profit margins by
approximately .5 percentage point.
SG&A:
SG&A expenses for the Commercial Imaging segment remained
unchanged at $49 million for the current quarter as compared with the
third quarter of 2002, but decreased as a percentage of sales from
13.9% to 13.1%.
R&D:
Third quarter R&D costs for the Commercial Imaging segment
decreased $7 million, or 39%, from $18 million in the third quarter of
2002 to $11 million for the current quarter, and decreased as a
percentage of sales from 5.1% to 2.9% in the current quarter.
EFO:
Earnings from operations for the Commercial Imaging segment
decreased $9 million, or 21%, from $42 million in the third quarter of
2002 to $33 million in the current quarter primarily as a result of
declining margin contributions from traditional graphic arts products.
All Other
Revenues:
Net worldwide sales for All Other were $28 million for the third
quarter of 2003 as compared with $26 million for the third quarter of
2002, representing an increase of $2 million, or 8%.
SK Display Corporation, the OLED manufacturing joint venture
between Kodak and Sanyo, continues production scale-up with the goal
of supplying production quantity OLED screens to the marketplace
throughout the remainder of 2003.
EFO:
The loss from operations for All Other was $19 million in the
current quarter as compared with the loss from operations of $8
million in the third quarter of 2002 primarily driven by increased
levels of investment for Kodak's Display business.
Balance Sheet:
Cash Flow:
Kodak defines free cash flow as net cash provided by continuing
operations, (as determined under generally accepted accounting
principles in the U.S.- U.S. GAAP), plus proceeds from the sale of
assets minus capital expenditures, acquisitions and investments in
unconsolidated affiliates. Kodak's definition of operating cash flow
equals free cash flow less dividends.
Operating cash flow during the third quarter of 2003 was positive
$243 million, $102 million lower than the positive $345 million
generated in the year ago quarter. This variance can be attributed
primarily to lower earnings from continuing operations. With third
quarter operating cash flow of $243 million and a $258 million
dividend payment in July 2003, free cash flow for the third quarter
2003 was equal to $501 million.
Net cash provided by (used in) continuing operations, investing
activities and financing activities, as determined under GAAP in the
third quarter of 2003 were $610 million, ($108) million and ($360)
million, respectively. The table below reconciles the net cash
provided by continuing operations as determined under U.S. GAAP to
Kodak's definition of operating cash flow for the third quarter of
2003:
($ millions)
- ----------------------------------------------------------------
Net cash provided by continuing operations $610
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Additions to properties (117)
- ----------------------------------------------------------------
Net proceeds from sales of businesses / assets 21
- ----------------------------------------------------------------
Acquisitions, net of cash acquired -
- ----------------------------------------------------------------
Investments in unconsolidated affiliates (13)
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Free cash flow (continuing operations) 501
- ----------------------------------------------------------------
Dividends (258)
- ----------------------------------------------------------------
Operating cash flow (continuing operations) $243
- ----------------------------------------------------------------
The Company previously provided guidance for full year, 2003
operating cash flow (before acquisitions) of approximately $500
million. Kodak's current estimate for operating cash flow (before
acquisitions) is approximately $700 million for full year 2003,
reflecting improved earnings and the recently announced change in
dividend payment. (Reconciliation to comparable GAAP measure can be
found at www.kodak.com.)
Dividend:
The Company has a dividend policy whereby it makes semi-annual
payments, which, when declared, will be paid on the Company's 10th
business day each July and December to shareholders of record on the
first business day of the preceding month. On April 15, 2003, the
Company's Board of Directors declared a semi-annual cash dividend of
$0.90 per share on the outstanding common stock of the Company. This
dividend was paid on July 16, 2003 to shareholders of record at the
close of business on June 2, 2003.
On September 24, 2003, the Company's Board of Directors voted to
reduce the amount of the annual dividend to $0.50 per share. On that
same date, the Company's Board of Directors declared a semi-annual
cash dividend of $0.25 per share on the outstanding common stock of
the Company. This dividend will be paid on December 12, 2003 to
shareholders of record at the close of business on November 3, 2003.
Capital Spending:
Capital additions were $117 million in the third quarter of 2003,
which is $38 million lower than the year ago quarter and $8 million
lower quarter sequentially. The majority of the spending supported new
products, manufacturing productivity and quality improvements,
infrastructure improvements and ongoing environmental and safety
initiatives.
Receivables:
Days sales outstanding (DSO) of 43 days decreased approximately 7
days from third quarter, 2002 and decreased approximately 2 days
quarter sequentially. The DSO calculation includes the impact of
reclassifying rebates as an offset to receivables for the last four
quarters. Excluding the impact of rebate reclassification, the
operational improvement in DSO was 3 days year over year and unchanged
quarter sequentially. Kodak defines DSO: 4 quarter moving average net
trade receivables after rebate reclassification, divided by 12 months
of sales, multiplied by 365 days. Total receivables of $2.340 billion
comprised of trade ($2.011 billion) and miscellaneous ($329 million)
receivables at the end of the third quarter, 2003, increased $39
million from third quarter of 2002. This increase is driven by higher
sales in the third quarter and the impact of foreign exchange,
somewhat offset by a reduction in past due receivables. Accrued
customer rebates are classified as miscellaneous payables, however,
the majority of these are cleared through customer deductions. The
effect of offsetting these accrued customer rebates would reduce the
trade receivable balance by $488 million to $1.523 billion at the end
of the third quarter of 2003, and would reduce the trade receivable
balance by $338 million to $1.677 billion at the end of the third
quarter of 2002. Therefore, this results in a net trade receivables
reduction of $154 million.
