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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the year ended December 31, 2003 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $2.50 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act.
Yes X No
1 CONTINUED
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price as of the
last business day of the registrant's most recently completed second
fiscal quarter, June 30, 2003, was approximately $7.8 billion. The
registrant has no non-voting common stock.
The number of shares outstanding of the registrant's common stock as of
March 5, 2004 was 286,611,414 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
PART III OF FORM 10-K
The following information was incorporated by reference from the 2004
Annual Meeting and Proxy Statement:
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11 - EXECUTIVE COMPENSATION
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Item 14 - PRINCIPAL AUDITOR FEES AND SERVICES
2
PART I
ITEM 1. BUSINESS
Kodak is the leader in helping people take, share, print and view
images for information and for entertainment. The Company is a major
participant in infoimaging, a $385 billion industry composed of devices
(digital cameras and flat-panel displays), infrastructure (online
networks and delivery systems for images) and services & media
(software, film and paper) enabling people to access, analyze and print
images.
As of and for the year ended December 31, 2003, the Company reported
financial information for three reportable segments (Photography,
Health Imaging and Commercial Imaging) and All Other. However, in
August of 2003, the Company announced the realignment of its operations
to accelerate growth in the commercial and consumer digital imaging
markets. In connection with the realignment, the Company's new
reporting structure will be implemented beginning in the first quarter
of 2004 as outlined below:
Digital and Film Imaging Systems Segment: The Digital and Film Imaging
Systems segment comprises the same products and services as the current
Photography segment without change. This segment provides consumers,
professionals and cinematographers with digital and traditional
products and services.
Health Imaging Segment: There were no changes to the Health Imaging
segment. This segment supplies the healthcare industry with
traditional and digital image capture and output products and services.
Commercial Imaging Segment: Subsequent to the realignment, the
Commercial Imaging segment is composed of document imaging products and
services, commercial and government systems products and services, and
optics. Prior to the realignment, optics was included in All Other.
Beginning in the first quarter of 2004, this segment will exclude the
results of Remote Sensing Systems and Research Systems, Inc., which
were part of the commercial and government systems products and
services, as a result of the sale of these businesses to ITT
Industries, Inc. that was announced in February 2004. This segment
offers image capture, output and storage products and services
to businesses and government.
Commercial Printing Segment: As of January 1, 2004, the Commercial
Printing segment is composed of the Company's equity investments in
NexPress Solutions LLC (Kodak's 50/50 joint venture with Heidelberger
Druckmaschinen AG (Heidelberg)) and Kodak Polychrome Graphics (Kodak's
50/50 joint venture with Sun Chemical), and the graphics and wide-
format inkjet businesses. All of the above were formerly included in
the Commercial Imaging segment prior to the realignment. This segment
will also include the results of Scitex Digital Printing, which was
acquired in January 2004 and has since been renamed Kodak Versamark,
and the results of Heidelberg Digital LLC and Heidelberg's 50% share of
NexPress Solutions LLC upon the closing of this acquisition, which is
expected to occur in May 2004. This segment offers on-demand color
printing and networking publishing systems.
3
All Other: All Other is composed of Kodak's display and components
business for organic light emitting diode (OLED) displays, sensors and
other small, miscellaneous businesses. These businesses offer state-of-
the-art OLED displays and other specialty materials, and deliver
imaging sensors to original equipment manufacturers (OEMs).
To further its growth, Kodak recently announced a new strategy that
will be implemented over the next three years to complete its
transition as the leader of the traditional photographic industry to a
leadership position in emerging digital imaging markets. There are
four key elements of the strategy:
- Disciplined management of traditional imaging businesses to
maximize cash generation over an extended period of time
- Accelerated growth in the Company's existing portfolio of
digital imaging products and services
- Tightly focused and highly disciplined acquisition strategy to
accelerate entry into existing and closely related business
opportunities
- New, longer-term organic growth opportunities in areas such as
electronic displays and inkjet
By the end of 2006, Kodak expects to have achieved a balanced digital
and traditional imaging products and services portfolio.
As previously mentioned, the realignment and the new reporting
structure are effective for the first quarter of 2004. Accordingly,
the following business discussion is based on the three reportable
segments and All Other as they were structured as of and for the year
ended December 31, 2003. Kodak's sales, earnings and identifiable
assets by reportable segment for these three reportable segments and
All Other for the past three years are shown in Note 23, "Segment
Information."
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PHOTOGRAPHY SEGMENT
Sales from continuing operations of the Photography segment for 2003,
2002 and 2001 were (in millions) $9,232, $9,002, and $9,403,
respectively.
4
This segment includes digital and traditional products for consumers,
professional photographers and the entertainment industry. This
segment combines digital and traditional photography and photographic
services in all its forms, including consumer, advanced amateur,
professional and motion picture. Kodak manufactures and markets films
(consumer, professional and motion picture), photographic papers,
processing services, photofinishing equipment, photographic chemicals,
and cameras (including one-time-use, traditional and digital). Kodak
has also developed products that bridge traditional silver halide and
digital products. Products and services include kiosks, printer docks,
consumer digital services and inkjet media. Other digitization options
have been created to stimulate more pictures in the use and printing of
these images, adding to the consumption of film and paper. These
products serve amateur photographers, as well as professional, motion
picture and television customers. In addition, Ofoto, Inc. has
accelerated Kodak's growth in the online photography market and helped
to drive more rapid adoption of digital and online services. Ofoto
offers digital processing of digital images and traditional film, top-
quality prints, private online image storage, sharing, editing and
creative tools, frames, cards, photo calendars and other merchandise.
Digital product offerings are substituting for some of the traditional
film and output products at varying rates. For example, the workflow
improvements offered by digital are having relatively more significant
effects in the professional markets, while digital is having little
impact in the entertainment markets. The future impact of digital
substitution on these film markets is difficult to predict due to a
number of factors, including the pace of digital technology adoption,
the underlying economic strength or weakness in major world markets,
household film and media usage following a digital camera purchase, and
the timing of digital infrastructure installation. Additionally,
digital substitution is happening at varying rates depending on
geography. For example, the pace of digital substitution in the
consumer film market is more rapid in Japan, followed by the U.S. and
Western Europe. For 2004, the Company estimates that consumer film
industry volumes will decline in the U.S. by 10% to 12% and worldwide
by 7% to 9% primarily due to digital substitution.
In June 2003, the Company completed its acquisition of Applied Science
Fiction's proprietary rapid film processing technology and other
assets. Applied Science Fiction's proprietary rapid film processing
technology has been combined with Kodak's world-class expertise in
kiosks to provide photo processing and printing in minutes from film or
digital inputs.
In October 2003, the Company completed its acquisition of Laser-Pacific
Media Corporation, a leading Hollywood-based post-production company.
It provides a full spectrum of post-production services for television,
home video and motion pictures, including film processing and transfer,
editing, mastering, digital preview, and DVD compression and authoring
services.
5
Marketing and Competition: The key elements of the Company's strategy
with respect to the digital and traditional products and services in
this segment include growth in digital capture, expansion of online
services and mobile imaging, leadership in professional lab solutions,
leadership in distributed output at retail and in the home, and
intelligent management of the traditional film and paper products and
services.
Traditional products and services for the consumer are sold direct to
retailers and through distributors throughout the world. Price
competition continues to exist in all marketplaces. To mitigate the
impacts of price competition, the Company has been successful in
continuing to move consumers up to higher value films and one-time-use
cameras. To be more cost competitive with its traditional product
offerings, the Company is continuing to move manufacturing operations
to lower cost markets. As previously outlined, digital product
offerings are substituting for some of the traditional film and output
products, primarily in the U.S., Japan and Western Europe, as a large
number of consumers actively use digital cameras. While this
substitution to date has had an impact primarily on the Company's film
and paper sales, and processing services in the U.S., Japan and Western
Europe, the Company's strategy is to offset this by providing its own
digital products, digitization services and output services. Despite
the digital substitution that is occurring in the Japan, U.S. and
Western Europe markets, the Company continues to realize the potential
for significant growth in the sale of sensitized products outside the
U.S., particularly in emerging markets including Russia, India and
China, where the Company has expanded the number of outlets for Kodak
products. To further accelerate the market for photography in China,
the Company entered into an agreement with China Lucky Film Corporation
in 2003 to work together in this regard. The final cooperative
agreement became effective on February 10, 2004, when the Chinese
government approved Kodak's acquisition of 20% of Lucky Film Co. Ltd.
The Company also has photofinishing laboratories in many parts of the
world and supplies photographic papers and chemicals to other entities
that provide photofinishing services. The Company's primary
laboratories provide consumers the opportunity to receive film images
in traditional formats or digital form, either through Kodak Picture CD
or the Company's retail online partners.
6
The Company's strategies in its consumer digital business are to drive
image output and sharing in all forms and make digital easier to use.
Consumer digital products, including digital cameras, self-contained
printer docks that print pictures from digital cameras without the need
for a personal computer, and inkjet media, are sold direct to retailers
or distributors. Products are also available to customers through the
Internet via online digital services like Ofoto. Products such as the
Company's EasyShare digital camera system with the camera docks are
intended to simplify digital imaging for consumers and thereby increase
the popularity for sharing and printing digital photo files. The
Company faces competition from other electronics manufacturers in this
market, particularly on price and technological advances. Rapid price
declines shortly after product introduction in this environment are
common, as producers are continually introducing new models with
enhanced capabilities, such as improved resolution and/or optical
systems. Ofoto, the Company's online printing business, continues to
demonstrate strong growth and has begun the establishment of a customer
base in selected overseas markets in 2003. Late in 2003, the Company
announced Kodak Mobile Service, which allows consumers with image-
enabled mobile phones to store, share and print their images.
Traditional and digital professional products and services are sold
direct to professional photographers and laboratories, or through
dealers throughout the world. Although the Company continues to
provide better performing and innovative traditional films and papers,
the focus has shifted towards new products, systems and solutions
focused on improving the digital workflow for professional
photographers and laboratories. These solutions range from digital
capture devices (digital cameras and scanners) designed to improve the
image acquisition or digitalization process, software products designed
to enhance and simplify the digital workflow, output devices (thermal
printers and digital silver halide writers) designed to produce high
quality images, and media (thermal and silver halide) optimized for
digital workflows.
Throughout the world, almost all entertainment imaging products are
sold direct to studios, laboratories, independent filmmakers, or
production companies. Quality and availability are important factors
for these products, which are sold in a price-competitive environment.
As the entertainment industry adopts digital formats, the Company
anticipates that it will face new competitors, including some of its
current customers and other electronics manufacturers.
Kodak's advertising programs actively promote the segment's products
and services in its various markets, and its principal trademarks,
trade dress and corporate symbol are widely used and recognized. Kodak
is frequently noted by trade and business publications as one of the
most recognized and respected brands in the world.
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7
HEALTH IMAGING SEGMENT
Sales from continuing operations of the Health Imaging segment for
2003, 2002 and 2001 were (in millions) $2,431, $2,274, and $2,262,
respectively.
Products and services of the Health Imaging segment enable healthcare
customers (e.g., hospitals, imaging centers, etc.) to capture, process,
integrate, archive and display images and information in a variety of
forms. These products and services provide intelligent decision
support through the entire patient pathway from research to detection
to diagnosis to treatment. The Health Imaging segment also provides
products and services that help customers improve workflow and
productivity in their facilities, which in turn helps them enhance the
quality and productivity of healthcare delivery.
Products of the Health Imaging segment include traditional analog
medical films, chemicals, and processing equipment. Kodak's history in
traditional analog imaging has made it a leader in this area and has
served as the foundation for building its important digital imaging
business. The segment provides digital medical imaging and information
products, systems and solutions, which are key components of future
sales and earnings growth. These include digital print films, laser
imagers, computed and digital radiography systems, and healthcare
information systems (HCIS). The Health Imaging segment serves the
general radiology market and specialty health markets, including
dental, mammography and oncology. The segment also provides molecular
imaging for the biotechnology research market.
In October 2003, the Company completed the acquisition of all of the
outstanding shares of PracticeWorks, Inc., a leading provider of dental
practice management software. In the purchase, Kodak also acquired
PracticeWorks' subsidiary, Trophy Radiologie, S.A., a leading provider
of dental digital radiographic imaging systems in Paris, France. This
acquisition will enable Kodak to offer its customers a full spectrum of
dental imaging products and services from traditional film to digital
radiography and photography and is expected to move Health Imaging into
the leading position in the dental practice management and dental
radiographic markets.
In November 2003, the Company completed the acquisition of Algotec
Systems, Ltd., a leading developer of advanced picture-archiving-and-
communications systems (PACS), which is part of HCIS, in a move that
improves Kodak's competitive position in the growing market for PACS,
which enable radiology departments worldwide to digitally manage and
store medical images and information.
8
Marketing and Competition: In the U.S., Canada and Latin America,
health imaging consumables and analog equipment are sold through
distributors. A significant portion of digital equipment and solutions
is sold direct to end users, with the balance sold through distributors
and OEMs. In the U.S., individual hospitals or groups of hospitals
represented by, as buying agents, group purchasing organizations
(GPOs), account for a significant portion of consumables and analog and
digital equipment sales industry-wide. The Health Imaging segment has
secured long-term contracts with virtually all the major GPOs and,
thus, has positioned itself well against competitors. In Europe,
consumables and analog equipment are sold through distributors and
value added service providers (VASPs) as well as direct to end users.
Hospitals in Europe, which are a mix of private and government-funded
types, employ a highly regimented tender process in acquiring medical
imaging products. In addition to creating a competitive pricing
environment, this process can result in a delay of up to 6 to 18 months
between the time the tender is delivered to the hospital and the time
the hospital makes a decision on the vendor. Additionally, the
government-funded hospitals' budgets tend to be limited and restricted.
Government reimbursement policies often drive the use of particular
types of equipment and influence the transition from analog to digital
imaging. These policies vary widely among European countries. In Asia
and Japan, sales of all products are split between distributors and end
users. In Europe, Asia and Japan, consumables and analog equipment are
often sold as part of a media/equipment bundle. Digital equipment and
solutions are sold direct to end-users and through OEMs in these three
geographic areas.
Worldwide, the medical imaging market is crowded with a range of
aggressive competitors. To compete aggressively, Kodak's Health
Imaging segment has developed a full portfolio of value-adding products
and services. Some competitors offer digital solutions similar to
those of Kodak, and other competitors offer similar analog solutions or
a mix of analog and digital. Health Imaging has a wide range of
solutions from analog to digital as well as solutions combining both
analog and digital technologies. Moreover, the segment's portfolio is
expanding into new areas, including information technology, thus
enabling the segment to offer solutions that combine medical images and
information, such as patient reports, into one unified package for
medical practitioners. Kodak will continue to innovate products and
services to meet the changing needs and preferences of the marketplace.
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COMMERCIAL IMAGING SEGMENT
Sales from continuing operations of the Commercial Imaging segment for
2003, 2002 and 2001 were (in millions) $1,559, $1,456, and $1,454,
respectively.
9
As of and for the year ended December 31, 2003, the Commercial Imaging
segment encompassed Kodak's expertise in imaging solutions, providing
image capture, analysis, printing and archiving. Markets for the
segment include commercial printing and industrial, banking and
insurance applications. Products include high-speed digital printing
equipment, wide-format inkjet printers, inks, media and services, high-
speed production document scanners, micrographic peripherals, and
aerial, industrial, graphic and micrographic films. The Company also
provides maintenance and professional services for Kodak and other
manufacturers' products, as well as providing imaging services to
customers. In addition, this segment includes the Company's equity
interests in Kodak Polychrome Graphics LLC (KPG) and NexPress Solutions
LLC (NexPress), which both serve commercial printing customers. The
Company's equity in the income or loss of these interests is reflected
in other charges, net.
