Exhibit 99.2
Eastman Kodak Company Financial Discussion Document
Fourth Quarter 2003 Results
2003 Compared with 2002
Fourth 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 require 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 announced an organizational
realignment, which will become effective January 1, 2004, changing the
corporate segment reporting structure beginning with the first quarter
of 2004 reported in April. The intent of these changes is to
accelerate growth in commercial and consumer digital imaging markets.
Through year-end 2003, Kodak reported 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) and Kodak Polychrome Graphics
(Kodak's 50/50 joint venture with Sun Chemical), relating to
which, Kodak records its share of income or losses in Other
charges; and the graphics and wide format inkjet businesses. All
of the above were formerly included in Commercial Imaging.
Beginning in the first quarter of 2004, this segment will also
include results related to the Scitex Digital Printing
acquisition.
- -- 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.
Fourth Quarter
Consolidated Revenues:
Net worldwide sales were $3.778 billion for the fourth quarter of
2003 as compared with $3.441 billion for the fourth quarter of 2002,
representing an increase of $337 million or 10% as reported, or an
increase of 4% excluding the favorable impact of exchange. The
increase in net sales was comprised of:
-- Acquisition: The PracticeWorks acquisition contributed $48
million or approximately 1.0 percentage point to fourth
quarter sales.
-- Volume: increases in volume contributed approximately 7.0
percentage points to fourth quarter sales driven primarily by
consumer digital cameras, one-time-use cameras, and Health
Imaging digital capture solutions.
-- Price/Mix: declines in price/mix reduced fourth quarter sales
by approximately 4.0 percentage points, primarily driven by
consumer digital cameras and traditional consumer products and
services.
-- Exchange: favorable exchange of approximately 6.0 percentage
points offset the negative impacts of price/mix.
Net sales in the U.S. were $1.714 billion for the fourth quarter
of 2003 as compared with $1.637 billion for the prior year quarter,
representing an increase of $77 million, or 5%. Net sales outside the
U.S. were $2.064 billion for the current quarter as compared with
$1.804 billion for the fourth quarter of 2002, representing an
increase of $260 million, or 14% as reported, or an increase of 3%
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 $1.001 billion for the fourth
quarter of 2003 as compared with $863 million for the prior year
quarter, representing an increase of $138 million or 16% as reported,
or an increase of 4% excluding the favorable impact of exchange.
Net sales in the Asia Pacific region were $692 million for the
current quarter as compared with $621 million for the prior year
quarter, representing an increase of $71 million, or 11% as reported,
or an increase of 1% excluding the favorable impact of exchange.
Net sales in the Canada and Latin America region were $371 million
in the current quarter as compared with $320 million for the fourth
quarter of 2002, representing an increase of $51 million, or 16% as
reported, or an increase of 8% 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 $734 million for the fourth quarter of 2003 as
compared with $643 million for the prior year quarter, representing an
increase of $91 million, or 14% as reported, or an increase of 11%
excluding the favorable impact of exchange. The emerging market
portfolio accounted for approximately 19% of Kodak's worldwide sales
and 36% of Kodak's non-U.S. sales in the quarter. Sales growth was
recorded for all major emerging markets including China +29%, Russia
+24%, India +20%, Mexico +5% and Brazil +5%.
Sales increases 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 continued growth from Kodak Express and the
Company's efforts to expand 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.
Gross Profit:
GAAP:
Gross profit was $1.217 billion for the fourth quarter of 2003 as
compared with $1.206 billion for the fourth quarter of 2002,
representing an increase of $11 million, or 1%. The gross profit
margin was 32.2% in the current quarter as compared with 35.0% in the
prior year quarter. The 2.8 percentage point decrease was primarily
attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 7.0 percentage points. These
declines relate primarily to product mix impacts in the
Photography Segment with volume increases in low margin
products and volume decreases in higher margin traditional
products. Negative price was driven primarily by consumer
digital cameras and traditional consumer products and
services.
-- Manufacturing Cost: despite $16 million of charges for
accelerated depreciation associated with ongoing cost
reduction programs, manufacturing cost favorably impacted
gross profit margins by approximately 3.0 percentage points
primarily as a result of continuing cost reduction actions.
-- Exchange: favorably impacted gross profit margins by
approximately 1.0 percentage point.
Operational:
Excluding charges of $16 million relating to accelerated
depreciation, gross profit on an operational basis was $1.233 billion
for the fourth quarter of 2003 as compared with $1.222 billion for the
fourth quarter of 2002, representing an increase of $11 million, or
1%. The gross profit margin was 32.6% in the current quarter as
compared with 35.5% in the prior year quarter. The 2.9 percentage
point decrease was primarily attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 7.0 percentage points.
-- Manufacturing Cost: manufacturing cost favorably impacted
gross profit margins by approximately 3.0 percentage points.
-- Exchange: favorably impacted gross profit margins by
approximately 1.0 percentage point.
Selling, General and Administrative Expenses:
GAAP:
Selling, general and administrative expenses (SG&A) were $727
million for the fourth quarter of 2003 as compared with $703 million
for the prior year quarter, representing an increase of $24 million,
or 3%. SG&A decreased as a percentage of sales from 20.4% for the
fourth quarter of 2002 to 19.2% for the current quarter. The increase
in SG&A is primarily attributable to the following:
-- Unfavorable exchange of $34 million.
