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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-87
EASTMAN KODAK COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 16-0417150
(State of incorporation) (IRS Employer
Identification No.)
343 STATE STREET, ROCHESTER, NEW YORK 14650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 585-724-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class June 30, 2002
Common Stock, $2.50 par value 291,749,740
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
Net sales $3,339 $3,592 $ 6,046 $6,567
Cost of goods sold 2,086 2,254 3,935 4,162
------ ------ ------ ------
Gross profit 1,253 1,338 2,111 2,405
Selling, general and
administrative expenses 659 629 1,200 1,203
Research and development costs 192 186 379 375
Goodwill amortization - 37 - 79
Restructuring costs and other - 336 - 336
------ ------ ------ ------
Earnings from operations 402 150 532 412
Interest expense 44 58 88 119
Other (charges) income (22) (7) (53) 16
------ ------ ------ ------
Earnings before income taxes 336 85 391 309
Provision for income taxes 52 49 68 123
------ ------ ------ ------
NET EARNINGS $ 284 $ 36 $ 323 $ 186
====== ====== ====== ======
Basic earnings per share $ .97 $ .12 $ 1.11 $ .64
====== ====== ====== ======
Diluted earnings per share $ .97 $ .12 $ 1.11 $ .64
====== ====== ====== ======
Earnings used in basic and
diluted earnings per share $ 284 $ 36 $ 323 $ 186
Number of common shares used in
basic earnings per share 291.7 290.5 291.5 290.3
Incremental shares from
assumed conversion of options 0.1 0.8 0.1 0.6
------ ------ ------ ------
Number of common shares used in
diluted earnings per share 291.8 291.3 291.6 290.9
====== ====== ====== ======
CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
Retained earnings at beginning
of period $7,445 $7,891 $7,431 $7,869
Net earnings 284 36 323 186
Cash dividends declared (262) (128) (262) (256)
Loss from issuance of treasury
stock relating to a
business acquisition - - (25) -
------ ------ ------ ------
Retained earnings
at end of period $7,467 $7,799 $7,467 $7,799
====== ====== ====== ======
- -----------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
3
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
June 30, Dec. 31,
2002 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 524 $ 448
Receivables, net 2,551 2,337
Inventories, net 1,218 1,137
Deferred income taxes 515 521
Other current assets 248 240
------- -------
Total current assets 5,056 4,683
------- -------
Property, plant and equipment, net 5,538 5,659
Goodwill, net 986 948
Other long-term assets 2,137 2,072
------- -------
TOTAL ASSETS $13,717 $13,362
======= =======
- -----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,559 $ 3,276
Short-term borrowings 1,813 1,534
Accrued income taxes 521 544
------- -------
Total current liabilities 5,893 5,354
OTHER LIABILITIES
Long-term debt, net of current portion 1,240 1,666
Postemployment liabilities 2,752 2,728
Other long-term liabilities 731 720
------- -------
Total liabilities 10,616 10,468
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 849 849
Retained earnings 7,467 7,431
Accumulated other comprehensive loss (472) (597)
------- -------
8,822 8,661
Less: Treasury stock at cost 5,721 5,767
------- -------
Total shareholders' equity 3,101 2,894
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $13,717 $13,362
======= =======
- -----------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
4
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Six Months Ended
June 30
----------------
2002 2001
Cash flows from operating activities:
Net earnings $ 323 $ 186
Adjustments to reconcile to
net cash provided by operating activities:
Depreciation and amortization 386 462
Restructuring costs and other charges - 393
(Benefit) provision for deferred taxes (2) 60
Increase in receivables (117) (254)
(Increase) decrease in inventories (16) 73
Increase in other assets (8) (57)
Decrease in liabilities excluding borrowings (106) (408)
------ ------
Total adjustments 137 269
------ ------
Net cash provided by operating
activities 460 455
------ ------
Cash flows from investing activities:
Additions to properties (207) (375)
Net proceeds from sales of businesses/assets 3 9
Acquisitions, net of cash acquired (6) (244)
Marketable securities - purchases (55) (29)
Marketable securities - sales 29 28
------ ------
Net cash used in investing activities (236) (611)
------ ------
Cash flows from financing activities:
Net increase (decrease) in borrowings
with original maturity of
90 days or less 65 (287)
Proceeds from other borrowings 527 1,489
Repayment of other borrowings (742) (707)
Dividend payments - (256)
Exercise of employee stock options 2 15
Stock repurchases - (44)
------ ------
Net cash (used in) provided by financing
activities (148) 210
------ ------
Effect of exchange rate changes on cash - (8)
------ ------
Net increase in cash and cash equivalents 76 46
Cash and cash equivalents, beginning of year 448 246
------ ------
Cash and cash equivalents, end of quarter $ 524 $ 292
====== ======
- -----------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
5
Eastman Kodak Company and Subsidiary Companies
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The consolidated interim financial statements are unaudited, and
certain information and footnote disclosures related thereto normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
omitted in accordance with Rule 10-01 of Regulation S-X. In the
opinion of management, the accompanying unaudited consolidated
financial statements were prepared following the same policies and
procedures used in the preparation of the audited financial statements
and reflect all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position of
Eastman Kodak Company and its subsidiaries (the Company). The results
of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year. These consolidated financial
statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Certain reclassifications of prior year financial information have been
made to conform with the 2002 presentation.
- -----------------------------------------------------------------------
NOTE 2: RECEIVABLES, NET
(in millions) June 30, December 31,
2002 2001
Trade receivables $2,171 $1,966
Miscellaneous receivables 380 371
------ ------
Total (net of allowances of $126 and $109) $2,551 $2,337
====== ======
Of the total trade receivable amounts of $2,171 million and $1,966
million as of June 30, 2002 and December 31, 2001, respectively,
approximately $327 million and $329 million, respectively, are expected
to be settled through customer deductions in lieu of cash payment.
Such deductions represent rebates owed to the customer and are included
in Accounts payable and other current liabilities in the accompanying
consolidated statement of financial position at each respective balance
sheet date.
- -----------------------------------------------------------------------
NOTE 3: INVENTORIES, NET
(in millions) June 30, December 31,
2002 2001
At FIFO or average cost
(approximates current cost)
Finished goods $ 900 $ 851
Work in process 324 318
Raw materials and supplies 411 412
------ ------
1,635 1,581
LIFO reserve (417) (444)
------ ------
Total $1,218 $1,137
====== ======
- -------------------------------------------------------------------------
6
NOTE 4: VENTURE INVESTMENT IMPAIRMENTS
During the second quarter of 2002, the Company recorded a total charge
of $13 million for other than temporary impairments relating to certain
of its strategic and non-strategic venture investments. The strategic
venture investment impairment of $10 million and the non-strategic
venture investment impairment of $3 million were recorded in selling,
general and administrative expenses and other (charges) income,
respectively, in the accompanying consolidated statement of earnings.
- -----------------------------------------------------------------------
NOTE 5: SHORT-TERM BORROWINGS AND LONG-TERM DEBT
SHORT-TERM BORROWINGS
Revolving Credit Facilities
On July 12, 2002, the Company completed the renegotiation of its 364-day
revolving credit facility. The new $1.0 billion facility is $225 million
lower than the 2001 facility due to a reduction in the Company's
commercial paper usage and the establishment of the accounts receivable
securitization program. Including the Company's $1.225 billion 5-year
facility, which expires in July 2006, the Company's total available
committed revolving credit facilities amount to $2.225 billion. There
were no amounts outstanding under these facilities at June 30, 2002.
In connection with the renegotiation of the $1.0 billion facility, the
covenant under both of the facilities, which previously required the
Company to maintain a certain EBITDA (earnings before interest, income
taxes, depreciation and amortization) to interest ratio, was changed to a
debt to EBITDA ratio. In the event of violation of the covenant, the
facility would not be available for borrowing until the covenant
provisions were waived, amended or satisfied.
Accounts Receivable Securitization Program
In March 2002, the Company entered into an accounts receivable
securitization program (the Program), which provides the Company with
borrowings up to a maximum of $400 million. Under the Program, the
Company sells certain of its domestic trade accounts receivable without
recourse to EK Funding LLC, a Kodak wholly-owned, consolidated,
bankruptcy-remote, limited purpose, limited liability corporation (EKFC).
Kodak continues to service, administer and collect the receivables. A
bank, acting as the Program agent, purchases undivided percentage
ownership interests in those receivables on behalf of the conduit
purchasers, who have a first priority security interest in the related
receivables pool. The receivables pool at June 30, 2002, representing
the outstanding balance of the gross accounts receivable sold to EKFC,
totaled approximately $760 million. As the Company has the right at any
time during the Program to repurchase all of the then outstanding
purchased interests for a purchase price equal to the outstanding
principal plus accrued fees, the receivables remain on the Company's
consolidated statement of financial position, and the proceeds from the
sale of undivided interests are recorded as secured borrowings.
7
As the Program is renewable annually subject to the bank's approval, the
secured borrowings under the Program are included in short-term
borrowings. The Company expects the Program to be renewed upon its
expiration in March 2003. At June 30, 2002, the Company had outstanding
secured borrowings under the Program of $186 million.
The cost of the secured borrowings under the Program is comprised of
yield, liquidity, conduit, Program and Program agent fees. The yield fee
is subject to a floating rate, based on the average of the conduits'
commercial paper rates. The total charge for these fees is recorded in
interest expense. Based on the outstanding secured borrowings level of
$186 million and the average of the conduits' commercial paper rates at
June 30, 2002, the estimated annualized borrowing cost rate is 2.46%.
Interest expense for both the three and six month periods ended June 30,
2002 was not material.
The Program agreement contains a number of customary covenants and
termination events. Upon the occurrence of a termination event, all
secured borrowings under the Program shall be immediately due and
payable. The Company was in compliance with all such covenants at June
30, 2002.
LONG-TERM DEBT
In the six month period ended June 30, 2002, the Company entered into
several separate term note arrangements (the Notes) with an aggregate
principal amount of approximately $37 million. The Notes bear interest
at annual rates ranging from 6.39% to 6.79% and are payable in 36
monthly installments of principal and interest of approximately $1.1
million. The Notes are collateralized by certain photofinishing
equipment. The Notes contain customary representations, warranties,
covenants and events of default. The Company was in compliance with all
of these provisions under the Notes at June 30, 2002. Of the
outstanding principal of $34 million at June 30, 2002, approximately $11
million and $23 million, respectively, were recorded in short-term
borrowings and long-term debt, net of current portion.
- -----------------------------------------------------------------------
NOTE 6: TAXES
During the second quarter of 2002, the Company recorded a tax benefit
of $45 million relating to the closure of its PictureVision subsidiary.
The decision to close the subsidiary was preceded by unsuccessful
attempts to sell the subsidiary. As a result of these activities, the
Company made the formal decision in the second quarter of 2002 to close
the subsidiary as a determination was made that the business was
worthless for tax purposes. Accordingly, the Company recorded a $45
million tax benefit in the second quarter of 2002 based on the
Company's remaining tax basis in the PictureVision stock.
- -----------------------------------------------------------------------
8
NOTE 7: COMMITMENTS AND CONTINGENCIES
Environmental
At June 30, 2002, the Company's undiscounted accrued liability for
environmental remediation costs amounted to approximately $154 million
and is reported in Other long-term liabilities.
The Company is currently implementing a Corrective Action Program
required by the Resource Conservation and Recovery Act (RCRA) at the
Kodak Park site in Rochester, NY. As part of this program, the Company
has completed the RCRA Facility Assessment (RFA), a broad-based
environmental investigation of the site. The Company is currently in
the process of completing, and in some cases has completed, RCRA
Facility Investigations (RFIs) and Corrective Measures Studies (CMS)
for areas at the site. At June 30, 2002, estimated future
investigation and remediation costs of $69 million are accrued on an
undiscounted basis and are included in Other long-term liabilities.
Additionally, the Company has retained certain obligations for
environmental remediation and Superfund matters related to certain
sites associated with the non-imaging health businesses sold in 1994.
In this regard, the Company has been identified as a potentially
responsible party (PRP) in connection with the non-imaging health
businesses in five active Superfund sites. At June 30, 2002, estimated
future remediation costs of $50 million are accrued on an undiscounted
basis and are included in Other long-term liabilities.
The Company has obligations relating to two former manufacturing sites
located outside the United States. Investigations were completed in
the fourth quarter of 2001, which facilitated the completion of cost
estimates for the future remediation and monitoring of these sites.
The Company's obligations with respect to these two sites include an
estimate of its cost to repurchase one of the sites and demolish the
buildings in preparation for its possible conversion to a public park.
The repurchase of the site was completed in the first quarter of 2002.
At June 30, 2002, estimated future investigation, remediation and
monitoring costs of $30 million are accrued on an undiscounted basis
and are included in Other long-term liabilities.
Additionally, the Company has approximately $5 million accrued on an
undiscounted basis in Other long-term liabilities at June 30, 2002
for remediation relating to other facilities, which are not material to
the Company's financial position, results of operations, cash flows or
competitive position.
Cash expenditures for the aforementioned investigation, remediation and
monitoring activities are expected to be incurred over the next thirty
years for each site. The accrual reflects the Company's cost estimate
of the amount it will incur under the agreed-upon or proposed work
plans. The Company's cost estimate is based upon existing technology
and has not been reduced by possible recoveries from third parties.
The Company's estimate includes equipment and operating costs for
remediation and long-term monitoring of the sites.
9
A Consent Decree was signed in 1994 in settlement of a civil complaint
brought by the U.S. Environmental Protection Agency and the U.S.
Department of Justice. In connection with the Consent Decree, the
Company is subject to a Compliance Schedule under which the Company has
improved its waste characterization procedures, upgraded one of its
incinerators, and is evaluating and upgrading its industrial sewer
system. The total expenditures required to complete this program are
currently estimated to be approximately $34 million over the next nine
years. These expenditures are primarily capital in nature and,
therefore, are not included in the environmental accrual at June 30,
2002.
The Company is presently designated as a PRP under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended (The Superfund law), or under similar state laws, for
environmental assessment and cleanup costs as the result of the
Company's alleged arrangements for disposal of hazardous substances at
six such active sites. With respect to each of these sites, the
Company's actual or potential allocated share of responsibility is
small. Furthermore, numerous other PRPs have also been designated at
these sites and, although the law imposes joint and several liability
on PRPs, the Company's historical experience demonstrates that these
costs are shared with other PRPs. Settlements and costs paid by the
Company in Superfund matters to date have not been material. Future
costs are also not expected to be material to the Company's financial
position, results of operations or cash flows.
The Clean Air Act Amendments were enacted in 1990. Expenditures to
comply with the Clean Air Act implementing regulations issued to date
have not been material and have been primarily capital in nature. In
addition, future expenditures for existing regulations, which are
primarily capital in nature, are not expected to be material. Many of
the regulations to be promulgated pursuant to this Act have not been
issued.
Uncertainties associated with environmental remediation contingencies
are pervasive and often result in wide ranges of outcomes. Estimates
developed in the early stages of remediation can vary significantly. A
finite estimate of cost does not normally become fixed and determinable
at a specific time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities
that help to frame and define a liability, and the Company continually
updates its cost estimates.
10
Estimates of the amount and timing of future costs of environmental
remediation requirements are necessarily imprecise because of the
continuing evolution of environmental laws and regulatory requirements,
the availability and application of technology and the identification
of presently unknown remediation sites and the allocation of costs
among the potentially responsible parties. Based upon information
presently available, such future costs are not expected to have a
material effect on the Company's competitive or financial position.
However, such costs could be material to results of operations in a
particular future quarter or year.
Other Commitments and Contingencies
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At June 30, 2002, the
maximum guarantees for which the Company could become obligated
approximated $368 million. Within the total amount of $368 million,
the Company is guaranteeing debt in the amount of $175 million for
Kodak Polychrome Graphics, an unconsolidated affiliate in which the
Company has a 50% ownership interest. The balance of the amount is
principally comprised of other loan guarantees and guarantees of
customer amounts due to banks in connection with various banks'
financing of customers' purchase of equipment and products from Kodak.
These guarantees would require payment from Kodak only in the event of
default on payment by the respective debtor. Management believes the
likelihood is remote that material payments will be required under
these guarantees. Relating to the maximum guarantee amount of $368
million, only $167 million of affiliated company and customer debt and
other obligations were outstanding at June 30, 2002.
The Company may provide up to $100 million in loan guarantees to
support funding needs for SK Display Corporation, an unconsolidated
affiliate in which the Company has a 34% ownership interest. At June
30, 2002, the SK Display Corporation had no outstanding debt relating
to the loan guarantees.