KPG is an unconsolidated joint venture between Kodak and Sun Chemical
Corporation in which Kodak owns a 50% interest. This joint venture is
responsible for the photographic plate business, as well as for
marketing Kodak graphic arts film, proofing materials and equipment.
NexPress is an unconsolidated joint venture between Kodak and
Heidelberger Druckmaschinen AG (Heidelberg) in which Kodak owns a 50%
interest that was formed for the purpose of developing and marketing
new digital color printing solutions.
As previously mentioned, in connection with the business realignment
that was announced in August of 2003, the results for the Company's
commercial printing products, graphics products, inkjet products, and
the Company's interests in KPG and NexPress will be reflected in the
Commercial Printing reportable segment beginning in the first quarter
of 2004.
In January 2004, Kodak acquired Scitex Digital Printing, now Kodak
Versamark. This entity is a wholly owned subsidiary of Kodak focused
in the transaction printing industry. Kodak Versamark provides a full
set of high-speed, variable-data inkjet printers, inks, service and
other consumables.
In February 2004, the Company announced its intent to sell to ITT
Industries, Inc. its RSS operations, which were not core to Kodak's
strategy. The Company's RSS operation had sales in 2003 of
approximately $425 million.
Additionally, in March 2004, the Company announced that it had agreed
with Heidelberger Druckmaschinen AG (Heidelberg) to purchase
Heidelberg's 50 percent interest in NexPress, which makes high-end, on-
demand digital color printing systems, and the equity of Heidelberg
Digital LLC, a leading maker of digital black-and-white variable-data
printing systems. Kodak also will acquire NexPress GmbH, a German
subsidiary of Heidelberg that provides engineering and development
support, and certain inventory, assets, and employees of Heidelberg's
regional operations or market centers. This acquisition advances the
Company's strategy of diversifying its business portfolio, and
accelerates its participation in the digital commercial printing
industry.
10
Marketing and Competition: Throughout the world, document imaging
products are sold primarily through distributors and value added
resellers. The end users of these products include businesses in the
banking and insurance sectors. While there is price competition, the
Company has been able to maintain price by adding more attractive
features to its products through technological advances. The Company
has developed a wide range of digital products to meet the needs of
customers who are interested in converting from traditional analog
technology to new enterprise digital workflow solutions. Maintenance
and professional services for Kodak and other manufacturer's products
are sold either through the product distribution channel or directly to
the end users of equipment. The Company provides imaging services in
Asia which are sold directly to its customers and include both
commercial and government customers.
Graphic products, primarily consisting of graphic films and chemistry,
are sold directly by the Company to KPG. The growth in digital
printing workflows has negatively affected the sale of graphic films.
The Company has announced its intentions to become more active in
digital printing products and services to participate in this growth
segment. The recently announced acquisition of Scitex Digital
Printing, now Kodak Versamark, was an important step in this direction.
Similar to document imaging products, inkjet products are sold
primarily through a two-tiered distribution channel. The Company
remains competitive by focusing on developing new ink and media
formulations, new printer technologies, new software and training
enhancements.
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ALL OTHER
Sales from continuing operations comprising All Other for 2003, 2002
and 2001 were (in millions) $95, $103, and $110, respectively.
All Other consists primarily of the Kodak components group, which
represents an effort by Kodak to diversify into high-growth product
areas that are consistent with the Company's historical strengths in
imaging science. As of and for the year ended December 31, 2003, the
Kodak components group was comprised of the Kodak display business, the
imaging sensor solutions business and an optics business. Products of
this group include OLED displays, imaging sensor solutions, and optics
and optical systems. As previously mentioned, in connection with the
realignment that was announced in August of 2003, the results for
optics and optical systems will be reflected in the Commercial Imaging
reportable segment beginning in the first quarter of 2004.
11
OLED technology, pioneered by Kodak, enables full-color, full-motion
flat-panel displays with a level of brightness and sharpness not
possible with other technologies. Kodak has a leading intellectual
property position in this field. Unlike traditional liquid-crystal
displays (LCDs), OLEDs are self-luminous and do not require
backlighting. This eliminates the need for bulky and environmentally
undesirable mercury lamps and yields a thinner, more compact display.
Unlike other flat panel displays, OLEDs have a wide viewing angle (up
to 160 degrees), even in bright light. Their lower power consumption
makes them especially well suited for portable and mobile devices. As
a result of this combination of features, OLED displays communicate
information in a more engaging way while adding less weight and taking
up less space.
In 2001, the Company and SANYO Electric Co., Ltd. established a global
business venture, the SK Display Corporation, to manufacture OLED
displays for consumer devices such as cameras, PDAs, and portable
entertainment machines. Kodak holds a 34% ownership interest and SANYO
holds a 66% interest in the business venture.
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FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Financial information by geographic area for the past three years is
shown in Note 23, "Segment Information."
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RAW MATERIALS
The raw materials used by the Company are many and varied, and are
generally available. Silver is one of the essential materials used in
the manufacture of films and papers. The Company purchases silver from
numerous suppliers under annual agreements or on a spot basis. Pulp is
an essential material in the manufacture of photographic papers. The
Company has contracts to acquire pulp from several vendors during the
next one to two years. Electronic components are prevalent in the
Company's equipment offerings. The Company has entered into contracts
with numerous vendors to supply these components over the next one to
two years.
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SEASONALITY OF BUSINESS
Sales and earnings of the Photography segment are linked to the timing
of vacations, holidays and other leisure activities. They are normally
lowest in the first quarter due to the absence of holidays and fewer
people taking vacations during that time. In addition, the demand for
photofinishing services is the lowest during the first quarter. Sales
and earnings of this segment are normally strongest in the second and
third quarter as demand for the products of this segment is high due to
heavy vacation activity, and events such as weddings and graduations.
During the latter part of the third quarter, demand for the products is
high as dealers prepare for the holiday seasons. Demand for
photofinishing services is also high during this heavy vacation period.
12
With respect to the Health Imaging and Commercial Imaging segments, the
sales of consumable products, which generate the major portion of the
earnings of these segments, tend to occur uniformly throughout the
year. Sales of the lower margin equipment products in these segments
tend to be highest in the fourth quarter as purchases by commercial and
healthcare customers are linked to their year-end capital budget
management process.
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RESEARCH AND DEVELOPMENT
Through the years, Kodak has engaged in extensive and productive
efforts in research and development.
Research and development expenditures for the Company's three
reportable segments and All Other for 2003, 2002 and 2001 were as
follows:
(in millions) 2003 2002 2001
Photography $481 $513 $542
Health Imaging 178 152 152
Commercial Imaging 51 63 58
All Other 71 34 27
---- ---- ----
Total $781 $762 $779
The downward trend in research and development expenditures in the
Photography and Commercial Imaging segments and upward trend in the
Health Imaging segment and All Other reflects the shift in strategic
focus from traditional products, such as color negative film and paper
and color reversal films, to digital product areas, such as display
technology including OLED, digital medical imaging, software, and
digital printing.
Research and development is headquartered in Rochester, New York.
Other U.S. groups are located in Boston, Massachusetts; Dallas, Texas;
Oakdale, Minnesota; Allendale, New Jersey; New Haven, Connecticut; and
Fremont, California. Outside the U.S., groups are located in
Australia, England, France, Japan, China and Canada. These groups work
in close cooperation with manufacturing units and marketing
organizations to develop new products and applications to serve both
existing and new markets.
It has been Kodak's general practice to protect its investment in
research and development and its freedom to use its inventions by
obtaining patents. The ownership of these patents contributes to
Kodak's ability to provide leadership products and to generate revenue
from licensing. The Company holds portfolios of patents in several
areas important to its business, including color negative films,
processing and papers; digital cameras; network photo fulfillment; and
organic light-emitting diodes. Each of these areas is important to
existing and emerging business opportunities that bear directly on the
Company's overall business performance.
13
The Company's major products are not dependent upon one single,
material patent. Rather, the technologies that underlie the Company's
products are supported by an aggregation of patents having various
remaining lives and expiration dates. There are no individual patents
or group of patents the expiration of which is expected to have a
material impact on the Company's results of operations.
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ENVIRONMENTAL PROTECTION
Kodak is subject to various laws and governmental regulations
concerning environmental matters. The U.S. federal environmental
legislation having an impact on Kodak includes the Toxic Substances
Control Act, the Resource Conservation and Recovery Act (RCRA), the
Clean Air Act, and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (the Superfund Law).
It is the Company's policy to carry out its business activities in a
manner consistent with sound health, safety and environmental
management practices, and to comply with applicable health, safety and
environmental laws and regulations. Kodak continues to engage in a
program for environmental protection and control.
Environmental protection is further discussed in the Management
Discussion and Analysis of Financial Condition and Results of
Operations, and Notes to Financial Statements.
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EMPLOYMENT
At the end of 2003, the Company employed approximately 63,900 full time
equivalent people, of whom approximately 35,400 full time equivalents
were employed in the U.S. The actual number of employees may be
greater because some individuals work part time.
The current employment amounts are expected to decline significantly
over the next few years as a result of the headcount reductions yet to
be made under the Company's Third Quarter, 2003 Restructuring Program
and under the new cost reduction program to be executed throughout the
2004 to 2006 timeframe.
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AVAILABLE INFORMATION
The Company files many reports with the Securities and Exchange
Commission (SEC), including annual reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K. These and all
amendments to such are made available free of charge as soon as
reasonably practicable after such material is electronically filed with
or furnished to the Commission. They are available through the
Company's website at www.Kodak.com. To reach the SEC filings, follow
the links to Corporate, and then Investor Center. The Company also
makes available free of charge through its website, at
www.Kodak.com/go/arp, its annual report to shareholders and proxy
statement.
14
The public may also read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an Internet site at www.sec.gov, that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
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ITEM 2. PROPERTIES
The Photography segment of Kodak's business in the United States is
centered in Rochester, New York, where photographic goods are
manufactured. Another manufacturing facility in Windsor, Colorado,
also produces sensitized photographic goods. Photography segment
products are also produced in Lenexa, Kansas. Ofoto's operations are
located in Emeryville, California.
Photography segment manufacturing facilities outside the United States
are located in Australia, Brazil, Canada, China, England, France,
India, Indonesia, Mexico and Russia. Kodak maintains marketing and
distribution facilities in many parts of the world. There are also
several photofinishing laboratories located across the United States
and certain countries in Europe. Products in the Health Imaging segment
are manufactured in the United States, primarily in Rochester, New
York; Windsor, Colorado; Oakdale, Minnesota; and White City, Oregon.
Manufacturing facilities outside the United States are located in
Brazil, China, France, Germany, India and Mexico.
Products in the Commercial Imaging segment are manufactured in the
United States, primarily in Rochester, New York. Manufacturing
facilities outside the United States are located in Brazil, Canada,
China, England, Japan and Mexico.
Properties within a country are generally shared by all segments
operating within that country.
Regional distribution centers are located in various places within and
outside of the United States. The Company owns or leases
administrative, manufacturing, marketing and processing facilities in
various parts of the world. The leases are for various periods and are
generally renewable.
The Company anticipates that its property portfolio will be reduced
significantly over the next few years as a result of the new cost
reduction program that will be executed throughout the 2004 to 2006
timeframe. Under this new program, the Company plans to reduce its
worldwide facility square footage by approximately one-third.
- -----------------------------------------------------------------------
15
ITEM 3. LEGAL PROCEEDINGS
In 2001, the Company discovered, and advised the New York State
Department of Environmental Conservation (DEC) of, errors
underestimating the air permitting information provided to the DEC
regarding the roaster at the Company's Kodak Park manufacturing
facility's silver-flow operations. The Company developed and completed
a test plan and submitted a report, which concluded that at the time of
construction of the roaster in 1982, Kodak triggered the Prevention of
Significant Deterioration Program under the Clean Air Act, requiring
the installation of Best Available Control Technology (BACT) for five
contaminants. In October 2003, the Company and the DEC successfully
negotiated a Consent Order, under which the parties agreed that BACT is
in place for three contaminants. However, the Company agreed to either
(1) shut down the roaster or (2) install a single-stage caustic
scrubber with a mist eliminator to control emissions of sulfur dioxide
and sulfuric acid mist. The Company is currently evaluating these two
alternatives. Additionally, the Company is required to implement a
supplemental environmental benefit project to reduce sulfur dioxide
emissions from a boiler at Kodak Park, and pay a penalty of $200,000
($100,000 in 2003, $100,000 in 2004).
- -----------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- -----------------------------------------------------------------------
16
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instructions G(3) of Form 10-K, the following list
is included as an unnumbered item in Part I of this report in lieu of
being included in the Proxy Statement for the Annual Meeting of
Shareholders.
(as of December 31, 2003)
Date First Elected
an to
Executive Present
Name Age Positions Held Officer Office
Michael P. Benard 56 Vice President 1994 1994
Robert L. Berman 46 Vice President 2002 2002
Charles S. Brown, Jr. 53 Senior Vice President 2000 2000
Richard G. Brown, Jr. 55 Controller 2003 2003
Robert H. Brust 60 Chief Financial Officer
and Executive Vice
President 2000 2000
Daniel A. Carp 55 Chairman of the Board,
Chief Executive Officer 1995 2000
Matthias Freund 55 Vice President 2003 1995
Carl E. Gustin, Jr. 52 Senior Vice President 1995 1995
Daniel I. Kerpelman 45 Senior Vice President 2002 2002
James T. Langley 53 Senior Vice President 2003 2003
Carl A. Marchetto 48 Senior Vice President 2001 2001
Bernard Masson 56 Senior Vice President 2002 2002
Michael P. Morley 60 Executive Vice President 1994 2000
Antonio M. Perez 57 President and Chief
Operating Officer 2003 2003
Henri D. Petit 55 Senior Vice President 2003 2000
Eric G. Rodli 47 Senior Vice President 2001 2001
Willy C. Shih 52 Senior Vice President 1997 2000
Karen A. Smith-
Pilkington 45 Senior Vice President 2002 2002
James C. Stoffel 57 Senior Vice President 2000 2000
Gary P. Van Graafeiland 57 General Counsel and
Senior Vice President 1992 1992
17
Executive officers are elected annually in February.
All of the executive officers have been employed by Kodak in various
executive and managerial positions for more than five years, except Mr.
Brust, who joined the Company on January 3, 2000; Mr. Rodli, who joined
the Company on January 24, 2000; Mr. Kerpelman, who joined the Company
on June 1, 2002; Mr. Masson, who joined the Company on December 12,
2002; Mr. Perez, who joined the Company on April 2, 2003; Mr. Langley,
who joined the Company on August 18, 2003; and Mr. Richard Brown, Jr.,
who joined the Company on December 17, 2003. Prior to joining Kodak in
2000, Mr. Brust was Executive Vice President and Chief Financial
Officer with Unisys Corporation since 1997. Prior to joining that
company, Mr. Brust held a variety of management positions with General
Electric since 1965. Prior to joining Kodak in 2000, Mr. Rodli served
as President of Bexel. Prior to joining that company, Mr. Rodli held a
broad range of senior management positions in the Boston Consulting
Group, Iwerks Entertainment, and the PricewaterhouseCoopers Management
Consulting Group. Prior to joining Kodak in 2002, Mr. Kerpelman held a
variety of management positions with General Electric since 1988.
Prior to joining Kodak in 2002, Mr. Masson held a variety of management
positions at Lexmark since 1995. Prior to joining Kodak in 2003, Mr.
Perez served as an independent consultant for large investment firms,
providing counsel on the effect of technology shifts on financial
markets. Prior to that, he was President and Chief Executive Officer
of Gemplus International. Prior to that, he held a variety of
management positions at Hewlett-Packard Company both in Europe and the
United States. Prior to joining Kodak in 2003, Mr. Langley held a
variety of management positions at Hewlett-Packard Company. Prior to
joining Kodak in 2003, Mr. Richard Brown, Jr. was a partner at Ernst &
Young LLP.
