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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 September 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 September 30, 2002
Common Stock, $2.50 par value 291,769,113
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(in millions, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2002 2001 2002 2001
Net sales $3,354 $3,308 $9,400 $9,875
Cost of goods sold 2,066 2,176 6,001 6,338
------ ------ ------ ------
Gross profit 1,288 1,132 3,399 3,537
Selling, general and
administrative expenses 632 661 1,832 1,864
Research and development costs 188 197 567 572
Goodwill amortization - 37 - 116
Restructuring (credits)
costs and other (9) 35 (9) 371
------ ------ ------ ------
Earnings from operations 477 202 1,009 614
Interest expense 40 52 128 171
Other charges 21 18 74 2
------ ------ ------ ------
Earnings before income taxes 416 132 807 441
Provision for income taxes 82 36 150 159
------ ------ ------ ------
NET EARNINGS $ 334 $ 96 $ 657 $ 282
====== ====== ====== ======
Basic and diluted
earnings per share $ 1.15 $ .33 $ 2.25 $ .97
====== ====== ====== ======
Earnings used in basic and
diluted earnings per share $ 334 $ 96 $ 657 $ 282
Number of common shares used in
basic earnings per share 291.8 290.9 291.6 290.5
Incremental shares from
assumed conversion of options 0.0 0.4 0.0 0.5
------ ------ ------ ------
Number of common shares used in
diluted earnings per share 291.8 291.3 291.6 291.0
====== ====== ====== ======
CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
Retained earnings at beginning
of period $7,467 $7,799 $7,431 $7,869
Net earnings 334 96 657 282
Cash dividends declared - (128) (262) (384)
Loss from issuance of treasury
stock relating to a
business acquisition - - (25) -
------ ------ ------ ------
Retained earnings
at end of period $7,801 $7,767 $7,801 $7,767
====== ====== ====== ======
- -----------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
3
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
Sept. 30, Dec. 31,
2002 2001
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 561 $ 448
Receivables, net 2,301 2,337
Inventories, net 1,238 1,137
Deferred income taxes 516 521
Other current assets 240 240
------- -------
Total current assets 4,856 4,683
------- -------
Property, plant and equipment, net 5,443 5,659
Goodwill, net 975 948
Other long-term assets 2,192 2,072
------- -------
TOTAL ASSETS $13,466 $13,362
======= =======
- -----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,284 $ 3,276
Short-term borrowings 1,515 1,534
Accrued income taxes 551 544
------- -------
Total current liabilities 5,350 5,354
OTHER LIABILITIES
Long-term debt, net of current portion 1,227 1,666
Postemployment liabilities 2,744 2,728
Other long-term liabilities 755 720
------- -------
Total liabilities 10,076 10,468
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 848 849
Retained earnings 7,801 7,431
Accumulated other comprehensive loss (518) (597)
------- -------
9,109 8,661
Less: Treasury stock at cost 5,719 5,767
------- -------
Total shareholders' equity 3,390 2,894
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $13,466 $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 (UNAUDITED)
(in millions)
Nine Months Ended
September 30
------------------
2002 2001
Cash flows from operating activities:
Net earnings $ 657 $ 282
Adjustments to reconcile to
net cash provided by operating activities:
Depreciation and amortization 601 686
Gain on sale of assets (17) (1)
Restructuring (credits) costs and other charges (9) 488
Provision for deferred taxes 32 78
Decrease (increase) in receivables 126 (114)
(Increase) decrease in inventories (58) 165
Decrease in liabilities, excluding borrowings (35) (545)
Other items, net 2 126
------ ------
Total adjustments 642 883
------ ------
Net cash provided by operating
activities 1,299 1,165
------ ------
Cash flows from investing activities:
Additions to properties (362) (531)
Net proceeds from sales of businesses/assets 18 -
Acquisitions, net of cash acquired (6) (246)
Investments in unconsolidated affiliates (96) (99)
Marketable securities - purchases (78) (42)
Marketable securities - sales 61 37
------ ------
Net cash used in investing activities (463) (881)
------ ------
Cash flows from financing activities:
Net decrease in borrowings
with original maturity of
90 days or less (69) (448)
Proceeds from other borrowings 625 1,768
Repayment of other borrowings (1,015) (1,188)
Dividend payments (262) (384)
Exercise of employee stock options 2 21
Stock repurchases - (44)
------ ------
Net cash used in financing
activities (719) (275)
------ ------
Effect of exchange rate changes on cash (4) (3)
------ ------
Net increase in cash and cash equivalents 113 6
Cash and cash equivalents, beginning of year 448 246
------ ------
Cash and cash equivalents, end of quarter $ 561 $ 252
====== ======
- -------------------------------------------------------------------
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 to the 2002 presentation.
- -----------------------------------------------------------------------
NOTE 2: RECEIVABLES, NET
(in millions) Sept.30, Dec. 31,
2002 2001
Trade receivables $2,015 $1,966
Miscellaneous receivables 286 371
------ ------
Total (net of allowances of $118 and $109) $2,301 $2,337
====== ======
Of the total trade receivable amounts of $2,015 million and $1,966
million as of September 30, 2002 and December 31, 2001, respectively,
approximately $338 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) Sept. 30, Dec. 31,
2002 2001
At FIFO or average cost
(approximates current cost)
Finished goods $ 916 $ 851
Work in process 329 318
Raw materials and supplies 403 412
------ ------
1,648 1,581
LIFO reserve (410) (444)
------ ------
Total $1,238 $1,137
====== ======
- -----------------------------------------------------------------------
6
NOTE 4: VENTURE INVESTMENT IMPAIRMENTS
During the third quarter of 2002, the Company recorded a total charge
of $21 million for other than temporary impairments relating to certain
of its strategic and non-strategic venture investments. The strategic
venture investment impairment of $13 million and the non-strategic
venture investment impairment of $8 million were recorded in selling,
general and administrative expenses and other charges, respectively, in
the accompanying consolidated statement of earnings.
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, respectively.
The charges were taken in the respective quarters in which the
available evidence, including subsequent financing rounds, independent
valuations, and other factors indicated that the underlying
investments were impaired on an other than temporary basis.
The remaining carrying value of all of the Company's venture
investments of $34 million at September 30, 2002 is included in other
long-term assets in the accompanying consolidated statement of
financial position.
- -----------------------------------------------------------------------
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
September 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. The Company was in
compliance with this covenant at September 30, 2002.
7
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 September 30, 2002,
representing the outstanding balance of the gross accounts receivable
sold to EKFC, totaled approximately $681 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.
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 September 30, 2002, the Company had
outstanding secured borrowings under the Program of $180 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 $180 million and the average of the conduits'
commercial paper rates at September 30, 2002, the estimated annualized
borrowing cost rate is 2.44%. Interest expense for both the three and
nine month periods ended September 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
September 30, 2002.
8
LONG-TERM DEBT
In the nine month period ended September 30, 2002, the Company entered
into several separate term note arrangements (the "Notes") with an
aggregate principal amount of approximately $43 million. The Notes
bear interest at annual rates ranging from 5.03% to 6.79% and are
payable in 36 monthly installments of principal and interest of
approximately $1.3 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 September
30, 2002. Of the outstanding principal of $38 million at September 30,
2002, approximately $14 million and $24 million, respectively, were
recorded in short-term borrowings and long-term debt, net of current
portion, in the accompanying consolidated statement of financial
position.
- -----------------------------------------------------------------------
NOTE 6: TAXES
The Company recorded a tax benefit of $46 million during the third
quarter of 2002 relating to the consolidation of its photofinishing
operations in Japan and the loss realized from the liquidation of a
subsidiary as part of this consolidation. The Company expects this
loss to be utilized during the next five years to reduce taxable income
from operations in Japan and, accordingly, has reflected the benefit in
the current quarter in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income 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.
- -----------------------------------------------------------------------
9
NOTE 7: COMMITMENTS AND CONTINGENCIES
Environmental
At September 30, 2002, the Company's undiscounted accrued liability for
environmental remediation costs amounted to approximately $152
million and is reported in other long-term liabilities, in the
accompanying consolidated statement of financial position.
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 September 30, 2002, estimated future
investigation and remediation costs of $68 million are accrued on an
undiscounted basis and are included in the $152 million reported 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 September 30, 2002,
estimated future remediation costs of $50 million are accrued on an
undiscounted basis and are included in the $152 million reported 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 September 30, 2002, estimated future investigation, remediation and
monitoring costs of $29 million are accrued on an undiscounted basis
and are included in the $152 million reported in other long-term
liabilities.
Additionally, the Company has approximately $5 million accrued on an
undiscounted basis in the $152 million reported in other long-term
liabilities at September 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.
10
Cash expenditures for the aforementioned investigation, remediation and
monitoring activities are expected to be incurred over the next thirty
years for each site. For these known environmental exposures, the
accrual reflects the Company's best estimate of the amount it will
incur under the agreed-upon or proposed work plans. The Company's cost
estimates were determined using the ASTM Standard E 2137-01 "Standard
Guide for Estimating Monetary Costs and Liabilities for Environmental
Matters," and have not been reduced by possible recoveries from third
parties. The overall method includes the use of a probabilistic model
which forecasts a range of cost estimates for the remediation required
at individual sites. The projects are closely monitored and the models
are reviewed as significant events occur or at least once per year.
The Company's estimate includes equipment and operating costs for
remediation and long-term monitoring of the sites. The Company does
not believe it is reasonably possible that the losses for the known
exposures could exceed the current accruals by material amounts.
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 $32 million over the next eight
years. These expenditures are primarily capital in nature and,
therefore, are not included in the environmental accrual at September
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.
11
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.
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 unconsolidated affiliated companies and customers. At
September 30, 2002, the maximum guarantees for which the Company could
become obligated approximated $334 million. Within the total amount of
$334 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 composed 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 current
guarantee amount of $334 million, only $218 million of unconsolidated
affiliated company and customer debt and other obligations were
outstanding at September 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. As of
September 30, 2002, the Company has not been required to guarantee any
of SK Display Corporation's outstanding debt.
12
The Company has a commitment under a put option arrangement with an
unaffiliated company whereby the shareholders of this entity have the
ability to put 100% of the stock to Kodak for total consideration,
including the assumption of debt, of approximately $62 million. The
option first became exercisable on October 1, 2002 and may be exercised
up through December 31, 2002. The Company expects the shareholders of
the unaffiliated company to exercise their rights under the put option
in the fourth quarter of 2002. If the option were exercised, the cash
payment under this commitment would be expected to occur in the first
quarter of 2003.
In connection with the Company's investment in China that began in
1998, certain unaffiliated entities invested in two Kodak consolidated
companies with the opportunity to put their minority interests to Kodak
at any time after the third anniversary, but prior to the
tenth anniversary, of the date on which the two companies were
established. The total exercise price in connection with these put
options, which increases at a rate of 2% per annum, is approximately
$97 million at September 30, 2002. The Company expects that the put
options will be exercised and the related cash payments will occur over
the next twelve months.
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 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.
13
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 has been
experiencing financial difficulty and its financial condition continues
to worsen. 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
$504 million at September 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 would be convertible into the Vendor's unrestricted voting common
stock. As a result of the steps taken by the Company to mitigate the
risk as it relates to its continued ability to procure spare parts, the
Company does not anticipate any significant liability arising from
any inability to fulfill its servicing obligations under this
arrangement.
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 July
2003. Under the amended RPA arrangement, maximum borrowings were
reduced to $370 million. Total outstanding borrowings under the RPA at
September 30, 2002 were $345 million.
14
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. For the nine months ended September
30, 2002, total sales of photofinishing equipment were $8.3 million.
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 66.
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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 accompanying
consolidated 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 $150 million of
floating-rate debt to fixed-rate debt. The Company does not utilize
financial instruments for trading or other speculative purposes.
15
The Company has entered into foreign currency forward contracts that
are designated as cash flow hedges of exchange rate risk related to
forecasted foreign currency denominated intercompany sales. At
September 30, 2002, the Company had cash flow hedges for the euro, the
Australian dollar, and the Canadian dollar, with maturity dates ranging
from October 2002 to December 2002.
At September 30, 2002, the fair value of all open foreign currency
forward contracts hedging foreign denominated intercompany sales was an
unrealized loss of $6 million, recorded in accumulated other
comprehensive loss. 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 $3 million, related to closed
foreign currency contracts hedging foreign denominated intercompany
sales, have been deferred in accumulated other comprehensive loss.
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 third
quarter of 2002, a loss of $10 million was reclassified from
accumulated other comprehensive loss 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). The majority of the contracts held by the
Company are denominated in euros, Australian dollars, Chinese renminbi,
and British pounds.
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 September 30, 2002, the Company had open forward
contracts with maturity dates ranging from October 2002 to March 2003.
At September 30, 2002, the fair value of open silver forward contracts
was an unrealized loss of less than $1 million, recorded in accumulated
other comprehensive loss. 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 accumulated other comprehensive
loss. These gains will be reclassified into cost of goods sold as
silver-containing products are sold, all within the next twelve months.