11
Qualex, a wholly-owned subsidiary of Kodak, has a 50% ownership
interest in ESF, which is a joint venture partnership between Qualex
and Dana Credit Corporation (DCC), a wholly-owned subsidiary of Dana
Corporation. Qualex accounts for its investment in ESF under the
equity method of accounting. ESF provides a long-term financing
solution to Qualex's photofinishing customers in connection with
Qualex's leasing of photofinishing equipment to third parties, as
opposed to Qualex extending long-term credit. As part of the
operations of its photofinishing services, Qualex sells equipment under
a sales-type lease arrangement and records a long-term receivable.
These long-term receivables are subsequently sold to ESF without
recourse to Qualex. ESF incurs long-term debt to finance the purchase
of the receivables from Qualex. This debt is collateralized solely by
the long-term receivables purchased from Qualex, and in part, by a $60
million guarantee from DCC. Qualex provides no guarantee or collateral
to ESF's creditors in connection with the debt, and ESF's debt is non-
recourse to Qualex. Qualex's only continued involvement in connection
with the sale of the long-term receivables is the servicing of the
related equipment under the leases. Qualex has continued revenue
streams in connection with this equipment through future sales of
photofinishing consumables, including paper and chemicals, and
maintenance.
Qualex has risk with respect to the ESF arrangement as it relates to
its continued ability to procure spare parts from the primary
photofinishing equipment vendor (the Vendor) to fulfill its servicing
obligations under the leases. The Vendor is currently experiencing
financial difficulty, which raises concern about Qualex's ability to
procure the required service parts. The lessees' requirement to pay
ESF under the lease agreements is not contingent upon Qualex's
fulfillment of its servicing obligations. Under the agreement with
ESF, Qualex would be responsible for any deficiency in the amount of
rent not paid to ESF as a result of any lessee's claim regarding
maintenance or supply services not provided by Qualex. Such lease
payments would be made in accordance with the original lease terms,
which generally extend over 5 to 7 years. ESF's outstanding lease
receivable amount was approximately $530 million at June 30, 2002. To
mitigate the risk of not being able to fulfill its service obligations,
Qualex has built up its inventory of these spare parts and has begun
refurbishing used parts. Effective April 3, 2002, Kodak entered into
certain agreements with the Vendor under which the Company has
committed to pay up to $25 million for: a license relating to the spare
parts intellectual property; an equity interest in the intellectual
property holding company; an arrangement to purchase spare parts;
approximately five percent of the Vendor's outstanding unrestricted
voting common stock; and a loan to the Vendor if the Vendor meets
certain criteria. A portion of such debt will be convertible into the
Vendor's unrestricted voting common stock.
12
In December 2001, Standard & Poor's downgraded the credit ratings of
Dana Corporation to BB for long-term debt and B for short-term debt,
which are below investment grade. This action created a Guarantor
Termination Event under the Receivables Purchase Agreement (RPA)
between ESF and its banks. To cure the Guarantor Termination Event, in
January 2002, ESF posted $60 million of additional collateral in the
form of cash and long-term lease receivables. At that time, if Dana
Corporation were downgraded to below BB by Standard & Poor's or below
Ba2 by Moody's, that action would constitute a Termination Event under
the RPA and ESF would be forced to renegotiate its debt arrangements
with the banks. On February 22, 2002, Moody's downgraded Dana
Corporation to a Ba3 credit rating, thus creating a Termination Event.
Effective April 15, 2002, ESF cured the Termination Event by executing
an amendment to the RPA. Under the amended RPA, the maximum borrowings
were lowered to $400 million, and ESF must pay a higher interest rate
on outstanding and future borrowings. Additionally, if there were
certain changes in control with respect to Dana Corporation or DCC, as
defined in the amended RPA, such an occurrence would constitute an
event of default. Absent a waiver from the banks, this event of
default would create a Termination Event under the RPA. The amended
RPA arrangement was further amended in July 2002 to extend through
2003. Under the amended RPA arrangement, maximum borrowings were
reduced to $370 million. Total outstanding borrowings under the RPA at
June 30, 2002 were $370 million.
Dana Corporation's Standard & Poor's and Moody's long-term debt credit
ratings have remained at the February 22, 2002 levels of BB and Ba3,
respectively. Under the amended RPA, if either of Dana Corporation's
long-term debt ratings were to fall below their current respective
ratings, such an occurrence would create a Termination Event as defined
in the RPA.
The amended RPA arrangement extends through July 2003, at which time
the RPA can be extended or terminated. If the RPA were terminated,
Qualex would no longer be able to sell its lease receivables to ESF and
would need to find an alternative financing solution for future sales
of its photofinishing equipment. Under the partnership agreement
between Qualex and DCC, subject to certain conditions, ESF has
exclusivity rights to purchase Qualex's long-term lease receivables.
The term of the partnership agreement continues through October 6,
2003. In light of the timing of the partnership termination, Qualex is
currently considering alternative financing solutions for prospective
leasing activity with its customers.
The Company and its subsidiary companies are involved in lawsuits,
claims, investigations and proceedings, including product liability,
commercial, environmental, and health and safety matters, which are
being handled and defended in the ordinary course of business. There
are no such matters pending that the Company and its General Counsel
expect to be material in relation to the Company's business, financial
position or results of operations. Refer to Item 1, Legal Proceedings,
on page 51.
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13
NOTE 8: FINANCIAL INSTRUMENTS
The Company, as a result of its global operating and financing
activities, is exposed to changes in foreign currency exchange rates,
commodity prices, and interest rates which may adversely affect its
results of operations and financial position. The Company manages such
exposures, in part, with derivative financial instruments. The fair
value of these derivative contracts is reported in Other current assets
or Accounts payable and other current liabilities in the Company's
Statement of Financial Position.
Foreign currency forward contracts are used to hedge existing foreign
currency denominated assets and liabilities, especially those of the
Company's international treasury center, as well as forecasted foreign
currency denominated intercompany sales. Silver forward contracts are
used to mitigate the Company's risk to fluctuating silver prices. The
Company's exposure to changes in interest rates results from its
investing and borrowing activities used to meet its liquidity needs.
Long-term debt is generally used to finance long-term investments,
while short-term debt is used to meet working capital requirements. An
interest rate swap agreement was used to convert some floating-rate
debt to fixed-rate debt. The Company does not utilize financial
instruments for trading or other speculative purposes.
The Company has entered into foreign currency forward contracts that
are designated as cash flow hedges of exchange rate risk related to
forecasted foreign currency denominated intercompany sales. At June
30, 2002, the Company had cash flow hedges for the euro, the Australian
dollar, and the Canadian dollar, with maturity dates ranging from July
2002 to December 2002.
At June 30, 2002, the fair value of all open foreign currency forward
contracts was an unrealized loss of $20 million, recorded in Other
comprehensive income. If this amount were to be realized, all of it
would be reclassified into cost of goods sold during the next twelve
months. Additionally, realized losses of $2 million, related to closed
foreign currency contracts, have been deferred in Other comprehensive
income. These losses will be reclassified into cost of goods sold as
the inventory transferred in connection with the intercompany sales is
sold to third parties, all within the next twelve months. During the
second quarter of 2002, a gain of less than $1 million was reclassified
from Other comprehensive income to cost of goods sold. Hedge
ineffectiveness was insignificant.
The Company does not apply hedge accounting to the foreign currency
forward contracts used to offset currency-related changes in the fair
value of foreign currency denominated assets and liabilities. These
contracts are marked to market through earnings at the same time that
the exposed assets and liabilities are remeasured through earnings
(both in Other (charges) income). The majority of the contracts held
by the Company are denominated in euros, Australian dollars, British
pounds, Chinese renminbi, and Canadian dollars.
14
The Company has entered into silver forward contracts that are
designated as cash flow hedges of price risk related to forecasted
worldwide silver purchases. The Company used silver forward contracts
to minimize its exposure to increases in silver prices in 2000, 2001,
and 2002. At June 30, 2002, the Company had open forward contracts
with maturity dates ranging from August 2002 to September 2002.
At June 30, 2002, the fair value of open silver forward contracts was
an unrealized gain of $2 million, recorded in Other comprehensive
income. If this amount were to be realized, all of it would be
reclassified into cost of goods sold during the next twelve months.
Additionally, realized gains of $2 million, related to closed silver
contracts, have been deferred in Other comprehensive income. These
gains will be reclassified into cost of goods sold as silver-containing
products are sold, all within the next twelve months. During the
second quarter of 2002, a realized gain of $1 million was recorded in
cost of goods sold. Hedge ineffectiveness was insignificant.
In July 2001, the Company entered into an interest rate swap agreement
designated as a cash flow hedge of the LIBOR-based floating-rate
interest payments on $150 million of debt issued June 26, 2001 and
maturing September 16, 2002. The swap effectively converts interest
expense on that debt to a fixed annual rate of 4.06%.
At June 30, 2002, the fair value of the swap was a loss of $1 million,
recorded in Other comprehensive income. If this amount were to be
realized, all of this loss would be reclassified into interest expense
within the next twelve months. During the second quarter of 2002, less
than $1 million was charged to interest expense related to the swap.
There was no hedge ineffectiveness.
The Company's financial instrument counterparties are high-quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk
by requiring specific minimum credit standards and diversification of
counterparties. The Company has procedures to monitor the credit
exposure amounts. The maximum credit exposure at June 30, 2002 was not
significant to the Company.
- -----------------------------------------------------------------------
15
NOTE 9: RESTRUCTURING PROGRAM
The following table summarizes the activity with respect to the
remaining balances in the restructuring reserves at June 30, 2002
related to the restructuring charges taken in 2001:
(in millions)
Exit
Severance Costs
------------------- -------
Number of
Employees Reserve Reserve Total
--------- ------- ------- -----
Ending balance at
December 31, 2001 4,225 $ 275 $ 43 $ 318
2002 utilization (2,925) (109) (14) (123)
------- ----- ---- -----
Ending balance at
June 30, 2002 1,300 $ 166 $ 29 $ 195
======= ===== ==== =====
As previously disclosed in the Company's 2001 Annual Report on Form 10-K,
the Company had two separate restructuring programs in 2001 primarily
relating to the rationalization of the U.S. photofinishing operations,
the elimination of excess manufacturing capacity, the exit of certain
operations and reductions in research and development positions and
selling, general and administrative positions worldwide. In connection
with these restructuring actions, the Company recorded a total net charge
of $678 million, which was comprised of severance, long-term assets,
inventory and exit cost charges of $331 million, $215 million, $84
million and $48 million, respectively. The net severance charge
represented the elimination of 6,925 worldwide positions, of which 5,625
positions had been eliminated as of June 30, 2002. The remaining 1,300
positions will be eliminated by year-end 2002. Terminated employees can
elect to receive severance payments for up to two years following their
date of termination. Write-downs and write-offs of long-term assets and
inventory were completed during 2001. The actions relating to the exit
cost reserve will be completed by the end of 2002.
- -----------------------------------------------------------------------
NOTE 10: EARNINGS PER SHARE
Options to purchase 23.7 million and 40.5 million shares of common
stock at weighted average per share prices of $61.46 and $60.17 for the
three months ended June 30, 2002 and 2001, respectively, and options to
purchase 23.8 million and 42.4 million shares of common stock at
weighted average per share prices of $61.44 and $59.50 for the six
months ended June 30, 2002 and 2001, respectively, were outstanding
during the periods presented but were not included in the computation
of diluted earnings per share because the options' exercise price was
greater than the average market price of the common shares for the
respective periods.
- -----------------------------------------------------------------------
16
NOTE 11: COMMON STOCK
The Company has 950 million shares of authorized common stock with a
par value of $2.50 per share, of which 391 million shares had been
issued as of June 30, 2002 and December 31, 2001. Treasury stock at
cost consists of approximately 100 million shares at both June 30, 2002
and December 31, 2001.
- -----------------------------------------------------------------------
NOTE 12: COMPREHENSIVE INCOME
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
Net income $284 $ 36 $323 $ 186
Unrealized holding (losses)
gains on marketable
securities - (3) 2 (12)
Unrealized (losses) gains
from hedging activity (14) 13 (6) 26
Currency translation
adjustments 161 (28) 129 (122)
---- ----- ---- -----
Total comprehensive income $ 431 $ 18 $448 $ 78
==== ===== ==== =====
- -----------------------------------------------------------------------
NOTE 13: SEGMENT INFORMATION
(in millions)
Beginning in the fourth quarter of 2001, the Company changed its
operating structure, which was previously comprised of seven business
units, to be centered around strategic product groups. The strategic
product groups from existing businesses and geographies have been
integrated into segments that share common technology, manufacturing
and product platforms and customer sets. In accordance with the change
in the operating structure, certain of the Company's product groups
were realigned to reflect how senior management now reviews the
business, makes investing and resource allocation decisions and
assesses operating performance. The realignment of certain of the
Company's strategic product groups resulted in changes to the
composition of the reportable segments.
As a result of the change in composition of the reportable segments,
the accompanying segment information for the three months and six
months ended June 30, 2001 has been presented in accordance with the
new structure and to conform to the presentation in the Company's 2001
Annual Report on Form 10-K and the presentation for the three months
and six months ended June 30, 2002. The Company has three reportable
segments: Photography; Health Imaging; and Commercial Imaging. The
balance of the Company's operations, which individually and in the
aggregate do not meet the criteria of a reportable segment, are
reported in All Other.
Segment financial information is shown below.
17
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
Net sales:
Photography $2,378 $2,600 $4,192 $4,629
Health Imaging 569 586 1,090 1,147
Commercial Imaging 364 370 712 730
All Other 28 36 52 61
------ ------ ------ ------
Consolidated total $3,339 $3,592 $6,046 $6,567
====== ====== ====== ======
Earnings from
operations:
Photography $ 257 $ 401 $ 273 $ 504
Health Imaging 112 98 188 206
Commercial Imaging 49 43 94 90
All Other (6) 1 (13) 5
------ ------ ------ ------
Total of segments 412 543 542 805
Venture investment
impairments (10) - (10) -
Restructuring costs
and asset impairments - (316) - (316)
Wolf charge - (77) - (77)
------ ------ ------ ------
Consolidated total $ 402 $ 150 $ 532 $ 412
====== ====== ====== ======
Net earnings :
Photography $ 175 $ 269 $ 178 $ 354
Health Imaging 82 68 132 141
Commercial Imaging 23 20 45 49
All Other (4) 1 (10) 4
------ ------ ------ ------
Total of segments 276 358 345 548
Venture asset impairment (13) - (13) -
Restructuring costs
and asset impairments - (316) - (316)
Wolf charge - (77) - (77)
Interest expense (44) (58) (88) (119)
Other corporate items 3 2 5 4
Tax benefit - PictureVision
subsidiary closure 45 - 45 -
Income tax effects on
above items and taxes
not allocated to segments 17 127 29 146
------ ------ ------ ------
Consolidated total $ 284 $ 36 $ 323 $ 186
====== ====== ====== ======
- -----------------------------------------------------------------------
18
NOTE 14: ACCOUNTING CHANGES
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets." In accordance with SFAS No. 142, the
Company discontinued the amortization of goodwill and, therefore, the
results from operations for the three months and six months ended June
30, 2002 excludes amortization expense on goodwill. Under the
transitional guidance of SFAS No. 142, the Company was required to
perform two steps, step one to test for a potential impairment of
goodwill, and step two to measure the impairment loss, if any such loss
were identified in the performance of step one. The Company completed
step one in its first quarter ended March 31, 2002, which resulted in
no impairment. Accordingly, the performance of step two was not
required. Additionally, in the quarter ended March 31, 2002, the
Company evaluated the useful lives assigned to its intangible assets,
which resulted in no material changes to such useful lives.
Net income and earnings per share for the three months and six months ended
June 30, 2001, as adjusted for the exclusion of amortization expense, were
as follows:
Three Months Ended Impact of
June 30, 2001 Exclusion of
------------------------ Goodwill
As Reported As Adjusted Amort. Expense
----------- ----------- --------------
Earnings before income
taxes (as originally
reported) $ 85 $ 85 $ -
Adjustment for the
exclusion of goodwill
amortization - 37 37
----- ----- ----
Earnings before income
taxes 85 122 37
Provision for income
taxes 49 55 6
----- ----- ----
Net income $ 36 $ 67 $ 31
===== ===== ====
Basic and diluted
earnings per share $ .12 $ .23 $.11
===== ===== ====
19
Six Months Ended Impact of
June 30, 2001 Exclusion of
------------------------ Goodwill
As Reported As Adjusted Amort. Expense
----------- ----------- --------------
Earnings before income
taxes (as originally
reported) $ 309 $ 309 $ -
Adjustment for the
exclusion of goodwill
amortization - 79 79
----- ----- ----
Earnings before income
taxes 309 388 79
Provision for income
taxes 123 135 12
----- ----- ----
Net income $ 186 $ 253 $ 67
===== ===== ====
Basic and diluted
earnings per share $ .64 $ .87 $.23
===== ===== ====
Effective January 1, 2002, the Company adopted the provisions of SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The adoption of SFAS No. 144 did not have an impact on the
Company's consolidated financial statements for the quarter ended June
30, 2002.