There have been no events under any bankruptcy act, no criminal
proceedings, and no judgments or injunctions material to the evaluation
of the ability and integrity of any executive officer during the past
five years.
- -----------------------------------------------------------------------
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Eastman Kodak Company common stock is principally traded on the New
York Stock Exchange. There are 85,712 shareholders of record of common
stock as of December 31, 2003. See Liquidity and Capital Resources,
and Market Price Data in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
- -----------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Refer to Summary of Operating Data on page 178.
- -----------------------------------------------------------------------
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying consolidated financial statements and notes to
consolidated financial statements contain information that is pertinent
to management's discussion and analysis of the financial condition and
results of operations. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and
expenses, and the related disclosure of contingent assets and
liabilities.
The Company believes that the critical accounting policies and
estimates discussed below involve additional management judgment due to
the sensitivity of the methods and assumptions necessary in determining
the related asset, liability, revenue and expense amounts.
REVENUE RECOGNITION
Kodak recognizes revenue when it is realized or realizable and earned.
For the sale of multiple-element arrangements whereby equipment is
combined with services, including maintenance and training, and other
elements, including software and products, the Company allocates to,
and recognizes revenue from, the various elements based on verifiable
objective evidence of fair value (if software is not included or is
incidental to the transaction) or Kodak-specific objective evidence of
fair value if software is included and is other than incidental to the
sales transaction as a whole. For full service solutions sales, which
consist of the sale of equipment and software which may or may not
require significant production, modification or customization, there
are two acceptable methods of accounting: percentage of completion
accounting and completed contract accounting. For certain of the
Company's full service solutions, the completed contract method of
accounting is being followed by the Company. This is due to
insufficient historical experience resulting in the inability to
provide reasonably dependable estimates of the revenues and costs
applicable to the various stages of such contracts as would be
necessary under the percentage of completion methodology. When the
Company does have sufficient historical experience and the ability to
provide reasonably dependable estimates of the revenues and the costs
applicable to the various stages of these contracts, the Company will
account for these full service solutions under the percentage of
completion methodology.
19
At the time revenue is recognized, the Company also records reductions
to revenue for customer incentive programs in accordance with the
provisions of Emerging Issues Task Force (EITF) Issue No. 01-09,
"Accounting for Consideration Given from a Vendor to a Customer
(Including a Reseller of the Vendor's Products)." Such incentive
programs include cash and volume discounts, price protection,
promotional, cooperative and other advertising allowances, and coupons.
For those incentives that require the estimation of sales volumes or
redemption rates, such as for volume rebates or coupons, the Company
uses historical experience and internal and customer data to estimate
the sales incentive at the time revenue is recognized. In the event
that the actual results of these items differ from the estimates,
adjustments to the sales incentive accruals would be recorded.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Kodak regularly analyzes its customer accounts and, when it becomes
aware of a specific customer's inability to meet its financial
obligations to the Company, such as in the case of bankruptcy filings
or deterioration in the customer's overall financial condition, records
a specific provision for uncollectible accounts to reduce the related
receivable to the amount that is estimated to be collectible. The
Company also records and maintains a provision for doubtful accounts
for customers based on a variety of factors including the Company's
historical experience, the length of time the receivable has been
outstanding and the financial condition of the customer. If
circumstances related to specific customers were to change, the
Company's estimates with respect to the collectibility of the related
receivables could be further adjusted. However, losses in the
aggregate have not exceeded management's expectations.
20
INVENTORIES
Kodak reduces the carrying value of its inventory based on estimates of
what is excess, slow-moving and obsolete, as well as inventory whose
carrying value is in excess of net realizable value. These write-downs
are based on current assessments about future demands, market
conditions and related management initiatives. If, in the future, the
Company determined that market conditions and actual demands are less
favorable than those projected and, therefore, inventory was
overvalued, the Company would be required to further reduce the
carrying value of the inventory and record a charge to earnings at the
time such determination was made. If, in the future, the Company
determined that inventory write-downs were overstated and, therefore,
inventory was undervalued, the Company would recognize the increase to
earnings through higher gross profit at the time the related
undervalued inventory was sold. However, actual results have not
differed materially from management's estimates.
VALUATION OF LONG-LIVED ASSETS, INCLUDING GOODWILL AND PURCHASED
INTANGIBLE ASSETS
The Company reviews the carrying value of its long-lived assets,
including goodwill and purchased intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. The Company assesses the recoverability
of the carrying value of long-lived assets, other than goodwill and
purchased intangible assets with indefinite useful lives, by first
grouping its long-lived assets with other assets and liabilities at the
lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities (the asset group)
and, secondly, estimating the undiscounted future cash flows that are
directly associated with and expected to arise from the use of and
eventual disposition of such asset group. The Company estimates the
undiscounted cash flows over the remaining useful life of the primary
asset within the asset group. If the carrying value of the asset group
exceeds the estimated undiscounted cash flows, the Company records an
impairment charge to the extent the carrying value of the long-lived
asset exceeds its fair value. The Company determines fair value
through quoted market prices in active markets or, if quoted market
prices are unavailable, through the performance of internal analyses of
discounted cash flows or external appraisals. The undiscounted and
discounted cash flow analyses are based on a number of estimates and
assumptions, including the expected period over which the asset will be
utilized, projected future operating results of the asset group,
discount rate and long-term growth rate.
21
To assess goodwill for impairment, the Company performs an assessment
of the carrying value of its reporting units on an annual basis or when
events and changes in circumstances occur that would more likely than
not reduce the fair value of the Company's reporting units below their
carrying value. If the carrying value of a reporting unit exceeds its
fair value, the Company would record an impairment charge to earnings
to the extent the carrying amount of the reporting unit goodwill
exceeds its implied fair value. The Company estimates the fair value
of its reporting units through internal analyses and external
valuations, which utilize income and market valuation approaches
through the application of capitalized earnings, discounted cash flow
and market comparable methods. These valuation techniques are based on
a number of estimates and assumptions, including the projected future
operating results of the reporting unit, discount rate, long-term
growth rate and appropriate market comparables.
The Company's assessments of impairment of long-lived assets, including
goodwill and purchased intangible assets, and its periodic review of
the remaining useful lives of its long-lived assets are an integral
part of the Company's ongoing strategic review of the business and
operations, and are also performed in conjunction with the Company's
periodic restructuring actions. Therefore, future changes in the
Company's strategy, the ongoing digital substitution, the continuing
shift from overnight photofinishing to onsite processing and other
changes in the operations of the Company could impact the projected
future operating results that are inherent in the Company's estimates
of fair value, resulting in impairments in the future. Additionally,
other changes in the estimates and assumptions, including the discount
rate and expected long-term growth rate, which drive the valuation
techniques employed to estimate the fair value of long-lived assets and
goodwill could change and, therefore, impact the assessments of
impairment in the future.
In performing the annual assessment of goodwill for impairment, the
Company determined that no material reporting units' carrying values
were close to exceeding their respective fair values. See "Goodwill"
under Note 1, "Significant Accounting Policies."
INVESTMENTS IN EQUITY SECURITIES
Kodak holds minority interests in certain publicly traded and privately
held companies having operations or technology within its strategic
areas of focus. The Company's policy is to record an impairment charge
on these investments when they experience declines in value that are
considered to be other-than-temporary. Poor operating results of the
investees or adverse changes in market conditions in the future may
cause losses or an inability of the Company to recover its carrying
value in these underlying investments. The remaining carrying value of
the Company's investments in these equity securities is $25 million at
December 31, 2003.
22
INCOME TAXES
The Company records a valuation allowance to reduce its net deferred tax
assets to the amount that is more likely than not to be realized. At
December 31, 2003, the Company has deferred tax assets for its net
operating loss and foreign tax credit carryforwards of $258 million and
$137 million, respectively, relating to which the Company has a
valuation allowance of $45 million and $56 million, respectively. The
Company has considered future market growth, forecasted earnings, future
taxable income, the mix of earnings in the jurisdictions in which the
Company operates, and prudent and feasible tax planning strategies in
determining the need for these valuation allowances. If Kodak were to
determine that it would not be able to realize a portion of its net
deferred tax asset in the future for which there is currently no
valuation allowance, an adjustment to the net deferred tax assets would
be charged to earnings in the period such determination was made.
Conversely, if the Company were to make a determination that it is more
likely than not that the deferred tax assets for which there is
currently a valuation allowance would be realized, the related valuation
allowance would be reduced and a benefit to earnings would be recorded.
The Company's effective tax rate considers the impact of undistributed
earnings of subsidiary companies outside of the U.S. Deferred taxes
have not been provided for the potential remittance of such
undistributed earnings, as it is the Company's policy to permanently
reinvest its retained earnings. However, from time to time and to the
extent that the Company can repatriate overseas earnings on a tax-free
basis, the Company's foreign subsidiaries will pay dividends to the U.S.
Material changes in the Company's working capital and long-term
investment requirements could impact the decisions made by management
with respect to the level and source of future remittances and, as a
result, the Company's effective tax rate. See Note 15, "Income Taxes."
The Company operates within multiple taxing jurisdictions and is
subject to audit in these jurisdictions. These audits can involve
complex issues, which may require an extended period of time for
resolution. Although management believes that adequate provision has
been made for such issues, there is the possibility that the ultimate
resolution of such issues could have an adverse effect on the earnings
of the Company. Conversely, if these issues are resolved favorably in
the future, the related provisions would be reduced, thus having a
positive impact on earnings.
WARRANTY OBLIGATIONS
Management estimates expected product failure rates, material usage and
service costs in the development of its warranty obligations. In the
event that the actual results of these items differ from the estimates,
an adjustment to the warranty obligation would be recorded.
23
PENSION AND POSTRETIREMENT BENEFITS
Kodak's defined benefit pension and other postretirement benefit costs
and obligations are dependent on assumptions used by actuaries in
calculating such amounts. These assumptions, which are reviewed
annually by the Company, include the discount rate, long-term expected
rate of return on plan assets, salary growth, healthcare cost trend rate
and other economic and demographic factors. The Company bases the
discount rate assumption for its significant plans on the estimated rate
at which annuity contracts could be purchased to discharge the pension
benefit obligation. In estimating that rate, the Company looks to the
AA-rated corporate long-term bond yield rate in the respective country
as of the last day of the year in the Company's reporting period as a
guide. The long-term expected rate of return on plan assets is based on
a combination of formal asset and liability studies, historical results
of the portfolio, and management's expectation as to future returns that
are expected to be realized over the estimated remaining life of the
plan liabilities that will be funded with the plan assets. The salary
growth assumptions are determined based on the Company's long-term
actual experience and future and near-term outlook. The healthcare cost
trend rate assumptions are based on historical cost and payment data,
the near-term outlook, and an assessment of the likely long-term trends.
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 and liability study to reaffirm the current asset allocation and
the related EROA assumption. Wilshire Associates, a consulting firm,
completed a study (the Study) in September 2002, which led to several
asset allocation shifts and a decrease in the EROA from 9.5% for the
year ended December 31, 2002 to 9.0% for the year ended December 31,
2003. The EROA for 2004 will remain at 9.0%. Given the decrease in the
discount rate of 50 basis points from 6.5% for 2003 to 6.0% for 2004 and
increased recognition of unrecognized losses in accordance with
Statement of Financial Accounting Standards (SFAS) No. 87, "Employers'
Accounting for Pensions," total pension income for the major funded and
unfunded defined benefit plans in the U.S. is expected to decrease from
$47 million in 2003 to pension income in the range of $15 million to $25
million in 2004. This decrease in income will be partially offset by an
expected decrease in pension expense in the Company's non-U.S. plans in
the range of $5 million to $10 million in 2004. Additionally, due in
part to the decrease in the discount rate from 6.5% for 2003 to 6.0% for
2004 and increased amortization expense relating to the unrecognized
actuarial loss, the Company expects the cost of its most significant
postretirement benefit plan, the U.S. plan, to be in a range of $220
million to $265 million in 2004, as compared with $229 million in 2003.
These estimates have been incorporated into the Company's earnings
outlook for 2004.
24
Actual results that differ from our assumptions are recorded as
unrecognized gains and losses and are amortized to earnings over the
estimated future service period of the plan participants to the extent
such total net recognized gains and losses exceed 10% of the greater of
the plan's projected benefit obligation or the market-related value of
assets. Significant differences in actual experience or significant
changes in future assumptions would affect the Company's pension and
postretirement benefit costs and obligations.
In accordance with the guidance under SFAS No. 87, the Company is
required to record an additional minimum pension liability in its
Consolidated Statement of Financial Position that is at least equal to
the unfunded accumulated benefit obligation of its defined benefit
pension plans. In the fourth quarter of 2003, due to the improved
performance in the global equity markets, partially offset by decreasing
discount rates in 2003, the Company decreased its net additional minimum
pension liability by $167 million and recorded a corresponding credit to
accumulated other comprehensive income (a component of shareholders'
equity) of $122 million, net of taxes of $45 million. If the global
equity markets' performance continues to improve and discount rates
stabilize or improve in future periods, the Company may be in a position
to further reduce its additional minimum pension liability and reverse
the corresponding charges to shareholders' equity. Conversely, if the
global equity markets' performance and discount rates were to decline in
future periods, the Company may be required to increase its additional
minimum pension liability and record additional charges to shareholders'
equity. To mitigate the increase in its additional minimum pension
liability and additional charges to shareholders' equity, the Company
may elect to fund a particular plan or plans on a case-by-case basis.
ENVIRONMENTAL COMMITMENTS
Environmental liabilities are accrued based on estimates of known
environmental remediation exposures. The liabilities include accruals
for sites owned by Kodak, sites formerly owned by Kodak, and other
third party sites where Kodak was designated as a potentially
responsible party (PRP). The amounts accrued for such sites are based
on these estimates, which are determined using the ASTM Standard E 2137-
01, "Standard Guide for Estimating Monetary Costs and Liabilities for
Environmental Matters." The overall method includes the use of a
probabilistic model that forecasts a range of cost estimates for the
remediation required at individual sites. The Company's estimate
includes equipment and operating costs for remediation and long-term
monitoring of the sites. Such estimates may be affected by changing
determinations of what constitutes an environmental liability or an
acceptable level of remediation. Kodak's estimate of its environmental
liabilities may also change if the proposals to regulatory agencies for
desired methods and outcomes of remediation are viewed as not
acceptable, or additional exposures are identified. The Company has an
ongoing monitoring and identification process to assess how activities,
with respect to the known exposures, are progressing against the
accrued cost estimates, as well as to identify other potential
remediation sites that are presently unknown.
25
STOCK-BASED COMPENSATION
The Company accounts for its employee stock incentive plans under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" and the related interpretations under Financial
Accounting Standards Board (FASB) Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation." Accordingly,
no stock-based employee compensation cost is reflected in net earnings
for the years ended December 31, 2003, 2002 and 2001, as all options
granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. On February 18, 2004,
the Company announced that it will begin expensing stock options
starting January 1, 2005 using the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." The FASB is
expected to issue an exposure draft during 2004 relating to a new
accounting standard that will require the expensing of stock options.
This new accounting standard may become effective on January 1, 2005,
in which case the Company will follow the stock option expensing rules
of the new standard.
- ----------------------------------------------------------------------
NEW KODAK OPERATING MODEL AND CHANGE IN REPORTING STRUCTURE
As of and for the year ended December 31, 2003, the Company reported
financial information for three reportable segments (Photography,
Health Imaging and Commercial Imaging) and All Other. However, in
August of 2003, the Company announced the realignment of its operations
to accelerate growth in the commercial and consumer digital imaging
markets. In connection with the realignment, the Company's new
reporting structure will be implemented beginning in the first quarter
of 2004 as outlined below:
Digital and Film Imaging Systems Segment: The Digital and Film Imaging
Systems segment comprises the same products and services as the current
Photography segment without change.