-- Acquisition related SG&A of $23 million.
-- A charge of $8 million related to legal settlements
(non-operational).
-- A charge of $3 million for strategic asset impairments
(non-operational).
These increases were partially offset by:
-- Environmental reserve reversals of $9 million
(non-operational).
-- SG&A cost reduction actions.
Operational:
Excluding the non-operational charges noted above, SG&A expenses
on an operational basis were $725 million for the fourth quarter of
2003 as compared with $694 million for the prior year quarter,
representing an increase of $31 million, or 4%. The increase in SG&A
is primarily attributable to unfavorable exchange of $34 million,
spending increases in support of sales growth initiatives, and
acquisitions. As a percentage of sales, SG&A decreased from 20.2% for
the fourth quarter of 2002 to 19.2% for the current quarter.
Research and Development Costs:
GAAP:
Research and development costs (R&D) were $214 million for the
fourth quarter of 2003 as compared with $195 million for the fourth
quarter of 2002, representing an increase of $19 million, or 10%. R&D
as a percentage of sales remained unchanged at 5.7%. The increase in
R&D is primarily attributable to the company's purchase of in-process
R&D associated with the acquisition of PracticeWorks and investments
in growth initiatives.
Operational:
Excluding the charges for in-process R&D noted above, R&D expenses
on an operational basis were $204 million for the fourth quarter of
2003 as compared with $195 million for the prior year quarter,
representing an increase of $9 million, or 5%. The increase in R&D is
primarily attributable to investments in growth initiatives.
Cost Reduction Plans:
As announced in the third quarter of 2003, Kodak has implemented a
series of cost reduction actions resulting in pre-tax charges totaling
$272 million or $.66 per share in the fourth quarter. The components
of restructuring in the fourth quarter include $108 million for
employee severance relating to the elimination of approximately 2,160
positions and $148 million associated with exit costs and asset
write-offs. In addition, the Company recorded accelerated depreciation
of $16 million during the quarter associated with assets to be
disposed of in connection with the relocation of certain manufacturing
operations.
Approximately $102 million (pre-tax) of the total $272 million
charge in the quarter is associated with the divestiture of
photofinishing labs in Germany. The entire charge is associated with
asset impairments and business exit costs.
A summary of the Company's recent cost reduction actions is provided
in tabular format below:
Summary of Direct Charges
Q4 2002 Q1 2003 Q3 2003 Grand
Program Program Program Total
---------------- ----------- ---------------- --------
Actual Actual Actual Actual Remaining
2002 2003 2003 2003 2004
---------------- ----------- ----------------
Direct
Charges $M 109 21 78 385 158 751
Accelerated
Depreciation
and inventory
Writedowns $M 16 24 19 30 5 94
--------------- ---------- ------------- --------
Total
Charges $M 125 45 97 415 163 845
Headcount
Reduction 1,150 675 1,850 3,925 1,875 9,475
2004 Saving $M 210 85 250 545
Annual Saving $M 210 85 300 595
Q4 2002 Program- Related to personnel reductions in global
manufacturing and logistics, and R&D; the move of one-time use
camera assembly to Mexico; and the closure of x-ray and graphics
sensitizing operations in Mexico.
Q1 2003 Program-Rationalization of photofinishing operations in
the US and Europe.
Q3 2003 Program- Reduction of administrative costs.
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 1,700 to 1,900 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 $150 million to $170 million.
Consistent with the implementation of Kodak's new business model,
the company plans to develop and execute a new cost reduction plan
throughout the 2004 to 2006 timeframe. The objective of these actions
is to achieve a business model appropriate for Kodak's traditional
businesses, and to sharpen the Company's competitiveness in digital
markets. As a result of these actions, the Company expects cost
savings in the range of $800 million to $1 billion for full year 2007.
The program is expected to result in total charges of $1.3 billion
to $1.7 billion over the three-year period, of which $700 million to
$900 million are related to severance, with the remainder relating to
the disposal of building and equipment. Overall, Kodak's worldwide
facility square footage will be reduced by approximately one third.
Approximately 12,000 to 15,000 positions worldwide are expected to be
eliminated through these actions primarily in global manufacturing,
selected traditional businesses and corporate administration. Maximum
single year cash usage under the new plan is expected to be
approximately $200 million.
Earnings From Operations:
GAAP:
Earnings from operations (EFO) for the fourth quarter of 2003 were
$20 million as compared with earnings from operations of $201 million
for the fourth quarter of 2002, representing a decrease of $181
million. This decrease is attributable to the reasons indicated above.
Operational:
Excluding charges for cost reduction actions in the current
quarter, charges relating to strategic asset impairments, legal
settlements, in process R&D and reversal of environmental reserves,
EFO on an operational basis for the fourth quarter of 2003 were $304
million as compared with $333 million for the fourth quarter of 2002,
representing a decrease of $29 million, or 9%. The decrease in
earnings from operations is attributable to the reasons indicated
above.
The fourth quarter operational earnings, relative to the earnings
guidance, include the positive impact of changes in estimates totaling
$38 million, or $.11 per share, relating to employee benefit and
incentive compensation accruals reported in prior quarters.