Effective January 1, 2002, the Company adopted the provisions of
Emerging Issues Task Force (EITF) Issue No. 01-09, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of
the Vendor's Products)." The adoption of EITF Issue No. 01-09 did not
have a material impact on the Company's Consolidated Statement of
Earnings.
In June 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses the financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when it is incurred and measured
initially at fair value. The new guidance will impact the timing of
recognition and the initial measurement of the amount of liabilities
the Company recognizes in connection with exit or disposal activities
initiated after December 31, 2002, the effective date of SFAS No. 146.
- -----------------------------------------------------------------------
20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
(in millions, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- --------------------
2002 2001 Change 2002 2001 Change
Net Sales $3,339 $3,592 - 7% $6,046 $6,567 - 8%
Earnings from operations 402 150 +168 532 412 +29
Net earnings 284 36 +689 323 186 +74
Basic earnings per share .97 .12 +708 1.11 .64 +73
Diluted earnings per share .97 .12 +708 1.11 .64 +73
The Company's Results of Operations for the Three and Six Months Ended
June 30, 2002 included the following:
Beginning in the fourth quarter of 2001, the Company changed its
operating structure, which was previously comprised of seven business
units, to be centered around strategic product groups. In accordance
with the change in operating structure, certain of the Company's
product groups were realigned and such realignment resulted in changes
to the composition of the reportable segments. The Company has three
reportable segments: Photography, Health Imaging and Commercial
Imaging. The balance of the Company's operations, which individually
and in the aggregate do not meet the criteria of a reportable segment,
are reported in All Other. The accompanying six months ended June 30,
2002 and 2001 results have been reported in accordance with the new
operating structure.
Effective January 1, 2002, the Company adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets." In accordance with
SFAS No. 142, the Company discontinued the amortization of goodwill
and, therefore, net earnings for the three and six months ended June
30, 2002 of $284 million and $323 million, respectively, or $0.97 and
$1.11 per basic and diluted share, respectively, excludes amortization
expense on goodwill. Net earnings for the three and six months ended
June 30, 2001 of $36 million and $186 million, respectively, or $0.12
and $0.64 per basic and diluted share, respectively, includes
amortization expense on goodwill. On a pro forma basis, excluding
amortization expense on goodwill, net earnings for the three and six
months ended June 30, 2001 were $67 and $253 million, respectively, or
$0.23 and $0.87 per basic and diluted share, respectively.
- -----------------------------------------------------------------------
21
Net Sales by Reportable Segment and All Other
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ---------------------
2002 2001 Change 2002 2001 Change
Photography
Inside the U.S. $1,083 $1,306 -17% $1,882 $2,227 -15%
Outside the U.S. 1,295 1,294 0 2,310 2,402 - 4
------ ------ --- ------ ------ ---
Total Photography 2,378 2,600 - 9 4,192 4,629 - 9
------ ------ --- ------ ------ ---
Health Imaging
Inside the U.S. 270 283 - 5 518 551 - 6
Outside the U.S. 299 303 - 1 572 596 - 4
------ ------ --- ------ ------ ---
Total Health Imaging 569 586 - 3 1,090 1,147 - 5
------ ------ --- ------ ------ ---
Commercial Imaging
Inside the U.S. 204 210 - 3 393 412 - 5
Outside the U.S. 160 160 0 319 318 0
------ ------ --- ------ ------ ---
Total Commercial
Imaging 364 370 - 2 712 730 - 2
------ ------ --- ------ ------ ---
All Other
Inside the U.S. 16 21 -24 27 38 -29
Outside the U.S. 12 15 -20 25 23 + 9
------ ------ --- ------ ------ ---
Total All Other 28 36 -22 52 61 -15
------ ------ --- ------ ------ ---
Total Net Sales $3,339 $3,592 - 7% $6,046 $6,567 - 8%
====== ====== === ====== ====== ===
- -----------------------------------------------------------------------
22
Earnings from Operations by Reportable Segment and All Other
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ---------------------
2002 2001 Change 2002 2001 Change
Photography $ 257 $401 - 36% $ 273 $ 504 -46%
Percent of Sales 10.8% 15.4% 6.5% 10.9%
Health Imaging $ 112 $ 98 + 14% $ 188 $ 206 - 9%
Percent of Sales 19.7% 16.7% 17.2% 18.0%
Commercial Imaging $ 49 $ 43 + 14% $ 94 $ 90 + 4%
Percent of Sales 13.5% 11.6% 13.2% 12.3%
All Other $ (6) $ 1 $ (13) $ 5
Percent of Sales (21.4%) 2.8% (25.0%) 8.2%
------ ---- ---- ----- ----- ---
Total of segments $ 412 $543 - 24% $ 542 $ 805 -33%
Percent of Sales 12.3% 15.1% 9.0% 12.3%
Venture investment
impairments (10) - (10) -
Restructuring costs
and asset impairments - (316) - (316)
Wolf charge - (77) - (77)
------ ---- ---- ----- ----- ---
Consolidated total $ 402 $150 +168% $ 532 $ 412 +29%
====== ==== ==== ===== ===== ===
- -----------------------------------------------------------------------
23
Net Earnings by Reportable Segment and All Other
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ---------------------
2002 2001 Change 2002 2001 Change
Photography $ 175 $269 - 35% $ 178 $ 354 -50%
Percent of Sales 7.4% 10.3% 4.2% 7.6%
Health Imaging $ 82 $ 68 + 21% $ 132 $ 141 - 6%
Percent of Sales 14.4% 11.6% 12.1% 12.3%
Commercial Imaging $ 23 $ 20 + 15% $ 45 $ 49 - 8%
Percent of Sales 6.3% 5.4% 6.3% 6.7%
All Other $ (4) $ 1 $ (10) $ 4
Percent of Sales (14.3%) 2.8% (19.2%) 6.6%
------ ---- ---- ----- ----- ---
Total of segments $ 276 $358 - 23% $ 345 $ 548 -37%
Percent of Sales 8.3% 10.0% 5.7% 8.3%
Venture investment
impairments (13) - (13) -
Restructuring costs
and asset impairments - (316) - (316)
Wolf charge - (77) - (77)
Interest expense (44) (58) (88) (119)
Other corporate items 3 2 5 4
Tax benefit -
PictureVision
subsidiary closure 45 - 45 -
Income tax effects on
above items and taxes
not allocated to
segments 17 127 29 146
------ ---- ---- ----- ----- ---
Total Net Earnings $ 284 $ 36 +689% $ 323 $ 186 +74%
====== ==== ==== ===== ===== ===
- -----------------------------------------------------------------------
COSTS AND EXPENSES
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
2002 2001 Change 2002 2001 Change
Gross profit $1,253 $1,338 - 6% $2,111 $2,405 -12%
Percent of Sales 37.5% 37.2% 34.9% 36.6%
Selling, general and
administrative expenses $ 659 $ 629 + 5% $1,200 $1,203 0%
Percent of Sales 19.7% 17.5% 19.8% 18.3%
Research and development
costs $ 192 $ 186 + 3% $ 379 $ 375 + 1%
Percent of Sales 5.8% 5.2% 6.3% 5.7%
Goodwill amortization $ 0 37 $ 0 $ 79
Percent of Sales 1.0% 1.2%
- -----------------------------------------------------------------------
24
2002 COMPARED WITH 2001
Second Quarter
Consolidated
Net worldwide sales were $3.339 billion for the second quarter of 2002
as compared with $3.592 billion for the second quarter of 2001,
representing a decrease of $253 million, or 7% as reported, or 8%
excluding the impact of exchange. Net sales in the U.S. were $1.573
billion for the second quarter of 2002 as compared with $1.820 billion
for the second quarter of 2001, representing a decrease of $247
million, or 14%. Net sales outside the U.S. were $1.766 billion for
the second quarter of 2002 as compared with $1.772 billion for the
second quarter 2001, representing a decrease of $6 million, or flat as
reported, or a decrease of 2% excluding the impact of exchange.
Net sales in emerging markets were $605 million for the second quarter
of 2002 as compared with $606 million for the second quarter of 2001,
representing a decrease of $1 million. The emerging market portfolio
accounted for approximately 18% of Kodak's worldwide sales in the
quarter. Sales growth in Greater Russia, the Asia Region and Greater
China of 22%, 8% and 8%, respectively, was offset by declines in Latin
America and the Eastern Europe, Africa and Middle East region of 14%
and 2%, respectively. The declines are reflective of continued
economic weakness in many emerging market countries.
In the second quarter of 2002, the Company experienced sales increases
in Greater China of 8% as compared with the second quarter of 2001,
which were driven by growth in sales across most of the Company's
businesses in that region. Sales increases in India of 4% in the
second quarter of 2002 as compared with the prior year quarter were
driven by imaging industry market growth and the continued expansion of
the Photoshop program.
Gross profit was $1.253 billion for the second quarter of 2002 as
compared with $1.338 billion for the second quarter of 2001,
representing a decrease of $85 million, or 6%. The gross profit margin
was 37.5% in the current year quarter as compared with 37.2% in the
prior year quarter. The increase was primarily attributable to (1)
manufacturing productivity due to increased volumes, declines in labor
expense and improved product yields, partially offset by an increase in
year-over-year incentive compensation accruals and (2) costs associated
with restructuring and the exit of an equipment manufacturing facility
that were incurred in the second quarter of 2001 but not in the current
year. These increases were almost fully offset by declining prices on
consumer film, health laser imaging systems and consumer color paper
and product mix shifts primarily in the Photography Segment.
25
Selling, general and administrative expenses (SG&A) were $659 million
for the second quarter of 2002 as compared with $629 million for the
second quarter of 2001, representing an increase of $30 million, or 5%.
SG&A increased as a percentage of sales from 17.5% for the second
quarter of 2001 to 19.7% for the second quarter of 2002. The increase
in SG&A is primarily attributable to acquisitions, strategic venture
asset impairments, planned increases in advertising and an increase in
provisions for doubtful accounts, partially offset by the cost savings
from restructuring and other non-severance related components of the
Company's restructuring programs. Excluding advertising, SG&A
increased from $463 million for the second quarter of 2001 to $484
million for the current year quarter, representing an increase as a
percentage of sales from 12.9% to 14.5%.
Research and development costs (R&D) remained relatively flat at $192
million for the second quarter of 2002 as compared with $186 million
for the second quarter of 2001. R&D increased as a percentage of sales
from 5.2% for the second quarter of 2001 to 5.8% for the current year
quarter.
Earnings from operations for the second quarter of 2002 were $402
million as compared with $150 million for the second quarter of 2001,
representing an increase of $252 million, or 168%. The increase in
earnings from operations was primarily the result of $401 million of
restructuring costs, other non-recurring items and costs associated
with the exit of an equipment manufacturing facility in the second
quarter of 2001, partially offset by a decrease in sales resulting from
continuing economic weakness in markets worldwide and increases in year
over year SG&A and R&D costs. The increase in earnings from operations
was also impacted by the elimination of goodwill amortization.
Earnings from operations for the second quarter of 2001 of $150 million
included goodwill amortization expense of $37 million.
Interest expense for the second quarter of 2002 was $44 million as
compared with $58 million for the second quarter of 2001, representing
a decrease of $14 million, or 24%. The decrease in interest expense is
primarily attributable to lower average borrowing levels and lower
interest rates in the second quarter of 2002 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 second quarter of 2002 were $22 million as compared with $7
million for the second quarter of 2001. The increase in Other charges
is primarily attributable to gains on the sale of stock investments in
the second quarter of 2001, increased losses in the current quarter
from the Company's NexPress and Phogenix joint ventures as these
business ventures are in the early stages of bringing their offerings
to market and non-strategic venture investment impairments, offset by a
decrease in foreign exchange losses.
26
The Company's effective tax rate decreased from 58% for the second
quarter of 2001 to 16% for the second quarter of 2002. The decrease in
the effective tax rate is primarily attributable to a $45 million tax
benefit recorded in the second quarter of 2002 in connection with the
closure of the Company's PictureVision subsidiary and the recording of
certain restructuring costs in the second quarter of 2001, which did
not provide a tax benefit to the Company. Excluding the $45 million
tax benefit from the current quarter provision and the impact from
restructuring from the second quarter 2001 provision, the effective tax
rate decreased from 33% to 29%. The lower effective tax rate for the
current year quarter is primarily attributable to the tax effect from
the elimination of goodwill amortization and increased earnings from
operations in certain lower-taxed jurisdictions outside the U.S.
Net earnings for the second quarter of 2002 were $284 million, or $.97
per basic and diluted share, as compared with net earnings for the
second quarter of 2001 of $36 million, or $.12 per basic and diluted
share, representing an increase of $248 million. The increase in net
earnings is primarily attributable to the reasons described above.
Photography
Net worldwide sales for the Photography segment were $2.378 billion for
the second quarter of 2002 as compared with $2.600 billion for the
second quarter of 2001, representing a decrease of $222 million, or 9%.
Photography segment net sales in the U.S. were $1.083 billion for the
second quarter of 2002 as compared with $1.306 billion for the second
quarter of 2001, representing a decrease of $223 million, or 17%.
Photography segment net sales outside the U.S. were $1.295 billion for
the second quarter of 2002 as compared with $1.294 billion for the
second quarter of 2001, representing flat sales year over year, or a
decrease of 2% excluding the impact of exchange. The Company
experienced sales declines in most of the segment's strategic product
groups.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 11% in the second
quarter of 2002 as compared with the second quarter of 2001, reflecting
declines due to volume and price/mix, partially offset by the impact of
exchange. Sales of the Company's consumer film products within the
U.S. decreased 20% in the second quarter of 2002 as compared with the
prior year quarter, reflecting declines due to both volume and
price/mix. The lower film product sales are attributable to a
declining industry demand driven by a weak economy, lower year over
year market share and retailer inventory reductions in anticipation of
a softer summer selling season. Sales of the Company's consumer film
products outside the U.S. decreased 1%, reflecting flat volumes and a
decrease due to price/mix, partially offset by the positive impact of
exchange.
27
On a worldwide basis, for the most recent period that data is available
(fourth quarter of 2001), Kodak improved its consumer film market share
position. The U.S. film industry volume decreased 6% in the second
quarter of 2002 as compared with the prior year quarter due to
continuing economic weakness. The Company's blended U.S. consumer film
share was down three percentage points on a volume basis in the second
quarter of 2002 relative to the prior year quarter, while the Company's
quarterly market share improved against the first quarter of 2002 as
share management programs are achieving their planned objectives. The
Company believes it will maintain full-year U.S. market share as it has
done for the past four consecutive years.
Net worldwide sales of consumer color paper decreased 8% in the second
quarter of 2002 as compared with the second quarter of 2001, reflecting
declines due to volume and price/mix, partially offset by the impact of
exchange. Net sales of consumer color paper in the U.S. decreased 19%
in the second quarter of 2002 as compared with the prior year quarter,
reflecting decreases due to volume and price/mix. Net sales of
consumer color paper outside of the U.S. decreased 2%, reflecting
negative price/mix, partially offset by an increase in volume and the
impact of exchange.
Net worldwide photofinishing sales, including Qualex in the U.S. and
Consumer Imaging Services (CIS) outside the U.S., decreased 3% in the
second quarter of 2002 as compared with the second quarter of 2001,
reflecting lower volumes and prices, partially offset by favorable
exchange. In the U.S., Qualex's processing volumes (wholesale and on-
site) decreased 9% in the second quarter of 2002 as compared with the
prior year quarter, reflecting the effects of a continued weak film
industry and the adverse impact of several hundred store closures by a
major U.S. retailer. During the current year quarter, CIS revenues in
Europe benefited from the acquisition of (1) Spector Photo Group's
wholesale photofinishing and distribution activities in France,
Germany, and Austria, (2) ColourCare Limited's wholesale processing and
printing operations in the United Kingdom and (3) Percolor
photofinishing operations in Spain.
Net sales from the Company's consumer digital products and services,
which include Picture Maker kiosks/media and consumer digital services
revenue from Picture CD, "You've Got Pictures", and Retail.com,
remained essentially unchanged in the second quarter of 2002 as
compared with the second quarter of 2001. Lower sales of Picture Maker
kiosks were partially offset by an increase in sales of consumer
digital services. The Company has broadly enabled the retail industry
in the U.S. with its Picture Maker kiosks and is focused on bringing to
market new kiosk offerings, creating new kiosk channels, expanding
internationally and continuing to increase the media burn per kiosk.
Net worldwide sales of thermal media used in Picture Maker kiosks
increased 20% in the second quarter of 2002 as compared with the prior
year quarter.