Health Imaging Segment: There were no changes to the Health Imaging
segment.
Commercial Imaging Segment: Subsequent to the realignment, the
Commercial Imaging segment is composed of document imaging products and
services, commercial and government systems products and services, and
optics. Prior to the realignment, optics was included in All Other.
Beginning in the first quarter of 2004, this segment will exclude the
results of Remote Sensing Systems and Research Systems, Inc., which
were part of the commercial and government systems products and
services, as a result of the sale of these businesses to ITT
Industries, Inc. that was announced in February 2004.
26
Commercial Printing Segment: As of January 1, 2004, the Commercial
Printing Segment is composed of the Company's equity investments in
NexPress Solutions LLC (Kodak's 50/50 joint venture with Heidelberger
Druckmaschinen AG (Heidelberg)) and Kodak Polychrome Graphics (Kodak's
50/50 joint venture with Sun Chemical), and the graphics and wide-
format inkjet businesses. All of the above were formerly included in
the Commercial Imaging segment prior to the realignment. This segment
will also include the results of Scitex Digital Printing, which was
acquired in January 2004 and has since been renamed Kodak Versamark,
and the results of Heidelberg Digital LLC and Heidelberg's 50% share of
NexPress Solutions LLC upon the closing of this acquisition, which is
expected to occur in May 2004.
All Other: All Other is composed of Kodak's display and components
business for OLED displays, sensors and other small, miscellaneous
businesses.
27
DETAILED RESULTS OF OPERATIONS
Net Sales from Continuing Operations by Reportable Segment and All Other
(in millions) 2003 Change 2002 Change 2001
Photography
Inside the U.S. $ 3,812 - 6% $ 4,034 -10% $ 4,482
Outside the U.S. 5,420 + 9 4,968 + 1 4,921
------- --- ------- --- -------
Total Photography 9,232 + 3 9,002 - 4 9,403
------- --- ------- --- -------
Health Imaging
Inside the U.S. 1,061 - 2 1,088 0 1,089
Outside the U.S. 1,370 +16 1,186 + 1 1,173
------- --- ------- --- -------
Total Health Imaging 2,431 + 7 2,274 + 1 2,262
------- --- ------- --- -------
Commercial Imaging
Inside the U.S. 912 +11 818 0 820
Outside the U.S. 647 + 1 638 + 1 634
------- --- ------- --- -------
Total Commercial Imaging 1,559 + 7 1,456 0 1,454
------- --- ------- --- -------
All Other
Inside the U.S. 44 -17 53 -22 68
Outside the U.S. 51 + 2 50 +19 42
------- --- ------- --- -------
Total All Other 95 - 8 103 - 6 110
------- --- ------- --- -------
Total Net Sales $13,317 + 4% $12,835 - 3% $13,229
======= === ======= === =======
Earnings (Loss) from Continuing Operations Before Interest, Other
Charges, Net, and Income Taxes by Reportable Segment and All Other
(in millions)
Photography $ 418 - 46% $ 771 - 2% $ 787
Health Imaging 481 + 12 431 + 33 323
Commercial Imaging 166 - 14 192 + 12 172
All Other (78) -179 (28) + 53 (60)
------- ---- ------- ---- -------
Total of segments 987 - 28 1,366 + 12 1,222
Strategic asset impairments (3) (32) (12)
Impairment of Burrell
Companies' net assets held
for sale (9) - -
Restructuring costs
and other (557) (114) (720)
Donation to technology
enterprise (8) - -
GE settlement (12) - -
Patent infringement
claim settlement (14) - -
Prior year acquisition
settlement (14) - -
Legal settlements (8) - -
Environmental reserve
reversal 9 - -
Wolf charge - - (77)
Environmental reserve - - (41)
Kmart charge - - (20)
------- ---- ------- --- -------
Consolidated total $ 371 - 70% $ 1,220 +247% $ 352
======= ==== ======= === =======
28
Net Earnings (Loss) From Continuing Operations by Reportable Segment
and All Other
(in millions) 2003 Change 2002 Change 2001
Photography $ 347 - 37% $ 550 + 3% $ 535
Health Imaging 382 + 22 313 + 42 221
Commercial Imaging 99 + 19 83 - 1 84
All Other (73) -217 (23) + 39 (38)
----- ---- ----- ---- -----
Total of segments 755 - 18 923 + 15 802
Strategic asset and venture
investment impairments (7) (50) (15)
Impairment of Burrell
Companies' net assets held
for sale (9) - -
Restructuring costs
and other (557) (114) (720)
Donation to technology
enterprise (8) - -
GE settlement (12) - -
Patent infringement
claim settlement (14) - -
Prior year acquisition
settlement (14) - -
Legal settlements (8) - -
Environmental reserve
reversal 9 - -
Wolf charge - - (77)
Environmental reserve - - (41)
Kmart charge - - (20)
Interest expense (148) (173) (219)
Other corporate items 11 14 8
Tax benefit - contribution
of patents 13 - -
Tax benefit - PictureVision
subsidiary closure - 45 -
Tax benefit - Kodak Imagex
Japan - 46 -
Income tax effects on
above items and taxes
not allocated to segments 227 102 363
----- ---- ----- ---- -----
Consolidated total $ 238 - 70% $ 793 +879% $ 81
===== ==== ===== ==== =====
29
2003 COMPARED WITH 2002
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
- ------------
Net worldwide sales were $13,317 million for 2003 as compared with
$12,835 million for 2002, representing an increase of $482 million, or
4% as reported, or a decrease of 1% excluding the favorable impact from
exchange. The increase in net sales was primarily due to increased
volumes and favorable exchange, which increased sales for 2003 by 2.4
and 5.3 percentage points, respectively. The increase in volumes was
primarily driven by consumer digital cameras, Printer Dock products,
inkjet media and entertainment print films in the Photography segment,
digital products in the Health Imaging segment, and imaging services
and document scanners in the Commercial Imaging segment, partially
offset by decreased volumes for traditional consumer film products.
Favorable exchange resulted from an increased level of sales in non-
U.S. countries as the U.S. dollar weakened throughout 2003 in relation
to most foreign currencies, particularly the Euro. In addition, the
acquisition of PracticeWorks, Inc. (PracticeWorks) in the fourth
quarter of 2003 accounted for an additional 0.4 percentage points of
the increase in net sales. These increases were partially offset by
decreases attributable to price/mix, which reduced sales for 2003 by
approximately 4.2 percentage points. These decreases were driven
primarily by price/mix declines in traditional products and services,
and consumer digital cameras in the Photography segment, film and laser
imaging systems in the Health Imaging segment, and graphic arts
products in the Commercial Imaging segment.
Net sales in the U.S. were $5,829 million for the current year as
compared with $5,993 million for the prior year, representing a
decrease of $164 million, or 3%. Net sales outside the U.S. were
$7,488 million for the current year as compared with $6,842 million for
the prior year, representing an increase of $646 million, or 9% as
reported, or no change excluding the favorable impact of exchange.
The Company's operations outside the U.S. are reported in three
regions: (1) the Europe, Africa and Middle East region (EAMER), (2) the
Asia Pacific region, and (3) the Canada and Latin America region. Net
sales in EAMER for 2003 were $3,880 million as compared with $3,484
million for 2002, representing an increase of 11% as reported, or a
decrease of 2% excluding the favorable impact of exchange. Net sales
in the Asia Pacific region for 2003 were $2,368 million compared with
$2,240 million for 2002, representing an increase of 6% as reported, or
a decrease of 1% excluding the favorable impact of exchange. Net sales
in the Canada and Latin America region for 2003 were $1,240 million as
compared with $1,118 million for 2002, representing an increase of 11%
as reported, or an increase of 5% excluding the favorable impact of
exchange.
30
The Company's major emerging markets include China, Brazil, Mexico,
India, Russia, Korea, Hong Kong and Taiwan. Net sales in emerging
markets were $2,591 million for 2003 as compared with $2,425 million
for 2002, representing an increase of $166 million, or 7% as reported,
or an increase of 4% excluding the favorable impact of exchange. The
emerging market portfolio accounted for approximately 19% and 35% of
the Company's worldwide and non-U.S. sales, respectively, in 2003.
Sales growth in Russia, India and China of 26%, 17% and 12%,
respectively, were the primary drivers of the increase in emerging
market sales, partially offset by decreased sales in Taiwan, Hong Kong
and Brazil of 19%, 10% and 7%, respectively. The increase in sales in
Russia is a result of continued growth in the number of Kodak Express
stores, which represent independently owned photo specialty retail
outlets, and the Company's efforts to expand the distribution channels
for Kodak products and services. Sales increases in India were driven
by the continued success from the Company's efforts to increase the
level of camera ownership and from the continued success of
independently owned Photoshop retail stores. Sales growth in China
resulted from strong business performance for all Kodak's operations in
that region in the first, third and fourth quarters of 2003; however,
this growth was partially offset by the impact of the Severe Acute
Respiratory Syndrome (SARS) situation, particularly for consumer and
professional products and services, which negatively impacted sales in
China during the second quarter. The sales declines experienced in
Hong Kong and Taiwan during 2003 are also a result of the impact of
SARS. The sales decline in Brazil is reflective of the continued
economic weakness experienced there.
Gross profit was $4,284 million for 2003 as compared with $4,610
million for 2002, representing a decrease of $326 million, or 7%. The
gross profit margin was 32.2% in the current year as compared with
35.9% in the prior year. The decrease of 3.7 percentage points was
attributable to declines in price/mix, which reduced gross profit
margins by approximately 5.0 percentage points. This decrease was
driven primarily by price/mix declines in traditional consumer film
products, photofinishing, consumer digital cameras, and entertainment
print films in the Photography segment, analog medical film and digital
capture equipment in the Health Imaging segment, and graphic arts
products in the Commercial Imaging segment. The decline in price/mix
was partially offset by favorable exchange, which increased gross
margins by approximately 0.8 percentage points, and decreases in
manufacturing cost, which favorably impacted gross profit margins by
approximately 0.4 percentage points year-over-year due to reduced labor
expense, favorable materials pricing and improved product yields. The
acquisition of PracticeWorks in the fourth quarter of 2003 did not have
a significant impact on the gross profit margin.
31
Selling, general and administrative expenses (SG&A) were $2,648 million
for 2003 as compared with $2,530 million for 2002, representing an
increase of $118 million, or 5%. SG&A increased slightly as a
percentage of sales from 19.7% for the prior year to 19.9% for the
current year. The net increase in SG&A is primarily attributable to an
increase in the benefit rate and the occurrence of the following one-
time charges: intellectual property settlement of $12 million; patent
infringement claim of $14 million; settlement of outstanding issues
relating to a prior year acquisition of $14 million; write-down of the
Burrell Companies' net assets held for sale of $9 million; donation to
a technology enterprise for research purposes amounting to $8 million;
legal settlement of $8 million; strategic asset impairments of $3
million; and unfavorable exchange of $118 million due to an increased
level of SG&A costs incurred in non-U.S. countries as most foreign
currencies strengthened against the U.S. dollar in 2003. These items
were partially offset by a reversal of environmental reserves of $9
million and cost savings realized from position eliminations associated
with ongoing focused cost reduction programs.
Research and development (R&D) costs were $781 million for 2003 as
compared with $762 million for 2002, representing an increase of $19
million, or 2%. The increase in R&D is primarily due to $31 million of
write-offs for purchased in-process R&D associated with two
acquisitions made in 2003. These charges were partially offset by cost
savings realized from position eliminations associated with ongoing
focused cost reduction programs. As a percentage of sales, R&D costs
remained flat at 5.9% for both the current and prior years.
Earnings from continuing operations before interest, other charges,
net, and income taxes for 2003 were $371 million as compared with
$1,220 million for 2002, representing a decrease of $849 million, or
70%. The decrease is primarily the result of (1) the decline in gross
profit margin and an increase in SG&A, and (2) net focused cost
reduction charges of $484 million incurred during 2003 as compared with
$98 million for 2002, an increase of $386 million which was primarily
due to the costs incurred under the Third Quarter, 2003 Restructuring
Program.
Interest expense for 2003 was $148 million as compared with $173
million for 2002, representing a decrease of $25 million, or 14%. The
decrease in interest expense is almost entirely attributable to lower
average interest rates in 2003 relative to 2002, which was driven
mainly by the refinancing of the Company's $144 million 9.38% Notes due
March 2003 and the $110 million 7.36% Notes due April 2003 with lower
interest rate medium term notes and lower average interest rates on
commercial paper during 2003.
32
The other charges, net component includes principally investment
income, income and losses from equity investments, foreign exchange,
and gains and losses on the sales of assets and investments. Other
charges for the current year were a net charge of $51 million as
compared with a net charge of $101 million for 2002. The decrease in
other charges is primarily attributable to increased income from the
Company's equity investment in Kodak Polychrome Graphics, reduced
losses from the Company's NexPress joint venture, the elimination of
losses from the Company's equity investment in the Phogenix joint
venture due to its dissolution in the second quarter of 2003, and lower
non-strategic venture investment impairments.
The Company's effective tax benefit from continuing operations was $66
million for the year ended December 31, 2003, representing an effective
tax benefit rate from continuing operations of 38%, despite the fact
that the Company had positive earnings from continuing operations
before income taxes. The effective tax benefit rate from continuing
operations of 38% differs from the U.S. statutory tax rate of 35%
primarily due to earnings from operations in certain lower-taxed
jurisdictions outside the U.S., coupled with losses incurred in certain
jurisdictions that are benefited at a rate equal to or greater than the
U.S. federal income tax rate.
The Company's effective tax rate from continuing operations was 16% for
the year ended December 31, 2002. The effective tax rate from
continuing operations of 16% is less than the U.S. statutory rate of
35% primarily due to the charges for the focused cost reductions and
asset impairments being deducted in jurisdictions that have a higher
tax rate than the U.S. federal income tax rate, and also due to
discrete period tax benefits of $45 million in connection with the
closure of the Company's PictureVision subsidiary and $46 million
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. These benefits were
partially offset by the impact of recording a valuation allowance to
provide for certain tax benefits that the Company would be required to
forgo in order to fully realize the benefits of its foreign tax credit
carryforwards.
Excluding the effect of discrete period items, the effective tax rate
from continuing operations was 19.5% and 27% in 2003 and 2002,
respectively. The decrease from 27% in 2002 to 19.5% in 2003 is
primarily due to increased earnings in certain lower-taxed
jurisdictions outside the U.S. relative to total consolidated earnings.
Net earnings from continuing operations for 2003 were $238 million, or
$.83 per basic and diluted share, as compared with net earnings from
continuing operations for 2002 of $793 million, or $2.72 per basic and
diluted share, representing a decrease of $555 million, or 70%. The
decrease in net earnings from continuing operations is primarily
attributable to the reasons outlined above.
33
PHOTOGRAPHY
- -----------
Net worldwide sales for the Photography segment were $9,232 million for
2003 as compared with $9,002 million for 2002, representing an increase
of $230 million, or 3% as reported, or a decrease of 3% excluding the
favorable impact of exchange. Approximately 1.9 percentage points of
the increase in net sales was attributable to increases related to
volume, driven primarily by consumer digital cameras, Printer Dock
products, inkjet media and entertainment print films, partially offset
by volume declines for traditional consumer film products, and
approximately 5.9 percentage points of the increase was attributable to
favorable exchange. These increases were partially offset by price/mix
declines, primarily driven by consumer digital cameras and traditional
products and services, which reduced net sales by approximately 5.0
percentage points.