Below EFO:
GAAP:
Interest expense for the fourth quarter of 2003 was $44 million as
compared with $45 million for the prior year quarter, representing a
decrease of $1 million, or 2%.
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 $12 million as compared with
other charges of $27 million for the fourth quarter of 2002. The
improvement is primarily attributable to reduced losses from the
Company's equity investment in the NexPress joint venture, elimination
of losses from the Company's equity investment in the Phogenix joint
venture due to its dissolution, reduced losses from the Company's
equity investment in SK Display and increased income from the
Company's equity investment in Kodak Polychrome Graphics.
Operational:
Excluding pre-tax charges of $4 million in the current year
quarter and $7 million in the prior year quarter relating to
non-strategic venture asset impairments, other charges were $8 million
in the fourth quarter of 2003 as compared with other charges of $20
million for the fourth quarter of 2002. The improvement is primarily
attributable to the reasons indicated above.
Corporate Tax Rate:
GAAP:
The Company's annual effective tax rate from continuing operations
for full year 2003 increased from an estimated rate of 19% through the
third quarter of 2003 to a final rate of 19.5% in the current quarter.
This increase is primarily attributable to increased earnings from
operations in certain higher-taxed jurisdictions relative to total
consolidated earnings.
The Company's annual effective tax rate from continuing operations
for the fourth quarter decreased from 27% for the prior year to 19.5%
for the current year. This decrease is primarily attributable to
increased earnings from operations in certain lower-taxed
jurisdictions outside the U.S. relative to total consolidated earnings
and an increase in benefits from the utilization of foreign tax
credits.
During the fourth quarter of 2003, the Company recorded a tax
benefit on a GAAP basis of $43 million. The tax benefit on a GAAP
basis of $43 million for the quarter differs from the operational tax
charge of $53 million, which is based on the annual effective tax rate
of 19.5%, due to the impact of recording discrete period tax benefits
($96 million, or $.33 per share) in connection with the following
discrete period items:
-- A $272 million charge for focused cost reductions;
-- A $10 million charge for in-process research and development;
-- An environmental reserve reversal of $9 million;
-- An $8 million charge for legal settlements;
-- A $4 million charge for non-strategic venture asset
write-downs;
-- A $5 million tax benefit relating to the donation of
intellectual property; and
-- A $3 million charge for strategic asset write-downs.
Operational:
As indicated above, the Company's annual effective tax rate from
continuing operations increased from an estimated rate of 19% through
the third quarter of 2003 to a final rate of 19.5% in the current
quarter. This increase in the rate resulted in a $.01 cent per share
charge to both the operational and GAAP earnings for the quarter,
which all related to the impact of the increase in the rate on
year-to-date earnings through September 30, 2003.
Earnings from Continuing Operations:
GAAP:
Earnings from continuing operations for the fourth quarter of 2003
were $7 million, or $.03 per diluted share, as compared with earnings
from continuing operations for the fourth quarter of 2002 of $130
million, or $.45 per diluted share, representing a decrease of $123
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 fourth quarter of 2003 were $199 million, or $.70 per diluted
share, as compared with earnings from continuing operations on an
operational basis for the fourth quarter of 2002 of $191 million, or
$.65 per diluted share, representing an increase of $8 million, or 4%.
Fourth quarter operational earnings from continuing operations for
2003 exclude the following after-tax items:
-- A charge of $188 million ($272 million pre-tax), or $.66 per
share, resulting from previously announced cost reduction
initiatives. Of the pre-tax charge, $256 million is recorded
in "Restructuring Costs and Other" and $16 million of
accelerated depreciation associated with the relocation of
certain manufacturing operations is recorded in "Cost of Goods
Sold" (COGS).
-- A charge of $6 million ($10 million pre-tax) or $.02 per share
relating to the Company's purchase of in-process R&D
associated with the acquisition of PracticeWorks. The pre-tax
charge is recorded in "Research and development costs" (R&D).
-- A charge of $5 million ($8 million pre-tax) or $.02 per share
relating to legal settlements. The pre-tax charge is recorded
in SG&A.
-- Strategic asset and non-strategic venture asset impairments of
approximately $4 million ($7 million pre-tax), or $.01 per
share. The $3 million pre-tax charge for strategic asset
impairments is recorded in SG&A and the $4 million pre-tax
charge for non-strategic venture asset impairments is recorded
in "Other Income and Charges".
These charges were partially offset by:
-- A tax benefit totaling $5 million, or $.02 per share relating
to the Company's donation of intellectual property.
-- Reversal of environmental reserves of $6 million ($9 million
pre-tax), or $.02 per share, relating to two formerly-owned
Kodak sites outside the U.S.
Earnings from Discontinued Operations:
Earnings from discontinued operations for the fourth quarter of
2003 were $.04 per diluted share, as compared with a loss from
discontinued operations for the fourth quarter of 2002 of $.06 per
diluted share.
During the fourth quarter of 2003, the Company recorded a net of
tax credit of $7 million or $.03 per share, to discontinued operations
for the reversal of an environmental reserve, which was primarily
attributable to positive developments in the Company's remediation
efforts relating to a formerly owned manufacturing site in the U.S. In
addition, the Company reversed state income tax reserves of $3
million, or $.01 per share, through discontinued operations. The
reserve was released due to the favorable outcome of tax audits in
connection with a formerly owned business.