28
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs averaged 7.0% for the second quarter of 2002,
reflecting an increase from the 6.9% rate in the first quarter of 2002
and the 6.7% rate in the fourth quarter of 2001. The growth was driven
by continued consumer acceptance of Picture CD and Retail.com. During
the second quarter of 2002, both Safeway and Albertson's food stores
were added as new Retail.com customers. In addition, the number of
images scanned in the second quarter of 2002 increased 25% as compared
with the second quarter of 2001.
Net worldwide sales of consumer digital cameras decreased 4% in second
quarter of 2002 as compared with the second quarter of 2001. Although
the EasyShare consumer digital camera system continued to gain strong
consumer acceptance during the current year quarter, high demand
depleted the Company's current supply of product more quickly than
anticipated, while component shortages, specifically sourced CCD
sensors, delayed the planned availability of new models. The decrease
in sales in the second quarter of 2002 as compared with strong sales in
the prior year quarter, which were driven by the successful liquidation
of excess camera inventory levels, reflects a decline in volume and
price, partially offset by favorable mix and exchange.
Consumer digital camera market share declined modestly during the
second quarter of 2002 as compared with the first quarter of 2002.
Current supply challenges will continue throughout the third quarter
but are expected to be resolved before the start of the fourth quarter,
which represents the largest seasonal selling period for consumer
digital cameras.
Net worldwide sales of inkjet photo paper increased 26% in the second
quarter of 2002 as compared with the second quarter of 2001. Kodak
maintained its top two market share position quarter sequentially. The
double-digit revenue growth and the maintenance of market share are
primarily attributable to continued promotional activity at key
accounts, success in broadening channel distribution and continued
increases in merchandising efforts.
The Company's Ofoto business doubled its sales in the second quarter of
2002 as compared with the prior year quarter and is on plan to at least
double full year 2001 revenues in 2002.
Net worldwide sales of professional sensitized products, including color
negative, color reversal and commercial black and white films and
sensitized paper, decreased 13% in the second quarter of 2002 as compared
with the second quarter of 2001, reflecting primarily a decline in
volume. Excluding the favorable impact of exchange, net worldwide sales
of professional sensitized products declined 14%. Overall sales declines
were primarily the result of ongoing digital substitution and continued
economic weakness in markets worldwide.
Net worldwide sales of professional digital cameras and themed
entertainment services increased in the second quarter of 2002 as
compared with the prior year quarter.
29
Net worldwide sales of origination and print film to the entertainment
industry decreased 12% in the second quarter of 2002 as compared with the
second quarter of 2001, reflecting primarily lower volumes. The decrease
in net worldwide sales of film was primarily attributable to continuing
global weakness in production of feature films, strong sales in the prior
year quarter due to the entertainment industry strike threats which
caused the industry to pull the majority of their production forward to
the first half of the year, continuing soft demand for television
advertising and current blockbuster films which are experiencing longer
durations in theaters, thus slowing the demand for print film.
Gross profit for the Photography segment was $896 million for the second
quarter of 2002 as compared with $1.040 billion for the second quarter of
2001, representing a decrease of $144 million or 14%. The gross profit
margin was 37.7% in the current year quarter as compared with 40.0% in
the prior year quarter. The 2.3 percentage point decrease was primarily
attributable to a decrease in sales resulting from continuing economic
weakness in markets worldwide, declining prices on consumer film and
paper, a shift in the product mix and an increase in year-over-year
incentive compensation accruals, partially offset by manufacturing
productivity.
SG&A expenses for the Photography segment increased $23 million, or 5%,
from $484 million in the second quarter of 2001 to $507 million in the
second quarter of 2002. As a percentage of sales, SG&A expense increased
from 18.6% in the second quarter of 2001 to 21.3% in the current year
quarter. The increase in SG&A expenses is primarily attributable to
acquisitions, an increase in provisions for allowance for doubtful
accounts and planned increases in advertising, specifically direct media
spend.
R&D costs for the Photography segment increased $2 million, or 2%, from
$130 million in the second quarter of 2001 to $132 million in the second
quarter of 2002. As a percentage of sales, R&D costs increased from 5.0%
in the prior year quarter to 5.5% in the second quarter of 2002.
Earnings from operations for the Photography segment decreased $144
million, or 36%, from $401 million in the second quarter of 2001 to $257
million in the second quarter of 2002, reflecting the combined effects of
lower sales and a lower gross profit margin, partially offset by the
elimination of goodwill amortization in 2002, which was $26 million in
the second quarter of 2001.
30
Health Imaging
Net worldwide sales for the Health Imaging segment were $569 million for
the second quarter of 2002 as compared with $586 million for the second
quarter of 2001, representing a decrease of $17 million, or 3% as
reported, or 4% excluding the favorable impact of exchange. Net sales
in the U.S. were $270 million for the current year quarter as compared
with $283 million for the prior year quarter, representing a decrease of
$13 million, or 5%. Net sales outside the U.S. were $299 million for
the second quarter of 2002 as compared with $303 million for the second
quarter of 2001, representing a decrease of $4 million, or 1% as
reported, or 3% excluding the favorable impact of exchange. Net sales
in emerging markets increased 2% in the current year quarter as compared
with the prior year quarter, primarily due to sales in the Greater China
and Asia Pacific regions.
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 direct radiography equipment), services and Picture
Archiving and Communications Systems (PACS), increased 1% in the second
quarter of 2002 as compared with the second quarter of 2001. The
increase in digital product sales was primarily attributable to higher
digital media and service volumes. Service revenues increased in the
current year quarter as compared with the prior year quarter due to an
increase in digital equipment service contracts during the quarter.
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, decreased 8% in the second quarter of
2002 as compared with the second quarter of 2001. Analog film products
(excluding specialty films) decreased 9% in the current year quarter as
compared with the prior year quarter, reflecting declines due to volume
and price/mix. Analog film volumes in the U.S. increased in the second
quarter of 2002 as compared with the prior year quarter as a result of
the Novation Group Purchasing Organization (Novation GPO) contract
conversions in 2001, but were offset by declines caused by economic
difficulties in Latin America. Although analog film volumes declined on
a worldwide basis, current sales levels reflect an increase in
traditional film market share. Mammography and Oncology sales were flat
in the current year quarter as compared with the prior year quarter,
reflecting an increase in volume offset by declines in price.
Gross profit for the Health Imaging segment was $236 million for the
second quarter of 2002 as compared with $234 million in the second
quarter of 2001, representing an increase of $2 million, or 1%. The
gross profit margin was 41.5% in the current quarter as compared with
39.9% in the prior year quarter. The increase in the gross profit
margin of 1.6 percentage points was primarily attributable to
manufacturing and service productivity and favorable film to equipment
mix, partially offset by price declines.
SG&A expenses for the Health Imaging segment decreased $5 million, or
5%, from $92 million for the second quarter of 2001 to $87 million for
the second quarter of 2002. As a percentage of sales, SG&A expenses
decreased from 15.7% for the prior year quarter to 15.3% for the current
year quarter. The decrease in SG&A expenses is primarily attributable
to expense management.
31
R&D costs were essentially flat with the prior year quarter at $37
million, but increased as a percentage of sales from 6.3% for the second
quarter of 2001 to 6.5% for the second quarter of 2002.
Earnings from operations for the Health Imaging segment increased $14
million, or 14%, from $98 million for the second quarter of 2001 to $112
million for the second quarter of 2002. Earnings from operations as a
percentage of sales (operational earnings margin) increased from 16.7%
for the second quarter of 2001 to 19.7% for the second quarter of 2002.
The increase in earnings from operations and the resulting operational
earnings margin are primarily attributable to the combined effects of
gross profit margin improvements, lower SG&A expenses and the
elimination of goodwill amortization in 2002, which was $7 million in
the second quarter of 2001. The Company expects that the operational
earnings margin will settle in at the mid to upper teen range for the
remainder of 2002.
Commercial Imaging
Net worldwide sales for the Commercial Imaging segment were $364 million
for the second quarter of 2002 as compared with $370 million,
representing a decrease of $6 million, or 2%. Net sales in the U.S.
were $204 million for the current year quarter as compared with $210
million, representing a decrease of $6 million, or 3%. Net sales
outside the U.S. were unchanged at $160 million in the second quarter of
2002 as compared with the prior year quarter, or a decrease of 1%
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 9% in the second quarter
of 2002 as compared with the second quarter of 2001, primarily
reflecting volume declines in graphic arts film. This reduction resulted
largely from digital technology substitution and the effect of
continuing economic weakness in the commercial printing market. The
Company's equity in the earnings of KPG contributed positive results to
Kodak's "other income and charges" line during the second quarter of
2002.
NexPress, the unconsolidated joint venture between Kodak and Heidelberg
in which the Company has a 50% ownership interest, continues to proceed
as planned. NexPress has sold approximately 100 units through June
2002, with average monthly page volumes for these units running
approximately 20% higher than planned.
Gross profit for the Commercial Imaging segment was $113 million for the
second quarter in 2002 as compared with $112 million in the second
quarter of 2001, representing an increase of $1 million, or 1%. The
gross profit margin was 31.0% in the current quarter as compared with
30.3% in the prior year quarter. The increase in the gross profit
margin of 0.7 percentage points was primarily attributable to
manufacturing productivity improvements.
32
SG&A expenses for the Commercial Imaging segment decreased $1 million,
or 2%, from $51 million for the second quarter of 2001 to $50 million
for the second quarter of 2002. As a percentage of sales, SG&A expenses
decreased slightly from 13.8% for the prior year quarter to 13.7% for
the current year quarter.
R&D costs for the Commercial Imaging segment remained unchanged at $14
million for the second quarter of 2002 as compared with the second
quarter of 2001. As a percentage of sales, R&D costs remained unchanged
at 3.8% for the current year quarter as compared with the prior year
quarter.
Earnings from operations for the Commercial Imaging segment increased $6
million, or 14%, from $43 million in the second quarter of 2001 to $49
million in the second quarter of 2002. The increase in earnings from
operations is primarily attributable to overall expense management and
the elimination of goodwill amortization in 2002, which was $4 million
in the second quarter of 2001.
All Other
Net worldwide sales for All Other were $28 million for the second quarter
of 2002 as compared with $36 million for the second quarter of 2001,
representing a decrease of $8 million, or 22%. Net sales in the U.S.
were $16 million in the current year quarter as compared with $21 million
for the prior year quarter, representing a decrease of $5 million, or
24%. Net sales outside the U.S. were $12 million in the second quarter
of 2002 as compared with $15 million in the prior year quarter,
representing a decrease of $3 million, or 20%.
The loss from operations for All Other was $6 million in the second
quarter of 2002 as compared with earnings from operations of $1 million
in the second quarter of 2001, representing a decrease of $7 million.
The decrease in earnings from operations was primarily attributable to
reduced earnings in the Company's Sensor and Global Manufacturing
Services operations and increased costs incurred for the continued
development of the organic light emitting diode (OLED) business.
Year to Date
Consolidated
Net worldwide sales were $6.046 billion for the six months ended June
30, 2002 as compared with $6.567 billion for the six months ended June
30, 2001, representing a decrease of $521 million, or 8% as reported,
with no impact from exchange. Net sales in the U.S. were $2.820
billion for the current year period as compared with $3.228 billion for
the prior year period, representing a decrease of $408 million, or 13%.
Net sales outside the U.S. were $3.226 billion for the current year
period as compared with $3.339 billion for the prior year period,
representing a decrease of $113 million, or 3% as reported, or a
decrease of 2% excluding the negative impact of exchange.
33
Net sales in emerging markets were $1.149 billion for the six months
ended June 30, 2002 as compared with $1.174 billion for the six months
ended June 30, 2001, representing a decrease of $25 million, or 2%.
The emerging market portfolio accounted for approximately 19% of the
Company's worldwide sales in the current six month period. Sales
growth in Greater Russia, the Asia Region and Greater China of 9%, 5%
and 5%, respectively, was offset by declines in Latin America and the
Eastern Europe, Africa and Middle East region of 13% and 5%,
respectively. The declines are reflective of continued economic
weakness in many emerging market countries.
Gross profit was $2.111 billion for the six months ended June 30, 2002
as compared with $2.405 billion for the six months ended June 30, 2001,
representing a decrease of $294 million, or 12%. The gross profit
margin was 34.9% in the current year period as compared with 36.6% in
the prior year period. The decrease of 1.7 percentage points was
primarily attributable to declining prices on consumer film, health
laser imaging systems and consumer color paper, product mix shifts
primarily in the Photography segment and an increase in year-over-year
incentive compensation accruals, partially offset by costs associated
with restructuring and the exit of an equipment manufacturing facility
incurred in the first half of 2001 but not in the current year six
month period.
SG&A expenses were $1.200 billion for the six months ended June 30,
2002 as compared with $1.203 billion for the six months ended June 30,
2001, representing a decrease of $3 million. SG&A increased as a
percentage of sales from 18.3% for the prior year period to 19.8% for
the current year period. The net decrease in SG&A is primarily
attributable to the cost savings from the restructuring and other non-
severance related components of the Company's restructuring programs,
offset by acquisitions, strategic venture asset impairments and an
increase in provisions for doubtful accounts. Excluding advertising,
SG&A decreased from $929 million for the prior year period to $928
million for the current year period, but increased as a percentage of
sales from 14.1% to 15.3%.
R&D costs remained relatively flat at $379 million for the six months
ended June 30, 2002 as compared with $375 million for the six months
ended June 30, 2001, representing an increase of $4 million, or 1%.
R&D increased as a percentage of sales from 5.7% for the prior year
period to 6.3% for the current year period.
34
Earnings from operations for the six months ended June 30, 2002 were
$532 million as compared with $412 million for the six months ended
June 30, 2001, representing an increase of $120 million, or 29%. The
increase in earnings from operations was primarily the result of $411
million of restructuring costs, other non-recurring items and costs
associated with the exit of an equipment manufacturing facility in the
first half of 2001, partially offset by a decrease in sales in the
current year period resulting from continuing economic weakness in
markets worldwide and a lower gross profit margin. The increase in
earnings from operations in the current year period was also impacted
by the elimination of goodwill amortization. Earnings from operations
for the first half of 2001 of $412 million included goodwill
amortization expense of $79 million.
Interest expense for the six months ended June 30, 2002 was $88 million
as compared with $119 million for the six months ended June 30, 2001,
representing a decrease of $31 million, or 26%. The decrease in
interest expense is primarily attributable to lower average borrowing
levels and lower interest rates in the first half of 2002 relative to
the first half of 2001. The Other (charges) income 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 year period were
a net charge of $53 million as compared with Other income of $16
million for the prior year period. The increase in other charges is
primarily attributable to gains on the sale of stock investments in the
first half of 2001, increased losses in the first half of 2002 from the
Company's NexPress and Phogenix joint ventures as these business
ventures are in the early stages of bringing their offerings to market,
reduced income in 2002 from the Company's KPG joint venture, non-
strategic venture investment impairments in the first half of 2002 and
an increase in foreign exchange losses in the current year period.
The Company's effective tax rate decreased from 40% for the six months
ended June 30, 2001 to 17% for the six months ended June 30, 2002. The
decrease in the effective tax rate is primarily attributable to a $45
million tax benefit recorded in the second quarter of 2002 in connection
with the closure of the Company's PictureVision subsidiary and the
reduction in the tax benefit for the six months ended June 30, 2001 from
certain restructuring costs which do not provide a tax benefit to the
Company. Excluding the $45 million tax benefit from the provision for the
six months ended June 30, 2002 and excluding the impact from restructuring
from the provision for the first half of 2001, the effective tax rate
decreased from 33% for the prior year period to 29% for the current year
period. The lower effective tax rate for the current year period is
primarily attributable to the tax effect from the elimination of goodwill
amortization and increased earnings from operations in certain lower-taxed
jurisdictions outside the U.S.
Net earnings for the six months ended June 30, 2002 were $323 million,
or $1.11 per basic and diluted share, as compared with net earnings for
the six months ended June 30, 2001 of $186 million, or $.64 per basic
and diluted share, representing an increase of $137 million, or 74%.
The increase in net earnings is primarily attributable to the reasons
outlined above.
35
Photography
Net worldwide sales for the Photography segment were $4.192 billion for
the six months ended June 30, 2002 as compared with $4.629 billion for
the six months ended June 30, 2001, representing a decrease of $437
million, or 9% as reported, with no impact from exchange. Photography
segment net sales in the U.S. were $1.882 billion for the current year
period as compared with $2.227 billion for the prior year period,
representing a decrease of $345 million, or 15%. Photography segment
net sales outside the U.S. were $2.310 billion for the current year
period as compared with $2.402 billion for the prior year period,
representing a decrease of $92 million, or 4% as reported, or 3%
excluding the negative impact of exchange. The Company experienced
sales declines in most of the segment's strategic product groups.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 12% in the six months
ended June 30, 2002 as compared with the six months ended June 30,
2001, reflecting declines due to volume and price/mix, partially offset
by the favorable impact of exchange. Sales of the Company's consumer
film products within the U.S. decreased 20% in the current year period
as compared with the prior year period, reflecting declines due to
volume and price/mix. The lower film product sales are attributable to
a declining industry demand driven by a weak economy, lower year over
year market share and retailer inventory reductions in anticipation of
a softer summer selling season. Sales of the Company's consumer film
products outside the U.S. decreased 4%, reflecting declines due to
volume and price/mix, partially offset by the favorable impact of
exchange.