Photography segment net sales in the U.S. were $3,812 million for the
current year as compared with $4,034 million for the prior year,
representing a decrease of $222 million, or 6%. Photography segment
net sales outside the U.S. were $5,420 million for the current year as
compared with $4,968 million for the prior year, representing an
increase of $452 million, or 9% as reported, or a decrease of 1%
excluding the favorable impact of exchange.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 9% in 2003 as
compared with 2002, reflecting declines due to lower volumes of 12% and
price/mix declines of 3%, partially offset by favorable exchange of 6%.
Sales of the Company's consumer film products within the U.S. decreased
18% in the current year as compared with the prior year, reflecting
declines due to lower volumes of 17% and price/mix declines of 1%.
Sales of the Company's consumer film products outside the U.S.
decreased 2% in 2003 compared with 2002, reflecting declines in volume
of 9% and price/mix declines of 2%, partially offset by favorable
exchange of 9%. The lower film product sales are attributable to a
declining industry demand driven primarily by the impact of digital
substitution and retailer inventory reductions.
The U.S. film industry sell-through volumes decreased approximately 8%
in 2003 as compared with 2002 primarily due to the impact of digital
substitution. The Company's current estimate of worldwide consumer
film industry volumes for 2003 is a decrease of approximately 8%. The
Company maintained approximately flat year-over-year blended U.S.
consumer film share as it has done for the past several consecutive
years.
Net worldwide sales for photofinishing services (excluding equipment),
including Qualex in the U.S. and Consumer Imaging Services (CIS)
outside the U.S., decreased 15% in 2003 as compared with 2002,
reflecting lower volumes and declines in price/mix, partially offset by
favorable exchange. In the U.S., Qualex's sales for photofinishing
services decreased 19% in 2003 as compared with 2002, and outside of
the U.S., CIS sales decreased 8%. These decreases reflect the effects
of a continued weak film industry.
34
Net sales from the Company's consumer digital products and services,
which include picture maker kiosks/media and retail consumer digital
services revenue primarily from Picture CD and Retail.com, increased 6%
in 2003 as compared with 2002, driven primarily by an increase in sales
of kiosks and consumer digital services.
The Company's Ofoto business increased its sales 57% in 2003 as
compared with 2002. Ofoto's sales represented less than 1% of the
Company's consolidated net worldwide sales for 2003. Ofoto now has
more than 11 million members and continues to be the market leader in
the online photo services space.
Net worldwide sales of consumer digital cameras increased 79% in 2003
as compared with 2002, driven almost entirely by strong increases in
volume, which were partially offset by declines in price/mix. Sales
continue to be driven by strong consumer acceptance of the EasyShare
digital camera system, as reflected in increased market share in a
rapidly growing market.
Although some of Kodak's largest channels do not report share data,
Kodak continues to hold one of the top U.S. digital camera market share
positions in channels reporting share data, attaining the number three
share position for the full year, after attaining the top spot for the
fourth quarter alone. Outside of the U.S., Kodak placed in the top
four market share positions in 6 out of 9 key markets in the fourth
quarter, and in the top four in 5 out of 9 key markets for the full
year. Consumer digital cameras were profitable on a fully allocated
basis for the second half of 2003.
Kodak's new Printer Dock products, initially launched in the spring of
2003, experienced strong sales growth in the fourth quarter of 2003,
strengthening their number two share position in the U.S. snapshot
printer market and putting them on track to be a $100 million business
in the first full year of sales.
Net worldwide sales of inkjet photo paper increased 32% in 2003 as
compared with 2002, primarily due to higher volumes. Kodak continued
to maintain its shared leader market share position in the U.S. in
2003. The double-digit revenue growth and the maintenance of market
share are primarily attributable to strong underlying market growth and
the continued growth and acceptance of a new line of small format
inkjet papers.
35
Net worldwide sales of professional film capture products, including
color negative, color reversal and commercial black and white films,
decreased 13% in 2003 as compared with 2002, primarily reflecting
declines in volume and negative price/mix, partially offset by
favorable exchange. Sales declines of professional film capture
products resulted primarily from the ongoing impact of digital
substitution. Net worldwide sales of professional sensitized output,
including color negative paper and display materials, increased 2% in
2003 as compared with 2002, primarily reflecting an increase related to
favorable exchange, partially offset by declines in volume and negative
price/mix. In addition, net worldwide sales of professional digital
cameras and digital writers increased during 2003.
Net worldwide sales of origination and print film to the entertainment
industry increased 11% in 2003 as compared with 2002, primarily
reflecting higher print film volumes and favorable exchange, partially
offset by negative price/mix.
Gross profit for the Photography segment was $2,861 million for 2003 as
compared with $3,219 million for 2002, representing a decrease of $358
million or 11%. The gross profit margin was 31.0% in the current year
as compared with 35.8% in the prior year. The 4.8 percentage point
decrease was primarily attributable to decreases in price/mix that
impacted gross profit margins by approximately 6.6 percentage points,
partially offset by an increase in manufacturing cost improvements and
favorable exchange, which impacted gross margins by approximately 0.7
and 1.1 percentage points, respectively. The decrease in price/mix was
primarily due to the impact of digital substitution, resulting in a
decrease in sales of higher margin traditional products, the impact of
which was only partially offset by increased sales of lower margin
digital products.
SG&A expenses for the Photography segment were $1,962 million for 2003
as compared with $1,935 million for 2002, representing an increase of
$27 million or 1%. The net increase in SG&A spending is primarily
attributable to unfavorable exchange of $96 million and an increase in
the benefit rate, partially offset by cost savings realized from
position eliminations associated with ongoing focused cost reduction
programs. As a percentage of sales, SG&A expense decreased slightly
from 21.5% in the prior year to 21.3% in the current year.
R&D costs for the Photography segment decreased $32 million or 6% from
$513 million in 2002 to $481 million in 2003. As a percentage of
sales, R&D costs decreased slightly from 5.7% in the prior year to 5.2%
in the current year. The decrease in R&D is primarily due to cost
savings realized from position eliminations associated with ongoing
focused cost reduction programs. These cost savings were partially
offset by $21 million of write-offs for purchased in-process R&D
associated with an acquisition made in 2003.
Earnings from continuing operations before interest, other charges,
net, and income taxes for the Photography segment decreased $353
million, or 46%, from $771 million in 2002 to $418 million in 2003,
primarily as a result of the factors described above.
36
HEALTH IMAGING
- --------------
On October 7, 2003, the Company completed the acquisition of all of the
outstanding shares of PracticeWorks, Inc., a leading provider of dental
practice management software and digital radiographic imaging systems
for approximately $475 million in cash, inclusive of transaction costs,
and assumed net debt of approximately $20 million. This acquisition is
expected to contribute approximately $200 million in sales to the
Health Imaging segment during the first full year. At the time of the
acquisition, it was anticipated that the transaction would be slightly
dilutive to earnings from the date of acquisition through the end of
2005 and accretive to earnings thereafter. However, based on ongoing
success in the execution of the integration, it is anticipated to
become accretive to earnings sometime during 2005, ahead of the
original execution plan. This acquisition will enable Kodak to offer
its customers a full spectrum of dental imaging products and services
from traditional film to digital radiography and photography, and is
expected to move Health Imaging into the leading position in the dental
practice management and dental radiographic markets.
Net worldwide sales for the Health Imaging segment were $2,431 million
for 2003 as compared with $2,274 million for 2002, representing an
increase of $157 million, or 7% as reported, or an increase of 2%
excluding the favorable impact of exchange. The increase in sales was
comprised of: (1) an increase from favorable exchange of approximately
5.4 percentage points, (2) the acquisition of PracticeWorks Inc. in
October 2003, which accounted for approximately 2.0 percentage points
of the sales increase as it contributed $48 million to 2003 sales of
dental systems, and (3) an increase in volume of approximately 2.9
percentage points, driven primarily by volume increases in digital
products. These increases were partially offset by declines in
price/mix of approximately 3.3 percentage points, which were related to
both digital and traditional products.
Net sales in the U.S. were $1,061 million for the current year as
compared with $1,088 for the prior year, representing a decrease of $27
million, or 2%. Net sales outside the U.S. were $1,370 million for
2003 as compared with $1,186 million for 2002, representing an increase
of $184 million, or 16% as reported, or an increase of 6% excluding the
favorable 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, dental
practice management software, and Healthcare Information Systems (HCIS)
including Picture Archiving and Communications Systems (PACS),
increased 14% in 2003 as compared with 2002. The increase in digital
product sales was primarily attributable to favorable exchange, higher
volumes of digital media, digital capture equipment and services, and
the PracticeWorks acquisition. Service revenues increased due to an
increase in digital equipment service contracts during 2003 as compared
with the prior year. These increases were partially offset by declines
in price/mix for digital media and digital capture equipment.
37
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, decreased 1% in 2003 as compared
with 2002, reflecting declines in volume and negative price/mix almost
entirely offset by favorable exchange.
Gross profit for the Health Imaging segment was $1,049 million for 2003
as compared with $930 million for 2002, representing an increase of
$119 million, or 13%. The gross profit margin was 43.2% in 2003 as
compared with 40.9% in 2002. The increase in the gross profit margin
of 2.3 percentage points was primarily attributable to: (1) a decrease
in manufacturing cost, which increased gross profit margins by
approximately 3.2 percentage points, primarily due to favorable media
and equipment manufacturing cost led by DryView digital media and
digital capture equipment, complemented by lower service costs, (2)
favorable exchange, which contributed approximately 1.1 percentage
points to the gross profit margin, and (3) the acquisition of
PracticeWorks in the fourth quarter of 2003, which increased gross
profit margins by approximately 0.4 percentage points for the current
year. These increases were partially offset by decreases attributable
to price/mix, which negatively impacted gross profit margins by 2.4
percentage points due to lower prices for digital media, digital
capture equipment and analog medical film.
SG&A expenses for the Health Imaging segment increased $43 million, or
12%, from $347 million for 2002 to $390 million for 2003. As a
percentage of sales, SG&A expenses increased from 15.3% for 2002 to
16.0% for 2003. The increase in SG&A expenses is primarily due to the
acquisition of PracticeWorks, which had $22 million of SG&A expenses in
2003, an increase in the benefit rate, and the unfavorable impact of
exchange which accounted for $16 million of the increase.
R&D costs for the Health Imaging segment increased $26 million, or 17%,
from $152 million in 2002 to $178 million in 2003. As a percentage of
sales, R&D costs increased from 6.7% in 2002 to 7.3% in 2003. The
increase is primarily due to $12 million of R&D costs associated with
the acquisition of PracticeWorks, $10 million of which was a one-time
write-off of purchased in-process R&D. The remainder of the increase
is due to increased spending to drive growth in selected areas of the
product portfolio.
Earnings from continuing operations before interest, other charges,
net, and income taxes for the Health Imaging segment increased $50
million, or 12%, from $431 million for 2002 to $481 million for 2003
due primarily to the reasons described above.
38
COMMERCIAL IMAGING
- -------------------
Net worldwide sales for the Commercial Imaging segment for 2003
increased from $1,456 million for 2002 to $1,559 million for 2003,
representing an increase of $103 million, or 7%, or an increase of 4%
excluding the favorable impact of exchange. The increase in net sales
was primarily comprised of: (1) increases in volume, which contributed
approximately 4.8 percentage points to 2003 sales, which was primarily
attributable to commercial and government products and services,
imaging services and document scanners, and (2) an increase of
approximately 3.2 percentage points due to favorable exchange, which
was partially offset by declines due to price/mix of approximately 1.1
percentage points, primarily driven by graphics products.
Net sales in the U.S. were $912 million for 2003 as compared with $818
million for 2002, representing an increase of $94 million, or 11%. Net
sales outside the U.S. were $647 million in the current year as
compared with $638 million in the prior year, representing an increase
of $9 million, or 1%, or a decrease of 7% excluding the favorable
impact of exchange.
Net worldwide sales of the Company's commercial and government products
and services increased 33% in 2003 as compared with 2002. The increase
in sales was principally due to an increase in revenues from government
products and services under its government contracts, including the
modification of a long-term contract in the fourth quarter of 2003.
Net worldwide sales of graphic arts products to Kodak Polychrome
Graphics (KPG), an unconsolidated joint venture affiliate in which the
Company has a 50% ownership interest, decreased 14% in 2003 as compared
with 2002, reflecting declines in both volume and price/mix in graphic
arts film. This reduction resulted largely from digital substitution
and the effect of continuing economic weakness in the commercial
printing market.
KPG's earnings performance continues to improve driven primarily by its
world-leading position in the growth segments of digital proofing and
digital printing plates, coupled with favorable foreign exchange.
KPG's operating profit has been positive for 14 consecutive quarters
and has shown consistent improvement during that same period. The
Company's equity in the earnings of KPG contributed positive results to
other charges, net during 2003.
39
Gross profit for the Commercial Imaging segment for 2003 decreased $25
million, or 6%, from $449 million for 2002 to $424 million for 2003.
The gross profit margin was 27.2% for 2003 as compared with 30.8% for
2002. The decrease in the gross profit margin of 3.6 percentage points
was attributable to: (1) an increase in manufacturing cost, which
negatively impacted gross profit margins by approximately 2.1
percentage points, primarily as a result of moving certain
manufacturing processes to new facilities during 2003, (2) declines
attributable to price/mix, which reduced gross profit margins by
approximately 1.3 percentage points primarily due to declining
contributions from traditional graphic arts products for the reasons
outlined above, and (3) unfavorable exchange, which negatively impacted
gross profit margins by 0.2 percentage points.
SG&A expenses for the Commercial Imaging segment increased $13 million,
or 7%, from $194 million for 2002 to $207 million for 2003. The
increase in SG&A expense was primarily due to the impact of unfavorable
exchange, which accounted for $7 million of the increase, and an
increase in the benefit rate. As a percentage of sales, SG&A expenses
remained constant at 13.3% for both years.
R&D costs for the Commercial Imaging segment decreased $12 million, or
19%, from $63 million for 2002 to $51 million for 2003. As a
percentage of sales, R&D costs decreased from 4.3% in 2002 to 3.3% in
2003. The decline was primarily related to a decrease of approximately
$9 million in ENCAD Inc.'s R&D spending in 2003 as compared with 2002.
Earnings from continuing operations before interest, other charges,
net, and income taxes for the Commercial Imaging segment decreased $26
million, or 14%, from $192 million in 2002 to $166 million in 2003.
The decrease in earnings from operations is primarily attributable to
the reasons outlined above.
NexPress, the unconsolidated joint venture between Kodak and Heidelberg
in which the Company has a 50% ownership interest, continues to
increase unit placements of the NexPress 2100 Digital Production Color
Press despite a weak printing market, with good customer acceptance.
On February 9, 2004, the Company announced its intent to sell the
assets and business of the Remote Sensing Systems operation, including
the stock of Kodak's wholly owned subsidiary, Research Systems, Inc.,
collectively known as RSS, to ITT Industries for $725 million in cash.