Inventory:
Days supply in inventory (DSI) improved by 4 days from the third
quarter 2002 and by over 2 days quarter sequentially. Inventory turns
improved by 0.2 turns to 5.7 turns since the end of the second quarter
2003. The DSI calculation is based on inventory before the LIFO
reserve. Including the impact of the LIFO reserve, DSI improved by
almost 1 day from the third quarter of 2002 and improved by over 1 day
quarter sequentially; inventory turns improved slightly at 7.5 turns
relative to the second quarter of 2003.
DSI is defined as four-quarter average inventory before the LIFO
reserve divided by 12 months COGS as reported, multiplied by 365 days.
Kodak defines inventory turns as 12 months COGS as reported divided by
four quarter average inventory before the LIFO reserve.
Kodak's inventories (after LIFO) increased $32 million year over
year and increased $12 million quarter sequentially.
Debt
Debt decreased by $100 million to $2.890 billion and cash
increased by $145 million to $983 million quarter sequentially. On a
debt less cash basis, net debt was $1.907 billion, a decrease of $274
million from third quarter, 2002 levels of $2.181 billion.
In October, 2003, the Company completed a $1.075 billion bond
offering made up of $500 million of 7.25% senior notes due 2013 and
$575 million of 3.375% convertible senior notes due 2033. The Company
has the right to call the convertible notes on or after 7 years and
holders of the notes have the right to put them at various times on or
after 7 years. The securities contain a number of conversion features,
which include substantive contingencies. The holders may convert their
securities, in whole or in part, into shares of the Company's common
stock under certain circumstances that are outlined in the Company's
Form 10-Q. Proceeds will be used to reduce the Company's commercial
paper balances and partially fund the acquisition of PracticeWorks
that was completed in October.
Equity amounted to $2.924 billion, an increase of $70 million
quarter sequentially, primarily due to earnings, offset by the
declaration of the semi-annual dividend in the third quarter, payable
in the fourth quarter.
Debt to total capital ratio was 49.7%, decreasing 1.5 percentage
points quarter sequentially and increasing 5 percentage points year
over year.
Foreign Exchange:
Year over year, the impact of foreign exchange on operating
activities during the third quarter was a positive $0.12 per share
whereas foreign exchange activities recorded in "Other Charges" had a
negative $0.01 per share impact. Therefore, the sum of the operational
and reportable exchange impacts increased earnings in the quarter by
$0.11 per share.
Earnings Outlook:
The Company expects full year operational earnings of $2.10 to
$2.20 per share and GAAP earnings of $1.15 to $1.30 per share.
Investment in China:
Kodak and China Lucky Film Corporation have signed a 20-year
agreement intended to expand each other's market opportunities. As
part of the agreement, Kodak will acquire 20% of Lucky Film
Corporation. Kodak estimates that the cost of the transaction will
total approximately $100 million in cash plus other assets, with the
majority of the cash outlay occurring in 2004.
Upcoming Meetings:
Kodak will host an investor function for members of the investment
community who will be attending the upcoming RSNA trade show in
Chicago. This function will be held on Tuesday, December 2, 2003 at
McCormick Place. Please contact Kodak Investor Relations for
additional details.
Safe Harbor Statement:
Operational items are non-GAAP financial measures as defined by
the Securities and Exchange Commission's final rules under "Conditions
for Use of Non-GAAP Financial Measures."
Certain statements in this press release may be forward looking in
nature, or "forward-looking statements" as defined in the United
States Private Securities Litigation Reform Act of 1995. For example,
references to the Company's 2003 revenue, earnings, cash flow
expectations and future focused cost reductions are forward-looking
statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent estimates as of October 22, 2003, and should not
be relied upon as representing estimates as of any subsequent date.
While the Company may elect to update forward-looking statements at
some point in the future, we specifically disclaim any obligation to
do so, even if estimates change. Forward-looking statements are
subject to a number of risk factors, including the successful:
-- Implementation of the Company's growth strategy as outlined on
September 25, 2003
-- Implementation of product strategies (including category
expansion, digitization, OLED, and digital products);
-- Implementation of intellectual property licensing
strategies;
-- Development and implementation of e-commerce strategies;
-- Completion of information systems upgrades, including SAP;
-- Completion of various portfolio actions;
-- Reduction of inventories;
-- Improvement in manufacturing productivity;
-- Improvement in receivables performance;
-- Reduction in capital expenditures;
-- Improvement in supply chain efficiency;
-- Implementation of future focused cost reductions,
including personnel reductions;
-- Development of the Company's business in emerging markets
like China, India, Brazil, Mexico, and Russia.
-- Development of efficient manufacturing techniques for new
products.
The forward-looking statements contained in this press release are
subject to the following additional risk factors:
-- Inherent unpredictability of currency fluctuations and raw
material costs;
-- Competitive actions, including pricing;
-- The nature and pace of technology substitution, including the
analog-to-digital shift;
-- Continuing customer consolidation and buying power;
-- General economic, geopolitical, public health and business
conditions.
-- Other factors disclosed previously and from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this press release should be
evaluated in light of these important risk factors.
CONTACT: Eastman Kodak Company
Media Contacts:
Gerard Meuchner, 585-724-4513
gerard.meuchner@kodak.com
Anthony Sanzio, 585-781-5481
anthony.sanzio@kodak.com
or
Investor Relations Contacts:
Don Flick, 585/724-4352
donald.flick@kodak.com
Patty Yahn-Urlaub, 585/724-4683
patty.yahn-urlaub@kodak.com
Roberto Trevino, 585/724-6791
roberto.trevino@kodak.com