During the third quarter of 2002, a realized gain of $1 million was
recorded in cost of goods sold. Hedge ineffectiveness was
insignificant.
16
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 converted interest
expense on that debt to a fixed annual rate of 4.06%. During the third
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 September 30, 2002
was not significant to the Company.
SFAS No. 133 TRANSITION ADJUSTMENT
On January 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. If certain
conditions are met, a derivative may be designated as a hedge. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation.
The forward contracts used to hedge existing foreign currency
denominated assets and liabilities, especially those of the
International Treasury Center, are marked to market through earnings at
the same time that the exposed assets and liabilities are remeasured
through earnings (both in other charges) and are not given hedge
accounting treatment. When the Company early-adopted SFAS No. 133 on
January 1, 2000, it recorded a loss of $1 million in earnings to adjust
the pre-SFAS No. 133 book value of the forward contracts to their
market value of $4 million (liability).
Additionally, upon adoption of SFAS No. 133, the existing forward
contracts used to hedge forecasted silver purchases were designated as
cash flow hedges and the Company recorded a gain of $3 million in
accumulated other comprehensive loss to adjust the pre-SFAS No. 133
book value of the forward contracts to their market value of $3 million
(asset). These transition adjustments were not displayed in separate
captions as cumulative effects of a change in accounting principle due
to their immateriality.
- -----------------------------------------------------------------------
17
NOTE 9: RESTRUCTURING PROGRAM
During the nine month period ended September 30, 2001, as a result of a
number of factors, including the ongoing digital transformation,
declining photofinishing volumes, the discontinuance of certain product
lines, global economic conditions, and the growing presence of business
in certain geographies outside the United States, the Company committed
to a plan to reduce excess manufacturing capacity, primarily with
respect to the production of sensitized goods, to close certain central
photofinishing labs in the U.S. and Japan, to reduce selling, general
and administrative positions on a worldwide basis and to exit certain
businesses. The total restructuring charges in connection with these
actions were $369 million and were recorded in the second and third
quarters of 2001 (the "Second and Third Quarter 2001 Restructuring
Plan"). Due to the continued decline in the global economic conditions
and the events of September 11th, the Company committed to further
actions in the fourth quarter of 2001 (the "Fourth Quarter 2001
Restructuring Plan") to rationalize the worldwide manufacturing
capacity, reduce selling, general and administrative positions on a
worldwide basis and to exit certain businesses. The total
restructuring charges in connection with these actions were $329
million.
Second Quarter and Third Quarter 2001 Restructuring Plan
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the second
and third quarters of 2001 and the remaining balance in the related
restructuring reserves at September 30, 2002:
(in millions)
Long-lived Exit
Number of Severance Inventory Assets Costs
Employees Reserve Reserve Reserve Reserve Total
--------- ------- ------- ------- ------- -----
Q2, 2001 charges 2,400 $ 127 $57 $ 112 $ 20 $ 316
Q3, 2001 charges 300 7 20 25 1 53
------ ----- --- ----- ---- -----
Subtotal 2,700 134 77 137 21 369
2001 reversal (275) (20) - - - (20)
2001 utilization (1,400) (40) (77) (137) (5) (259)
------ ----- --- ----- ---- -----
Balance at 12/31/01 1,025 74 - - 16 90
Q1, 2002 utilization (550) (23) - - (2) (25)
------ ----- --- ----- ---- -----
Balance at 3/31/02 475 51 - - 14 65
Q2, 2002 utilization (100) (11) - - (2) (13)
------ ----- --- ----- ---- -----
Balance at 6/30/02 375 40 - - 12 52
Q3, 2002 reversal (225) (14) - - (3) (17)
Q3, 2002 utilization (50) (7) - - - (7)
------ ----- --- ----- ---- -----
Balance at 9/30/02 100 $ 19 $ - $ - $ 9 $ 28
18
The total restructuring charge of $369 million for the nine months ended
September 30, 2001 was composed of severance, inventory writedowns, long-
lived asset impairments and exit costs of $134 million, $77 million,
$137 million and $21 million, respectively, with $271 million of those
charges reported in restructuring (credits) costs and other in the
accompanying consolidated statement of earnings. The balance of the
charge of $98 million, composed of $77 million for inventory writedowns
relating to the product discontinuances and $21 million relating to
accelerated depreciation on the long-lived assets accounted for under
the held for use model of SFAS No. 121, was reported in cost of goods
sold in the accompanying statement of earnings. The severance and exit
costs require the outlay of cash, while the inventory writedowns and
long-lived asset impairments represent non-cash items.
The severance charge related to the termination of 2,700 employees,
including 990 administrative, 800 manufacturing, 760 service and
photofinishing and 150 research and development positions. The
geographic composition of the employees terminated included 1,110 in the
United States and Canada and 1,590 throughout the rest of the world.
The charge for the long-lived asset impairments includes the writeoff of
$61 million relating to sensitizing manufacturing equipment, lab
equipment and leasehold improvements, and other assets that were
scrapped or abandoned immediately and accelerated depreciation of $33
million relating to sensitizing manufacturing equipment, lab equipment
and leasehold improvements, and other assets that were to be used until
their expected abandonment within the first three months of 2002. The
total amount for long-lived asset impairments also includes a charge of
$43 million for the writeoff of goodwill relating to the Company's
PictureVision subsidiary, the realization of which was determined to be
impaired as a result of the Company's acquisition of Ofoto in the second
quarter of 2001.
In the fourth quarter of 2001, the Company reversed $20 million of the
$134 million in severance charges as certain termination actions,
primarily those in the European, African and Middle Eastern Region
("EAMER") and Japan, will be completed at a total cost less than
originally estimated. This is the result of a lower actual severance
cost per employee as compared with the original amounts estimated and
275 fewer employees being terminated, including approximately 150
service and photofinishing, 100 administrative and 25 R&D.
In the third quarter of 2002, the Company reversed $14 million of the
original $134 million in severance charges due primarily to higher
rates of attrition than originally expected, lower utilization of
training and outplacement services by terminated employees than
originally expected and termination actions being completed at an
actual cost per employee that was lower than originally estimated. As
a result, approximately 225 fewer employees will be terminated,
including 100 service and photofinishing, 100 administrative and 25
R&D. Also in the third quarter of 2002, the Company reversed $3
million of exit costs as a result of negotiating lower contract
termination payments in connection with business or product line exits.
19
Fourth Quarter, 2001 Restructuring Plan
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the fourth
quarter of 2001 and the remaining balance in the related restructuring
reserves at September 30, 2002:
(in millions)
Long-lived Exit
Number of Severance Inventory Assets Costs
Employees Reserve Reserve Reserve Reserve Total
--------- ------- ------- ------- ------- -----
2001 charges 4,500 $ 217 $ 7 $ 78 $ 27 $ 329
2001 utilization (1,300) (16) (7) (78) - (101)
------ ----- --- ----- ---- -----
Balance at 12/31/01 3,200 201 - - 27 228
Q1, 2002 utilization (1,725) (32) - - - (32)
------ ----- --- ----- ---- -----
Balance at 3/31/02 1,475 169 - - 27 196
Q2, 2002 utilization (550) (43) - - (10) (53)
------ ----- --- ----- ---- -----
Balance at 6/30/02 925 126 - - 17 143
Q3, 2002 reversal (275) (12) - - - (12)
Q3, 2002 utilization (125) (37) - - - (37)
------ ----- --- ----- ---- -----
Balance at 9/30/02 525 77 $ - $ - $ 17 $ 94
The total restructuring charge of $329 million for the fourth quarter
of 2001 was composed of severance, inventory writedowns, long-lived
asset impairments and exit costs of $217 million, $7 million, $78
million and $27 million, respectively, with $308 million of those
charges reported in restructuring (credits) costs and other in the
accompanying consolidated statement of earnings. The balance of the
charge of $21 million, comprised of $7 million for inventory writedowns
relating to the product discontinuances and $14 million relating to
accelerated depreciation on the long-lived assets accounted for under
the held for use model of SFAS No. 121, was reported in cost of goods
sold in the accompanying statement of earnings. The severance and exit
costs require the outlay of cash, while the inventory writedowns and
long-lived asset impairments represent non-cash items.
The severance charge related to the termination of 4,500 employees,
including 1,650 manufacturing, 1,385 administrative, 1,190 service and
photofinishing and 275 research and development positions. The
geographic composition of the employees terminated included 3,190 in
the United States and Canada and 1,310 throughout the rest of the
world. The charge for the long-lived asset impairments includes the
writeoff of $22 million relating to the sensitizing manufacturing
equipment, lab equipment and leasehold improvements, and other assets
that were scrapped or abandoned immediately and accelerated
depreciation of $17 million relating to sensitizing manufacturing
assets, lab equipment and leasehold improvements, and other assets that
were to be used until their expected abandonment in the first three
months of 2002. The balance of the long-lived asset impairment charge
of $39 million includes charges of $30 million relating to the
Company's exit of three non-core businesses, and $9 million for the
writeoff of long-lived assets in connection with the reorganization of
certain of the Company's digital camera manufacturing operations.
20
In the third quarter of 2002, the Company reversed $12 million of the
$217 million in severance charges due primarily to higher rates of
attrition than originally expected, lower utilization of training and
outplacement services by terminated employees than originally expected
and termination actions being completed at an actual cost per employee
that was lower than originally estimated. As a result, approximately
275 fewer people will be terminated, including approximately 200
service and photofinishing, 50 manufacturing and 25 administrative.
The remaining actions to be taken by the Company in connection with the
Second and Third Quarter, 2001 and the Fourth Quarter, 2001
Restructuring Plans relate primarily to severance and exit costs. The
Company has approximately 625 positions remaining to be
eliminated as of September 30, 2002. These positions will be
eliminated as the Company completes the closure of photofinishing labs
in the U.S., and completes the planned downsizing of manufacturing
positions in the U.S. and administrative positions outside the U.S.
These positions are expected to be eliminated by the end of the fourth
quarter of 2002. Total employee terminations from the 2001
restructuring actions are now expected to be approximately 6,425. A
significant portion of the severance had not been paid as of September
30, 2002 since, in many instances, the terminated employees can elect
or are required to receive their severance payments over an extended
period of time. The Company expects the actions contemplated by the
reserve for exit costs to be completed by the end of the fourth
quarter of 2002. Most exit costs are expected to be paid during the
year following the date of the plan. However, certain costs, such as
long-term lease payments, will be paid over periods longer than one
year.
Third Quarter, 2002 Restructuring Plan
During the third quarter, the Company consolidated and reorganized its
photofinishing operations in Japan by closing 8 photofinishing
laboratories and transferring the remaining 7 laboratories to a joint
venture it entered into with an independent third party. Beginning in
the fourth quarter of 2002, the Company will outsource its
photofinishing operations to this joint venture. The restructuring
charge of $20 million relating to the Photography segment includes a
charge for termination-related benefits of approximately $14 million
relating to the elimination of approximately 100 positions, which were
not transferred to the joint venture, and other statutorily required
payments. The positions were eliminated as of September 30, 2002 and
the related payments will be made in the fourth quarter of 2002. The
remaining restructuring charge of $6 million represents the writedown
of long-lived assets held for sale to their fair values based on
independent valuations.
21
During the fourth quarter of 2002, the Company will finalize its plans
and begin to implement a series of cost reduction actions that will
reduce assets and employment. The Company anticipates taking total
restructuring charges in the range of $130 million to $170 million to
cover the costs associated with the actions, with approximately $120
million to $150 million of these estimated charges to be recorded in
the fourth quarter of 2002. Approximately one-half of these charges
will be non-cash. These actions contemplate the elimination of 1,300
to 1,700 positions, with approximately 1,000 of the reductions
occurring in the fourth quarter of 2002.
- -----------------------------------------------------------------------
NOTE 10: OTHER ASSET IMPAIRMENTS
In the second quarter of 2001, the Company recorded a $77 million
charge associated with the bankruptcy of the Wolf Camera Inc. consumer
retail business. This amount is reflected in restructuring (credits)
costs and other in the accompanying consolidated statement of earnings.
In the third quarter of 2001, the Company recorded a $42 million charge
representing the writeoff of certain lease residuals, receivables and
capital assets resulting primarily from technology changes in the
transition from optical to digital photofinishing equipment within the
Company's onsite photofinishing operations. The charges for the lease
residuals and capital assets totaling $19 million have been included in
cost of goods sold in the accompanying consolidated statement of
earnings. The remaining $23 million has been included in restructuring
(credits) costs and other in the accompanying consolidated statement of
earnings.