On a worldwide basis, for the most recent period that data is available
(fourth quarter of 2001), Kodak improved its consumer film market share
position. The U.S. film industry volume decreased approximately 3% in
the six month period ended June 30, 2002 as compared with the six month
period ended June 30, 2001 due to continuing economic weakness. The
Company's blended U.S. consumer film share was down 3.8 percentage
points on a volume basis in the first half of 2002 relative to the
first half of 2001, while the Company's quarterly market share improved
against the first quarter of 2002 as share management programs were
achieving their planned objectives. The Company believes it will
maintain full-year U.S. market share as it has done for the past four
consecutive years.
Net worldwide sales of consumer color paper decreased 6% in the six
month period ended June 30, 2002 as compared with the six month period
ended June 30, 2001, reflecting declines due to volume, price/mix and
the negative impact of exchange. Net sales of consumer color paper in
the U.S. decreased 9% in the current year period as compared with the
prior year period, reflecting decreases due to volume and price/mix.
Net sales of consumer color paper outside of the U.S. decreased 4%,
reflecting negative price/mix and the negative impact of exchange,
partially offset by an increase in volume.
36
Net worldwide photofinishing sales, including Qualex in the U.S. and
Consumer Imaging Services (CIS) outside the U.S., decreased 5% in the
six month period ended June 30, 2002 as compared with the six month
period ended June 30, 2001, reflecting lower volumes. In the U.S.,
Qualex's processing volumes (wholesale and on-site) decreased
approximately 10% in the first half of 2002 as compared with the first
half of 2001, reflecting the effects of a continued weak film industry
and the adverse impact of several hundred store closures by a major
U.S. retailer. During the current year period, CIS revenues in Europe
benefited from the acquisition of (1) Spector Photo Group's wholesale
photofinishing and distribution activities in France, Germany, and
Austria, (2) ColourCare Limited's wholesale processing and printing
operations in the United Kingdom and (3) Percolor photofinishing
operations in Spain.
Net sales from the Company's consumer digital products and services,
which include Picture Maker kiosks/media and consumer digital services
revenue from Picture CD, "You've Got Pictures", and Retail.com,
decreased 8% in the six month period ended June 30, 2002 as compared to
the six month period ended June 30, 2001. The Company experienced
lower sales in both Picture Maker kiosks and consumer digital services.
The Company has broadly enabled the retail industry in the U.S. with
its Picture Maker kiosks and is focused on bringing to market new kiosk
offerings, creating new kiosk channels, expanding internationally and
continuing to increase the media burn per kiosk. Net worldwide sales
of thermal media used in Picture Maker kiosks increased 15% in the
current year period as compared with the prior year period.
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs averaged 7.0% for the six month period ended
June 30, 2002, reflecting an increase from the 4.4% rate in the six
month period ended June 30, 2001. The growth was driven by continued
consumer acceptance of Picture CD and Retail.com. During the first
half of 2002, both Safeway and Albertson's food stores were added as
new Retail.com customers. In addition, the number of images scanned in
the current year period increased 30% as compared with the prior year
period.
Net worldwide sales of consumer digital cameras decreased 2% in the six
month period ended June 30, 2002 as compared with the six month period
ended June 30, 2001. Although the EasyShare consumer digital camera
system continued to gain strong consumer acceptance during the current
year period, high demand depleted the Company's current supply of
product more quickly than anticipated, while component shortages,
specifically sourced CCD sensors, delayed the planned availability of
new models. The decrease in sales in the current year period as
compared with strong sales in the prior year period, which were driven
by the successful liquidation of excess camera inventory levels,
reflects declines due to price, mix and exchange, partially offset by
an increase in volumes.
Consumer digital camera market share declined modestly during the first
half of 2002 as compared with the first half of 2001. The current supply
challenges, which developed in the second quarter of 2002, will continue
throughout the third quarter but are expected to be resolved before the
start of the fourth quarter, which represents the largest seasonal selling
period for consumer digital cameras.
37
Net worldwide sales of inkjet photo paper increased 41% in the six
month period ended June 30, 2002 as compared with the six month period
ended June 30, 2001. Kodak maintained its top two market share
position quarter sequentially. The double-digit revenue growth and the
maintenance of market share are primarily attributable to continued
promotional activity at key accounts, success in broadening channel
distribution and continued increases in merchandising efforts.
Net worldwide sales of professional sensitized products, including color
negative, color reversal and commercial black and white films and
sensitized paper, decreased 16% in the six month period ended June 30,
2002 as compared with the six month period ended June 30, 2001,
reflecting declines due to volume, price/mix and exchange. Excluding the
negative impact of exchange, net worldwide sales of professional
sensitized products declined 15%. Overall sales declines were primarily
the result of ongoing digital substitution and continued economic
weakness in markets worldwide.
Net worldwide sales of professional digital cameras and themed
entertainment services increased in the current year period as compared
with the prior year period.
Net worldwide sales of origination and print film to the entertainment
industry decreased 14% in the six month period ended June 30, 2002 as
compared with the six month period ended June 30, 2001, reflecting
declines due to lower volumes, price/mix and the negative impact of
exchange. The decrease in net worldwide sales of film was primarily
attributable to continuing global weakness in production of feature
films, strong sales in the prior year quarter due to the entertainment
industry strike threats which caused the industry to pull the majority of
their production forward to the first half of the year, continuing soft
demand for television advertising and current blockbuster films such as
Spider Man and Star Wars which are experiencing longer durations in
theaters, thus slowing the demand for print film.
Gross profit for the Photography segment was $1.446 billion for the six
month period ended June 30, 2002 as compared with $1.734 billion for the
six month period ended June 30, 2001, representing a decrease of $288
million or 17%. The gross profit margin was 34.5% in the current year
period as compared with 37.5% in the prior year period. The 3.0
percentage point decrease was primarily attributable to a decrease in
sales resulting from continuing economic weakness in markets worldwide.
SG&A expenses for the Photography segment was unchanged at $912 million
for the six month period ended June 30, 2002 as compared with the six
month period ended June 30, 2001. As a percentage of sales, SG&A expense
increased from 19.7% in the prior year period to 21.8% in the current
year period.
38
R&D costs for the Photography segment were flat, increasing $1 million
from $260 million in the six month period ended June 30, 2001 to $261
million in the six month period ended June 30, 2002. As a percentage of
sales, R&D costs increased from 5.6% in the prior year period to 6.2% in
the current year period.
Earnings from operations for the Photography segment decreased $231
million, or 46%, from $504 million in the six month period ended June 30,
2001 to $273 million in the six month period ended June 30, 2002,
reflecting the combined effects of lower sales and a lower gross profit
margin, partially offset by the elimination of goodwill amortization in
2002, which was $58 million in the first half of 2001.
Health Imaging
Net worldwide sales for the Health Imaging segment were $1.090 billion
for the six month period ended June 30, 2002 as compared with $1.147
billion for the six month period ended June 30, 2001, representing a
decrease of $57 million, or 5% as reported, or 4% excluding the negative
impact of exchange. Net sales in the U.S. were $518 million for the
current year period as compared with $551 million for the prior year
period, representing a decrease of $33 million, or 6%. Net sales
outside U.S. were $572 million for the first half of 2002 as compared
with $596 million for the first half of 2001, representing a decrease of
$24 million, or 4% as reported, or 3% excluding the negative impact of
exchange. Net sales in emerging markets decreased 2% in the current
year period as compared with the prior year period, primarily due to
sales in the Latin America and Europe, Africa and Middle East Regions.
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 direct radiography equipment), services and Picture
Archiving and Communications Systems (PACS), were flat in the six month
period ended June 30, 2002 as compared with the six month period ended
June 30, 2001. The flat digital product sales were primarily
attributable to a 17% decrease in sales of DryView laser imagers and
accessories, offset by a 2% increase in digital media sales and a 16%
increase in service revenues. The decrease in sales of DryView laser
imagers and accessories is primarily the result of strong placements of
this equipment in the early part of the first half of 2001 due to
promotional programs and reductions in inventory, and lower sales in the
first half of 2002 to OEM partners due to restrained capital spending by
healthcare providers. Service revenues increased in current year period
as compared with the prior year period due to an increase in digital
equipment service contracts during the first half of 2002.
39
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, decreased 10% in the six month period
ended June 30, 2002 as compared with the six month period ended June 30,
2001. Analog film products (excluding specialty films) decreased 10% in
the first half of 2002 as compared with the first half of 2001,
reflecting declines due to volume, price/mix and exchange. Analog film
volumes in the U.S. increased in the current year period as compared
with the prior year period as a result of the Novation Group Purchasing
Organization (Novation GPO) contract conversions in 2001, but were
offset by declines in other parts of the world, including Latin America
which was due to economic difficulties. Although analog film volumes
declined on a worldwide basis, current sales levels reflect an increase
in traditional film market share. Mammography and Oncology sales
decreased 3% in the current year period as compared with the prior year
period, reflecting declines in price, partially offset by an increase in
volume.
Gross profit for the Health Imaging segment was $432 million for the six
month period ended June 30, 2002 as compared with $478 million for the
six month period ended June 30, 2001, representing a decrease of $46
million, or 10%. The gross profit margin was 39.6% in the first half of
2002 as compared with 41.7% in the first half of 2001. The decrease in
the gross profit margin of 2.1 percentage points was primarily
attributable to declines due to price/mix resulting from the impact of
the Novation GPO contract in the U.S.
SG&A expenses for the Health Imaging segment decreased $15 million, or
8%, from $185 million for the six month period ended June 30, 2001 to
$170 million for the six month period ended June 30, 2002. As a
percentage of sales, SG&A expenses decreased from 16.1% for the first
half of 2001 to 15.6% for the first half of 2002. The decrease in SG&A
expenses is primarily attributable to expense management.
R&D costs for the Health Imaging segment increased $1 million, or 1%,
from $73 million for the first half of 2001 to $74 million for the first
half of 2002. As a percentage of sales, R&D costs increased from 6.4%
for the prior year period to 6.8% for the current year period.
Earnings from operations for the Health Imaging segment decreased $18
million, or 9%, from $206 million for the six month period ended June 30,
2001 to $188 million for the six month period ended June 30, 2002.
Earnings from operations as a percentage of sales (operational earnings
margin) decreased from 18.0% for the first half of 2001 to 17.2% for the
first half of 2002. The decrease in earnings from operations and the
resulting operational earnings margin are primarily attributable to the
combined effects of lower sales and a lower gross profit margin,
partially offset by a decrease in SG&A expenses and the elimination of
goodwill amortization in 2002, which was $14 million in the first half of
2001. The Company expects that the operational earnings margin will
settle in at the mid to upper teen range for the remainder of 2002.
40
Commercial Imaging
Net worldwide sales for the Commercial Imaging segment were $712 million
for the six month period ended June 30, 2002 as compared with $730
million, representing a decrease of $18 million, or 2%. Net sales in
the U.S. were $393 million for the first half of 2002 as compared with
$412 million for the first half of 2001, representing a decrease of $19
million, or 5%. Net sales outside the U.S. were $319 million in the
current year period as compared with $318 million in the prior year
period, representing an increase of $1 million, with no impact from
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 six month
period ended June 30, 2002 as compared to the six month period ended
June 30, 2001, primarily reflecting volume declines in graphic arts
film. This reduction resulted largely from digital technology
substitution and the effect of continuing economic weakness in the
commercial printing market. The Company's equity in the earnings of KPG
contributed positive results to Kodak's "other income and charges" line
during the first half of 2002.
NexPress, the unconsolidated joint venture between Kodak and Heidelberg
in which the Company has a 50% ownership interest, continues to proceed
as planned. NexPress has sold approximately 100 units from its
inception through June 2002, with average monthly page volumes for these
units running approximately 20% higher than planned.
Gross profit for the Commercial Imaging segment was $221 million for the
six month period ended June 30, 2002 as compared with $229 million for
the six month period ended June 30, 2001, representing a decrease of $8
million, or 3%. The gross profit margin was 31.0% for the first half of
2002 as compared with 31.4% for the first half of 2001. The decrease in
the gross profit margin of 0.4 percentage points was primarily
attributable to a decline in volumes.
SG&A expenses for the Commercial Imaging segment decreased $2 million,
or 2%, from $101 million for the six month period ended June 30, 2001 to
$99 million for the six month period ended June 30, 2002. As a
percentage of sales, SG&A expenses increased slightly from 13.8% for the
first half of 2001 to 13.9% for the first half of 2002.
R&D costs for the Commercial Imaging segment decreased $1 million, or
3%, from $29 million for the first half of 2001 to $28 million for the
first half of 2002. As a percentage of sales, R&D costs decreased
slightly from 4.0% for the prior year period to 3.9% for the current
year period.
41
Earnings from operations for the Commercial Imaging segment increased $4
million, or 4%, from $90 million in the six month period ended June 30,
2001 to $94 million in the six month period ended June 30, 2002. The
increase in earnings from operations is primarily attributable to
overall expense management and the elimination of goodwill amortization
in 2002, which was $8 million in the first half of 2001, partially
offset by a decrease in sales and a lower gross profit margin.
All Other
Net worldwide sales for All Other were $52 million for the six month
period ended June 30, 2002 as compared with $61 million for the six
month period ended June 30, 2001, representing a decrease of $9
million, or 15%. Net sales in the U.S. were $27 million in the first
half of 2002 as compared with $38 million for the first half of 2001,
representing a decrease of $11 million, or 29%. Net sales outside the
U.S. were $25 million in the current year period as compared with $23
million in the prior year period, representing an increase of $2
million, or 9%.
The loss from operations for All Other was $13 million in the six month
period ended June 30, 2002 as compared with earnings from operations of
$5 million in the six month period ended June 30, 2001, representing a
decrease of $18 million. The decrease in earnings from operations was
primarily attributable to reduced earnings in the Company's Sensor and
Global Manufacturing Services businesses and increased costs incurred
for the continued development of the OLED business.
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42
RESTRUCTURING
The following table summarizes the activity with respect to the
remaining balances in the restructuring reserves at June 30, 2002
related to the restructuring charges taken in 2001:
(in millions)
Exit
Severance Costs
------------------- -------
Number of
Employees Reserve Reserve Total
--------- ------- ------- -----
Ending balance at
December 31, 2001 4,225 $ 275 $ 43 $ 318
2002 utilization (2,925) (109) (14) (123)
------- ----- ---- -----
Ending balance at
June 30, 2002 1,300 $ 166 $ 29 $ 195
======= ===== ==== =====
As previously disclosed in the Company's 2001 Annual Report on Form 10-
K, the Company had two separate restructuring programs in 2001
primarily relating to the rationalization of the U.S. photofinishing
operations, the elimination of excess manufacturing capacity, the exit
of certain operations and reductions in research and development
positions and selling, general and administrative positions worldwide.
In connection with these restructuring actions, the Company recorded a
total net charge of $678 million, which was comprised of severance,
long-term assets, inventory and exit cost charges of $331 million, $215
million, $84 million and $48 million, respectively. The net severance
charge represented the elimination of 6,925 worldwide positions, of
which 5,625 positions had been eliminated as of June 30, 2002. The
remaining 1,300 positions will be eliminated by year-end 2002.
Terminated employees can elect to receive severance payments for up to
two years following their date of termination. Write-downs and write-
offs of long-term assets and inventory were completed during 2001. The
actions relating to the exit cost reserve will be completed by the end
of 2002. The company expects to achieve approximately $450 million in
cost savings from restructuring for the full-year 2002. These cost
savings will be realized in cost of goods sold; selling, general and
administrative expenses; and research and development costs.
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43
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses the financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when it is incurred and measured
initially at fair value. The new guidance will impact the timing of
recognition and the initial measurement of the amount of liabilities
the Company recognizes in connection with exit or disposal activities
initiated after December 31, 2002, the effective date of SFAS No. 146.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $76 million from
December 31, 2001 to $524 million at June 30, 2002. The increase
resulted primarily from $460 million of cash flows from operating
activities, partially offset by $236 million of cash flows used in
investing activities and $148 million of cash used in financing
activities.