Year-over-Year Comparison of Reported and Operational Earnings
(Amounts in millions of dollars)
- ----------------------------------------------------------------------
4Q 03 as Excluded 4Q 03 4Q 02 as Excluded 4Q 02
Reported Items Operational Reported Items Operational
---------------------------------------------------------
Sales $3,778 $3,778 $3,441 $3,441
COGS 2,561 (16)a 2,545 2,235 (16)g 2,219
--------- ---------------------------------------
Gross Profit 1,217 1,233 1,206 1,222
SG&A 727 (2)b 725 703 (9) h 694
R&D 214 (10)c 204 195 195
Restructuring
costs and (256)d (107)i
other 256 - 107 -
--------- --------------------- --------
Earnings From
Operations 20 304 201 333
Interest
Expense 44 44 45 45
Other Charges 12 (4)e 8 27 (7)j 20
--------- --------------------- --------
Below EFO (56) (52) (72) (65)
(Loss)
Earnings
Before Taxes (36) 252 129 268
(Benefit)
Provision 96f 78k
for Taxes (43) 53 (1) 77
--------- --------------------- --------
Earnings -
Cont. Ops. 7 199 130 191
Earnings
(Loss) Disc.
Ops. 12 - (17) -
Net Earnings $19 199 113 191
Diluted EPS -
Cont. Ops. $0.03 $0.70 $0.45 $0.65
Total Diluted
EPS $0.07 $0.39
- ---------------------------------------------------------------------
Items excluded from Earnings on an operational basis:
a - Accelerated depreciation in connection with the focused cost
reduction actions.
b - Charge for legal settlements and strategic asset write-downs,
partially offset by the reversal of an environmental reserve.
c - Charge for in-process research and development in connection with
the acquisition of PracticeWorks, Inc.
d - Charge for focused cost reduction actions.
e - Charge for non-strategic venture asset write-downs.
f - Exclusion of income tax benefit in connection with the donation of
intellectual property and the tax impacts associated with the
above-mentioned excluded items.
g - Accelerated depreciation and inventory write-downs in connection
with the focused cost reduction actions.
h - Charge for strategic venture asset write-downs and a charitable
donation.
i - Charge for focused cost reduction actions.
j - Charge for non-strategic venture asset write-downs.
k - Tax impacts associated with the above-mentioned excluded items.
As Percent of Sales:
4Q 03 as 4Q 03 4Q 02 as 4Q 02
Reported Operational Reported Operational
------------------------------------------
Gross Profit 32.2% 32.6% 35.0% 35.5%
SG&A 19.2% 19.2% 20.4% 20.2%
SG&A w/o Advertising
14.7% 14.7% 14.6% 14.4%
R&D 5.7% 5.4% 5.7% 5.7%
EFO 0.5% 8.0% 5.8% 9.7%
Net Earnings 0.5% 5.3% 3.3% 5.6%
- ----------------------------------------------------------------------
Segment Results:
Photography
Revenues:
Net worldwide sales for the Photography segment were $2.618
billion for the fourth quarter of 2003 as compared with $2.401 billion
for the fourth quarter of 2002, representing an increase of $217
million, or 9% as reported, an increase of 3% excluding the favorable
impact of exchange. The increase in net sales was comprised of:
-- Volume: volumes increased fourth quarter sales by
approximately 8.0 percentage points. Volume increases for
consumer digital cameras and one-time-use cameras were
partially offset by volume declines for photofinishing
services and other traditional products and services.
-- Price/Mix: declines attributable to price/mix reduced fourth
quarter sales by approximately 5.0 percentage points driven by
consumer digital cameras and traditional consumer products and
services.
-- Exchange: favorable exchange of approximately 6.0 percentage
points partially offset the negative impacts of price/mix.
Photography segment net sales in the U.S. were $1.144 billion for
the current quarter as compared with $1.101 billion for the fourth
quarter of 2002, representing an increase of $43 million, or 4%.
Photography segment net sales outside the U.S. were $1.474 billion for
the fourth quarter of 2003 as compared with $1.300 billion for the
prior year quarter, representing an increase of $174 million, or 13%
as reported, or an increase of 2% excluding the favorable impact of
exchange.
Consumer products and services revenues:
Net worldwide sales of consumer digital cameras increased 87% in
the fourth 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 as
reflected in increased market share in a rapidly growing market.
While complete data for fourth quarter market share is not yet
available, all indications are that Kodak held the number one digital
camera market share position in the U.S. during the months of November
and December. Kodak also placed in the top three market share
positions in 6 out of 9 key markets outside the U.S. Consumer digital
cameras were profitable on a fully allocated basis for the second half
of 2003.
Kodak's new Printer Dock products, initially launched in the
spring of 2003, experienced strong sales growth during the quarter
putting them on track to be a $100 million business in the first year
of sales.
Net worldwide sales of inkjet photo paper increased 11% in the
current quarter as compared with a strong fourth quarter of 2002, when
the Company introduced a new line of small format inkjet paper
products. Although complete data for fourth quarter market share is
not yet available, Kodak continued to maintain its shared leader
market share position in the United States during October and
November.