- -----------------------------------------------------------------------
NOTE 11: RETIREMENT PLANS
Plans within the United States
The Company evaluates its expected long-term rate of return on plan
asset ("EROA") assumption annually for the Kodak Retirement Income Plan
("KRIP"). To facilitate this evaluation, every two to three years, or
when market conditions change materially, the Company undertakes a new
asset liability study to reaffirm the current asset allocation and the
related EROA assumption. Wilshire Associates, a consulting firm,
completed a study in September 2002, which led to several asset
allocation shifts and a decrease in the expected long-term return on
assets from 9.5% to 9.0%. Accordingly, effective January 1, 2003, the
Company expects to change its EROA assumption for KRIP to 9.0%. The
KRIP remains overfunded as of September 30, 2002.
Additionally, as a result of the Wilshire study, KRIP will eliminate
its investments in specialty sector U.S. equities including its holding
of 7.4 million Kodak shares, which the Company contributed to KRIP
in November 1995. The Kodak shares represent the only material single-
stock investment in the KRIP portfolio. The Company has offered
to purchase the shares from the investment manager with the fiduciary
responsibility for the Kodak investment, and expects to complete the
purchase in the fourth quarter of 2002.
22
Plans outside the United States
In light of the continuing global decline in the equity markets in
2002, the Company is currently evaluating the various assumptions
associated with its plans outside the United States. This includes
analyzing the status of plan funding to determine whether or not the
Company will have any additional minimum pension liabilities, as
defined under SFAS No. 87, "Employers' Accounting for Pensions," for
which it would be required to take a charge to equity. In the event
that the outcome of such evaluation indicates that the Company has any
additional minimum pension liabilities, the Company could mitigate, if
not eliminate, the related charge to equity through a contribution to
the plans.
- -----------------------------------------------------------------------
NOTE 12: EARNINGS PER SHARE
Options to purchase 35.3 million and 41.9 million shares of common
stock at weighted average per share prices of $51.39 and $62.62 for the
three months ended September 30, 2002 and 2001, respectively, and
options to purchase 27.7 million and 42.2 million shares of common
stock at weighted average per share prices of $58.09 and $60.54 for the
nine months ended September 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.
Under the stock option exchange program that was disclosed in Note 18
of the Company's 2001 Annual Report on Form 10-K, the Company issued
15,936,621 new options on August 26, 2002 with an exercise price of
$31.30. As this exercise price was greater than the average market
price of the Company's stock for the three and nine months ended
September 30, 2002, the options were not included in the computation of
diluted earnings per share for those respective periods.
- -----------------------------------------------------------------------
NOTE 13: 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 September 30, 2002 and December 31, 2001. Treasury stock
at cost consists of approximately 100 million shares at both September
30, 2002 and December 31, 2001.
The Company's purchase of the Kodak stock within KRIP, as disclosed in
Note 11, will reduce the Company's outstanding shares by approximately
3%.
- -----------------------------------------------------------------------
23
NOTE 14: COMPREHENSIVE INCOME
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
Net income $334 $ 96 $657 $282
Unrealized holding gains
(losses)on marketable
securities 6 (2) 8 (14)
Unrealized gains
from hedging activity 6 0 0 26
Currency translation
adjustments (57) 83 72 (39)
---- ---- ---- ----
Total comprehensive income $289 $177 $737 $255
==== ==== ==== ====
- -----------------------------------------------------------------------
NOTE 15: 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 and nine months
ended September 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 and nine
months ended September 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.
24
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
Net sales:
Photography $2,409 $2,396 $6,601 $7,025
Health Imaging 565 545 1,655 1,692
Commercial Imaging 354 343 1,066 1,073
All Other 26 24 78 85
------ ------ ------ ------
Consolidated total $3,354 $3,308 $9,400 $9,875
====== ====== ====== ======
Earnings (loss) from
operations:
Photography $ 324 $ 223 $ 597 $ 727
Health Imaging 126 51 314 257
Commercial Imaging 39 39 133 129
All Other (8) (16) (21) (11)
------ ------ ------ ------
Total of segments 481 297 1,023 1,102
Venture investment
impairments (13) - (23) -
Restructuring credits (costs)
and asset impairments 9 (95) 9 (411)
Wolf charge - - - (77)
------ ------ ------ ------
Consolidated total $ 477 $ 202 $1,009 $ 614
====== ====== ====== ======
Net earnings (loss):
Photography $ 232 $ 145 $ 410 $ 499
Health Imaging 89 35 221 176
Commercial Imaging 21 17 66 66
All Other (9) (11) (19) (7)
------ ------ ------ ------
Total of segments 333 186 678 734
Venture investment
impairments (21) - (34) -
Restructuring credits (costs)
and asset impairments 9 (95) 9 (411)
Wolf charge - - - (77)
Interest expense (40) (52) (128) (171)
Other corporate items 4 1 9 5
Tax benefit - PictureVision
subsidiary closure - - 45 -
Tax benefit - Kodak Imagex
Japan 46 - 46 -
Income tax effects on
above items and taxes
not allocated to segments 3 56 32 202
------ ------ ------ ------
Consolidated total $ 334 $ 96 $ 657 $ 282
====== ====== ====== ======
25
NOTE 16: ACCOUNTING CHANGES
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, the results from operations for the three and nine
months ended September 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 a finding of 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 and nine months ended
September 30, 2001, as adjusted for the exclusion of amortization
expense, were as follows:
Three Months Ended Impact of
September 30, 2001 Exclusion of
------------------------ Goodwill
As Reported As Adjusted Amort. Expense
----------- ----------- --------------
Earnings before income
taxes (as originally
reported) $132 $132 $ -
Adjustment for the
exclusion of goodwill
amortization - 37 37
---- ---- ----
Earnings before income
taxes 132 169 37
Provision for income
taxes 36 42 6
---- ---- ----
Net income $ 96 $127 $ 31
==== ==== ====
Basic and diluted
earnings per share $.33 $.44 $.11
==== ==== ====
26
Nine Months Ended Impact of
September 30, 2001 Exclusion of
------------------------ Goodwill
As Reported As Adjusted Amort. Expense
----------- ----------- --------------
Earnings before income
taxes (as originally
reported) $441 $ 441 $ -
Adjustment for the
exclusion of goodwill
amortization - 116 116
---- ----- ----
Earnings before income
taxes 441 557 116
Provision for income
taxes 159 177 18
---- ----- ----
Net income $282 $ 380 $ 98
==== ===== ====
Basic and diluted
earnings per share $.97 $1.31 $.34
==== ===== ====
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 nine months ended
September 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.
27
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
(in millions, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- --------------------
2002 2001 Change 2002 2001 Change
Net sales $3,354 $3,308 + 1% $9,400 $9,875 - 5%
Earnings from operations 477 202 +136 1,009 614 + 64
Net earnings 334 96 +248 657 282 +133
Basic and diluted earnings
per share 1.15 .33 +248 2.25 .97 +132
The Company's Results of Operations for the Three and Nine Months Ended
September 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 results for the three and
nine months ended September 30, 2002 and 2001 have been reported in
accordance with the new operating structure.
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, net
earnings for the three and nine months ended September 30, 2002 of $334
million and $657 million, respectively, or $1.15 and $2.25 per basic
and diluted share, respectively, excludes amortization expense on
goodwill. Net earnings for the three and nine months ended September
30, 2001 of $96 million and $282 million, respectively, or $0.33 and
$0.97 per basic and diluted share, respectively, include amortization
expense on goodwill. On a pro forma basis, excluding amortization
expense on goodwill, net earnings for the three and nine months ended
September 30, 2001 were $127 and $380 million, respectively, or $0.44
and $1.31 per basic and diluted share, respectively.
28
Net Sales by Reportable Segment and All Other
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ----------------------
2002 2001 Change 2002 2001 Change
Photography
Inside the U.S. $1,051 $1,107 - 5% $2,933 $3,334 -12%
Outside the U.S. 1,358 1,289 + 5 3,668 3,691 - 1
------ ------ --- ------ ------ ---
Total Photography 2,409 2,396 + 1 6,601 7,025 - 6
------ ------ --- ------ ------ ---
Health Imaging
Inside the U.S. 273 267 + 2 791 818 - 3
Outside the U.S. 292 278 + 5 864 874 - 1
------ ------ --- ------ ------ ---
Total Health Imaging 565 545 + 4 1,655 1,692 - 2
------ ------ --- ------ ------ ---
Commercial Imaging
Inside the U.S. 200 193 + 4 593 605 - 2
Outside the U.S. 154 150 + 3 473 468 + 1
------ ------ --- ------ ------ ---
Total Commercial
Imaging 354 343 + 3 1,066 1,073 - 1
------ ------ --- ------ ------ ---
All Other
Inside the U.S. 13 15 -13 40 53 -25
Outside the U.S. 13 9 +44 38 32 +19
------ ------ --- ------ ------ ---
Total All Other 26 24 + 8 78 85 - 8
------ ------ --- ------ ------ ---
Total Net Sales $3,354 $3,308 + 1% $9,400 $9,875 - 5%
====== ====== === ====== ====== ===
29
Earnings (Loss) from Operations by Reportable Segment and All Other
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2002 2001 Change 2002 2001 Change
Photography $ 324 $223 + 45% $ 597 $ 727 -18%
Percent of Sales 13.4% 9.3% 9.0% 10.3%
Health Imaging $ 126 $ 51 +147% $ 314 $ 257 +22%
Percent of Sales 22.3% 9.4% 19.0% 15.2%
Commercial Imaging $ 39 $ 39 0% $ 133 $ 129 + 3%
Percent of Sales 11.0% 11.4% 12.5% 12.0%
All Other $ (8) $(16) + 50% $ (21) $ (11) -91%
Percent of Sales (30.8%) (66.7%) (26.9%) (12.9%)
------ ---- ---- ------ ------ ---
Total of segments $ 481 $297 + 62% $1,023 $1,102 - 7%
Percent of Sales 14.3% 9.0% 10.9% 11.2%
Venture investment
impairments (13) - (23) -
Restructuring credits
(costs) and asset
impairments 9 (95) 9 (411)
Wolf charge - - - (77)
------ ---- ---- ------ ----- ---
Consolidated total $ 477 $202 +136% $1,009 $ 614 +64%
====== ==== ==== ===== ===== ===
30
Net Earnings (Loss) by Reportable Segment and All Other
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ---------------------
2002 2001 Change 2002 2001 Change
Photography $ 232 $ 145 + 60% $ 410 $ 499 - 18%
Percent of Sales 9.6% 6.1% 6.2% 7.1%
Health Imaging $ 89 $ 35 +154% $ 221 $ 176 + 26%
Percent of Sales 15.8% 6.4% 13.4% 10.4%
Commercial Imaging $ 21 $ 17 + 24% $ 66 $ 66 0%
Percent of Sales 5.9% 5.0% 6.2% 6.2%
All Other $ (9) $ (11) + 18% $ (19) $ (7) -171%
Percent of Sales (34.6%) (45.8%) (24.4%) (8.2%)
------ ----- ---- ----- ----- ----
Total of segments $ 333 $ 186 + 79% $ 678 $ 734 - 8%
Percent of Sales 9.9% 5.6% 7.2% 7.4%
Venture investment
impairments (21) - (34) -
Restructuring credits
(costs) and asset
impairments 9 (95) 9 (411)
Wolf charge - - - (77)
Interest expense (40) (52) (128) (171)
Other corporate items 4 1 9 5
Tax benefit -
PictureVision
subsidiary closure - - 45 -
Tax benefit - Kodak
Imagex Japan 46 - 46 -
Income tax effects on
above items and taxes
not allocated to
segments 3 56 32 202
------ ----- ---- ----- ----- ----
Total Net Earnings $ 334 $ 96 +248% $ 657 $ 282 +133%
====== ===== ==== ===== ===== ====
- -----------------------------------------------------------------------
COSTS AND EXPENSES
(in millions)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2002 2001 Change 2002 2001 Change
Gross profit $1,288 $1,132 +14% $3,399 $3,537 - 4%
Percent of Sales 38.4% 34.2% 36.2% 35.8%
Selling, general and
administrative expenses $ 632 $ 661 - 4% $1,832 $1,864 - 2%
Percent of Sales 18.8% 20.0% 19.5% 18.9%
Research and development
costs $ 188 $ 197 - 5% $ 567 $ 572 - 1%
Percent of Sales 5.6% 6.0% 6.0% 5.8%
Goodwill amortization $ 0 37 $ 0 $ 116
Percent of Sales 1.1% 1.2%
- -----------------------------------------------------------------------
31
2002 COMPARED WITH 2001
Third Quarter
Consolidated
Net worldwide sales were $3.354 billion for the third quarter of 2002
as compared with $3.308 billion for the third quarter of 2001,
representing an increase of $46 million, or 1% as reported, or a
decrease of 1% excluding the positive impact of exchange. The increase
in sales was comprised of (1) an increase in volume of approximately
1.0 percentage point, driven primarily by volume increases in one-time-
use cameras and entertainment origination and print films, and (2)
favorable exchange, which increased sales by approximately 2.5
percentage points, partially offset by decreases attributable to
price/mix, which reduced third quarter sales by approximately 2.3
percentage points, primarily driven by consumer film and consumer
digital cameras.