The net cash provided by operating activities of $460 million for the
six month period ended June 30, 2002 was partially attributable to net
earnings of $323 million which, when adjusted for depreciation and
amortization, provided $709 million of operating cash. This was
partially offset by an increase in receivables of $117 million, an
increase in inventories of $16 million and a decrease in liabilities
excluding borrowings of $106 million, related primarily to severance
payments for restructuring programs. The net cash used in investing
activities of $236 million was utilized primarily for capital
expenditures of $207 million, business acquisitions of $6 million and
net purchases of marketable securities of $26 million. The net cash
used in financing activities of $148 million was primarily the result
of net increases in total borrowings of $592 million, more than offset
by debt repayments of $742 million.
Net working capital, excluding short-term borrowings, increased to $976
million at June 30, 2002 from $863 million at December 31, 2001. This
increase is primarily attributable to higher cash, inventory and
receivables balances, a lower accrued income taxes balance, partially
offset by an increase in accounts payable and other current
liabilities.
The Company's primary estimated future uses of cash for 2002 include
dividend payments, capital expenditures, severance payments in
connection with its 2001 restructuring plans, debt reductions and
acquisitions.
44
In October 2001, the Company's Board of Directors approved a change in
the dividend policy from quarterly dividend payments to 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 11, 2002, 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, 2002 to shareholders of record at the
close of business on June 3, 2002.
Capital additions were $207 million in the first half of 2002, with the
majority of the spending supporting new products, manufacturing
productivity and quality improvements, infrastructure improvements and
ongoing environmental and safety initiatives. For the full year 2002,
the Company expects its capital spending, excluding acquisitions and
equipment purchased for lease, to be in the range of $550 million to
$600 million. Based on the year-to-date experience and historical
spending patterns, the capital spending is in line with the full-year
plan.
The Company anticipates the net cash cost of the restructuring charge
recorded in 2001 to be approximately $182 million after tax, which will
be recovered through cost savings in 2002. In the first six months
ended June 30, 2002, the Company expended $123 million against the
related restructuring reserves, primarily for the payment of severance
benefits. The remaining severance-related actions associated with the
total 2001 restructuring charge will be completed by year-end 2002.
Terminated employees can elect to receive severance payments for up to
two years following their date of termination.
The Company currently expects to fund expenditures for dividend
payments, capital requirements, severance, acquisitions and liquidity
needs from cash generated from operations. Cash balances and financing
arrangements will be used to bridge timing differences between
expenditures and cash generated from operations.
On July 12, 2002, the Company completed the renegotiation of its 364-
day revolving credit facility. The new $1.0 billion facility is $225
million lower than the 2001 facility due to a reduction in the
Company's commercial paper usage and the establishment of the accounts
receivable securitization program. As a result, the Company now has
$2.225 billion in committed revolving credit facilities, which are
available to support the Company's commercial paper program and for
general corporate purposes. The credit facilities are comprised of the
newly renegotiated 364-day commitment at $1.0 billion expiring in July
2003 and a 5-year commitment at $1.225 billion expiring in July 2006.
If unused, they have a commitment fee of $3 million per year, at the
Company's current credit rating. Interest on amounts borrowed under
these facilities is calculated at rates based on spreads above certain
reference rates and the Company's credit rating.
45
In connection with the renegotiation of the $1.0 billion facility, the
covenant under both of the facilities, which previously required the
Company to maintain a certain EBITDA (earnings before interest, income
taxes, depreciation and amortization) to interest ratio, was changed to
a debt to EBITDA ratio. In the event of violation of the covenant, the
facility would not be available for borrowing until the covenant
provisions were waived, amended or satisfied. The Company does not
anticipate that a violation is likely to occur.
At June 30, 2002, the Company had $922 million in commercial paper
outstanding, with a weighted average interest rate of 2.35%. To
provide additional financing flexibility, the Company entered into an
accounts receivable securitization program, which provides for
borrowings up to a maximum of $400 million. At June 30, 2002, the
Company had outstanding borrowings under this program of $186 million.
Based on the outstanding secured borrowings level of $186 million, the
estimated annualized interest rate under this program is 2.46%.
During the second quarter of 2001, the Company increased its medium-
term note program from $1.0 billion to $2.2 billion for issuance of
debt securities due nine months or more from date of issue. At June
30, 2002, the Company had debt securities outstanding of $850 million
under this medium-term note program, with $150 million of this balance
due within one year. The Company has remaining availability of $1.2
billion under its medium-term note program for the issuance of new
notes.
During the quarter ended March 31, 2002, the Company's credit ratings
for long-term debt were lowered by Moody's and by Fitch to Baa1 and A-,
respectively. However, in connection with its downgrade, Moody's
changed the Company's outlook from negative to stable. Additionally,
Fitch lowered the Company's credit rating on short-term debt to F2. On
April 23, 2002, Standard & Poor's lowered the Company's credit rating on
long-term debt from A- to BBB+, a level equivalent to the Company's
current rating from Moody's of Baa1. Standard & Poor's reaffirmed the
short-term debt at A2 and maintained the Company's outlook at stable.
These credit rating downgrade actions were due to lower earnings as a
result of the continued weakened economy, industry factors and other
world events. The credit rating downgrades in the first half of 2002
coupled with the downgrades in the fourth quarter of 2001 have resulted
in an increase in borrowing rates; however, interest expense for the
three and six month periods ended June 30, 2002 is down relative to the
three and six month periods ended June 30, 2001 due to lower average
debt levels and lower interest rates during the period relative to the
prior year.
46
The Company is in compliance with all covenants or other requirements
set forth in its credit agreements and indentures. Further, the Company
does not have any rating downgrade triggers that would accelerate the
maturity dates of its debt, with the exception of a $110 million note
due in 2003 and $34 million in term notes that will amortize through
2005 that can be accelerated if the Company's credit rating were to fall
below BBB and BBB-, respectively. Further downgrades in the Company's
credit rating or disruptions in the capital markets could impact
borrowing costs and the nature of its funding alternatives. However,
the Company has access to $2.225 billion in committed bank revolving
credit facilities to meet unanticipated funding needs should it be
necessary. Borrowing rates under these credit facilities are based on
the Company's credit rating.
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At June 30, 2002, the
maximum guarantees for which the Company could become obligated
approximated $368 million. Within the total amount of $368 million, the
Company is guaranteeing debt in the amount of $175 million for Kodak
Polychrome Graphics, an unconsolidated affiliate in which the Company
has a 50% ownership interest. The balance of the amount is principally
comprised of other loan guarantees and guarantees of customer amounts
due to banks in connection with various banks' financing of customers'
purchase of equipment and products from Kodak. These guarantees would
require payment from Kodak only in the event of default on payment by
the respective debtor. Management believes the likelihood is remote
that material payments will be required under these guarantees.
Relating to the maximum guarantee amount of $368 million, only $167
million of affiliated company and customer debt and other obligations
were outstanding at June 30, 2002.
The Company may provide up to $100 million in loan guarantees to support
funding needs for SK Display Corporation, an unconsolidated affiliate in
which the Company has a 34% ownership interest. At June 30, 2002, the
SK Display Corporation had no outstanding debt relating to the loan
guarantees.
47
Qualex, a wholly-owned subsidiary of Kodak, has a 50% ownership
interest in Express Stop Financing (ESF), which is a joint venture
partnership between Qualex and Dana Credit Corporation (DCC), a wholly-
owned subsidiary of Dana Corporation. Qualex accounts for its
investment in ESF under the equity method of accounting. ESF provides
a long-term financing solution to Qualex's photofinishing customers in
connection with Qualex's leasing of photofinishing equipment to third
parties, as opposed to Qualex extending long-term credit. As part of
the operations of its photofinishing business, Qualex sells equipment
under a sales-type lease arrangement and records a long-term
receivable. These long-term receivables are subsequently sold to ESF
without recourse to Qualex. ESF incurs long-term debt to finance a
portion of the purchase of the receivables from Qualex. This debt is
collateralized solely by the long-term receivables purchased from
Qualex and, in part, by a $60 million guarantee from DCC. Qualex
provides no guarantee or collateral to ESF's creditors in connection
with the debt, and ESF's debt is non-recourse to Qualex. Qualex's only
continued involvement in connection with the sale of the long-term
receivables is the servicing of the related equipment under the leases.
Qualex has continued revenue streams in connection with this equipment
through future sales of photofinishing consumables, including paper and
chemicals, and maintenance.
Qualex has risk with respect to the ESF arrangement as it relates to
its continued ability to procure spare parts from the primary
photofinishing equipment vendor (the Vendor) to fulfill its servicing
obligations under the leases. The Vendor is currently experiencing
financial difficulty, which raises concern about Qualex's ability to
procure the required service parts. The lessees' requirement to pay
ESF under the lease agreements is not contingent upon Qualex's
fulfillment of its servicing obligations. Under the agreement with
ESF, Qualex would be responsible for any deficiency in the amount of
rent not paid to ESF as a result of any lessee's claim regarding
maintenance or supply services not provided by Qualex. Such lease
payments would be made in accordance with the original lease terms,
which generally extend over 5 to 7 years. ESF's outstanding lease
receivable amount was approximately $530 million at June 30, 2002. To
mitigate the risk of not being able to fulfill its service obligations,
Qualex has built up its inventory of these spare parts and has begun
refurbishing used parts. Effective April 3, 2002, Kodak entered into
certain agreements with the Vendor under which the Company has
committed to pay up to $25 million for: a license relating to the spare
parts intellectual property; an equity interest in the intellectual
property holding company; an arrangement to purchase spare parts;
approximately five percent of the Vendor's outstanding unrestricted
voting common stock; and a loan to the Vendor if the Vendor meets
certain criteria. A portion of such debt will be convertible into the
Vendor's unrestricted voting common stock.
48
In December 2001, Standard & Poor's downgraded the credit ratings of
Dana Corporation to BB for long-term debt and B for short-term debt,
which are below investment grade. This action created a Guarantor
Termination Event under the Receivables Purchase Agreement (RPA)
between ESF and its banks. To cure the Guarantor Termination Event, in
January 2002, ESF posted $60 million of additional collateral in the
form of cash and long-term lease receivables. At that time, if Dana
Corporation were downgraded to below BB by Standard & Poor's or below
Ba2 by Moody's, that action would constitute a Termination Event under
the RPA and ESF would be forced to renegotiate its debt arrangements
with the banks. On February 22, 2002, Moody's downgraded Dana
Corporation to a Ba3 credit rating, thus creating a Termination Event.
Effective April 15, 2002, ESF cured the Termination Event by executing
an amendment to the RPA. Under the amended RPA, the maximum borrowings
have been lowered to $400 million, and ESF must pay a higher interest
rate on outstanding and future borrowings. Additionally, if there were
certain changes in control with respect to Dana Corporation or DCC, as
defined in the amended RPA, such an occurrence would constitute an
event of default. Absent a waiver from the banks, this event of
default would create a Termination Event under the amended RPA. The
amended RPA arrangement was further amended in July 2002 to extend
through 2003. Under the amended RPA arrangement, maximum borrowings
were reduced to $370 million. Total outstanding borrowings under the
RPA at June 30, 2002 were $370 million.
Dana Corporation's Standard & Poor's and Moody's long-term debt credit
ratings have remained at the February 22, 2002 levels of BB and Ba3,
respectively. Under the amended RPA, if either of Dana Corporation's
long-term debt ratings were to fall below their current respective
ratings, such an occurrence would create a Termination Event as defined
in the RPA.
The amended RPA arrangement extends through July 2003, at which time
the RPA can be extended or terminated. If the RPA were terminated,
Qualex would no longer be able to sell its lease receivables to ESF and
would need to find an alternative financing solution for future sales
of its photofinishing equipment. Under the partnership agreement
between Qualex and DCC, subject to certain conditions, ESF has
exclusivity rights to purchase Qualex's long-term lease receivables.
The term of the partnership agreement continues through October 6,
2003. In light of the timing of the partnership termination, Qualex is
currently considering alternative financing solutions for prospective
leasing activity with its customers.
At June 30, 2002, the Company had outstanding letters of credit
totaling $108 million and surety bonds in the amount of $46 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
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49
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in nature, or
"forward-looking statements" as defined in the United States Private
Securities Litigation Reform Act of 1995. For example, references to
the Company's revenue and cash flow expectations for 2002 are forward-
looking statements.
Actual results may differ from those expressed or implied in forward-
looking statements. The forward-looking statements contained in this
report are subject to a number of risk factors, including the
successful: implementation of product strategies (including category
expansion, digitization, OLED, and digital products); implementation of
intellectual property licensing strategies; development and
implementation of e-commerce strategies; completion of information
systems upgrades, including SAP; completion of various portfolio
actions; reduction of inventories; improvement in manufacturing
productivity; improvement in receivables performance; reduction in
capital expenditures; improvement in supply chain efficiency;
implementation of restructurings, including personnel reductions;
development of the Company's business in emerging markets like China,
India, Brazil, Mexico, and Russia. The forward-looking statements
contained in this report are subject to the following additional risk
factors: inherent unpredictability of currency fluctuations and raw
material costs and availability; competitive actions, including
pricing; the nature and pace of technology substitution, including the
analog-to-digital shift; continuing customer consolidation and buying
power; general economic and business conditions, including the timing
of a business upturn; and 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 report should be evaluated in
light of these important risk factors.
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50
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company, as a result of its global operating and financing
activities, is exposed to changes in foreign currency exchange rates,
commodity prices, and interest rates, which may adversely affect its
results of operations and financial position. In seeking to minimize
the risks and/or costs associated with such activities, the Company may
enter into derivative contracts.
Foreign currency forward contracts are used to hedge existing foreign
currency denominated assets and liabilities, especially those of the
Company's international treasury center, as well as forecasted foreign
currency denominated intercompany sales. Silver forward contracts are
used to mitigate the Company's risk to fluctuating silver prices. The
Company's exposure to changes in interest rates results from its
investing and borrowing activities used to meet its liquidity needs.
Long-term debt is generally used to finance long-term investments,
while short-term debt is used to meet working capital requirements. An
interest rate swap agreement was used to convert some floating-rate
debt to fixed-rate debt. The Company does not utilize financial
instruments for trading or other speculative purposes.
A sensitivity analysis indicates that if foreign currency exchange
rates at June 30, 2002 and 2001 increased 10%, the Company would incur
losses of $22 million and $64 million on foreign currency forward
contracts outstanding at June 30, 2002 and 2001, respectively. Such
losses would be substantially offset by gains from the revaluation or
settlement of the underlying positions hedged.
A sensitivity analysis indicates that, based on broker-quoted
termination values, if the price of silver decreased 10% from spot
rates at June 30, 2002 and 2001, the fair value of silver forward
contracts would be reduced by $1 million and $21 million, respectively.
Such losses in fair value, if realized, would be offset by lower costs
of manufacturing silver-containing products.
The Company is exposed to interest rate risk primarily through its
borrowing activities and, to a lesser extent, through investments in
marketable securities. The Company utilizes U.S. dollar denominated
and foreign currency denominated borrowings to fund its working capital
and investment needs. The majority of short-term and long-term
borrowings are in fixed-rate instruments. There is inherent roll-over
risk for borrowings and marketable securities as they mature and are
renewed at current market rates. The extent of this risk is not
predictable because of the variability of future interest rates and
business financing requirements.
51
Using a yield-to-maturity analysis, if June 30, 2002 interest rates
increased 10% (approximately 42 basis points) with the current period's
level of debt, there would be decreases in fair value of short-term and
long-term borrowings of $2 million and $20 million, respectively. If
June 30, 2001 interest rates increased 10% (approximately 49 basis
points) with the June 30, 2001 level of debt, there would be decreases
in fair value of short-term and long-term borrowings of $1 million and
$31 million, respectively.
The Company's financial instrument counterparties are high-quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk
by requiring specific minimum credit standards and diversification of
counterparties. The Company has procedures to monitor the credit
exposure amounts. The maximum credit exposure at June 30, 2002 was not
significant to the Company.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Shareholders of Eastman Kodak Company was
held on May 8.
A total of 238,987,288 of the Company's shares were present or
represented by proxy at the meeting. This represented more than 81% of
the Company's shares outstanding.
The individuals named below were re-elected to a three-year term as
Class III Directors:
Name Votes Received Votes Withheld
Richard Braddock 231,800,351 7,186,937
Daniel A. Carp 231,841,694 7,145,594
Durk I. Jager 231,863,643 7,123,645
Debra L. Lee 231,793,141 7,194,147
The individuals named below were elected to a one-year term as Class I
Directors:
Name Votes Received Votes Withheld
Timothy M. Donahue 231,766,714 7,220,574
Delano E. Lewis 231,711,557 7,275,731
William W. Bradley, Martha Layne Collins, Hector de J. Ruiz and Laura
D'Andrea Tyson all continue as directors of the Company.
52
The election of PricewaterhouseCoopers LLP as independent accountants
was ratified, with 228,913,221 shares voting for, 6,214,703 shares
voting against, and 3,859,364 shares abstaining.