The double-digit revenue growth and the maintenance of market
share are primarily attributable to strong underlying market growth
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 55%
in the fourth 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 fourth quarter of 2003. Ofoto now has more
than 11 million members and continues to be the market leader in the
online photo services space.
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 7% in the fourth quarter of 2003 as compared with the fourth
quarter of 2002, driven primarily by an increase in sales of new
generation kiosks and consumer digital services.
Net worldwide sales of consumer film products, including 35mm
film, Advantix film and one-time-use cameras (OTUC), decreased 11% in
the fourth quarter of 2003 as compared with the fourth quarter of
2002, reflecting 15% volume declines, negative 1% price/mix and 5%
favorable exchange. Sales of the Company's consumer film products
within the U.S. decreased 20%, reflecting 23% volume declines and
positive 3% price/mix. Sales of the Company's consumer film products
outside the U.S. decreased 2%, reflecting 10% volume declines,
negative 1% price/mix, partially offset by 10% favorable exchange.
U.S. consumer film industry sell-through volumes decreased
approximately 10% in the fourth quarter of 2003 as compared with the
prior year quarter. Year to date 2003, U.S. consumer film industry
volumes decreased approximately 8% year over year. A significant
decrease in U.S. retailer inventories accounted for the differential
between Kodak's sell-in volume during the quarter, and industry sales
to consumers.
The Company's current estimate of worldwide consumer film industry
volumes for full year 2003 is a decrease of approximately 8%.
The Company's blended U.S. consumer film share remained
essentially unchanged on a volume basis relative to the fourth quarter
of 2002. For full year 2003, Kodak maintained approximately flat
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 fourth quarter of 2003 as compared with the fourth
quarter of 2002, with U.S. volumes declining low double digits and
volumes outside the U.S. decreasing slightly. Kodak no longer reports
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 14% in the fourth quarter of 2003
as compared with the fourth 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
16%.
Professional products and services revenues:
Net worldwide sales of professional film capture products
decreased 19% in the fourth quarter of 2003 as compared with the
fourth quarter of 2002, primarily reflecting declines in volume and
negative price/mix partially offset by favorable exchange. Net
worldwide sales of professional sensitized output increased 4% in the
fourth quarter of 2003 as compared with the prior year quarter
reflecting decreases in volume offset by favorable exchange and
positive price/mix.
During the fourth quarter, worldwide sales increases were recorded
for professional digital cameras and Event Imaging Solutions.
Entertainment products and services revenues:
Net worldwide sales of origination and print film to the
entertainment industry increased 4%, primarily reflecting volume
declines offset by favorable exchange and price/mix. The new Vision 2
origination film continues to gain strong customer acceptance.
Gross profit:
Gross profit for the Photography segment was $795 million for the
fourth quarter of 2003 as compared with $842 million for the prior
year quarter, representing a decrease of $47 million or 6%. The gross
profit margin was 30.4% in the current year quarter as compared with
35.1% in the prior year quarter. The 4.7 percentage point decline was
primarily attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 9.0 percentage points driven
by consumer digital cameras, and traditional consumer products
and services.
-- Manufacturing Cost: manufacturing cost positively impacted
gross profit margins by approximately 3.0 percentage points.
-- Exchange: favorably impacted gross profit margins by
approximately 1.0 percentage point.
SG&A:
In the fourth quarter, SG&A expenses for the Photography segment
decreased $8 million, or 1%, from $540 million in the fourth quarter
of 2002 to $532 million in the current quarter, and decreased as a
percentage of sales from 22.5% to 20.3%. Despite unfavorable exchange
of $28 million, SG&A decreased as a result of ongoing cost reduction
actions.
R&D:
Fourth quarter R&D costs for the Photography segment decreased $5
million, or 4%, from $127 million in the fourth quarter of 2002 to
$122 million in the current quarter and decreased as a percentage of
sales from 5.3% to 4.7%. The decrease in R&D was primarily
attributable to cost savings realized from position eliminations
associated with ongoing cost reduction programs.
EFO
Earnings from operations for the Photography segment decreased $33
million, or 19%, from $174 million in the fourth quarter of 2002 to
$141 million in the fourth 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. This acquisition is expected to contribute approximately $200
million in sales to the Health Imaging business during the first full
year. During the fourth quarter, PracticeWorks contributed $48 million
in sales to Health Imaging's revenues.
A planned, this transaction on an operating basis will be slightly
dilutive to earnings per share through 2004. However, based on ongoing
successes in the execution of the integration, it is anticipated to be
no longer dilutive to operations as of 2005, ahead of the original
execution plan. 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 $704
million for the fourth quarter of 2003 as compared with $619 million
for the prior year quarter, representing an increase of $85 million,
or 14% as reported, an increase of 8% excluding the favorable impact
of exchange. The increase in net sales was comprised of:
-- Acquisition: The PracticeWorks acquisition contributed $48
million or approximately 7.0 percentage points to fourth
quarter sales.
-- Volume: Increases in volume contributed approximately 5.0
percentage points to fourth quarter sales, driven primarily by
volumes increases in digital capture equipment, and digital
media and services.