RSS, a leading provider of specialized imaging solutions to the
aerospace and defense community, is part of the Company's commercial &
government systems' operation within the Commercial Imaging segment and
its customers include NASA, other U.S. government agencies, and
aerospace and defense companies. Kodak's RSS operation had sales in
2003 of approximately $425 million. The sale of RSS is expected to
result in an after-tax gain of approximately $390 million. Taking into
account both the after-tax gain on the sale and the loss of operational
results of RSS, the Company expects that the sale will positively
impact earnings by approximately $1.31 per share in 2004. The
after-tax gain and expected impact to earnings per share for 2004 as a
result of the RSS sale excludes the potential impacts from any
settlement or curtailment gains or losses that may be incurred in
connection with the Company's pension and postretirement benefit plans,
as these amounts are not currently determinable. The Company is
currently evaluating whether the sale of RSS will be accounted for as
a discontinued operation beginning in the first quarter of 2004 in
accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
40
On March 8, 2004, the Company announced that it had agreed with
Heidelberger Druckmaschinen AG (Heidelberg) to purchase Heidelberg's 50
percent interest in NexPress, a 50/50 joint venture of Kodak and
Heidelberg that makes high-end, on-demand digital color printing
systems, and the equity of Heidelberg Digital LLC, a leading maker of
digital black-and-white variable-data printing systems. Kodak also
will acquire NexPress GmbH, a German subsidiary of Heidelberg that
provides engineering and development support, and certain inventory,
assets, and employees of Heidelberg's regional operations or market
centers. The Company will not pay any cash at closing for the
businesses being acquired. Under the terms of the acquisition, Kodak
and Heidelberg agreed to use a performance-based earn-out formula
whereby Kodak will make periodic payments to Heidelberg over a two-year
period, if certain sales goals are met. If all sales goals are met
during the next two calendar years ending December 31, 2005, the
Company will pay a maximum of $150 million in cash. Additional
payments may also be made if certain sales goals are met during a five-
year period following the closing of the transaction. This
acquisition, which is expected to close in May 2004, advances the
Company's strategy of diversifying its business portfolio, and
accelerates its participation in the digital commercial printing
industry. The Company expects this acquisition to incrementally
increase revenue by approximately $175 million over the remainder of
2004. The impact of these acquisitions to 2004 net earnings can not be
accurately estimated until the Company completes the acquisition.
OTHER
- -----
Net worldwide sales for All Other were $95 million for 2003 as compared
with $103 million for 2002, representing a decrease of $8 million, or
8%. Net sales in the U.S. were $44 million in 2003 as compared with
$53 million for 2002, representing a decrease of $9 million, or 17%.
Net sales outside the U.S. were $51 million in the current year as
compared with $50 million in the prior year, representing an increase
of $1 million, or 2%.
SK Display Corporation, the OLED panel manufacturing joint venture
between Kodak and Sanyo, supplies OLED screens to the Company for its
digital camera manufacturing, and continues to focus on improving
manufacturing yields. Kodak supplies OLED chemicals and materials to
SK Display, and has created a new generation of chemistry that is
currently being tested.
Loss from continuing operations before interest, other charges, net,
and income taxes for All Other increased $50 million from a loss of $28
million in 2002 to a loss of $78 million in 2003. Increased levels of
investment for the Company's display business primarily drove the
increase in the loss from operations.
41
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
Earnings from discontinued operations were $.09 per basic and diluted
share for 2003, as compared with a loss from discontinued operations
for 2002 of $.08 per basic and diluted share.
During the first quarter of 2003, the Company reversed a tax reserve of
$15 million through discontinued operations. The reversal of the tax
reserve was triggered by the Company's repurchase of certain properties
that were initially sold in connection with the 1994 divestiture of
Sterling Winthrop Inc., which represented a portion of the Company's
non-imaging health businesses. The repurchase of these properties will
allow the Company to directly manage the environmental remediation that
the Company is required to perform in connection with those properties,
which will result in better overall cost control. In addition, the
repurchase eliminated the uncertainty regarding the recoverability of
tax benefits associated with the indemnification payments that were
previously being made to the purchaser.
During the fourth quarter of 2003, the Company recorded a net of tax
credit of $7 million through discontinued operations for the reversal
of an environmental reserve, which was primarily attributable to
positive developments in the Company's remediation efforts relating to
a formerly owned manufacturing site in the U.S. In addition, during
the fourth quarter of 2003, the Company reversed state income tax
reserves of $3 million, net of tax, through discontinued operations due
to the favorable outcome of tax audits in connection with a formerly
owned business.
The loss from discontinued operations for 2002 was comprised of losses
incurred from the shutdown of Kodak Global Imaging, Inc., which
amounted to $35 million net of tax, partially offset by net of tax
earnings of $12 million related to the favorable outcome of litigation
associated with the 1994 sale of Sterling Winthrop Inc.
NET EARNINGS
Net earnings for 2003 were $265 million, or $.92 per basic and diluted
share, as compared with net earnings for 2002 of $770 million, or $2.64
per basic and diluted share, representing a decrease of $505 million,
or 66%. This decrease is primarily attributable to the reasons
outlined above.
42
2002 COMPARED WITH 2001
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
- ------------
Net worldwide sales were $12,835 million for 2002 as compared with
$13,229 million for 2001, representing a decrease of $394 million, or
3% as reported, with no net impact from exchange. Declines in volume
accounted for approximately 1.5 percentage points of the sales
decrease, driven primarily by volume decreases in traditional film and
U.S. photofinishing services. Declines in price/mix reduced sales for
2002 by approximately 1.5 percentage points, driven primarily by
traditional consumer film products and health film and laser imaging
systems.
Net sales in the U.S. were $5,993 million for the current year as
compared with $6,459 million for the prior year, representing a
decrease of $466 million, or 7%. Net sales outside the U.S. were
$6,842 million for the current year as compared with $6,770 million for
the prior year, representing an increase of $72 million, or 1% as
reported, with no impact from exchange.
Net sales in EAMER for 2002 were $3,491 million as compared with $3,333
million for 2001, representing an increase of 5% as reported, or 1%
excluding the favorable impact of exchange. Net sales in the Asia
Pacific region for 2002 increased slightly from $2,231 million for 2001
to $2,240 million for 2002, with no impact from exchange. Net sales in
the Canada and Latin America region for 2002 were $1,111 million as
compared with $1,206 million for 2001, representing a decrease of 8% as
reported, or an increase of 6% excluding the negative impact of
exchange.
Net sales in emerging markets were $2,425 million for 2002 as compared
with $2,371 million for 2001, representing an increase of $54 million,
or 2%. Sales growth in China and Russia of 25% and 20%, respectively,
were the primary drivers of the increase in sales in emerging markets,
partially offset by decreased sales in Argentina, Brazil and Mexico of
53%, 11% and 6%, respectively. The sales growth in China resulted from
strong business performance for health and consumer products. The
increase in sales in Russia is a result of continued growth in the
number of Kodak Express stores, which represent independently owned
photo specialty retail outlets, and the Company's efforts to expand the
distribution channels for Kodak products and services. The sales
declines in Argentina, Brazil and Mexico were 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 2002.
43
Gross profit was $4,610 million for 2002 as compared with $4,568
million for 2001, representing an increase of $42 million, or 1%. The
gross profit margin was 35.9% in the current year as compared with
34.5% in the prior year. The increase of 1.4 percentage points was
primarily attributable to manufacturing cost, which favorably impacted
gross profit margins by approximately 2.7 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 2001 but not in the current year,
which negatively impacted gross profit margins for 2001 by
approximately 1.0 percentage point. The positive impacts to gross
profit were partially offset by year-over-year price/mix declines,
which reduced gross profit margins by approximately 2.3 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 $2,530 million for 2002 as compared with $2,625
million for 2001, representing a decrease of $95 million, or 4%. SG&A
decreased slightly as a percentage of sales from 19.8% for the prior
year to 19.7% for the current year. The net decrease in SG&A is
primarily attributable to the cost savings from the employment
reductions and other non-severance related components of the Company's
focused cost reductions, offset by acquisitions in the Photography and
Commercial segments and higher strategic venture investment impairments
in 2002 when compared with 2001 of $15 million.
R&D costs remained relatively flat at $762 million for 2002 as compared
with $779 million for 2001, representing a decrease of $17 million, or
2%. As a percentage of sales, R&D costs also remained flat at 5.9% for
both the current and prior years.
Earnings from continuing operations before interest, other charges,
net, and income taxes for 2002 were $1,220 million as compared with
$352 million for 2001, representing an increase of $868 million, or
247%. The primary reason for the increase in earnings from operations
was a decrease in restructuring costs and asset impairments of $586
million. Results for 2002 also benefited from the savings associated
with restructuring programs implemented in 2001. In addition, results
for 2001 included charges of $138 million for the Wolf bankruptcy
charge, environmental reserve and Kmart bankruptcy, and goodwill
amortization charges of $153 million.
Interest expense for 2002 was $173 million as compared with $219
million for 2001, representing a decrease of $46 million, or 21%. The
decrease in interest expense is primarily attributable to lower average
borrowing levels and lower interest rates in 2002 relative to 2001.
44
Other charges for the current year were a net charge of $101 million as
compared with a net charge of $18 million for the prior year. The
increase in other charges, net is primarily attributable to increased
losses from the Company's NexPress and SK Display joint ventures as
these business ventures are in the early stages of bringing their
offerings to market, higher non-strategic venture investment
impairments, higher losses related to minority interests and an
increase in foreign exchange losses. This activity was partially
offset by a gain recognized on the sale of assets in the current year.
The Company's effective tax rate from continuing operations decreased
from 30% for 2001 to 16% for 2002. The effective tax rate from
continuing operations of 16% for 2002 is less than the U.S. statutory
rate of 35% primarily due to the charges for the focused cost
reductions and asset impairments being deducted in jurisdictions that
have a higher tax rate than the U.S. federal income tax rate, and also
due to discrete period tax benefits of $45 million in connection with
the closure of the Company's PictureVision subsidiary and $46 million
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. These benefits were
partially offset by the impact of recording a valuation allowance to
provide for certain tax benefits that the Company would be required to
forgo in order to fully realize the benefits of its foreign tax credit
carryforwards.
The effective tax rate from continuing operations of 30% for 2001 is
less than the U.S. statutory rate of 35% primarily because of a tax
benefit from favorable tax settlements in the third quarter of 2001,
which was partially offset by the impact of nondeductible goodwill
amortization in 2001.
Excluding the items described above, the Company's effective tax rate
from continuing operations decreased from 31% for 2001 to 27% for 2002.
The lower effective tax rate from continuing operations in the current
year as compared with the prior year is primarily attributable to the
tax benefits from the elimination of goodwill amortization in 2002 and
further increases in earnings in lower tax rate jurisdictions.
Net earnings from continuing operations for 2002 were $793 million, or
$2.72 per basic and diluted share, as compared with net earnings from
continuing operations for 2001 of $81 million, or $.28 per basic and
diluted share, representing an increase of $712 million, or 879%. The
increase in net earnings from continuing operations is primarily
attributable to the reasons outlined above.
45
Photography
- ------------
Net worldwide sales for the Photography segment were $9,002 million for
2002 as compared with $9,403 million for 2001, representing a decrease
of $401 million, or 4% as reported, with no net impact from exchange.
Approximately 2.0 percentage points of the decrease was attributable to
declines in volume, driven primarily by volume decreases in consumer
and professional film and photofinishing, and approximately 2.0
percentage points of the decrease was attributable to declines due to
price/mix, driven primarily by consumer film products.
Photography segment net sales in the U.S. were $4,034 million for the
current year as compared with $4,482 million for the prior year,
representing a decrease of $448 million, or 10%. Photography segment
net sales outside the U.S. were $4,968 million for the current year as
compared with $4,921 million for the prior year, representing an
increase of $47 million, or 1% as reported, with no impact from
exchange.
Net worldwide sales of consumer film products, including 35mm film,
Advantix film and one-time-use cameras, decreased 6% in 2002 as
compared with 2001, reflecting declines due to lower volumes of 2%,
negative price/mix of 3%, and 1% negative impact of exchange. Sales of
the Company's consumer film products within the U.S. decreased 12% in
the current year as compared with the prior year, reflecting declines
due to lower volumes of 7% and negative price/mix of 5%. The lower
film product sales are attributable to a declining industry demand
driven by a weak economy and the impact of digital substitution. Sales
of the Company's consumer film products outside the U.S. remained flat,
with declines related to negative exchange of 1% offsetting increases
related to higher volumes of 1%.
The U.S. film industry volume decreased approximately 3% in 2002 as
compared with 2001 due to continuing economic weakness and the impact
of digital substitution. For the fifth consecutive year, the Company
has met its goal of maintaining full year U.S. consumer film market
share.
46
Net worldwide photofinishing sales, including Qualex in the U.S. and
CIS outside the U.S., decreased 4% in 2002 as compared with 2001, 5% 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 14% in 2002 as compared
with 2001, which is composed of decreases in wholesale and on-site
processing volumes of 13% and 16%, respectively. These declines
reflect the effects of a continued weak film industry, the adverse
impact of several hundred store closures by a major U.S. retailer, and
the impact of digital substitution. During the current year, CIS
revenues in Europe benefited from the acquisition of: (1) Spector Photo
Group's wholesale photofinishing and distribution operations 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. These benefits were partially
offset by weak industry trends for photofinishing in the second half of
the year.
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
flat in 2002 as compared with 2001. 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 11% in the current year as compared with
the prior year.
Net worldwide sales of consumer digital cameras increased 10% in 2002
as compared with 2001 due to strong consumer acceptance of the
EasyShare digital camera system, despite sensor component shortages
earlier in the year. As a result, consumer digital camera market share
increased modestly in 2002 compared with 2001.
Net worldwide sales of inkjet photo paper increased 43% in 2002 as
compared with 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, introduction of new
products, continued promotional activity at key accounts and success in
broadening channel distribution.
Net worldwide sales of professional sensitized products, including
color negative, color reversal and commercial black and white films and
sensitized paper, decreased 13% in 2002 as compared with 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.
47
Net worldwide sales of origination and print film to the entertainment
industry remained flat in 2002 as compared with 2001, with a 1%
favorable impact from exchange offset by a 1% decline attributable to
lower volumes. The decrease in volumes of net worldwide film sales was
primarily attributable to economic factors impacting origination film
for commercials and independent feature films, partially offset by an
increase in print film volumes.
Gross profit for the Photography segment was $3,219 million for 2002 as
compared with $3,402 million for 2001, representing a decrease of $183
million or 5%. The gross profit margin was 35.8% in the current year
as compared with 36.2% in the prior year. The 0.4 percentage point
decrease was primarily attributable to decreases due to price/mix that
impacted gross profit margins by approximately 3.0 percentage points,
partially offset by an increase due to productivity/cost improvements
that impacted gross margins by approximately 2.6 percentage points.
SG&A expenses for the Photography segment were $1,935 million for 2002
as compared with $1,963 million for 2001, representing a decrease of
$28 million or 1%. The net decrease in SG&A spending is primarily
attributable to cost reduction activities and expense management,
partially offset by increases in SG&A expense related to CIS
photofinishing acquisitions in Europe. As a percentage of sales, SG&A
expense increased from 20.9% in the prior year to 21.5% in the current
year.
R&D costs for the Photography segment decreased $29 million or 5% from
$542 million in 2001 to $513 million in 2002. As a percentage of
sales, R&D costs decreased slightly from 5.8% in the prior year to 5.7%
in the current year.
Earnings from continuing operations before interest, other charges,
net, and income taxes for the Photography segment decreased $16
million, or 2%, from $787 million in 2001 to $771 million in 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 $110 million in
2001.
Health Imaging
- --------------
Net worldwide sales for the Health Imaging segment were $2,274 million
for 2002 as compared with $2,262 million for 2001, representing an
increase of $12 million, or 1% as reported, or an increase of 2%
excluding the negative net impact of exchange. The increase in sales
was attributable to an increase in price/mix and volume of
approximately 0.4 and 1.1 percentage points, respectively, primarily
due to laser imaging systems and equipment services, partially offset
by a decrease from negative exchange of approximately 0.8 percentage
points.
48
Net sales in the U.S. decreased slightly from $1,089 million for the
prior year to $1,088 million for the current year. Net sales outside
the U.S. were $1,186 million for 2002 as compared with $1,173 million
for 2001, representing an increase of $13 million, or 1% as reported,
or an increase of 2% excluding the negative 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 5% in
2002 as compared with 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.
Net worldwide sales of traditional products, including analog film,
equipment, chemistry and services, decreased 4% in 2002 as compared
with 2001. The decrease in sales was primarily attributable to a net
decline in sales of analog film products. This net decrease was partly
mitigated by an increase in sales of Mammography and Oncology (M&O)
analog film products. Analog film products (excluding M&O) decreased
8% in 2002 as compared with 2001, reflecting declines due to volume,
exchange and price/mix of approximately 5%, 2% and 1%, respectively.