Net sales in the U.S. were $1.537 billion for the third quarter of 2002
as compared with $1.582 billion for the third quarter of 2001,
representing a decrease of $45 million, or 3%. The Company's
operations outside the U.S. are reported in three regions: (1) the
Europe, Africa and Middle East region ("EAMER"), (2) the Asia Pacific
region and (3) the Canada and Latin America region. Net sales outside
the U.S. were $1.817 billion for the third quarter of 2002 as compared
with $1.726 billion for the third quarter 2001, representing an
increase of $91 million, or 5% as reported, or flat excluding the
positive impact of exchange.
Net sales in the EAMER region were $975 million for the third quarter
of 2002 as compared with $887 million for the third quarter of 2001,
representing an increase of 10% as reported, or 2% excluding the
positive impact of exchange.
Net sales in the Asia Pacific region were $557 million for the third
quarter of 2002 as compared with $535 million for the third quarter of
2001, representing an increase of 4% as reported, or 2% excluding the
positive impact of exchange.
Net sales in the Canada and Latin America region were $285 million in
the current year quarter as compared with $304 million in the prior
year quarter, representing a decrease of 6% as reported, with no impact
from exchange.
32
The Company's major emerging markets include Brazil, Mexico,
Russia, India, China, Korea, Hong Kong and Taiwan. Net sales in
emerging markets were $633 million for the third quarter of 2002 as
compared with $578 million for the third quarter of 2001, representing
an increase of 10% as reported, or 8% excluding the positive impact of
exchange. The emerging market portfolio accounted for approximately
19% of Kodak's worldwide sales and 35% of Kodak's non-U.S. sales in the
quarter. Sales growth in China and Russia of 40% and 37%,
respectively, was partially offset by declines in Brazil and
Mexico of 11% and 4%, respectively. The growth in China resulted from
strong business performance for health, entertainment and consumer
products and services. The increase in sales in Russia is due to
continued success in camera seeding programs there. The declines in
Brazil and Mexico are reflective of continued economic weakness in
those emerging market countries.
Gross profit was $1.288 billion for the third quarter of 2002 as
compared with $1.132 billion for the third quarter of 2001,
representing an increase of $156 million, or 14%. The gross profit
margin was 38.4% in the current year quarter as compared with 34.2% in
the prior year quarter. The increase was primarily attributable to (1)
manufacturing productivity/cost, which increased gross profit margins
by approximately 4.5 percentage points due to increased volumes,
reduced labor expense, favorable materials pricing and improved product
yields and (2) costs incurred in the prior year quarter in connection
with the Company's restructuring programs, which negatively impacted
third quarter 2001 gross profit margins by approximately 1.8 percentage
points. These increases were partially offset by product shifts,
primarily in the Photography segment, which reduced gross profit
margins by approximately 2.0 percentage points.
Selling, general and administrative expenses ("SG&A") were $632 million
for the third quarter of 2002 as compared with $661 million for the
third quarter of 2001, representing a decrease of $29 million, or 4%.
SG&A decreased as a percentage of sales from 20.0% for the third
quarter of 2001 to 18.8% for the third quarter of 2002. The decrease
in SG&A is primarily attributable to a decline in advertising of $8
million, which was primarily due to planned decreases in advertising
for non-media related spend, cost savings resulting from headcount
and other non-severance related components of the Company's
restructuring programs. These decreases were partially offset by
increases of $13 million from venture investment impairments,
$11 million from acquisitions in the Photography and Commercial
segments and $14 million due to unfavorable exchange.
Research and development costs ("R&D") for the third quarter 2002 were
$188 million as compared with $197 million for the third quarter of
2001, representing a decrease of $9 million, or 5%. R&D
decreased as a percentage of sales from 6.0% for the third quarter of
2001 to 5.6% for the current year quarter.
33
Earnings from operations for the third quarter of 2002 were $477
million as compared with $202 million for the third quarter of 2001,
representing an increase of $275 million, or 136%. The increase in
earnings from operations was primarily the result of (1) improved gross
profit margins, (2) a decrease in SG&A, (3) a decrease in R&D and (4)
the reversal of restructuring charges of $29 million relating to costs
originally recorded as part of the Company's 2001 restructuring
programs. These increases were partially offset by a restructuring
charge of $20 million recorded in the current quarter, which related to
the consolidation of the photofinishing operations in Japan.
During the third quarter of 2002, earnings from operations were
impacted by an adjustment of incentive compensation accrual rates,
which affect wage dividend and management compensation payouts. The
incentive compensation program is based on annual goals for economic
profit and revenue growth. Although the Company exceeded goals on
economic profit, lower than forecasted revenue led to the
determination that expected payouts will be lower than previously
targeted levels. As a result, the accruals for the first six months
of 2002 were adjusted by approximately $23 million and the new accrual
rate was reduced by approximately $12 million for the remainder of the
year, creating an accrual adjustment, that increased third quarter
earnings on a quarter sequential basis by approximately $35 million.
The quarter sequential impacts on gross profit, SG&A and
R&D were approximately $23 million, $6 million and $6 million,
respectively. Including the adjustment for incentive compensation in
the current year quarter, the incentive compensation accruals for the
third quarter of 2002 as compared with the third quarter of 2001 were
not materially different.
Interest expense for the third quarter of 2002 was $40 million as
compared with $52 million for the third quarter of 2001, representing a
decrease of $12 million, or 23%. The decrease in interest expense is
primarily attributable to lower average borrowing levels and lower
interest rates in the third 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 third quarter of 2002 were $21 million as compared with $18
million for the third quarter of 2001. The increase in other charges
is primarily attributable to increased losses from the equity in the
losses of the Company's joint venture investments and venture asset
impairments, partially offset by gains from property sales.
34
The Company's effective tax rate decreased from 27% for the third
quarter of 2001 to 20% for the third quarter of 2002. The effective
tax rate of 20% for the third quarter of 2002 is primarily attributable
to a $46 million tax benefit relating to the consolidation of the
Company's photofinishing operations in Japan and the loss realized from
the liquidation of a subsidiary as part of that consolidation. The
effective tax rate of 27% for the third quarter of 2001 is primarily
attributable to an $11 million tax benefit related to favorable tax
settlements. Excluding the $11 million tax benefit from the prior year
quarter provision and the $46 million tax benefit from the current
quarter 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 expected increased earnings from operations in certain
lower-taxed jurisdictions outside the U.S.
Net earnings for the third quarter of 2002 were $334 million, or $1.15
per basic and diluted share, as compared with net earnings for the
third quarter of 2001 of $96 million, or $.33 per basic and diluted
share, representing an increase of $238 million. The increase in net
earnings is primarily attributable to the reasons described above and
the elimination of goodwill amortization in 2002.
Photography
Net worldwide sales for the Photography segment were $2.409 billion for
the third quarter of 2002 as compared with $2.396 billion for the third
quarter of 2001, representing an increase of $13 million, or 1% as
reported, or a decrease of 2% excluding the positive impact of
exchange. The increase in sales was comprised of (1) an increase in
volume of approximately 1.2 percentage points and (2) favorable
exchange of 2.7 percentage points, partially offset by price/mix
declines of approximately 3.0 percentage points.
Photography segment net sales in the U.S. were $1.051 billion for the
third quarter of 2002 as compared with $1.107 billion for the third
quarter of 2001, representing a decrease of $56 million, or 5%.
Photography segment net sales outside the U.S. were $1.358 billion for
the third quarter of 2002 as compared with $1.289 billion for the third
quarter of 2001, representing an increase of $69 million, or 5%.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 1% in the third
quarter of 2002 as compared with the third quarter of 2001, reflecting
a 5% decline due to price/mix, partially offset by increases due to
exchange and volume of 3% and 1%, respectively. Sales of the Company's
consumer film products within the U.S. decreased 3% in the third
quarter of 2002 as compared with the prior year quarter, reflecting a
6% decline due to price/mix, partially offset by a 3% increase in
volume. Sales of the Company's consumer film products outside the U.S.
increased 1%, reflecting flat volumes and a 5% increase due to
exchange, partially offset by a 4% decline due to price/mix.
35
The U.S. film industry volume decreased 3% in the third quarter of 2002
as compared with the prior year quarter due to continuing economic
weakness. The Company's blended U.S. consumer film share increased on
a volume basis in the third quarter of 2002 relative to the prior year
quarter, 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 remained unchanged in the
third quarter of 2002 as compared with the third quarter of 2001,
reflecting declines due to volume and price/mix of 1% and 2%,
respectively, offset by an increase due to exchange of 3%. Net sales
of consumer color paper in the U.S. decreased 7% in the third quarter
of 2002 as compared with the prior year quarter, reflecting a 7%
decline due to decreases in volume and flat price/mix. Net sales of
consumer color paper outside of the U.S. increased 3%, reflecting
increases due to volume and exchange of 2% and 4%, respectively,
partially offset by a 3% decline due to price/mix.
Net worldwide photofinishing sales, including Qualex in the U.S. and
Consumer Imaging Services ("CIS") outside the U.S., increased 1% in the
third quarter of 2002 as compared with the third quarter of 2001,
reflecting favorable exchange, which was partially offset by lower
volumes. In the U.S., Qualex's processing volumes (wholesale and
on-site) decreased 11% in the third 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 third quarter of 2002 as compared
with the third quarter of 2001. Lower sales of Picture Maker kiosks
were partially offset by an increase in sales of consumer digital
services. Net worldwide sales of thermal media used in Picture Maker
kiosks increased 16% in the third quarter of 2002 as compared with the
prior year quarter.
The average penetration rate for the number of rolls scanned at
Qualex's wholesale labs averaged 8.1% for the third quarter of 2002,
reflecting an increase from the 7.0% rate in the second quarter of 2002
and the 5.8% rate in the third quarter of 2001. The growth was driven
by continued consumer acceptance of Picture CD and Retail.com. In
addition, the number of images scanned in the third quarter of 2002
increased 20% as compared with the third quarter of 2001.
36
Net worldwide sales of consumer digital cameras increased 12% in the
third quarter of 2002 as compared with the third quarter of 2001,
reflecting an increase in volume and favorable exchange, partially
offset by a decline in price. While industry supply for CCD sensors
remains somewhat constrained, the Company is favorably positioned
and has adequate product supply for the important fourth quarter
selling season.
Consumer digital camera market share declined modestly during the third
quarter of 2002 on a quarter sequential basis, due to a combination of
end-of-life product transition to new EasyShare camera models and
component supply challenges in the quarter, both of which constrained
the number of cameras available for sale.
Net worldwide sales of inkjet photo paper increased 25% in the third
quarter of 2002 as compared with the third quarter of 2001. The
Company maintained its top two market share position in the United
States quarter sequentially. The double-digit revenue growth and the
maintenance of market share are primarily attributable to strong
underlying market growth, continued promotional activity at key
accounts and continued increases in merchandising efforts.
The Company's Ofoto business more than doubled its sales in the third
quarter of 2002 as compared with the prior year quarter and is on plan
to more than double full year 2001 revenues in 2002. Ofoto now has 5
million members and is consistently achieving a repeat customer
purchase rate of greater than 50%.
Net worldwide sales of professional sensitized products, including
color negative, color reversal and commercial black and white films and
sensitized paper, decreased 11% in the third quarter of 2002 as
compared with the third quarter of 2001, reflecting primarily a decline
in volume. Excluding the favorable impact of exchange, net worldwide
sales of professional sensitized products declined 13%. Overall sales
declines were primarily the result of ongoing digital substitution and
continued economic weakness in markets worldwide.
Net worldwide sales of origination and print film to the entertainment
industry increased 19% in the third quarter of 2002 as compared with
the third quarter of 2001, reflecting primarily higher volumes
resulting from increased television and feature film production.
Gross profit for the Photography segment was $931 million for the third
quarter of 2002 as compared with $895 million for the third quarter of
2001, representing an increase of $36 million or 4%. The gross profit
margin was 38.7% in the current year quarter as compared with 37.4% in
the prior year quarter. The 1.3 percentage point increase was
primarily attributable to an increase in manufacturing productivity
that favorably impacted gross profit margins by approximately 4.0
percentage points from the prior year quarter, partially offset by a
decline in price/mix from the prior year quarter that reduced gross
profit margins by approximately 2.7 percentage points.
37
SG&A expenses for the Photography segment decreased $27 million, or 5%,
from $509 million in the third quarter of 2001 to $482 million in the
third quarter of 2002. As a percentage of sales, SG&A expense decreased
from 21.2% in the third quarter of 2001 to 20.0% in the current year
quarter. The decrease in SG&A is primarily attributable to planned
decreases in advertising relating to non-media spend, which accounted
for approximately $9 million of the decrease in SG&A expenses and cost
savings due to headcount and other non-severance related components
of the Company's restructuring programs, partially offset by an
increase of $5 million from Consumer Imaging Services photofinishing
acquisitions in Europe and an increase of $11 million due to
unfavorable exchange.