-- Price/Mix: Decrease in price/mix reduced fourth quarter sales
by approximately 4.0 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 $306 million for the current quarter as
compared with $297 million for the fourth quarter of 2002,
representing an increase of $9 million, or 3%. Excluding the impact of
the PracticeWorks acquisition, U.S. net sales decreased $16 million or
5% from fourth quarter 2002.
Net sales outside the U.S. were $398 million for the fourth
quarter of 2003 as compared with $322 million for the prior year
quarter, representing an increase of $76 million, or 24% as reported,
or 12% excluding the favorable impact of exchange. Excluding the
impact of the PracticeWorks acquisition, net sales outside the U.S.
increased $53 million or 16%, 5% 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, dental practice management software and Picture Archiving
and Communications Systems ("PACS"), increased 26% in the fourth
quarter of 2003 as compared with the prior year quarter, reflecting
volume increases, and favorable exchange partially offset by negative
price/mix. The increase in digital product sales was primarily
attributable to the PracticeWorks acquisition and higher volumes of
digital capture equipment and digital media and services.
Traditional products and services revenues:
Net worldwide sales of traditional products, including analog
film, equipment, chemistry and services, decreased 1% in the fourth
quarter of 2003 as compared with the fourth quarter of 2002 driven
primarily by lower volumes and negative price/mix for traditional
products partially offset by favorable exchange.
Gross profit:
Gross profit for the Health Imaging segment was $307 million for
the fourth quarter of 2003 as compared with $253 million in the prior
year quarter, representing an increase of $54 million, or 21%. The
gross profit margin was 43.6% in the current quarter as compared with
40.9% in the fourth quarter of 2002. The increase in the gross profit
margin of 2.7 percentage points was principally attributable to:
-- Acquisition: the PracticeWorks acquisition increased gross
profit by approximately 1.0 percentage point.
-- Manufacturing Cost: productivity/cost increased gross profit
margins by approximately 4.0 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 and analog medical film.
-- Exchange: favorable exchange added 1.0 percentage points to
the gross profit rate.
SG&A:
In the fourth quarter, SG&A expenses for the Health Imaging
segment increased $31 million, or 33%, from $94 million in the fourth
quarter of 2002 to $125 million for the current quarter, and increased
as a percentage of sales from 15.2% to 17.8%. The increase in SG&A
expenses is primarily attributable to $22 million associated with the
PracticeWorks acquisition, unfavorable effects of foreign exchange and
increased investment for growth initiatives.
R&D:
GAAP:
Fourth quarter R&D costs increased $16 million, or 38%, from $42
million in the fourth quarter of 2002 to $58 million in the current
quarter and increased as a percentage of sales from 6.8% for the
fourth quarter of 2002 to 8.2% for the current quarter. R&D expenses
increased in the fourth quarter primarily due to $12 million
associated with the PracticeWorks acquisition, $10 million of which
was a one-time write-off of in-process R&D.
Operational
Fourth quarter R&D costs increased $6 million from $42 million in
the fourth quarter of 2002 to $48 million in the current quarter and
remained the same as a percentage of sales at 6.8% for both quarters.
R&D expenses increased in the fourth quarter primarily due to
increased spending to drive growth in selected areas of the product
portfolio.
EFO:
GAAP
Earnings from operations for the Health Imaging segment increased
$7 million, or 6%, from $117 million for the prior year quarter to
$124 million for the fourth quarter of 2003 while the operating
earnings margin rate decreased 1.3 percentage points to 17.6% from
18.9% for the prior year quarter. The decrease in operating earnings
reflects the impact of the PracticeWorks acquisition, including $10
million write-off of in-process R&D, and increased investment for
growth in SG&A and R&D.
Operational
Excluding the impact of the in-process R&D charge relating to the
PracticeWorks acquisition, earnings from operations for the Health
Imaging segment increased $17 million, or 15%, from $117 million for
the prior year quarter to $134 million for the fourth quarter of 2003
while the operating earnings margin rate increased .1 percentage point
to 19.0% from 18.9% for the prior year quarter.
Commercial Imaging
Revenues:
Net worldwide sales for the Commercial Imaging segment were $432
million for the fourth quarter of 2003 as compared with $396 million
for the prior year quarter, representing an increase of $36 million,
or 9% as reported, or an increase of 5% 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 fourth quarter sales driven by the
modification of a long-term contract, Imaging Services, and
document scanners.
-- Price/Mix: Decrease in price/mix reduced fourth quarter sales
by approximately 1.0 percentage point.
-- Exchange: favorable exchange contributed approximately 4.0
percentage points to fourth quarter sales.
Net sales in the U.S. were $255 million for the current year
quarter as compared with $226 million for the prior year quarter,
representing an increase of $29 million, or 13%. Net sales outside the
U.S. were $177 million in the fourth quarter of 2003 as compared with
$170 million for the prior year quarter, representing an increase of
$7 million or 4% as reported, or a decrease of 5% 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 10% in the current
quarter as compared with the fourth quarter of 2002, primarily
reflecting volume declines and negative price/mix for 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 14 consecutive quarters and
continued to contribute positively to Kodak's "Other Charges" during
the fourth 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 $120 million
for the fourth quarter of 2003 as compared with $116 million in the
prior year quarter, representing an increase of $4 million, or 3%. The
gross profit margin was 27.8% in the current quarter as compared with
29.3% in the prior year quarter. The decrease in the gross profit
margin of 1.5 percentage points was primarily attributable to:
-- Price/Mix: declines due to price/mix reduced gross profit
margins by approximately 1.0 percentage point driven by
graphics products, partially offset by the favorable impact
resulting from the modification of a long-term contract.