Although analog film volumes declined on a worldwide basis, current
sales levels reflect an increase in traditional film market share. M&O
sales increased 6% in the current year as compared with the prior year,
reflecting higher volumes of approximately 8%, partially offset by
decreases in price/mix and exchange of approximately 1% and 1%,
respectively.
Gross profit for the Health Imaging segment was $930 million for 2002
as compared with $869 million for 2001, representing an increase of $61
million, or 7%. The gross profit margin was 40.9% in 2002 as compared
with 38.4% in 2001. The 2.5 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 cost led by DryView digital media, analog medical film,
laser imaging equipment and PACS, which were complemented by lower
service costs and improved supply chain management. The positive
effects of productivity/cost on gross profit margins were partially
offset by a decrease in price/mix that impacted margins by
approximately 0.5 percentage points due to declining digital laser
media and analog medical film prices.
49
SG&A expenses for the Health Imaging segment decreased $20 million, or
5%, from $367 million for 2001 to $347 million for 2002. As a
percentage of sales, SG&A expenses decreased from 16.2% for 2001 to
15.3% for 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 remained constant at $152
million for 2002 and 2001. As a percentage of sales, R&D costs
remained unchanged at 6.7% for both years.
Earnings from continuing operations before interest, other charges,
net, and income taxes for the Health Imaging segment increased $108
million, or 33%, from $323 million for 2001 to $431 million for 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 expense, and the
elimination of goodwill amortization in 2002, which was $28 million in
2001.
Commercial Imaging
- ------------------
Net worldwide sales for the Commercial Imaging segment for 2002
increased slightly from $1,454 million for 2001 to $1,456 million for
2002, representing an increase of $2 million, with no net impact from
exchange. The slight increase in sales was attributable to an increase
in price/mix of approximately 1.0 percentage point, which was almost
entirely offset by declines in volume of approximately 0.9 percentage
points related to graphic arts and micrographic products.
Net sales in the U.S. were $818 million for 2002 as compared with $820
million for 2001, representing a decrease of $2 million. Net sales
outside the U.S. were $638 million in the current year as compared with
$634 million in the prior year, representing an increase of $4 million,
or 1%, with no impact from exchange.
Net worldwide sales of the Company's commercial and government products
and services increased 7% in 2002 as compared with 2001. The increase
in sales was principally due to an increase in revenues from government
products and services under its government contracts.
Net worldwide sales for inkjet products were a contributor to the net
increase in Commercial Imaging sales as these revenues increased 175%
in 2002 as compared with 2001. The increase in sales was attributable
to the 2002 acquisition of ENCAD, Inc., which represented approximately
5% of total net worldwide Commercial Imaging segment sales for 2002 and
virtually all of the 175% increase in sales of inkjet products. The
acquisition of ENCAD has improved the Company's channel to the inkjet
printer market.
50
Net worldwide sales of graphic arts products to KPG decreased 10% in
2002 as compared with 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, net
during 2002, but was not material to the Company's results from
operations.
Gross profit for the Commercial Imaging segment for 2002 decreased
slightly from $451 million for 2001 to $449 million for 2002. The
gross profit margin was 30.8% for 2002 as compared with 31.0% for 2001.
The gross profit margin remained relatively flat due to declines
related to price/mix, which reduced margins by approximately 1.9
percentage points. These declines were offset by productivity/cost
improvements, which increased margins by approximately 1.9 percentage
points. ENCAD comprised approximately 3% of the gross profit dollars
for 2002 and contributed to the year-over-year decrease in the gross
profit margin percentage.
SG&A expenses for the Commercial Imaging segment decreased $14 million,
or 7%, from $208 million for 2001 to $194 million for 2002. As a
percentage of sales, SG&A expenses decreased from 14.3% for 2001 to
13.3% for 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 2002 as compared
with 2001, partially offset by the acquisition of ENCAD, Inc. in 2002,
which increased SG&A by $23 million.
R&D costs for the Commercial Imaging segment increased $5 million, or
9%, from $58 million for 2001 to $63 million for 2002. The increase
was due to the acquisition of ENCAD, Inc. in 2002, which increased R&D
costs by $8 million. As a percentage of sales, R&D costs increased
from 4.0% in 2001 to 4.3% in 2002.
Earnings from continuing operations before interest, other charges,
net, and income taxes for the Commercial Imaging segment increased $20
million, or 12%, from $172 million in 2001 to $192 million in 2002.
The increase in earnings from operations is primarily attributable to
overall expense management and the elimination of goodwill amortization
in 2002, which was $15 million in 2001, partially offset by a lower
gross profit margin.
All Other
- ---------
Net worldwide sales for All Other were $103 million for 2002 as
compared with $110 million for 2001, representing a decrease of $7
million, or 6%. Net sales in the U.S. were $53 million in 2002 as
compared with $68 million for 2001, representing a decrease of $15
million, or 22%. Net sales outside the U.S. were $50 million in the
current year as compared with $42 million in the prior year,
representing an increase of $8 million, or 19%.
51
Loss from continuing operations before interest, other charges, net,
and income taxes for All Other decreased $32 million from a loss of $60
million in 2001 to a loss of $28 million in 2002. The reduction in the
loss from operations was primarily attributable to cost reductions in
certain miscellaneous businesses and the benefit of current year
manufacturing cost.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
In March 2001, the Company acquired Citipix from Groupe Hauts Monts
along with two related subsidiaries involved in mapping services.
Citipix was involved in the aerial photography of large cities in the
United States, scanning of this imagery and hosting the imagery on the
Internet for government, commercial and private sectors. The acquired
companies were formed into Kodak Global Imaging, Inc. (KGII), a wholly
owned subsidiary, which was reported in the commercial and government
products and services business in the Commercial Imaging segment. Due
to a combination of factors, including the collapse of the
telecommunications market, limitations on flying imposed by the events
of September 11th, delays and losses of key contracts and the global
economic downturn, KGII did not achieve the financial results expected
by management during both 2001 and 2002. In November 2002, the Company
approved a plan to dispose of the operations of KGII.
Net sales from KGII for the years ended December 31, 2002 and 2001 were
$6 million and $5 million, respectively. The Company incurred
operational losses before income taxes from KGII for the years ended
December 31, 2002 and 2001 of $13 million and $7 million, respectively.
The Company recognized losses before income taxes in the fourth quarter
of 2002 of approximately $44 million for costs associated with the
disposal of KGII. The disposal costs were comprised of impairment
losses related to the write-down of the carrying value of goodwill,
intangibles and fixed assets to fair value, losses recognized from the
sale of certain assets, and the accrual of various costs related to the
shutdown of KGII, including severance relating to approximately 150
positions.
Also during the fourth quarter of 2002, the Company recognized earnings
before income taxes of $19 million as a result of the favorable outcome
of litigation associated with the 1994 sale of Sterling Winthrop Inc.
The loss from discontinued operations before income taxes for the years
ended December 31, 2002 and 2001 was at an effective tax rate of 38%
and 31%, respectively, resulting in the loss from discontinued
operations, net of incomes taxes in the Consolidated Statement of
Earnings of $23 million and $5 million, respectively.
52
SUMMARY
(in millions, except per share data)
2003 Change 2002 Change 2001
Net sales from continuing
operations $13,317 + 4% $12,835 - 3% $13,229
Earnings from continuing
operations before interest,
other charges, net,
and income taxes 371 - 70 1,220 +247 352
Earnings from continuing
operations 238 - 70 793 +879 81
Earnings (loss) from
discontinued operations 27 +217 (23) -360 (5)
Net earnings 265 - 66 770 +913 76
Basic and diluted earnings
(loss) per share:
Continuing operations .83 - 69 2.72 +871 .28
Discontinued operations .09 +213 (.08) -300 (.02)
Total .92 - 65 2.64 +915 .26
The Company's results as noted above include certain one-time items,
such as charges associated with focused cost reductions and other
special charges. These one-time items, which are described below,
should be considered to better understand the Company's results of
operations that were generated from normal operational activities.
2003
The Company's results from continuing operations for the year included
the following:
Charges of $557 million ($378 million after tax) related to focused
cost reductions implemented in the first and third quarters. See
further discussion in the Restructuring Costs and Other section of
Management's
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) and Note 16, "Restructuring Costs and Other."
Charges of $16 million ($10 million after tax) related to venture
investment impairments and other asset write-offs incurred in the
second and fourth quarters. See MD&A and Note 7, "Investments," for
further discussion of venture investment impairments.
Charges of $31 million ($19 million after tax), including $21 million
($13 million after tax) in the first quarter and $10 million ($6
million after tax) in the fourth quarter, related to purchased in-
process R&D.
Charges of $14 million ($9 million after tax) connected with the
settlement of a patent infringement claim.
Charges of $12 million ($7 million after tax) related to an
intellectual property settlement.
53
Charges of $14 million ($9 million after tax) connected with the
settlement of certain issues relating to a prior-year acquisition.
Charges of $8 million ($5 million after tax) for a donation to a
technology enterprise.
Charges of $8 million ($5 million after tax) for legal settlements.
Reversal of $9 million ($6 million after tax) for an environmental
reserve.
Income tax benefits of $13 million, which included tax benefits related
to the donation of patents in the first and fourth quarters, amounting
to $8 million and $5 million, respectively.
2002
The Company's results from continuing operations for the year included
the following:
Charges of $114 million ($80 million after tax) related to focused cost
reductions implemented in the third and fourth quarters. See further
discussion in the Restructuring Costs and Other section of MD&A and
Note 16, "Restructuring Costs and Other."
Charges of $50 million ($34 million after tax) related to venture
investment impairments and other asset write-offs incurred in the
second, third and fourth quarters. See MD&A and Note 7, "Investments,"
for further discussion of venture investment impairments.
Income tax benefits of $121 million, including a $45 million tax benefit
related to the closure of the PictureVision subsidiary in the second
quarter, a $46 million benefit from the loss realized on the liquidation
of a Japanese photofinishing operations subsidiary in the third quarter,
an $8 million benefit from a fourth quarter property donation, and a $22
million benefit relating to the decline in the year-over-year
operational effective tax rate.
54
2001
The Company's results from continuing operations for the year included
the following one-time items:
Charges of $830 million ($583 million after tax) related to the
restructuring programs implemented in the second, third and fourth
quarters and other asset impairments.
A charge of $41 million ($28 million after tax) for environmental
exposures.
A charge of $20 million ($14 million after tax) for the Kmart
bankruptcy.
Income tax benefits of $31 million, including a favorable tax settlement
of $11 million and a $20 million benefit relating to the decline in the
year-over-year operational effective tax rate.
55
RESTRUCTURING COSTS AND OTHER
- -----------------------------
Currently, the Company is being adversely impacted by the progressing
digital substitution. As the Company continues to adjust its operating
model in light of changing business conditions, it is probable that
ongoing cost reduction activities will be required from time to time.
In accordance with this, the Company periodically announces planned
restructuring programs (Programs), which often consist of a number of
restructuring initiatives. These Program announcements provide
estimated ranges relating to the number of positions to be eliminated
and the total restructuring charges to be incurred. The actual charges
for initiatives under a Program are recorded in the period in which the
Company commits to formalized restructuring plans or executes the
specific actions contemplated by the Program and all criteria for
restructuring charge recognition under the applicable accounting
guidance have been met.
56
Restructuring Programs Summary
The activity in the accrued restructuring balances and the non-cash
charges incurred in relation to all of the restructuring programs
described below was as follows for fiscal 2003:
Non-
Balance Cash cash Balance
(in millions) Dec. 31, Costs Adjust- Pay- Settle- Dec. 31,
2002 Incurred ments ments ments 2003
Q3 2003 Program:
Severance reserve $ - $231 $ - $ (51) $ - $180
Exit costs reserve - 40 - (28) - 12
---- ---- ---- ----- ----- ----
Total reserve $ - $271 $ - $ (79) $ - $192
==== ==== ==== ===== ===== ====
Long-lived asset
impairments $ - $109 $ - $ - $(109) $ -
Accelerated depreciation
and inventory write-downs - 22 - - (22) -
Q1 2003 Program:
Severance reserve $ - $ 67 $ - $ (44) $ - $ 23
Exit costs reserve - 8 - (4) - 4
---- ---- ---- ----- ----- ----
Total reserve $ - $ 75 $ - $ (48) $ - $ 27
==== ==== ==== ===== ===== ====
Long-lived asset
impairments $ - $ 5 $ - $ - $ (5) $ -
Accelerated depreciation
and inventory write-downs - 25 - - (25) -
Phogenix:
Exit costs reserve $ - $ 9 $ - $ - $ - $ 9
Long-lived asset
impairments - 6 - - (6) -
Inventory write-downs - 2 - - (2) -
Q4 2002 Program:
Severance reserve $ 53 $ 21 $ - $ (62) $ - $ 12
Exit costs reserve 17 - - (9) - 8
---- ---- ---- ----- ----- ----
Total reserve $ 70 $ 21 $ - $ (71) $ - $ 20
==== ==== ==== ===== ===== ====
Accelerated depreciation
and inventory write-downs $ - $ 24 $ - $ - $ (24) $ -
2001 Programs:
Severance reserve $ 67 $ - $(12) $ (49) $ - $ 6
Exit costs reserve 18 - - (5) - 13
---- ---- ---- ----- ----- ----
Total reserve $ 85 $ - $(12) $ (54) $ - $ 19
==== ==== ==== ===== ===== ====
Total of all
restructuring programs $155 $569 $(12) $(252) $(193) $267
==== ==== ==== ===== ===== ====
57
The costs incurred and adjustments, which total $557 million for the
year ended December 31, 2003, include $73 million of charges related to
accelerated depreciation and inventory write-downs, which were reported
in cost of goods sold in the accompanying Consolidated Statement of
Earnings for the year ended December 31, 2003. The remaining costs
incurred and adjustments of $484 million were reported as restructuring
costs and other in the accompanying Consolidated Statement of Earnings
for the year ended December 31, 2003.
2004-2006 Restructuring Program
In addition to completing the remaining initiatives under the Third
Quarter, 2003 Restructuring Program, the Company announced on January
22, 2004 that it plans to develop and execute a new cost reduction
program throughout the 2004 to 2006 timeframe. The objective of these
actions is to achieve a business model appropriate for the Company's
traditional businesses, and to sharpen the Company's competitiveness in
digital markets. As a result of the actions, the Company expects cost
savings in the range of $800 million to $1,000 million for full year
2007.
The Program is expected to result in total charges of $1.3 billion to
$1.7 billion over the three-year period, of which $700 million to $900
million are related to severance, with the remainder relating to the
disposal of buildings and equipment. Overall, Kodak's worldwide
facility square footage will be reduced by approximately one-third.
Approximately 12,000 to 15,000 positions worldwide are expected to be
eliminated through these actions primarily in global manufacturing,
selected traditional businesses and corporate administration. Maximum
single year cash usage under the new program is expected to be
approximately $200 million.
Third Quarter, 2003 Restructuring Program
During the third quarter of 2003, the Company announced that it intends
to implement a series of cost reduction actions during the last two
quarters of 2003 and the first two quarters of 2004, which were
expected to result in pre-tax charges totaling $350 million to $450
million. It is anticipated that these actions will result in a
reduction of approximately 4,500 to 6,000 positions worldwide,
primarily relating to the rationalization of global manufacturing
assets, reduction of corporate administration and R&D, and the
consolidation of the infrastructure and administration supporting the
Company's consumer imaging and professional products and services
operations. The Company expects the 2004 cost savings as a result of
these actions to be $275 million to $325 million, with annual savings
of $300 million to $400 million thereafter.