R&D costs for the Photography segment decreased $11 million, or 8%,
from $136 million in the third quarter of 2001 to $125 million in the
third quarter of 2002. As a percentage of sales, R&D costs decreased
from 5.7% in the prior year quarter to 5.2% in the third quarter of
2002. The decrease in cost is primarily attributable to cost savings
due to headcount and other non-severance related components of the
Company's restructuring programs.
Earnings from operations for the Photography segment increased $101
million, or 45%, from $223 million in the third quarter of 2001 to $324
million in the third quarter of 2002, for the reasons described above
and the elimination of goodwill amortization in 2002, which was $27
million in the third quarter of 2001.
Health Imaging
Net worldwide sales for the Health Imaging segment were $565 million
for the third quarter of 2002 as compared with $545 million for the
third quarter of 2001, representing an increase of $20 million, or 4%
as reported, or 1% excluding the favorable impact of exchange. The
increase in sales was comprised of (1) an increase in volume of
approximately 2.2 percentage points, primarily due to digital media,
analog medical film and equipment services and (2) an increase from
favorable exchange of approximately 2.4 percentage points, partially
offset by a decrease in price/mix of approximately 1.0 percentage
point, primarily driven by digital media and analog medical film.
Net sales in the U.S. were $273 million for the current year quarter as
compared with $267 million for the prior year quarter, representing an
increase of $6 million, or 2%. Net sales outside the U.S. were $292
million for the third quarter of 2002 as compared with $278 million for
the third quarter of 2001, representing an increase of $14 million, or
5% as reported, or 1% excluding the favorable impact of exchange.
38
Net worldwide sales of digital products, which include laser printers
(DryView imagers and wet laser printers), digital media (DryView and
wet laser media), digital capture equipment (computed radiography
capture equipment and digital radiography equipment), services
and Picture Archiving and Communications Systems ("PACS"), increased 6%
in the third quarter of 2002 as compared with the third quarter of
2001. The increase in digital product sales was primarily attributable
to higher volumes of digital media, service, digital capture and PACS.
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. Digital capture and PACS volume
increased as the market for these products continues to grow.
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, increased 1% in the third quarter of
2002 as compared with the third quarter of 2001. Analog film products
(excluding specialty films) decreased 1% in the current year quarter as
compared with the prior year quarter, reflecting declines due to
price/mix, partially offset by higher volume. Higher volumes in the
Greater Asia and EAMER regions drove the overall growth in traditional
film. Traditional product volumes in the U.S. were flat, but continued
to show year-over-year growth in sales to customers, who are members in
the Novation Group Purchasing Organization ("Novation GPO").
Mammography and Oncology sales increased 14% in the third quarter of
2002 compared with the third quarter of 2001, reflecting higher volumes
partially offset by declines in price.
Gross profit for the Health Imaging segment was $246 million for the
third quarter of 2002 as compared with $189 million in the third
quarter of 2001, representing an increase of $57 million, or 30%. The
gross profit margin was 43.5% in the current quarter as compared with
34.6% in the prior year quarter. The increase in the gross profit
margin of 8.9 percentage points was principally attributable to (1)
favorable cost and manufacturing productivity, which increased gross
margin by approximately 8.0 percentage points, primarily due to
favorable media and equipment manufacturing productivity led by DryView
digital media, analog medical film, laser imaging equipment and PACS,
complemented by lower service costs and improved supply chain
management and (2) price/mix, which increased gross profit by
approximately 1.0 percentage point due to favorable mix from the
growth of DryView laser media and digital services, partially offset
by declining digital laser media and analog medical film prices outside
the U.S.
The Company substantially completed the conversions of customers to the
Novation GPO in the second and third quarters of 2001, and, therefore,
the Company does not anticipate that this arrangement will have any
additional significant potential impact on gross profit trends in the
future as was experienced in 2001.
SG&A expenses for the Health Imaging segment decreased $8 million, or
9%, from $90 million for the third quarter of 2001 to $82 million for
the second quarter of 2002. As a percentage of sales, SG&A expenses
decreased from 16.5% for the prior year quarter to 14.6% for the
current year quarter. The decrease in SG&A expenses is primarily
attributable to expense management.
39
R&D costs decreased 8% from $40 million for the third quarter of 2001
to $37 million for the third quarter of 2002. As a percentage of
sales, R&D costs decreased from 7.5% for the third quarter of 2001 to
6.6% for the third quarter of 2002.
Earnings from operations for the Health Imaging segment increased $75
million, or 147%, from $51 million for the third quarter of 2001 to
$126 million for the third 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 and R&D expenses and the elimination of
goodwill amortization in 2002, which was $6 million in the third
quarter of 2001.
Commercial Imaging
Net worldwide sales for the Commercial Imaging segment were $354
million for the third quarter of 2002 as compared with $343 million,
representing an increase of $11 million, or 3% as reported, or 2%
excluding the favorable impact of exchange, which was driven by the
Encad acquisition, an increase of 1.0 percentage point due to
price/mix and an increase of 1.5 percentage points due to exchange.
Net sales in the U.S. were $200 million for the current year quarter as
compared with $193 million for the prior year quarter, representing an
increase of $7 million, or 4%. Net sales outside the U.S. were $154
million in the third quarter of 2002 as compared with $150 million for
the prior year quarter, or an increase of 3% as reported, unchanged
excluding the 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 12% in the third
quarter of 2002 as compared with the third 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
other charges during the third quarter of 2002, which were not material
to the Company's results from operations.
NexPress, the unconsolidated joint venture between Kodak and Heidelberg
in which the Company has a 50% ownership interest, has taken orders for
approximately 200 units through September 2002, with average monthly
page volumes for these units running higher than planned.
Gross profit for the Commercial Imaging segment was $107 million for
the third quarter of 2002 as compared with $110 million in the third
quarter of 2001, representing a decrease of $3 million, or 3%. The
gross profit margin was 30.3% in the current quarter as compared with
32.0% in the prior year quarter. The decrease in the gross profit
margin of 1.7 percentage points was primarily attributable to price/mix
impacts, which reduced gross profit margins by approximately 3.0
percentage points, partially offset by manufacturing productivity/cost
improvements, which increased gross profit margins by 1.4 percentage
points.
40
SG&A expenses for the Commercial Imaging segment decreased $3 million,
or 7%, from $53 million for the third quarter of 2001 to $50 million
for the third quarter of 2002. As a percentage of sales, SG&A expenses
decreased from 15.6% for the prior year quarter to 14.1% for the
current year quarter. The primary contributors to the decrease in SG&A
expenses for the third quarter 2002 were cost reductions in the quarter
that were partially offset by the Encad acquisition, which increased
SG&A by $6 million.
R&D costs for the Commercial Imaging segment increased from $13 million
for the third quarter of 2001 to $18 million for the third quarter of
2002. As a percentage of sales, R&D costs increased from 3.9% for the
third quarter of 2001 to 5.2% for the third quarter of 2002.
Earnings from operations for the Commercial Imaging segment remained
unchanged at $39 million including the elimination of goodwill
amortization in 2002, which was $4 million in the third quarter of
2001.
All Other
Net worldwide sales for All Other were $26 million for the third
quarter of 2002 as compared with $24 million for the third quarter of
2001, representing an increase of $2 million, or 8%. Net sales in the
U.S. were $13 million in the current year quarter as compared with $15
million for the prior year quarter, representing a decrease of $2
million, or 13%. Net sales outside the U.S. were $13 million in the
third quarter of 2002 as compared with $9 million in the prior year
quarter, representing an increase of $4 million, or 44%.
SK Display Corporation, the OLED manufacturing joint venture between
Kodak and Sanyo, continued production scale-up with the goal of
supplying production quantity OLED screens to the marketplace in 2003.
The loss from operations for All Other was $8 million in the third
quarter of 2002 as compared with the loss from operations of $16
million in the third quarter of 2001.
41
Year to Date
Consolidated
Net worldwide sales were $9.400 billion for the nine months ended
September 30, 2002 as compared with $9.875 billion for the nine months
ended September 30, 2001, representing a decrease of $475 million, or
5% as reported, with no impact from exchange. Declines in volume
accounted for approximately 2.7 percentage points of the sales
decrease, driven primarily by volume decreases in traditional film and
Qualex processing. Declines in price/mix reduced sales for the current
nine month period by approximately 2.7 percentage points, driven
primarily by traditional consumer film products and health film and
laser imaging systems.
Net sales in the U.S. were $4.357 billion for the current year period
as compared with $4.810 billion for the prior year period, representing
a decrease of $453 million, or 9%. Net sales outside the U.S. were
$5.043 billion for the current year period as compared with $5.065
billion for the prior year period, representing a decrease of $22
million as reported, or a decrease of 1% excluding the favorable impact
of exchange.
Net sales in the EAMER region for the first nine months of 2002 were
$2.627 billion as compared with $2.561 billion for the first nine months
of 2001, representing an increase of 3% as reported, or no change
excluding the favorable impact of exchange.
Net sales in the Asia Pacific region for the first nine months of 2002
were $1.619 billion as compared with $1.635 billion for the first nine
months of 2001, representing a decrease of 1% as reported, or no change
excluding the negative impact of exchange.
Net sales in the Canada and Latin America region for the first nine
months of 2002 were $797 million as compared with $869 million for the
first nine months of 2001, representing a decrease of 8% as reported,
or 7% excluding the negative impact of exchange.
Net sales for all Emerging Market countries were $1.782 billion for the
nine months ended September 30, 2002 as compared with $1.753 billion
for the nine months ended September 30, 2001, representing an increase
of $29 million, or 2%. Sales growth in China and Russia of 22% and
17%, respectively, were the primary drivers of the increase in sales in
Emerging Market countries, partially offset by decreased sales in
Argentina, Brazil and Mexico of 56%, 6% and 6%, respectively. The
sales growth in Russia is a result of continued success in camera
seeding programs there. Sales growth in China resulted from strong
business performance for health, entertainment and consumer products
and services. The sales declines in Argentina, Brazil and Mexico are
reflective of the continued economic weakness currently being
experienced by many Latin American emerging market countries. The
emerging market portfolio accounted for approximately 19% and 35% of
the Company's worldwide and non-U.S. sales, respectively, in the
current nine month period.
42
Gross profit was $3.399 billion for the nine months ended September 30,
2002 as compared with $3.537 billion for the nine months ended
September 30, 2001, representing a decrease of $138 million, or 4%.
The gross profit margin was 36.2% in the current year period as
compared with 35.8% in the prior year period. The increase of 0.4
percentage points was primarily attributable to manufacturing
productivity/cost, which favorably impacted gross profit margins by
approximately 1.6 percentage points year-over-year due to reduced
labor expense, favorable materials pricing and improved product yields.
This increase was also attributable to costs associated with
restructuring and the exit of an equipment manufacturing facility
incurred in the first nine months of 2001 but not in the current year
nine month period, which negatively impacted gross profit margins for
the first nine months of 2001 by approximately 1.4 percentage points.
The positive impacts to gross profit were partially offset by
year-over-year price/mix declines, which reduced gross profit margins
by approximately 2.5 percentage points. The price/mix decreases were
primarily related to declining prices on consumer film, health laser
imaging systems and consumer color paper, and product shifts primarily
in the Photography segment.
SG&A expenses were $1.832 billion for the nine months ended September
30, 2002 as compared with $1.864 billion for the nine months ended
September 30, 2001, representing a decrease of $32 million, or 2%.
SG&A increased as a percentage of sales from 18.9% for the prior year
period to 19.5% for the current year period. The net decrease in SG&A
is primarily attributable to the cost savings from the headcount and
other non-severance related components of the Company's restructuring
programs, plus a $10 million decline in advertising costs related to
planned decreases in advertising for non-media related spend, offset
by acquisitions in the Photography and Commercial segments, strategic
venture asset impairments of $23 million and the impact of unfavorable
exchange, which increased SG&A expense by $8 million.
R&D costs remained relatively flat at $567 million for the nine months
ended September 30, 2002 as compared with $572 million for the nine
months ended September 30, 2001, representing a decrease of $5 million,
or 1%. R&D increased slightly as a percentage of sales from 5.8% for
the prior year period to 6.0% for the current year period.
Earnings from operations for the nine months ended September 30, 2002
were $1.009 billion as compared with $614 million for the nine months
ended September 30, 2001, representing an increase of $395 million, or
64%. The increase in earnings from operations was primarily the result
of $506 million of restructuring costs, other non-recurring items and
costs associated with the exit of an equipment manufacturing facility
in the first nine months of 2001 and lower overall spending. The
increase in earnings from operations resulting from these cost
reduction measures was partially offset by strategic venture asset
impairments of $23 million and a decrease in gross profit margins
measured on an operational basis, or excluding the impact of
restructuring, in the current year period as a result of continued
economic weakness in markets worldwide. 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 nine months of 2001 of $614 million included goodwill
amortization expense of $116 million.