-- Manufacturing Cost: manufacturing cost negatively impacted
gross profit margins by approximately 1.0 percentage point.
-- Exchange: exchange had no impact on gross profit margins.
SG&A:
SG&A expenses for the Commercial Imaging segment increased $8
million, or 16%, from $51 million in the fourth quarter of 2002 to $59
million for the current quarter, and increased as a percentage of
sales from 12.9% to 13.7%.
R&D:
Fourth quarter R&D costs for the Commercial Imaging segment
decreased $5 million, or 29%, from $17 million in the fourth quarter
of 2002 to $12 million for the current quarter, and decreased as a
percentage of sales from 4.3% to 2.8% in the current quarter.
EFO:
Earnings from operations for the Commercial Imaging segment
remained unchanged at $49 million for the fourth quarter. For the
quarter, EFO includes the favorable impact that relates to the
modification of a long-term contract.
All Other
Revenues:
Net worldwide sales for All Other were $24 million for the fourth
quarter of 2003, as compared with $25 million for the prior year
quarter, representing a decrease of $1 million, or 4% as reported.
SK Display Corporation, the OLED manufacturing joint venture
between Kodak and Sanyo, continues to focus on improving manufacturing
yields and process engineering and has created a new generation of
chemistry used for coating OLED backplanes.
EFO:
The loss from operations for All Other was $20 million in the
current quarter as compared with the loss from operations of $7
million in the fourth 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, debt assumed in
acquisitions and investments in unconsolidated affiliates. Kodak's
definition of operating cash flow equals free cash flow less
dividends. Investable cash is operating cash flow excluding
acquisitions and debt assumed in acquisitions.
Operating cash flow during the fourth quarter of 2003 was negative
$105 million, $452 million lower than the positive $347 million
generated in the year ago quarter. Excluding the impact of
acquisitions of $630 million and $66 million for 2003 and 2002
respectively, the 2003 investable cash flow of $525 million was $112
million higher than the fourth quarter of 2002.
Net cash provided by (used in) continuing operations, investing
activities and financing activities, as determined under GAAP in the
fourth quarter of 2003 were $780 million, ($815) million and $240
million, respectively. The table below reconciles the net cash
provided by continuing operations as determined under U.S. GAAP to
Kodak's definition of operating cash flow for the fourth quarter of
2003:
4th Qtr.
Net Cash Provided by Continuing Operations to
Investable Cash Flow
- ----------------------------------------------------------------------
($ millions) 2003 2002
- ----------------------------------------------------------------------
Net cash provided by continuing operations 780 909
Additions to properties (153) (215)
Net proceeds from sales of businesses / assets 5 9
Investments in unconsolidated affiliates (35) (27)
Acquisitions, net of cash acquired (587) (66)
Debt assumed from Acquisitions (43) -
Dividends (72) (263)
- ----------------------------------------------------------------------
Operating cash flow (continuing operations) (105) 347
Acquisitions, net of cash acquired 587 66
Debt assumed from Acquisitions 43 -
- ----------------------------------------------------------------------
Investable Cash Flow 525 413
- ----------------------------------------------------------------------
Full Year
Net Cash Provided by Continuing Operations to
Investable Cash Flow
- ----------------------------------------------------------------------
$ Millions 2003 2002
- ----------------------------------------------------------------------
Net cash provided by continuing operations 1,626 2,218
Additions to properties (506) (577)
Net proceeds from sales of businesses / assets 26 27
Investments in unconsolidated affiliates (89) (123)
Acquisitions, net of cash acquired (697) (72)
Debt assumed from Acquisitions (52) -
Dividends (330) (525)
- ----------------------------------------------------------------------
Operating cash flow (continuing operations) (22) 948
Acquisitions, net of cash acquired 697 72
Debt assumed from Acquisitions 52 -
- ----------------------------------------------------------------------
Investable Cash Flow 727 1,020
- ----------------------------------------------------------------------
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 September 24, 2003, 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 was paid on December 12, 2003 to shareholders of record at
the close of business on November 3, 2003.
Capital Spending:
Capital additions were $153 million in the fourth quarter of 2003,
which is $62 million lower than the year ago quarter and $36 million
higher quarter sequentially. The majority of the spending supported
new products, manufacturing productivity and quality improvements,
infrastructure improvements and ongoing environmental and safety
initiatives. Full year 2003 capital additions were $506 million, which
is $71 million lower than full year 2002 capital spend of $577
million.
Receivables:
Total receivables of $2.389 billion comprised of gross trade
($2.028 billion) and miscellaneous ($361 million) receivables at the
end of the fourth quarter, 2003, increased $155 million from fourth
quarter of 2002. This increase is driven by higher sales in the fourth
quarter and the impact of foreign exchange, somewhat offset by a
reduction in past due receivables. Past due receivables decreased by
30% or $81 million from the year-ago quarter, to $185 million, and
decreased by 16% or $35 million quarter sequentially.