The shareholder proposal requesting additional environmental disclosure
was defeated, with 9,951,986 shares voting for, 181,771,330 shares
voting against, 8,279,176 shares abstaining, and 38,984,796 non-votes.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and financial statement schedules required as part of this
report are listed in the index appearing on page 53.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed for the
quarter ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
EASTMAN KODAK COMPANY
(Registrant)
Date August 13, 2002
Robert P. Rozek
Controller
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53
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit
Number Page
(10) S. Executive Compensation for Excellence and Leadership
Plan (formerly known as the 2000 Management Variable
Compensation Plan), as amended and restated effective
as of January 1, 2002. 54
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 74
(99.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 75
54
Exhibit (10) S.
EASTMAN KODAK COMPANY
EXECUTIVE COMPENSATION FOR EXCELLENCE AND LEADERSHIP
Article Page
1. Purpose, Effective Date and Term of Plan 55
2. Definitions 55
3. Eligibility 64
4. Plan Administration 64
5. Forms of Awards 65
6. Setting Performance Goals and Performance Formula 66
7. Award Determination 66
8. Payment of Awards for a Performance Period 68
9. Deferral of Awards 69
10. Additional Awards 69
11. Change In Ownership 69
12. Change In Control 70
13. Miscellaneous 71
2002, Eastman Kodak Company
55
ARTICLE 1 -- PURPOSE, EFFECTIVE DATE AND TERM OF PLAN
1.1 Purpose
The purposes of the Plan are to provide an annual incentive to Key
Employees of the Company to put forth maximum efforts toward the
continued growth and success of the Company, to encourage such Key
Employees to remain in the employ of the Company, to assist the Company
in attracting and motivating new Key Employees on a competitive basis,
and to endeavor to qualify the Awards granted to Covered Employees
under the Plan as performance-based compensation as defined in Section
162(m) of the Code. The Plan is intended to apply to Key Employees of
the Company in the United States and throughout the world.
1.2 Effective Date
The Plan, in its amended and restated form, will be effective as of
January 1, 2002.
1.3 Term
Awards shall not be granted pursuant to the Plan after December 31,
2004; provided, however, the Committee may grant Awards after such date
in recognition of performance for a Performance Period completed on or
prior to such date.
ARTICLE 2 -- DEFINITIONS
2.1 Actual Award Pool
"Actual Award Pool" means, for a Performance Period, the amount
determined in accordance with Section 7.2(d). The Actual Award Pool
for a Performance Period determines the aggregate amount of all the
Awards that are to be issued under the Plan for such Performance
Period.
2.2 Award
"Award" means the compensation granted to a Participant by the
Committee for a Performance Period pursuant to Articles 7 and 8. All
Awards shall be issued in the form specified by Article 5.
2.3 Award Pool
"Award Pool" means, for a Performance Period, the dollar amount
calculated in accordance with Section 7.2(b) by applying the
Performance Formula for such Performance Period against the Performance
Goals for the same Performance Period.
2.4 Award Payment Date
"Award Payment Date" means, for each Performance Period, the date that
the amount of the Award for that Performance Period shall be paid to
the Participant under Article 8, without regard to any election to
defer receipt of the Award made by the Participant under Article 9 of
the Plan.
56
2.5 Board
"Board" means the Board of Directors of Kodak.
2.6 Capital Charge
"Capital Charge" means, for a Performance Period, the amount obtained
by multiplying the Cost of Capital for the Performance Period by
Operating Net Assets for the Performance Period.
2.7 Cause
"Cause" means (a) the willful and continued failure by a Key Employee
to substantially perform his or her duties with his or her employer
after written warnings identifying the lack of substantial performance
are delivered to the Key Employee by his or her employer to
specifically identify the manner in which the employer believes that
the Key Employee has not substantially performed his or her duties; or
(b) the willful engaging by a Key Employee in illegal conduct which is
materially and demonstrably injurious to the Company.
2.8 CEO
"CEO" means the Chief Executive Officer of Kodak.
2.9 Change In Control
"Change in Control" means the occurrence of any one of the
following events:
(a) individuals who, on December 9, 1999, constitute the Board
(the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board, provided that
any person becoming a director subsequent to December 9,
1999, whose election or nomination for election was approved
by a vote of at least two-thirds of the Incumbent Directors
then on the Board (either by a specific vote or by approval
of the proxy statement of Kodak in which such person is named
as a nominee for director, without written objection to such
nomination) shall be an Incumbent Director; provided,
however, that no individual initially elected or nominated as
a director of Kodak as a result of an actual or threatened
election contest (as described in Rule 14a-11 under the Act)
("Election Contest") or any other actual or threatened
solicitation of proxies or consents by or on behalf of any
"person" (as such term is defined in Section 3(a)(9) of the
Act) other than the Board ("Proxy Contest"), including by
reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest, shall be deemed to be an
Incumbent Director;
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(b) any person is or becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Act), directly or indirectly, of
securities of Kodak representing 25% or more of the combined
voting power of Kodak's then outstanding securities eligible
to vote for the election of the Board (the "Kodak Voting
Securities"); provided, however, that the event described in
this paragraph (b) shall not be deemed to be a Change in
Control by virtue of any of the following acquisitions: (1)by
Kodak or any subsidiary, (2) by any employee benefit plan (or
related trust) sponsored or maintained by Kodak or any
subsidiary, or (3) by any underwriter temporarily holding
securities pursuant to an offering of such securities;
(c) the consummation of a merger, consolidation, statutory share
exchange or similar form of corporate transaction involving
Kodak or any of its subsidiaries that requires the approval
of Kodak's shareholders, whether for such transaction or the
issuance of securities in the transaction (a
"Reorganization"), or sale or other disposition of all or
substantially all of Kodak's assets to an entity that is not
an affiliate of Kodak (a "Sale"), unless immediately
following such Reorganization or Sale: (1) more than 60% of
the total voting power of (x) the corporation resulting from
such Reorganization or Sale (the "Surviving Company"), or (y)
if applicable, the ultimate parent corporation that directly
or indirectly has beneficial ownership of 100% of the voting
securities eligible to elect directors of the Surviving
Company (the "Parent Company"), is represented by Kodak
Voting Securities that were outstanding immediately prior to
such Reorganization or Sale (or, if applicable, is
represented by shares into which such Kodak Voting Securities
were converted pursuant to such Reorganization or Sale), and
such voting power among the holders thereof is in
substantially the same proportion as the voting power of such
Kodak Voting Securities among the holders thereof immediately
prior to the Reorganization or Sale, (2) no person (other
than any employee benefit plan (or related trust) sponsored
or maintained by the Surviving Company or the Parent
Company), is or becomes the beneficial owner, directly or
indirectly, of 25% or more of the total voting power of the
outstanding voting securities eligible to elect directors of
the Parent Company (or, if there is no Parent Company, the
Surviving Company) and (3) at least a majority of the members
of the board of directors of the Parent Company (or, if there
is no Parent Company, the Surviving Company) following the
consummation of the Reorganization or Sale were Incumbent
Directors at the time of the Board's approval of the
execution of the initial agreement providing for such
Reorganization or Sale (any Reorganization or Sale which
satisfies all of the criteria specified in (1), (2) and (3)
above shall be deemed to be a "Non-Qualifying Transaction");
or
(d) the shareholders of Kodak approve a plan of complete
liquidation or dissolution of Kodak.
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Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any person acquires beneficial ownership of
more than 25% of Kodak Voting Securities as a result of the acquisition
of Kodak Voting Securities by Kodak which reduces the number of Kodak
Voting Securities outstanding; provided that if after such acquisition
by Kodak such person becomes the beneficial owner of additional Kodak
Voting Securities that increases the percentage of outstanding Kodak
Voting Securities beneficially owned by such person, a Change in
Control shall then occur.
2.10 Change In Ownership
"Change In Ownership" means a Change In Control that results directly
or indirectly in Kodak's Common Stock ceasing to be actively traded on
the New York Stock Exchange.
2.11 Code
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, including regulations thereunder and successor provisions and
regulations thereto.
2.12 Committee
"Committee" means the Executive Compensation and Development Committee
of the Board, or such other Board committee as may be designated by the
Board to administer the Plan; provided that the Committee shall consist
of three or more directors, all of whom are both a "Non-Employee
Director" within the meaning of Rule 16b-3 under the Exchange Act and
an "outside director" within the meaning of the definition of such term
as contained in Proposed Treasury Regulation Section 1.162-27(e)(3), or
any successor definition adopted.
2.13 Company
"Company" means Kodak and its Subsidiaries.
2.14 Cost of Capital
"Cost of Capital" means, for a Performance Period, the estimated
weighted average of the Company's cost of equity and cost of debt for
the Performance Period as determined by the Committee in its sole and
absolute discretion. The Committee will determine the Cost of Capital
for a Performance Period within the first 90 days of the Performance
Period.
2.15 Covered Employee
"Covered Employee" means a Key Employee who is either a "Covered
Employee" within the meaning of Section 162(m) of the Code or a Key
Employee who the Committee has identified as a potential "Covered
Employee" within the meaning of Section 162(m) of the Code.
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2.16 Disability
"Disability" means a disability under the terms of any long-term
disability plan maintained by the Company.
2.17 Economic Profit
"Economic Profit" means, for a Performance Period, the Net Operating
Profit After Tax that remains after subtracting the Capital Charge for
such Performance Period. Economic Profit may be expressed as follows:
Economic Profit = Net Operating Profit After Tax - Capital Charge.
Economic Profit may be either positive or negative.
2.18 Effective Date
"Effective Date" means the date an Award is determined to be effective
by the Committee upon its grant of such Award.
2.19 Exchange Act or Act
"Exchange Act" or "Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
2.20 Key Employee
"Key Employee" means either (a) a salaried employee of the Company in
wage grade 48 or above, or the equivalent thereof; or (b) a salaried
employee of the Company who holds a position of responsibility in a
managerial, administrative, or professional capacity and is in wage
grade 43 or above.
2.21 Kodak
"Kodak" means Eastman Kodak Company.
2.22 Negative Discretion
"Negative Discretion" means the discretion granted to the Committee
pursuant to Sections 7.2(c) to reduce or eliminate the portion of the
Award Pool allocated to a Covered Employee.
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2.23 Net Operating Profit After Tax
"Net Operating Profit After Tax" means, for a Performance Period, the
after-tax operating earnings of the Company for the Performance Period
adjusted for interest expense and Wang in-process R&D. The Committee
is authorized at any time during the first 90 days of a Performance
Period, or at any time thereafter in its sole and absolute discretion,
to adjust or modify the calculation of Net Operating Profit After Tax
for such Performance Period in order to prevent the dilution or
enlargement of the rights of Participants, (a) in the event of, or in
anticipation of, any dividend or other distribution (whether in the
form of cash, securities or other property), recapitalization,
restructuring, reorganization, merger, consolidation, spin off,
combination, repurchase, share exchange, liquidation, dissolution, or
other similar corporate transaction, event or development; (b) in
recognition of, or in anticipation of, any other unusual or
nonrecurring event affecting the Company, or the financial statements
of the Company, or in response to, or in anticipation of, changes in
applicable laws, regulations, accounting principles, or business
conditions; (c) in recognition of, or in anticipation of, any other
extraordinary gains or losses; and (d) in view of the Committee's
assessment of the business strategy of the Company, performance of
comparable organizations, economic and business conditions, and any
other circumstances deemed relevant. However, if and to the extent the
exercise of such authority after the first 90 days of a Performance
Period would cause the Awards granted to the Covered Employees for the
Performance Period to fail to qualify as "Performance-Based
Compensation" under Section 162(m) of the Code, then such authority
shall only be exercised with respect to those Participants who are not
Covered Employees.
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2.24 Operating Net Assets
"Operating Net Assets" means, for a Performance Period, the net
investment used in the operations of the Company. Operating Net Assets
is calculated from the Company's audited consolidated financial
statements as being total assets minus non-interest-bearing liabilities
adjusted for LIFO inventories, postemployment benefits other than
pensions (OPEB) and Wang in-process R&D. The Committee is authorized
at any time during a Performance Period to adjust or modify the
calculation of Operating Net Assets for such Performance Period in
order to prevent the dilution or enlargement of the rights of
Participants, (a) in the event of, or in anticipation of, any dividend
or other distribution (whether in the form of cash, securities or other
property), recapitalization, restructuring, reorganization, merger,
consolidation, spin off, combination, repurchase, share exchange,
liquidation, dissolution, or other similar corporate transaction, event
or development; (b) in recognition of, or in anticipation of, any other
unusual or nonrecurring event affecting the Company, or the financial
statements of the Company, or in response to, or in anticipation of,
changes in applicable laws, regulations, accounting principles, or
business conditions; (c) in recognition of, or in anticipation of, any
other extraordinary gains or losses; and (d) in view of the Committee's
assessment of the business strategy of the Company, performance of
comparable organizations, economic and business conditions, and any
other circumstances deemed relevant. However, if and to the extent the
exercise of such authority after the first 90 days of a Performance
Period would cause the Awards granted to the Covered Employees for the
Performance Period to fail to qualify as "Performance-Based
Compensation" under Section 162(m) of the Code, then such authority
shall only be exercised with respect to those Participants who are not
Covered Employees.
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2.25 Participant
"Participant," means for a Performance Period, a Key Employee who is
designated to participate in the Plan for the Performance Period
pursuant to Article 3.
2.26 Performance Criteria
"Performance Criteria" means the stated business criterion or criteria
upon which the Performance Goals for a Performance Period are based as
required pursuant to Proposed Treasury Regulation Section 1.162-
27(e)(4)(iii). The Performance Criteria that will be used to establish
such Performance Goal(s) will be based on or derived from one or more
of the following as designated by the Committee on a company specific
basis, business unit basis or in comparison with peer group
performance: Economic Profit/EVA, return on net assets ("RONA"), return
on shareholders' equity, return on assets, return on capital, return on
sales, shareholder return, total shareholder return, profit margin,
earnings per share, net earnings, operating earnings, earnings before
interest and taxes, Common Stock price per share, cash flow, cost
reduction, revenue, revenue growth, sales or market share.
2.27 Performance Formula
"Performance Formula" means, for a Performance Period, the one or more
objective formulas applied against the Performance Goals to determine
the Award Pool for the Performance Period. The Performance Formula for
a Performance Period shall be established in writing by the Committee
within the first 90 days of the Performance Period (or, if later,
within the maximum period allowed pursuant to Section 162(m) of the
Code).
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2.28 Performance Goals
"Performance Goals" means, for a Performance Period, the one or more
goals for the Performance Period established by the Committee in
writing within the first 90 days of the Performance Period (or, if
longer, within the maximum period allowed pursuant to Section 162(m) of
the Code) based upon the Performance Criteria. The Committee is
authorized at any time during the first 90 days of a Performance
Period, or at any time thereafter in its sole and absolute discretion,
to adjust or modify the calculation of a Performance Goal for such
Performance Period in order to prevent the dilution or enlargement of
the rights of Participants, (a) in the event of, or in anticipation of,
any unusual or extraordinary corporate item, transaction, event or
development; (b) in recognition of, or in anticipation of, any other
unusual or nonrecurring events affecting the Company, or the financial
statements of the Company, or in response to, or in anticipation of,
changes in applicable laws, regulations, accounting principles, or
business conditions; and (c) in view of the Committee's assessment of
the business strategy of the Company, performance of comparable
organizations, economic and business conditions, and any other
circumstances deemed relevant. However, to the extent the exercise of
such authority after the first 90 days of a Performance Period would
cause the Awards granted to the Covered Employees for the Performance
Period to fail to qualify as "Performance-Based Compensation" under
Section 162(m) of the Code, then such authority shall only be exercised
with respect to those Participants who are not Covered Employees.
2.29 Performance Period
"Performance Period" means Kodak's fiscal year.
2.30 Plan
"Plan" means the Executive Compensation for Excellence and Leadership
plan
2.31 Retirement
"Retirement" means, in the case of a Participant employed by Kodak,
voluntary termination of employment: (i) on or after age 55 with 10 or
more years of service or on or after age 65; or (ii) at any time if the
Participant had an age and years of service combination of at least 75
points on December 31, 1995. In the case of a Participant employed by
a Subsidiary, "Retirement" means early or normal retirement under the
terms of the Subsidiary's retirement plan, or if the Subsidiary does
not have a retirement plan, termination of employment on or after age
60. A Participant must voluntarily terminate his or her employment in
order for his or her termination of employment to be for "Retirement."
2.32 Subsidiary
Subsidiary means a corporation or other business entity in which Kodak
directly or indirectly has an ownership interest of at least 50%.
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2.33 Target Award
"Target Award" means, for a Performance Period, the target award
amounts established for each wage grade by the Committee for the
Performance Period. A Participant's Target Award for a Performance
Period is expressed as a percentage of his or her annual base salary in
effect as of the last day of the Performance Period. The Target Awards
shall serve only as a guideline in making Awards under the Plan.