43
Interest expense for the nine months ended September 30, 2002 was $128
million as compared with $171 million for the nine months ended
September 30, 2001, representing a decrease of $43 million, or 25%.
The decrease in interest expense is primarily attributable to lower
average borrowing levels and lower interest rates in the first nine
months of 2002 relative to the first nine months of 2001. Other
charges for the current year period were a net charge of $74 million
as compared with a net charge of $2 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 nine months of 2001,
increased losses in the first nine months 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,
non-strategic venture investment impairments in the first nine months
of 2002, losses in the first nine months of 2002 related to
minority interests and an increase in foreign exchange losses in the
current year period. This activity was partially offset by a gain
recognized on the sale of assets in the current quarter.
The Company's effective tax rate decreased from 36% for the nine months
ended September 30, 2001 to 19% for the nine months ended September
30, 2002. The effective tax rate of 19% for the current year period
is primarily attributable to (1) a $45 million tax benefit recorded in
the second quarter of 2002 in connection with the closure of the
Company's PictureVision subsidiary and (2) a $46 million tax benefit
recorded in the third quarter relating to the consolidation of the
Company's photofinishing operations in Japan and the loss realized from
the liquidation of a subsidiary as part of that consolidation. The
effective tax rate of 36% for the prior year period is primarily
attributable to a reduction in tax benefits from certain restructuring
costs incurred in the second and third quarters of 2001, which do not
provide a tax benefit to the Company, partially offset by favorable tax
settlements of $11 million reported in the third quarter of 2001.
Excluding the impacts of restructuring and the favorable tax
settlements from the 2001 year-to-date provision and excluding the
tax benefits from the closure of the Company's PictureVision subsidiary
and the consolidation of the Company's photofinishing operations in
Japan from the 2002 year-to-date provision, the effective tax rate
decreased from 33% for the nine months ended September 30, 2001 to 29%
for the nine months ended September 30, 2002. The lower effective tax
rate for the current year period is primarily attributable to the tax
effect from the elimination of goodwill amortization and expected
increased earnings from operations in certain lower-taxed jurisdictions
outside the U.S.
Net earnings for the nine months ended September 30, 2002 were $657
million, or $2.25 per basic and diluted share, as compared with net
earnings for the nine months ended September 30, 2001 of $282 million,
or $.97 per basic and diluted share, representing an increase of $375
million, or 133%. The increase in net earnings is primarily
attributable to the reasons outlined above and the elimination of
goodwill amortization in 2002.
44
Photography
Net worldwide sales for the Photography segment were $6.601 billion for
the nine months ended September 30, 2002 as compared with $7.025
billion for the nine months ended September 30, 2001, representing a
decrease of $424 million, or 6% as reported, or 7% excluding the
positive impact of exchange. Approximately 3.4 percentage points of
the decrease was attributable to declines in volume, driven primarily
by volume decreases in traditional film and Qualex processing.
Declines in price/mix reduced sales for the current nine month period
by approximately 3.3 percentage points, driven primarily by consumer
film products. Favorable exchange of 0.7 percentage points partially
offset the negative impact of price/mix.
Photography segment net sales in the U.S. were $2.933 billion for the
current year period as compared with $3.334 billion for the prior year
period, representing a decrease of $401 million, or 12%. Photography
segment net sales outside the U.S. were $3.668 billion for the current
year period as compared with $3.691 billion for the prior year period,
representing a decrease of $23 million, or 1% as reported, or 2%
excluding the positive impact of exchange.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 8% in the nine months
ended September 30, 2002 as compared with the nine months ended
September 30, 2001, reflecting declines due to lower volumes of 4% and
negative price/mix of 5%, partially offset by the 1% favorable impact
of exchange. Sales of the Company's consumer film products within the
U.S. decreased 15% in the current year period as compared with the
prior year period, reflecting declines due to lower volumes of 10% and
negative price/mix of 5%. The lower film product sales are
attributable to a declining industry demand driven by a weak economy.
Sales of the Company's consumer film products outside the U.S.
decreased 2%, reflecting negative price/mix of 4%, partially offset by
the 2% favorable impact of exchange.
The U.S. film industry volume decreased approximately 3% in the nine
month period ended September 30, 2002 as compared with the nine month
period ended September 30, 2001 due to continuing economic weakness.
The Company's blended U.S. consumer film share was down 2.1 percentage
points on a volume basis in the first nine months of 2002 relative to
the first nine months of 2001, while the Company's quarterly market
share improved against the second 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 4% in the nine
month period ended September 30, 2002 as compared with the nine month
period ended September 30, 2001, reflecting declines due to volume and
price/mix of 2% and 3%, respectively, partially offset by 1% favorable
impact of exchange. Net sales of consumer color paper in the U.S.
decreased 8% in the current year period as compared with the prior year
period, driven entirely by lower volumes. Net sales of consumer color
paper outside of the U.S. decreased 1%, reflecting a 4% decline related
to negative price/mix, partially offset by a 2% increase in volume and
1% favorable impact of exchange.
45
Net worldwide photofinishing sales, including Qualex in the U.S. and
Consumer Imaging Services ("CIS") outside the U.S., decreased 3% in the
nine month period ended September 30, 2002 as compared with the nine
month period ended September 30, 2001, 4% of which was attributable to
lower volumes, partially offset by 1% favorable impact of exchange. In
the U.S., Qualex's processing volumes (wholesale and on-site) decreased
approximately 13% in the first nine months of 2002 as compared with the
first nine months 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 3% in the nine month period ended September 30, 2002 as
compared with the nine month period ended September 30, 2001, primarily
due to the lower sales of Picture Maker kiosks. 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 16% 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 7.4% for the nine month period ended
September 30, 2002, reflecting an increase from the 4.9% rate in the
nine month period ended September 30, 2001. The growth was driven by
continued consumer acceptance of Picture CD and Retail.com. During the
first nine months of 2002, Shoppers Drug Mart, Safeway, Target and
Albertson's stores were added as new Retail.com customers. In
addition, the number of images scanned in the current year period
increased 26% as compared with the prior year period.
Net worldwide sales of consumer digital cameras decreased 1% in the
nine month period ended September 30, 2002 as compared with the nine
month period ended September 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. However, the Company is now
favorably positioned and has adequate product supply for the important
fourth quarter selling season.
Consumer digital camera market share declined modestly during the first
nine months of 2002 as compared with the first nine months of 2001 due
to a combination of end-of-life product transitions to new EasyShare
camera models, and component supply challenges, both of which
constrained the number of cameras available for sale.
46
Net worldwide sales of inkjet photo paper increased 35% in the nine
month period ended September 30, 2002 as compared with the nine month
period ended September 30, 2001, primarily due to higher volumes.
The double-digit revenue growth and the maintenance of market share
are primarily attributable to strong underlying market growth,
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 14% in the nine month period ended
September 30, 2002 as compared with the nine month period ended
September 30, 2001, reflecting primarily a decline in volume, with no
impact from exchange. Overall sales declines were primarily the result
of ongoing digital substitution and continued economic weakness in
markets worldwide.
Net worldwide sales of origination and print film to the entertainment
industry decreased 4% in the nine month period ended September 30, 2002
as compared with the nine month period ended September 30, 2001,
reflecting declines primarily due to lower volumes. The decrease in
volumes of net worldwide film sales was primarily attributable to
strong sales in the U.S. for the nine month period ended September 30,
2001 due to the entertainment industry strike threats which caused the
industry to pull the majority of their production forward to the first
six months of the prior year, coupled with the effect of a depressed
economy which slowed the demand for film to be used for advertising
purposes.
Gross profit for the Photography segment was $2.377 billion for the
nine month period ended September 30, 2002 as compared with $2.629
billion for the nine month period ended September 30, 2001,
representing a decrease of $252 million or 10%. The gross profit
margin was 36.0% in the current year period as compared with 37.4% in
the prior year period. The 1.4 percentage point decrease was primarily
attributable to decreases in price/mix that impacted gross profit
margins by approximately 2.9 percentage points, partially offset by an
increase in productivity/cost that impacted gross margins by 1.5
percentage points.
SG&A expenses for the Photography segment were $1.395 billion for
the nine month period ended September 30, 2002 as compared with $1.421
billion for the nine month period ended September 30, 2001,
representing a decrease of $26 million or 2%. As a percentage of
sales, SG&A expense increased from 20.2% in the prior year period to
21.1% in the current year period. The net decrease in SG&A is
primarily attributable to the cost savings from the headcount and
other non-severance related components of the Company's restructuring
programs and reductions in advertising costs related to planned
decreases in advertising for non-media related spend, partially offset
by increases in SG&A expense related to CIS photofinishing
acquisitions in Europe and the impact of unfavorable exchange, which
increased SG&A expense by $7 million.
47
R&D costs for the Photography segment decreased $10 million or 3% from
$396 million in the nine month period ended September 30, 2001 to $386
million in the nine month period ended September 30, 2002. As a
percentage of sales, R&D costs increased from 5.6% in the prior year
period to 5.8% in the current year period.
Earnings from operations for the Photography segment decreased $130
million, or 18%, from $727 million in the nine month period ended
September 30, 2001 to $597 million in the nine month period ended
September 30, 2002, reflecting the combined effects of lower sales and
a lower gross profit margin, partially offset by SG&A and R&D cost
reductions and the elimination of goodwill amortization in 2002, which
was $85 million in the first nine months of 2001.
Health Imaging
Net worldwide sales for the Health Imaging segment were $1.655 billion
for the nine month period ended September 30, 2002 as compared with
$1.692 billion for the nine month period ended September 30, 2001,
representing a decrease of $37 million, or 2% as reported, with no
impact from exchange. The decrease in sales was attributable to
declines in price/mix of approximately 2.5 percentage points related to
the health laser imaging systems and analog medical film, partially
offset by slight increases related to volumes and favorable exchange.
Net sales in the U.S. were $791 million for the current year period as
compared with $818 million for the prior year period, representing a
decrease of $27 million, or 3%. Net sales outside the U.S. were $864
million for the first nine months of 2002 as compared with $874 million
for the first nine months of 2001, representing a decrease of $10
million, or 1% as reported, or 2% excluding the positive impact of
exchange.
Net worldwide sales of digital products, which include laser printers
(DryView imagers and wet laser printers), digital media (DryView and
wet laser media), digital capture equipment (computed radiography
capture equipment and digital radiography equipment), services
and Picture Archiving and Communications Systems ("PACS"), increased 2%
in the nine month period ended September 30, 2002 as compared with the
nine month period ended September 30, 2001. The increase in digital
product sales was primarily attributable to higher digital media,
service, digital capture and PACS volumes as the market for these
products continues to grow. Service revenues increased in the current
year period as compared with the prior year period due to an increase
in digital equipment service contracts during the first nine months of
2002.
48
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, decreased 6% in the nine month
period ended September 30, 2002 as compared with the nine month period
ended September 30, 2001. Analog film products (excluding specialty
films) decreased 8% in the first nine months of 2002 as compared with
the first nine months of 2001, reflecting declines due to volume and
price/mix. 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 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
increased 4% in the current year period as compared with the prior year
period, reflecting higher volumes partially offset by decreases in
price.
Gross profit for the Health Imaging segment was $677 million for the
nine month period ended September 30, 2002 as compared with $666
million for the nine month period ended September 30, 2001,
representing an increase of $11 million, or 2%. The gross profit
margin was 40.9% in the first nine months of 2002 as compared with
39.4% in the first nine months of 2001. The 1.5 percentage point
increase was attributable to productivity/cost improvements, which
increased gross profit margins by 2.9 percentage points due to
favorable media and equipment manufacturing productivity led by DryView
digital media, analog medical film, laser imaging equipment, and PACS,
which was complemented by lower service costs and improved supply chain
management. The positive effects of productivity/cost on gross profit
margins was partially offset by a decrease in price/mix that impacted
margins by approximately 1.5 percentage points due to declining digital
laser media and analog medical film prices outside the U.S.
The Company substantially completed the conversion of customers to the
Novation GPO in the second and third quarters of 2001 and, therefore,
the Company does not anticipate that this arrangement will have any
additional significant potential impacts on gross profit trends in the
future as was experienced in 2001.
SG&A expenses for the Health Imaging segment decreased $22 million, or
8%, from $275 million for the nine month period ended September 30,
2001 to $253 million for the nine month period ended September 30,
2002. As a percentage of sales, SG&A expenses decreased from 16.3% for
the first nine months of 2001 to 15.3% for the first nine months of
2002. The decrease in SG&A expenses is primarily a result of cost
reduction activities and expense management.
R&D costs for the Health Imaging segment decreased $3 million, or 3%,
from $114 million for the first nine months of 2001 to $111 million for
the first nine months of 2002. As a percentage of sales, R&D costs
remained constant at 6.7% for both periods.