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 gross trade receivable balance by $528 million to
$1.500 billion at the end of the fourth quarter of 2003, and would
reduce the trade receivable balance by $371 million to $1.525 billion
at the end of the fourth quarter of 2002.
Kodak defines days sales outstanding (DSO) as the four quarter
moving average net trade receivables after rebate reclassification,
divided by 12 months of sales, multiplied by 365 days. Due to the fact
that a majority of the customer rebates are cleared through customer
deductions, the Company's DSO calculation includes the impact of
reclassifying rebates as an offset to receivables. By reclassifying
the rebates as an offset to receivables, the Company's DSO calculation
is more reflective of the true number of days the net trade
receivables are outstanding. Based on the Company's DSO definition,
DSO for the fourth quarter was 42 days, representing a 5-day decrease
from fourth quarter, 2002 and a one-day decrease quarter sequentially.
If rebate accrual balances were not offset against receivables, DSO
would have decreased only 2 days year over year and remained unchanged
quarter sequentially, due to relatively higher accrual balances in
2003 versus 2002. However, the Company does not believe that the DSO
calculation utilizing trade receivables before rebate classification
is an accurate reflection of the number of days the net trade
receivables are outstanding.
Inventory:
Kodak's inventories (after LIFO) increased $13 million year over
year and decreased $127 million quarter sequentially. The year over
year increase is primarily due to the impact of exchange partially
offset by operational reductions in inventory levels.
Days supply in inventory (DSI) improved by 6 days from the fourth
quarter 2002 and by 3 days quarter sequentially. Inventory turns
improved by 0.2 turns to 5.9 turns since the end of the third quarter
2003. The DSI calculation is based on inventory before the LIFO
reserve.
Including the impact of the LIFO reserve, DSI improved by almost 3
days from the fourth quarter of 2002 and improved by 2 days quarter
sequentially; inventory turns improved slightly at 7.8 turns relative
to the third 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.
Debt:
Debt increased by $358 million to $3.248 billion and cash
increased by $267 million to $1.250 billion quarter sequentially. On a
debt less cash basis, net debt was $1.998 billion, a decrease of $39
million from fourth quarter, 2002 levels of $2.037 billion. Debt
increased as a result of the issuance of a $500 million, 10 year note
and a $575 million 30 year convertible note during October, 2003. The
majority of these funds have been used to reduce commercial paper and
pay for the acquisition of PracticeWorks.
Equity amounted to $3.264 billion, an increase of $340 million
quarter sequentially, primarily due to the positive impact of exchange
and a reduction in the minimum pension liability.
Debt to total capital ratio was 49.9%, increasing .2 percentage
point quarter sequentially and increasing 1.5 percentage points year
over year.
Foreign Exchange:
Year over year, the impact of foreign exchange on operating
activities during the fourth quarter was a positive $0.16 per share
whereas foreign exchange activities recorded in "Other Charges" had a
negative $0.03 per share impact. Therefore, the sum of the operational
and reportable exchange impacts increased earnings in the quarter by
$0.13 per share.
Earnings Outlook:
The Company expects full year 2004 operational earnings of $2.25
to $2.55 per share and GAAP earnings of $.80 to $1.30 per share. For
the first quarter of 2004, the company expects operational earnings
per share to approximate those of the year-ago period.
Upcoming Meetings:
Kodak will host an investor function for members of the investment
community who will be attending the upcoming PMA trade show in Las
Vegas. This function will be held on Friday, February 13, 2004 at the
Las Vegas Convention Center. Please contact Kodak Investor Relations
for additional details.
Safe Harbor Statement:
Certain statements in these presentations 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 expectations for the Company's growth in sales and
earnings, cash generation, tax rate, and debt are forward-looking
statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent our estimates only as of the date they are made,
and should not be relied upon as representing our estimates as of any
subsequent date. While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any
obligation to do so, even if our estimates change. The forward-looking
statements contained in these presentations are subject to a number of
factors and uncertainties, including:
-- The successful
-- Implementation of our recently announced digitally-oriented
growth strategy;
-- Implementation of product strategies (including category
expansion, digitization, organic light emitting diode (OLED),
and digital products);
-- Implementation of intellectual property licensing strategies;
-- Development and implementation of e-commerce strategies;
-- Completion of information systems upgrades, including SAP, our
enterprise system software;
-- Completion of various portfolio actions;
-- Reduction of inventories;
-- Integration of newly acquired businesses;
-- Improvement in manufacturing productivity and techniques;
-- Improvement in receivables performance;
-- Reduction in capital expenditures;
-- Improvement in supply chain efficiency;
-- Implementation of future focused cost reductions, including
personnel reductions; and
-- Development of our business in emerging markets like China,
India, Brazil, Mexico and Russia.
- -- Inherent unpredictability of currency fluctuations and raw
material costs;
- -- Competitive actions, including pricing;
- -- The nature and pace of technology evolution, including the
analog-to-digital transition;
- -- Continuing customer consolidation and buying power;
- -- General economic, business, geopolitical and public health
conditions; and
- -- Other factors and uncertainties disclosed from time to time in our
filings with the Securities and Exchange Commission.
Any forward-looking statements in these presentations should be
evaluated in light of these important factors and uncertainties.
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