Depending upon the Committee's exercise of its discretion pursuant to
Section 7.2(e), but subject to Section 7.3, a Participant may receive
an Award for a Performance Period that may be more or less than the
Target Award for his or her wage grade for that Performance Period.
Moreover, the fact that a Target Award is established for a
Participant's wage grade for a Performance Period shall not in any
manner entitle the Participant to receive an Award for such period.
ARTICLE 3 -- ELIGIBILITY
All Key Employees are eligible to participate in the Plan. The
Committee will, in its sole discretion, designate within the first 90
days of a Performance Period which Key Employees will be Participants
for such Performance Period. However, the fact that a Key Employee is
a Participant for a Performance Period shall not in any manner entitle
such Participant to receive an Award for the period. The determination
as to whether or not such Participant shall be paid an Award for such
Performance Period shall be decided solely in accordance with the
provisions of Articles 7 and 8 hereof.
ARTICLE 4 -- PLAN ADMINISTRATION
4.1 Responsibility
The Committee shall have total and exclusive responsibility to control,
operate, manage and administer the Plan in accordance with its terms.
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4.2 Authority of the Committee
The Committee shall have all the authority that may be necessary or
helpful to enable it to discharge its responsibilities with respect to
the Plan. Without limiting the generality of the preceding sentence,
the Committee shall have the exclusive right: to interpret the Plan, to
determine eligibility for participation in the Plan, to decide all
questions concerning eligibility for and the amount of Awards payable
under the Plan, to establish and administer the Performance Goals and
certify whether, and to what extent, they are attained, to construe any
ambiguous provision of the Plan, to correct any default, to supply any
omission, to reconcile any inconsistency, to issue administrative
guidelines as an aid to administer the Plan, to make regulations for
carrying out the Plan and to make changes in such regulations as it
from time to time deems proper, and to decide any and all questions
arising in the administration, interpretation, and application of the
Plan. In addition, in order to enable Key Employees who are foreign
nationals or are employed outside the United States or both to receive
Awards under the Plan, the Committee may adopt such amendments,
procedures, regulations, subplans and the like as are necessary or
advisable, in the opinion of the Committee, to effectuate the purposes
of the Plan.
4.3 Discretionary Authority
The Committee shall have full discretionary authority in all matters
related to the discharge of its responsibilities and the exercise of
its authority under the Plan including, without limitation, its
construction of the terms of the Plan and its determination of
eligibility for participation and Awards under the Plan. It is the
intent of Plan that the decisions of the Committee and its action with
respect to the Plan shall be final, binding and conclusive upon all
persons having or claiming to have any right or interest in or under
the Plan.
4.4 Section 162(m) of the Code
With regard to all Covered Employees, the Plan shall for all purposes
be interpreted and construed in accordance with Section 162(m) of the
Code.
4.5 Delegation of Authority
Except to the extent prohibited by law, the Committee may delegate some
or all of its authority under the Plan to any person or persons as long
as any such delegation is in writing; provided, however, only the
Committee may select and grant Awards to Participants who are Covered
Employees.
ARTICLE 5 -- FORM OF AWARDS
All Awards will be paid in cash.
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ARTICLE 6 -- SETTING PERFORMANCE GOALS AND PERFORMANCE FORMULA
Within the first 90 days of a Performance Period (or, if longer, within
the maximum period allowed pursuant to Section 162(m) of the Code), the
Committee shall establish in writing:
(a) the one or more Performance Goals for the Performance Period
based upon the Performance Criteria;
(b) the one or more Performance Formulas for the Performance
Period; and
(c) an objective means of allocating, on behalf of each Covered
Person, a portion of the Award Pool (not to exceed the amount set
forth in Section 7.3(b) to be granted, subject to the Committee's
exercise of Negative Discretion, for such Performance Period in
the event the Performance Goals for such period are attained.
ARTICLE 7 -- AWARD DETERMINATION
7.1 Certification
(a) In General. As soon as practicable following the
availability of performance results for the completed
Performance Period, the Committee shall determine the
Company's performance in relation to the Performance Goals
for that period and certify in writing whether the
Performance Goals were satisfied.
(b) Performance Goals Achieved. If the Committee certifies that
the Performance Goals for a Performance Period were
satisfied, it shall determine the Awards for such Performance
Period by following the procedure described in Section 7.2.
During the course of this procedure, the Committee shall
certify in writing for the Performance Period the amount of:
(i) the Award Pool; and (ii) the Award Pool to be allocated
to each Covered Employee in accordance with Section 7.2(c).
(c) Performance Goals Not Achieved. In the event the Performance
Goals for a Performance Period are not satisfied, the
limitation contained in Section 7.3(c) shall apply to the
Covered Employees.
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7.2 Calculation of Awards
(a) In General. As detailed below in the succeeding provisions
of this Section 7.2, the procedure for determining Awards for
a Performance Period involves the following steps:
(1) determining the Award Pool;
(2) allocating the Award Pool to Covered Employees;
(3) determining the Actual Award Pool; and
(4) allocating the Actual Award Pool among individual
Participants other than Covered Employees.
Upon completion of this process, any Awards earned for the
Performance Period shall be paid in accordance with Article
8.
(b) Determining Award Pool. The Committee shall determine the
Award Pool for the Performance Period by applying the
Performance Formula for such Performance Period against the
Performance Goals for the same Performance Period.
(c) Allocating Award Pool to Covered Employees. The Committee
shall determine, by way of the objective means established
pursuant to Article 6, the portion of the Award Pool that is
to be allocated to each Covered Employee for the Performance
Period. The Committee shall have no discretion to increase
the amount of any Covered Employee's Award as so determined,
but may through Negative Discretion reduce the amount of or
totally eliminate such Award if it determines, in its
absolute and sole discretion, that such a reduction or
elimination is appropriate.
(d) Determining Actual Award Pool. The Committee may use its
discretion to adjust upward or downward the amount of the
Award Pool for any Performance Period. No such adjustment
will, however, affect the amount of the Awards paid to the
Covered Employees for the Performance Period. To the extent
the Committee determines to exercise discretion with regard
to the Award Pool for a Performance Period, the amount
remaining after such adjustment shall be the Actual Award
Pool for the Performance Period. Thus, if the Committee
elects not to exercise discretion with respect to the Award
Pool for a Performance Period, the amount of the Actual Award
Pool for the Performance Period will equal the amount of the
Award Pool for such period. Examples of situations where the
Committee may choose to exercise this discretion include
unanticipated economic or market changes, extreme currency
exchange effects, management or significant workforce issues,
or dramatic shifts in customer satisfaction.
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(e) Allocating Actual Award Pool to Individual Participants Other
Than Covered Employee. Based on such factors, indicia,
standards, goals, criteria and/or measures that the Committee
shall determine, the Committee shall, in its sole and
absolute discretion, determine for each Participant, other
than those that are Covered Employees, the portion, if any,
of the Actual Award Pool that will be awarded to such
Participant for the Performance Period. By way of
illustration, and not by way of limitation, the Committee
may, but shall not be required to, consider: (1) the
Participant's position and level of responsibility,
individual merit, contribution to the success of the Company
and Target Award; (2) the performance of the Company or the
organizational unit of the Participant based upon attainment
of financial and other performance criteria and goals; and
(3) business unit, division or department achievements.
7.3 Limitations on Awards
The provisions of this Section 7.3 shall control over any Plan
provision to the contrary.
(a) Maximum Award Pool. The total of all Awards granted for a
Performance Period shall not exceed the amount of the Actual
Award Pool for such Performance Period.
(b) Maximum Award Payable to Covered Employees. The maximum
Award payable to any Covered Employee under the Plan for a
Performance Period shall be $5,000,000.
(c) Attainment of Performance Goals. The Performance Goals for a
Performance Period must be achieved in order for a Covered
Employee to receive an Award for such Performance Period.
ARTICLE 8 -- PAYMENT OF AWARDS FOR A PERFORMANCE PERIOD
8.1 Termination of Employment
The Committee shall determine rules regarding the treatment of a
Participant under the Plan for a Performance Period in the event of the
Participant's termination of employment prior to the Award Payment Date
for such Performance Period.
8.2 Timing of Award Payments
Unless deferred pursuant to Article 9 hereof, the Awards granted for a
Performance Period shall be paid to Participants on the Award Payment
Date for such Performance Period, which date shall occur as soon as
administratively practicable following the completion of the procedure
described in Section 7.2.
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ARTICLE 9 -- DEFERRAL OF AWARDS
At the discretion of the Committee, a Participant may, subject to such
terms and conditions as the Committee may determine, elect to defer
payment of all or any part of any Award which the Participant might
earn with respect to a Performance Period by complying with such
procedures as the Committee may prescribe. Any Award, or portion
thereof, upon which such an election is made shall be deferred into,
and be subject to the terms, conditions and requirements of, the
Eastman Kodak Employees' Savings and Investment Plan, 1982 Eastman
Kodak Company Executive Deferred Compensation Plan or such other
applicable deferred compensation plan of the Company.
ARTICLE 10 --
Intentionally omitted.
ARTICLE 11 -- CHANGE IN OWNERSHIP
11.1 Background
Notwithstanding any provision contained in the Plan, including, but not
limited to, Sections 1.1, 4.4 and 13.9, the provisions of this Article
11 shall control over any contrary provision. Upon a Change in
Ownership: (a) the terms of this Article 11 shall immediately become
operative, without further action or consent by any person or entity;
(b) all terms, conditions, restrictions and limitations in effect on
any unpaid and/or deferred Award shall immediately lapse as of the date
of such event; and (c) no other terms, conditions, restrictions, and/or
limitations shall be imposed upon any Awards on or after such date, and
in no event shall an Award be forfeited on or after such date.
11.2 Payment of Awards
Upon a Change in Ownership, any Key Employee, whether or not he or she
is still employed by the Company, shall be paid, as soon as practicable
but in no event later than 90 days after the Change in Ownership, the
Awards set forth in (a) and (b) below:
(a) All of the Key Employee's unpaid Awards; and
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(b) A pro-rata Award for the Performance Period in which the
Change in Ownership occurs. The amount of the pro-rata Award
shall be determined by multiplying the Target Award for such
Performance Period for Participants in the same wage grade as
the Key Employee by a fraction, the numerator of which shall
be the number of full months in the Performance Period prior
to the date of the Change in Ownership and the denominator of
which shall be the total number of full months in the
Performance Period. For purposes of this calculation, a
partial month shall be treated as a full month to the extent
of 15 or more days in such month have elapsed. To the extent
Target Awards have not yet been established for the
Performance Period, the Target Awards for the immediately
preceding Performance Period shall be used. The pro-rata
Awards shall be paid to the Key Employee in the form of a
lump-sum cash payment.
11.3 Miscellaneous
Upon a Change In Ownership, no action, including, but not by way of
limitation, the amendment, suspension, or termination of the Plan,
shall be taken which would affect the rights of any Key Employee or the
operation of the Plan with respect to any Award to which the Key
Employee may have become entitled hereunder on or prior to the date of
such action or as a result of such Change In Ownership.
ARTICLE 12 -- CHANGE IN CONTROL
12.1 Background
Notwithstanding any provision contained in the Plan, including, but not
limited to, Sections 1.1, 4.4 and 13.9, the provisions of this Article
12 shall control over any contrary provision. All Key Employees shall
be eligible for the treatment afforded by this Article 12 if their
employment with the Company terminates within two years following a
Change In Control, unless the termination is due to (a) death; (b)
Disability; (c) Cause; (d) resignation other than (1) resignation from
a declined reassignment to a job that is not reasonably equivalent in
responsibility or compensation (as defined in Kodak's Termination
Allowance Plan), or that is not in the same geographic area (as defined
in Kodak's Termination Allowance Plan), or (2) resignation within
thirty days of a reduction in base pay; or (e) Retirement.
12.2 Vesting and Lapse of Restrictions
If a Key Employee qualifies for treatment under Section 12.1, his or
her Awards shall be treated in the manner described in Subsections
11.1(b) and (c).
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12.3 Payment of Awards
If a Key Employee qualifies for treatment under Section 12.1, he or she
shall be paid, as soon as practicable but in no event later than 90
days after his or her termination of employment, the Awards set forth
in (a) and (b) below:
(a) All of the Key Employee's unpaid Awards; and
(b) A pro-rata Award for the Performance Period in which his or
her termination of employment occurs. The amount of the pro-
rata Award shall be determined by multiplying the Target
Award for such Performance Period for Participants in the
same wage grade as the Key Employee by a fraction, the
numerator of which shall be the number of full months in the
Performance Period prior to the date of the Key Employee's
termination of employment and the denominator of which shall
be the total number of full months in the Performance Period.
For purposes of this calculation, a partial month shall be
treated as a full month to the extent 15 or more days in such
month have elapsed. To the extent Target Awards have not yet
been established for the Performance Period, the Target
Awards for the immediately preceding Performance Period shall
be used. The pro-rata Awards shall be paid to the Key
Employee in the form of a lump-sum cash payment.
12.4 Miscellaneous
Upon a Change In Control, no action, including, but not by way of
limitation, the amendment, suspension, or termination of the Plan,
shall be taken which would affect the rights of any Key Employee or the
operation of the Plan with respect to any Award to which the Key
Employee may have become entitled hereunder prior to the date of the
Change In Control or to which he or she may become entitled as a result
of such Change In Control.
ARTICLE 13 -- MISCELLANEOUS
13.1 Nonassignability
No Awards under the Plan shall be subject in any manner to alienation,
anticipation, sale, transfer (except by will or the laws of descent and
distribution), assignment, pledge, or encumbrance, nor shall any Award
be payable to anyone other than the Participant to whom it was granted.
13.2 Withholding Taxes
The Company shall be entitled to deduct from any payment under the
Plan, regardless of the form of such payment, the amount of all
applicable income and employment taxes required by law to be withheld
with respect to such payment or may require the Participant to pay to
it such tax prior to and as a condition of the making of such payment.
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13.3 Amendments to Awards
The Committee may at any time unilaterally amend any unearned, deferred
or unpaid Award, including, but not by way of limitation, Awards earned
but not yet paid, to the extent it deems appropriate; provided,
however, that any such amendment which, in the opinion of the
Committee, is adverse to the Participant shall require the
Participant's consent.
13.4 No Right to Continued Employment or Grants
Participation in the Plan shall not give any Key Employee any right to
remain in the employ of the Company. Kodak or, in the case of
employment with a Subsidiary, the Subsidiary, reserves the right to
terminate any Key Employee at any time. Further, the adoption of this
Plan shall not be deemed to give any Key Employee or any other
individual any right to be selected as a Participant or to be granted
an Award.
13.5 Amendment/Termination
The Committee may suspend or terminate the Plan at any time with or
without prior notice. In addition, the Committee may, from time to
time and with or without prior notice, amend the Plan in any manner,
but may not without shareholder approval adopt any amendment which
would require the vote of the shareholders of Kodak pursuant to Section
162(m) of the Code, but only insofar as such amendment affects Covered
Employees.
13.6 Governing Law
The Plan shall be governed by and construed in accordance with the laws
of the State of New York, except as superseded by applicable Federal
Law, without giving effect to its conflicts of law provisions.
13.7 No Right, Title, or Interest in Company Assets
To the extent any person acquires a right to receive payments from the
Company under this Plan, such rights shall be no greater than the
rights of an unsecured creditor of the Company and the Participant
shall not have any rights in or against any specific assets of the
Company. All of the Awards granted under the Plan shall be unfunded.
13.8 No Guarantee of Tax Consequences
No person connected with the Plan in any capacity, including, but not
limited to, Kodak and its Subsidiaries and their directors, officers,
agents and employees makes any representation, commitment, or guarantee
that any tax treatment, including, but not limited to, Federal, state
and local income, estate and gift tax treatment, will be applicable
with respect to amounts deferred under the Plan, or paid to or for the
benefit of a Participant under the Plan, or that such tax treatment
will apply to or be available to a Participant on account of
participation in the Plan.
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13.9 Compliance with Section 162(m)
If any provision of the Plan would cause the Awards granted to a
Covered Person not to constitute qualified Performance-Based
Compensation under Section 162(m) of the Code, that provision, insofar
as it pertains to the Covered Person, shall be severed from, and shall
be deemed not to be a part of, this Plan, but the other provisions
hereof shall remain in full force and effect.
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Exhibit (99.1)
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Eastman Kodak Company (the
Company) on Form 10-Q for the three and six month periods ended June
30, 2002 as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Daniel A. Carp, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Daniel A. Carp
Daniel A. Carp
Chief Executive Officer
August 12, 2002
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Exhibit (99.2)
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Eastman Kodak Company (the
Company) on Form 10-Q for the three and six month periods ended June
30, 2002 as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Robert H. Brust, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Robert H. Brust
Robert H. Brust
Chief Financial Officer
August 12, 2002