49
Earnings from operations for the Health Imaging segment increased $57
million, or 22%, from $257 million for the nine month period ended
September 30, 2001 to $314 million for the nine month period ended
September 30, 2002. The increase in earnings from operations and the
resulting operational earnings margin are primarily attributable to
the combined effects of improvements in gross profit margins, lower
SG&A and R&D expenses, and the elimination of goodwill amortization
in 2002, which was $20 million in the first nine months of 2001.
Commercial Imaging
Net worldwide sales for the Commercial Imaging segment were $1.066
billion for the nine month period ended September 30, 2002 as compared
with $1.073 billion for the nine month period ended September 30, 2001,
representing a decrease of $7 million, or 1%, with no impact from
exchange. The decrease in sales was attributable to a decline in
volumes of approximately 2 percentage points related to graphic arts
products and Imagelink products, partially offset by increases related
to price/mix, which had a favorable impact on margins of approximately
0.7 percentage points.
Net sales in the U.S. were $593 million for the first nine months of
2002 as compared with $605 million for the first nine months of 2001,
representing a decrease of $12 million, or 2%. Net sales outside the
U.S. were $473 million in the current year period as compared with $468
million in the prior year period, representing an increase of $5
million, or 1%, or no change excluding the favorable impact of
exchange.
Net worldwide sales of graphic arts products to Kodak Polychrome
Graphics ("KPG"), an unconsolidated joint venture affiliate in which
the Company has a 50% ownership interest, decreased 10% in the nine
month period ended September 30, 2002 as compared with the nine month
period ended September 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 other charges during
the first nine months of 2002, which were not material to the Company's
results from operations.
50
Gross profit for the Commercial Imaging segment was $328 million for
the nine month period ended September 30, 2002 as compared with $338
million for the nine month period ended September 30, 2001,
representing a decrease of $10 million, or 3%. The gross profit margin
was 30.8% for the first nine months of 2002 as compared with 31.5% for
the first nine months of 2001. The decrease in the gross profit margin
of 0.7 percentage points was primarily attributable to declines related
to price/mix, which reduced margins by approximately 1.8 percentage
points, partially offset by productivity/cost improvements which
increased margins by 1.0 percentage point.
SG&A expenses for the Commercial Imaging segment decreased $6 million,
or 4%, from $155 million for the nine month period ended September 30,
2001 to $149 million for the nine month period ended September 30,
2002. As a percentage of sales, SG&A expenses decreased slightly from
14.4% for the first nine months of 2001 to 14.0% for the first nine
months of 2002. The primary contributors to the decrease in SG&A
expenses were cost reductions from the prior year restructuring actions
which had a larger impact on the results of the first nine months of
2002 as compared with the first nine months of 2001, partially offset
by the acquisition of Encad in the third quarter of 2002, which
increased SG&A by $16 million.
R&D costs for the Commercial Imaging segment increased $4 million, or
10%, from $42 million for the first nine months of 2001 to $46 million
for the first nine months of 2002. As a percentage of sales, R&D costs
increased from 3.9% for the prior year period to 4.3% for the current
year period.
Earnings from operations for the Commercial Imaging segment increased
$4 million, or 3%, from $129 million in the nine month period ended
September 30, 2001 to $133 million in the nine month period ended
September 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 $11 million in
the first nine months of 2001, partially offset by a decrease in sales
and a lower gross profit margin.
All Other
Net worldwide sales for All Other were $78 million for the nine month
period ended September 30, 2002 as compared with $85 million for the
nine month period ended September 30, 2001, representing a decrease of
$7 million, or 8%. Net sales in the U.S. were $40 million in the first
nine months of 2002 as compared with $53 million for the first nine
months of 2001, representing a decrease of $13 million, or 25%. Net
sales outside the U.S. were $38 million in the current year period as
compared with $32 million in the prior year period, representing an
increase of $6 million, or 19%.
The loss from operations for All Other was $21 million in the nine
month period ended September 30, 2002 as compared with a loss from
operations of $11 million in the nine month period ended September 30,
2001, representing a decrease of $10 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.
51
RESTRUCTURING
During the nine month period ended September 30, 2001, as a result of a
number of factors, including the ongoing digital transformation,
declining photofinishing volumes, the discontinuance of certain product
lines, global economic conditions, and the growing presence of business
in certain geographies outside the United States, the Company committed
to a plan to reduce excess manufacturing capacity, primarily with
respect to the production of sensitized goods, to close certain central
photofinishing labs in the U.S. and Japan, to reduce selling, general
and administrative positions on a worldwide basis and to exit certain
businesses. The total restructuring charges in connection with these
actions were $369 million and were recorded in the second and third
quarters of 2001 (the "Second and Third Quarter 2001 Restructuring
Plan"). Due to the continued decline in the global economic conditions
and the events of September 11th, the Company committed to further
actions in the fourth quarter of 2001 (the "Fourth Quarter 2001
Restructuring Plan") to rationalize the worldwide manufacturing
capacity, reduce selling, general and administrative positions on a
worldwide basis and to exit certain businesses. The total
restructuring charges in connection with these actions were $329
million.
Second Quarter and Third Quarter 2001 Restructuring Plan
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the second
and third quarters of 2001 and the remaining balance in the related
restructuring reserves at September 30, 2002:
(in millions)
Long-lived Exit
Number of Severance Inventory Assets Costs
Employees Reserve Reserve Reserve Reserve Total
--------- ------- ------- ------- ------- -----
Q2, 2001 charges 2,400 $ 127 $57 $ 112 $ 20 $ 316
Q3, 2001 charges 300 7 20 25 1 53
------ ----- --- ----- ---- -----
Subtotal 2,700 134 77 137 21 369
2001 reversal (275) (20) - - - (20)
2001 utilization (1,400) (40) (77) (137) (5) (259)
------ ----- --- ----- ---- -----
Balance at 12/31/01 1,025 74 - - 16 90
Q1, 2002 utilization (550) (23) - - (2) (25)
------ ----- --- ----- ---- -----
Balance at 3/31/02 475 51 - - 14 65
Q2, 2002 utilization (100) (11) - - (2) (13)
------ ----- --- ----- ---- -----
Balance at 6/30/02 375 40 - - 12 52
Q3, 2002 reversal (225) (14) - - (3) (17)
Q3, 2002 utilization (50) (7) - - - (7)
------ ----- --- ----- ---- -----
Balance at 9/30/02 100 $ 19 $ - $ - $ 9 $ 28
52
The total restructuring charge of $369 million for the nine months ended
September 30, 2001 was composed of severance, inventory writedowns, long-
lived asset impairments and exit costs of $134 million, $77 million,
$137 million and $21 million, respectively, with $271 million of those
charges reported in restructuring (credits) costs and other in the
accompanying consolidated statement of earnings. The balance of the
charge of $98 million, composed of $77 million for inventory writedowns
relating to the product discontinuances and $21 million relating to
accelerated depreciation on the long-lived assets accounted for under
the held for use model of SFAS No. 121, was reported in cost of goods
sold in the accompanying statement of earnings. The severance and exit
costs require the outlay of cash, while the inventory writedowns and
long-lived asset impairments represent non-cash items.
The severance charge related to the termination of 2,700 employees,
including 990 administrative, 800 manufacturing, 760 service and
photofinishing and 150 research and development positions. The
geographic composition of the employees terminated included 1,110 in the
United States and Canada and 1,590 throughout the rest of the world.
The charge for the long-lived asset impairments includes the writeoff of
$61 million relating to sensitizing manufacturing equipment, lab
equipment and leasehold improvements, and other assets that were
scrapped or abandoned immediately and accelerated depreciation of $33
million relating to sensitizing manufacturing equipment, lab equipment
and leasehold improvements, and other assets that were to be used until
their expected abandonment within the first three months of 2002. The
total amount for long-lived asset impairments also includes a charge of
$43 million for the writeoff of goodwill relating to the Company's
PictureVision subsidiary, the realization of which was determined to be
impaired as a result of the Company's acquisition of Ofoto in the second
quarter of 2001.
In the fourth quarter of 2001, the Company reversed $20 million of the
$134 million in severance charges as certain termination actions,
primarily those in EAMER and Japan, will be completed at a total cost
less than originally estimated. This is the result of a lower actual
severance cost per employee as compared with the original amounts
estimated and 275 fewer employees being terminated, including
approximately 150 service and photofinishing, 100 administrative and
25 R&D.
In the third quarter of 2002, the Company reversed $14 million of the
original $134 million in severance charges due primarily to higher
rates of attrition than originally expected, lower utilization of
training and outplacement services by terminated employees than
originally expected and termination actions being completed at an
actual cost per employee that was lower than originally estimated. As
a result, approximately 225 fewer employees will be terminated,
including 100 service and photofinishing, 100 administrative and 25
R&D. Also in the third quarter of 2002, the Company reversed $3
million of exit costs as a result of negotiating lower contract
termination payments in connection with business or product line exits.
53
Fourth Quarter, 2001 Restructuring Plan
The following table summarizes the activity with respect to the
restructuring and asset impairment charges recorded during the fourth
quarter of 2001 and the remaining balance in the related restructuring
reserves at September 30, 2002:
(in millions)
Long-lived Exit
Number of Severance Inventory Assets Costs
Employees Reserve Reserve Reserve Reserve Total
--------- ------- ------- ------- ------- -----
2001 charges 4,500 $ 217 $ 7 $ 78 $ 27 $ 329
2001 utilization (1,300) (16) (7) (78) - (101)
------ ----- --- ----- ---- -----
Balance at 12/31/01 3,200 201 - - 27 228
Q1, 2002 utilization (1,725) (32) - - - (32)
------ ----- --- ----- ---- -----
Balance at 3/31/02 1,475 169 - - 27 196
Q2, 2002 utilization (550) (43) - - (10) (53)
------ ----- --- ----- ---- -----
Balance at 6/30/02 925 126 - - 17 143
Q3, 2002 reversal (275) (12) - - - (12)
Q3, 2002 utilization (125) (37) - - - (37)
------ ----- --- ----- ---- -----
Balance at 9/30/02 525 $ 77 $ - $ - $ 17 $ 94
The total restructuring charge of $329 million for the fourth quarter
of 2001 was composed of severance, inventory writedowns, long-lived
asset impairments and exit costs of $217 million, $7 million, $78
million and $27 million, respectively, with $308 million of those
charges reported in restructuring (credits) costs and other in the
accompanying consolidated statement of earnings. The balance of the
charge of $21 million, comprised of $7 million for inventory writedowns
relating to the product discontinuances and $14 million relating to
accelerated depreciation on the long-lived assets accounted for under
the held for use model of SFAS No. 121, was reported in cost of goods
sold in the accompanying statement of earnings. The severance and exit
costs require the outlay of cash, while the inventory writedowns and
long-lived asset impairments represent non-cash items.
The severance charge related to the termination of 4,500 employees,
including 1,650 manufacturing, 1,385 administrative, 1,190 service and
photofinishing and 275 research and development positions. The
geographic composition of the employees terminated included 3,190 in
the United States and Canada and 1,310 throughout the rest of the
world. The charge for the long-lived asset impairments includes the
writeoff of $22 million relating to the sensitizing manufacturing
equipment, lab equipment and leasehold improvements, and other assets
that were scrapped or abandoned immediately and accelerated
depreciation of $17 million relating to sensitizing manufacturing
assets, lab equipment and leasehold improvements, and other assets that
were to be used until their expected abandonment in the first three
months of 2002. The balance of the long-lived asset impairment charge
of $39 million includes charges of $30 million relating to the
Company's exit of three non-core businesses, and $9 million for the
writeoff of long-lived assets in connection with the reorganization of
certain of the Company's digital camera manufacturing operations.
54
In the third quarter of 2002, the Company reversed $12 million of the
$217 million in severance charges due primarily to higher rates of
attrition than originally expected, lower utilization of training and
outplacement services by terminated employees than originally expected
and termination actions being completed at an actual cost per employee
that was lower than originally estimated. As a result, approximately
275 fewer people will be terminated, including approximately 200
service and photofinishing, 50 manufacturing and 25 administrative.
The remaining actions to be taken by the Company in connection with the
Second and Third Quarter, 2001 and the Fourth Quarter, 2001
Restructuring Plans relate primarily to severance and exit costs. The
Company has approximately 625 positions remaining to be eliminated as
of September 30, 2002. These positions will be eliminated as the
Company completes the closure of photofinishing labs in the U.S., and
completes the planned downsizing of manufacturing positions in the U.S.
and administrative positions outside the U.S. These positions are
expected to be eliminated by the end of the fourth quarter of 2002.
Total employee terminations from the 2001 restructuring actions are
now expected to be approximately 6,425. A significant portion of
the severance had not been paid as of September 30, 2002 since, in
many instances, the terminated employees can elect or are required
to receive their severance payments over an extended period of time.
The Company expects the actions contemplated by the reserve for
exit costs to be completed by the end of the fourth quarter of 2002.
Most exit costs are expected to be paid during the year following the
date of the plan. However, certain costs, such as long-term lease
payments, will be paid over periods longer than one year.
Cost savings related to the Second Quarter and Third Quarter 2001
Restructuring Plan and the Fourth Quarter 2001 Restructuring Plan
actions are still expected to approximate $450 million.
Third Quarter, 2002 Restructuring Plan
During the third quarter, the Company consolidated and reorganized its
photofinishing operations in Japan by closing 8 photofinishing
laboratories and transferring the remaining 7 laboratories to a joint
venture it entered into with an independent third party. Beginning in
the fourth quarter of 2002, the Company will outsource its
photofinishing operations to this joint venture. The restructuring
charge of $20 million relating to the Photography segment includes a
charge for termination-related benefits of approximately $14 million
relating to the elimination of approximately 100 positions, which were
not transferred to the joint venture, and other statutorily required
payments. The positions were eliminated as of September 30, 2002 and
the related payments will be made in the fourth quarter of 2002. The
remaining restructuring charge of $6 million represents the writedown
of long-lived assets held for sale to their fair values based on
independent valuations.
55
During the fourth quarter of 2002, the Company will finalize its plans
and begin to implement a series of cost reduction actions that will
reduce assets and employment. The Company anticipates taking total
restructuring charges in the range of $130 million to $170 million to
cover the costs associated with the actions, with approximately $120
million to $150 million of these estimated charges to be recorded in
the fourth quarter of 2002. Approximately one-half of these charges
will be non-cash. These actions contemplate the elimination of 1,300
to 1,700 positions, with approximately 1,000 of the reductions
occurring in the fourth quarter of 2002. The cost savings from these
actions are expected to be about $200 million annually, with about one-
half of that amount to be realized in 2003.
- -----------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
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 nine months ended
September 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.
- -----------------------------------------------------------------------
56
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $113 million from
December 31, 2001 to $561 million at September 30, 2002. The increase
resulted primarily from $1,299 million of cash flows from operating
activities, partially offset by $463 million of cash flows used in
investing activities and $719 million of cash used in financing
activities.
The net cash provided by operating activities of $1,299 million for the
nine month period ended September 30, 2002 was partially attributable
to (1) net earnings of $657 million which, when adjusted for
depreciation and amortization, provided $1,258 million of operating
cash and (2) a decrease in accounts receivable of $126 million. This
was partially offset by an increase in inventories of $58 million, a
decrease in liabilities excluding borrowings of $35 million, related
primarily to severance payments for restructuring programs, and a gain
on the sale of assets of $17 million. The net cash used in investing
activities of $463 million was utilized primarily for capital
expenditures of $362 million, investments in unconsolidated affiliates
of $96 million, business acquisitions of $6 million and net purchases
of marketable securities of $17 million. The net cash used in
financing activities of $719 million was primarily the result of net
debt repayments of $459 million and dividend payments of $262 million.
Net working capital, excluding short-term borrowings, increased to
$1,021 million at September 30, 2002 from $863 million at December 31,
2001. This increase is primarily attributable to higher cash and
inventory balances and a lower accrued income taxes balance, partially
offset by an increase in accounts payable and other current liabilities
and lower receivables.
The Company's primary estimated future uses of cash for 2002 include
the following: dividend payments, capital expenditures, severance
payments in connection with its 2001 restructuring plans, debt
reductions, the purchase of the Company's stock from KRIP, the
potential funding of the Company's pension plans outside the United
States (in the event the Company incurs any additional minimum pension
liabilities and the Company makes a contribution to the respective
plans to mitigate, or eliminate, the equity charge), and acquisitions,
including the potential exercise of the minority interest put options.
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. On October 10, 2002, the Company's
Board of Director's declared a semi-annual cash dividend of $.90 per
share on the outstanding common stock of the Company. This dividend
will be paid to the shareholders of record at the close of business on
December 13, 2002.
57
Capital additions were $362 million in the first three quarters 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 nine months
ended September 30, 2002, the Company expended $167 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, the Kodak stock purchase
from KRIP, the potential funding of pension plans outside the United
States (in the event the Company incurs additional minimum pension
liabilities and the Company makes a contribution to the respective
plans to mitigate, or eliminate, the equity charge), acquisitions
(including cash requirements in connection with the exercise of the
put options) 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 ("364-Day 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 new 364-Day Facility at $1.0 billion
expiring in July 2003 and a 5-year commitment at $1.225 billion
expiring in July 2006 ("5-Year Facility"). If unused, they have a
commitment fee of $3 million per year, at the Company's current credit
rating of BBB+ (Standard & Poor's) and Baa1 (Moody's). Interest on
amounts borrowed under these facilities is calculated at rates based on
spreads above certain reference rates and the Company's credit rating.
Due to the credit rating downgrades mentioned below and the generally
tight bank credit market, the borrowing costs under the new 364-Day
Facility have increased by approximately 7 basis points on an undrawn
basis and 40 basis points on a fully drawn basis at the Company's
current credit ratings. The borrowing costs under the 5-Year Facility
have increased by 7.5 basis points on an undrawn basis and 25 basis
points on a fully drawn basis. These costs will increase or decrease
based on future changes in the Company's credit rating.
58
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 was in
compliance with this covenant at September 30, 2002. The Company does
not anticipate that a violation is likely to occur.
At September 30, 2002, the Company had $830 million in commercial paper
outstanding, with a weighted average interest rate of 2.17%. 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 September 30, 2002, the
Company had outstanding borrowings under this program of $180 million.
Based on the outstanding secured borrowings level of $180 million, the
estimated annualized interest rate under this program is 2.44%.
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
September 30, 2002, the Company had debt securities outstanding of $700
million under this medium-term note program, with none 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.
59
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 reductions in the Company's long-term debt credit
ratings have impacted the credit spread applied to Kodak's U.S. long-
term debt traded in the secondary markets. However, this has not
resulted in an increase in interest expense, as the Company has not
issued any significant new long-term debt during this period. The
reduction in the Company's short-term debt credit ratings has impacted
the cost of short-term borrowings, primarily the cost of issuing
commercial paper. However, this increased cost was more than offset by
the lowering of market rates of interest as a result of actions taken
by the Federal Reserve to stimulate the U.S. economy. As indicated
above, the Company's weighted average commercial paper rate for
commercial paper outstanding at September 30, 2002 was 2.17% as
compared with 3.38% at September 30, 2001. 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, due to lower average debt levels and lower commercial paper
rates, interest expense for the three and nine month periods ended
September 30, 2002 is down relative to the three and nine month periods
ended September 30, 2001.
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 the
following: a $110 million note due in 2003 and $38 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;
and the outstanding borrowings under the accounts receivable
securitization program if the Company's credit ratings from Standard
& Poor's or Moody's were to fall below BBB- and Baa3, respectively,
and such condition continued for a period of 30 days. 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.
60
The Company guarantees debt and other obligations under agreements with
certain unconsolidated affiliated companies and customers. At
September 30, 2002, the maximum guarantees for which the Company could
become obligated approximated $334 million. Within the total amount of
$334 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 composed 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 current
guarantee amount of $334 million, only $218 million of unconsolidated
affiliated company and customer debt and other obligations were
outstanding at September 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. As of
September 30, 2002, the Company has not been required to guarantee any
of the SK Display Corporation's outstanding debt.
The Company has a commitment under a put option arrangement with an
unaffiliated company whereby the shareholders of this entity have the
ability to put 100% of the stock to Kodak for total consideration,
including the assumption of debt, of approximately $62 million. The
option first became exercisable on October 1, 2002 and may be exercised
up through December 31, 2002. The Company expects the shareholders of
the unaffiliated company to exercise their rights under the put option
in the fourth quarter of 2002. If the option were exercised, the cash
payment under this commitment would be expected to occur in the first
quarter of 2003.
In connection with the Company's investment in China that began in
1998, certain unaffiliated entities invested in two Kodak consolidated
companies with the opportunity to put their minority interests to
Kodak at any time after the third anniversary, but prior to the tenth
anniversary, of the date on which the companies were established. The
total exercise price in connection with these put options, which
increases at a rate of 2% per annum, is approximately $97 million at
September 30, 2002. The Company expects that the put options will be
exercised and the related cash payments will occur over the next twelve
months.
61
The Company evaluates its expected long-term rate of return on plan
asset ("EROA") assumption annually for the Kodak Retirement Income Plan
("KRIP"). To facilitate this evaluation, every two to three years, or
when market conditions change materially, the Company undertakes a new
asset liability study to reaffirm the current asset allocation and the
related EROA assumption. Wilshire Associates, a consulting firm,
completed a study in September 2002, which led to several asset
allocation shifts and a decrease in the expected long-term return on
assets from 9.5% to 9.0%. Accordingly, effective January 1, 2003, the
Company expects to change its EROA assumption for KRIP to 9.0%. The
KRIP remains overfunded as of September 30, 2002. The Company estimates
that the reduction in the EROA assumption, coupled with the loss of the
transition asset, lower actual return on assets for 2002 and the
expected change in the discount rate, will reduce pension income in 2003
relative to 2002 in a range of approximately $109 million to $117
million.
Additionally, as a result of the Wilshire study, KRIP will eliminate its
investments in specialty sector U.S. equities including its holding of
7.4 million Kodak shares, which the Company contributed to KRIP in
November 1995. The Kodak shares represent the only material single-
stock investment in the KRIP portfolio. The Company has offered to
purchase the shares from the investment manager with the fiduciary
responsibility for the Kodak investment, and expects to complete the
purchase in the fourth quarter of 2002.
In light of the continuing global decline in the equity markets in 2002,
the Company is currently evaluating the various assumptions associated
with its plans outside the United States. This includes analyzing the
status of plan funding to determine whether or not the Company will
have any additional minimum pension liabilities, as defined under
SFAS No. 87, "Employers' Accounting for Pensions," for which it would be
required to take a charge to equity. In the event that the outcome of
such evaluation indicates that the Company has any additional minimum
pension liabilities, the Company could mitigate, if not eliminate, the
related charge to equity through a contribution to the plans.
62
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 has been
experiencing financial difficulty and its financial condition continues
to worsen. 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
$504 million at September 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. As a result of the steps taken by the Company to mitigate the
risk as it relates to its continued ability to procure spare parts, the
Company does not anticipate any significant liability arising from
any inability to fulfill its service obligations under this
arrangement.
63
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 July 2003. Under the amended RPA arrangement, maximum
borrowings were reduced to $370 million. Total outstanding borrowings
under the RPA at September 30, 2002 were $345 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. For the nine months ended September
30, 2002, total sales of photofinishing equipment were $8.3 million.
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 September 30, 2002, the Company had outstanding letters of credit
totaling $109 million and surety bonds in the amount of $69 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
64
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.
65
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.
Using a sensitivity analysis based on estimated fair value of open
forward contracts using available forward rates, if the U.S. dollar had
been 10% weaker at September 30, 2002 and 2001, the fair value of open
forward contracts would have increased $18 million, and decreased $28
million, respectively. Such gains or losses would be substantially
offset by losses or gains from the revaluation or settlement of the
underlying positions hedged.
Using a sensitivity analysis based on estimated fair value of open
forward contracts using available forward prices, if available forward
silver prices had been 10% lower at September 30, 2002 and 2001, the
fair value of open forward contracts would have decreased $4 million
and $17 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.
66
Using a sensitivity analysis based on estimated fair value of short-
term and long-term borrowings, if available market interest rates had
been 10% (about 39 basis points) higher at September 30, 2002, the fair
value of short-term and long-term borrowings would have decreased $1
million and $17 million, respectively. Using a sensitivity analysis
based on estimated fair value of short-term and long-term borrowings,
if available market interest rates had been 10% (about 43 basis points)
higher at September 30, 2001, the fair value of short-term and long-
term borrowings would have decreased $1 million and $27 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
September 30, 2002 was not significant to the Company.
Item 4. Controls and Procedures
In accordance with the Securities Exchange Act Rules 13a-15 and 15d-15,
the Company's management, under the supervision of the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures within 90 days of the filing date of this
quarterly report. Based on that evaluation, the Company concluded that
the design and operation of its disclosure controls and procedures were
effective. There have been no significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of such evaluation.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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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 72.
(b) Reports on Form 8-K
The Company filed an 8-K on August 13, 2002 regarding certification
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of title 18, United States
Code).
67
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 November 14, 2002
Robert P. Rozek
Controller
68
CERTIFICATIONS
I, Daniel A. Carp, certify that:
1. I have reviewed this quarterly report on Form 10-Q;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statement, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
69
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Daniel A. Carp
Chief Executive Officer
70
I, Robert H. Brust, certify that:
1. I have reviewed this quarterly report on Form 10-Q;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statement, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
71
Date: November 14, 2002
/s/ Robert H. Brust
Chief Financial Officer
72
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit
Number Page
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 73
(99.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 74
73
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 nine month periods ended
September 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
November 14, 2002
74
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 nine month periods ended
September 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
November 14, 2002