58
The Company implemented certain actions under this Program during 2003.
As a result of these actions, the Company recorded charges of $381
million in continuing operations in 2003, which was composed of
severance, long-lived asset impairments, exit costs and inventory write-
downs of $23l million, $109 million, $40 million and $1 million,
respectively. The severance costs related to the elimination of
approximately 3,850 positions, including approximately 1,675
manufacturing, 1,125 administrative, 800 photofinishing and 250
research and development positions. The geographic composition of the
positions to be eliminated includes approximately 2,550 in the United
States and Canada and 1,300 throughout the rest of the world. The
reduction of the 3,850 positions and the $271 million charges for
severance and exit costs are reflected in the Third Quarter, 2003
Restructuring Program table below. The $109 million charge for long-
lived asset impairments was included in restructuring costs and other
in the accompanying Consolidated Statement of Earnings for the year
ended December 31, 2003. The charges taken for inventory write-downs
of $1 million were reported in cost of goods sold in the accompanying
Consolidated Statement of Earnings for the year ended December 31,
2003.
The following table summarizes the activity with respect to the
severance charges and exit costs recorded in connection with the
focused cost reductions that were announced in the third quarter of
2003 and the remaining balances in the related reserves at December 31,
2003:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- -------- ------- -----
Q3, 2003 charges 1,700 $123 - $123
Q3, 2003 utilization (100) (3) - (3)
----- ---- --- ----
Balance at 9/30/03 1,600 120 - 120
Q4, 2003 charges 2,150 108 40 148
Q4, 2003 utilization (2,025) (48) (28) (76)
----- ---- --- ----
Balance at 12/31/03 1,725 $180 $12 $192
===== ==== === ====
The severance charges of $231 million and the exit costs of $40 million
taken in 2003 were reported in restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The severance costs and exit costs require the
outlay of cash, while the long-lived asset impairments and inventory
write-downs represent non-cash items. Severance payments relating to
the third quarter restructuring actions will be paid during the period
through 2005, since, in many instances, the employees whose positions
were eliminated can elect or are required to receive their severance
payments over an extended period of time. Most exit costs are expected
to be paid during 2004. However, certain costs, such as long-term
lease payments, will be paid over periods after 2004.
59
As a result of initiatives implemented under the Third Quarter, 2003
Restructuring Program, the Company recorded $21 million of accelerated
depreciation on long-lived assets in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The accelerated depreciation relates to long-lived
assets accounted for under the held and used model of SFAS No. 144.
The year-to-date amount of $21 million relates to $20 million of
manufacturing facilities and equipment and $1 million of photofinishing
facilities and equipment that will be used until their abandonment.
The Company will incur accelerated depreciation charges of $10 million,
$8 million and $3 million in the first, second and third quarters of
2004, respectively, as a result of the initiatives implemented under
the Third Quarter, 2003 Restructuring Program.
The charges of $402 million recorded in 2003 included $210 million
applicable to the Photography segment, $20 million to the Health
Imaging segment and $9 million to the Commercial Imaging segment. The
remaining $163 million was applicable to manufacturing, research and
development, and administrative functions, which are shared across
segments.
With respect to the Third Quarter, 2003 Program, the Company
anticipates completing the remaining initiatives originally
contemplated under the Program by the end of the second quarter of
2004. As a result of these initiatives, an additional 1,700 to 1,900
positions will be eliminated throughout the world by the end of the
second quarter of 2004. The estimated cost to complete these remaining
initiatives will be in the range of $150 million to $170 million. The
Company expects the 2004 cost savings as a result of all actions
contemplated under the Third Quarter, 2003 Restructuring Program to be
$250 million to $300 million in 2004, with annual savings of $275
million to $375 million thereafter.
First Quarter, 2003 Restructuring Program
In the early part of the first quarter of 2003, as part of its
continuing focused cost reduction efforts and in addition to the
remaining initiatives under the Fourth Quarter, 2002 Restructuring
Program, the Company announced its First Quarter, 2003 Restructuring
Program that included new initiatives to further reduce employment
within a range of 1,800 to 2,200 employees. A significant portion of
these new initiatives relates to the rationalization of the Company's
photofinishing operations in the U.S. and Europe. Specifically, as a
result of declining film and photofinishing volumes and in response to
global economic and political conditions, the Company began to
implement initiatives to 1) close certain photofinishing operations in
the U.S. and EAMER, 2) rationalize manufacturing capacity by
eliminating manufacturing positions on a worldwide basis, and 3)
eliminate selling, general and administrative positions, particularly
in the Photography segment.
60
The total restructuring charge for continuing operations recorded in
2003 relating to the First Quarter, 2003 Restructuring Program was $81
million, which was composed of severance, exit costs, long-lived asset
impairments and inventory write-downs of $67 million, $8 million, $5
million and $1 million, respectively. The severance charge related to
the elimination of 1,850 positions, including approximately 1,225
photofinishing, 325 administrative and 300 manufacturing positions.
The geographic composition of the 1,850 positions to be eliminated
includes approximately 1,100 in the United States and Canada and 750
throughout the rest of the world. The reduction of 1,850 positions and
the total severance and exit charges of $75 million are reflected in
the First Quarter, 2003 Restructuring Program table below. The
remaining actions anticipated under the First Quarter, 2003
Restructuring Program are expected to be completed during the first
quarter of 2004.
The following table summarizes the activity with respect to the
severance and exit costs charges recorded in connection with the
focused cost reductions that were announced in the first quarter of
2003 and the remaining balances in the related reserves at December 31,
2003:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- -------- ------- -----
Q1, 2003 charges 425 $ 28 $ - $ 28
Q1, 2003 utilization (150) (2) - (2)
----- ---- ---- ----
Balance at 3/31/03 275 26 - 26
Q2, 2003 charges 500 20 4 24
Q2, 2003 utilization (500) (13) - (13)
---- ---- ---- ----
Balance at 6/30/03 275 33 4 37
Q3, 2003 charges 925 19 4 23
Q3, 2003 utilization (400) (12) (1) (13)
---- ---- ---- ----
Balance at 9/30/03 800 40 7 47
Q4, 2003 utilization (625) (17) (3) (20)
---- ---- ---- ----
Balance at 12/31/03 175 $ 23 $ 4 $ 27
==== ==== ==== ====
The charges of $80 million for severance, long-lived asset impairments
and exit costs reserves were reported in restructuring costs and other
in the accompanying Consolidated Statement of Earnings for the year
ended December 31, 2003. The charges taken for inventory write-downs
of $1 million were reported in cost of goods sold in the accompanying
Consolidated Statement of Earnings for the year ended December 31,
2003. The severance and exit costs require the outlay of cash, while
the inventory write-downs and long-lived asset impairments represent
non-cash items. Severance payments will be paid during the period
through 2005 since, in many instances, the employees whose positions
were eliminated can elect or are required to receive their severance
payments over an extended period of time. Most exit costs are expected
to be paid during 2004. However, certain costs, such as long-term
lease payments, will be paid over periods after 2004.
61
As a result of initiatives implemented under the First Quarter, 2003
Restructuring Program, the Company recorded $24 million of accelerated
depreciation on long-lived assets in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The accelerated depreciation relates to long-lived
assets accounted for under the held and used model of SFAS No. 144.
The year-to-date amount of $24 million relates to lab equipment used in
photofinishing that will be used until their abandonment. The Company
will incur accelerated depreciation charges of $8 million in the first
quarter of 2004 and $1 million in the second quarter of 2004 as a
result of the initiatives implemented under the First Quarter, 2003
Restructuring Program.
Cost savings resulting from the implementation of all First Quarter,
2003 Restructuring Program actions are in line with the original
estimate of approximately $35 million to $50 million in 2003 and are
expected to be $65 million to $85 million on an annual basis
thereafter.
The total restructuring charges of $105 million recorded in 2003 under
the First Quarter, 2003 Restructuring Program included $85 million
applicable to the Photography segment and $5 million applicable to the
Commercial Imaging segment. The remaining $15 million was applicable
to manufacturing, research and development, and administrative
functions, which are shared across all segments.
In addition to the $105 million of restructuring charges recorded in
2003 under the First Quarter, 2003 Restructuring Program, the Company
recorded $17 million of charges in the second quarter associated with
the Company's exit from the Photography segment's Phogenix joint
venture with Hewlett Packard. The $17 million charge included
approximately $2 million of inventory write-downs, $6 million of long-
lived asset impairments and $9 million of exit costs. The inventory
write-downs were reported in cost of goods sold in the accompanying
Consolidated Statement of Earnings for the year ended December 31,
2003. The long-lived asset impairments and exit costs were reported in
restructuring costs and other in the accompanying Consolidated
Statement of Earnings for the year ended December 31, 2003. The exit
costs, which represent the only cash portion of the charge, are
expected to be paid during 2004.
62
Fourth Quarter, 2002 Restructuring Program
During the fourth quarter of 2002, the Company announced a planned
Program consisting of a number of focused cost reduction initiatives
designed to deploy manufacturing assets more effectively in order to
provide competitively-priced products to the global market. In the
announcement, the Company discussed the restructuring initiatives under
its Fourth Quarter, 2002 Restructuring Program that would begin in the
fourth quarter of 2002 and extend into 2003. These initiatives were
expected to affect a total of 1,300 to 1,700 positions worldwide,
including approximately 150 positions in the Company's U.S. research
and development organizations, 500 positions in its U.S. one-time-use
camera assembly operations, 300 positions in its Mexico sensitizing
operations and 550 positions in its global manufacturing and logistics
organization. Specific initiatives included the relocation of the one-
time-use camera assembly operations in Rochester, New York and the
graphic arts and x-ray film sensitizing operations in Mexico to other
Kodak locations.
The total restructuring charge for continuing operations recorded in
2002 for these initiatives that were implemented was $116 million,
which was composed of severance, inventory write-downs, long-lived
asset impairments and exit costs of $55 million, $7 million, $37
million and $17 million, respectively. The severance charge related to
the elimination of 1,150 positions, including approximately 525
manufacturing and logistics, 300 service and photofinishing, 175
administrative and 150 research and development positions. The
geographic composition of the 1,150 positions eliminated included
approximately 775 in the United States and Canada and 375 throughout
the rest of the world. The charge for the long-lived asset impairments
includes the write-off of $13 million relating to equipment used in the
manufacture of cameras and printers, $13 million for sensitized
manufacturing equipment, $5 million for lab equipment used in
photofinishing and $6 million for other assets that were scrapped or
abandoned immediately. The reduction of 1,150 positions and the $72
million charge for severance and exit costs are reflected in the Fourth
Quarter, 2002 Restructuring Program table below. These amounts exclude
the fourth quarter elimination of 150 positions and the restructuring
charges relating to the shutdown of Kodak Global Imaging, Inc., as
these charges were reflected in the loss from discontinued operations
for the year ended December 31, 2002.
During 2003, the Company recorded additional severance charges of $21
million in continuing operations relating to 675 positions that were
contemplated under its Fourth Quarter, 2002 Restructuring Program,
including the relocation of Mexican sensitizing operations and the U.S.
one-time-use camera assembly operations. The 675 positions that were
eliminated included approximately 500 manufacturing and 175
administrative positions. The geographic composition of the 675
positions included approximately 425 in the U.S. and Canada and 250
throughout the rest of the world. The reduction of 675 positions and
the related severance charges of $21 million are reflected in the
Fourth Quarter, 2002 Restructuring Program table below. All actions
anticipated under the Fourth Quarter, 2002 Restructuring Program were
completed in the third quarter of 2003. A total of 1,825 positions
were eliminated under the Fourth Quarter, 2002 Restructuring Program.
63
The following table summarizes the activity with respect to the
severance and exit costs charges recorded in connection with the
focused cost reductions that were announced in the fourth quarter of
2002 and the remaining balance in the related reserves at December 31,
2003:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- -------- ------- -------
Q4, 2002 charges l,l50 $ 55 $ 17 $ 72
Q4, 2002 utilization (250) (2) - (2)
------ ----- ---- ----
Balance at 12/31/02 900 53 17 70
Q1, 2003 charges 450 16 - 16
Q1, 2003 utilization (850) (24) (2) (26)
------ ----- ---- ----
Balance at 3/31/03 500 45 15 60
Q2, 2003 charges 25 1 - 1
Q2, 2003 utilization (500) (11) (4) (15)
------ ----- ---- ----
Balance at 6/30/03 25 35 11 46
Q3, 2003 charges 200 4 - 4
Q3, 2003 utilization (225) (8) (2) (10)
------ ----- ---- ----
Balance at 9/30/03 0 31 9 40
Q4, 2003 utilization 0 (19) (1) (20)
------ ----- ---- ----
Balance at 12/31/03 0 $ 12 $ 8 $ 20
====== ===== ==== ====
The severance charges taken in 2003 of $21 million were reported in
restructuring costs and other in the accompanying Consolidated
Statement of Earnings for the year ended December 31, 2003. The
severance and exit costs require the outlay of cash, while the
inventory write-downs and long-lived asset impairments represent non-
cash items. Severance payments will continue into 2004 since, in many
instances, the employees whose positions were eliminated can elect or
are required to receive their severance payments over an extended
period of time. Most exit costs are expected to be paid during 2004.
However, certain costs, such as long-term lease payments, will be paid
over periods after 2004.
As a result of initiatives implemented under the Fourth Quarter, 2002
Restructuring Program, the Company recorded $24 million of accelerated
depreciation on long-lived assets in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The accelerated depreciation relates to long-lived
assets accounted for under the held and used model of SFAS No. 144, and
the full year amount of $24 million was comprised of $15 million
relating to equipment used in the manufacture of cameras, $6 million
for lab equipment used in photofinishing and $3 million for sensitized
manufacturing equipment that was used until their abandonment in 2003.
64
Cost savings resulting from the implementation of all Fourth Quarter,
2002 Restructuring Program actions are in line with the original
estimate of approximately $90 million to $95 million in 2003 and $205
million to $210 million on an annual basis thereafter.
The full year 2003 charges of $45 million included $31 million of
charges applicable to the Photography segment, $3 million relating to
the Commercial Imaging segment and $11 million associated with
manufacturing, research and development, and administrative functions,
which are shared across all segments. The fourth quarter 2002 charges
of $116 million included $40 million of charges applicable to the
Photography segment, $19 million applicable to the Commercial Imaging
segment and $2 million applicable to the Health Imaging segment. The
remaining $55 million was associated with manufacturing, research and
development, and administrative functions, which are shared across all
segments.
2001 Restructuring Programs
At December 31, 2002, the Company had remaining severance and exit
costs reserves of $67 million and $18 million, respectively, relating
to the restructuring plans it implemented during 2001. During the
first quarter of 2003, the Company completed the severance actions
associated with the 2001 Restructuring Programs and recorded a reversal
of $12 million of reserves through restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The completion of the 2001 Restructuring Programs
resulted in the elimination of the remaining 200 positions included in
the original plans. A total of 6,425 positions were eliminated under
the 2001 Restructuring Programs.
The remaining severance reserve of $6 million as of December 31, 2003
has not been paid since, in many instances, the employees whose
positions were eliminated could elect or were required to receive their
severance payments over an extended period of time. However, these
payments will be made by the end of 2004. Most of the remaining exit
costs reserves of $13 million as of December 31, 2003 represent long-
term lease payments, which will be paid over periods after 2004.
- -----------------------------------------------------------------------
65
LIQUIDITY AND CAPITAL RESOURCES
2003
The Company's cash and cash equivalents increased $681 million during
2003 to $1,250 million at December 31, 2003. The increase resulted
primarily from $1,645 million of cash flows from operating activities
and $270 million of cash provided by financing activities, partially
offset by $1,267 million of cash flows used in investing activities.
The net cash provided by operating activities of $1,645 million for the
year ended December 31, 2003 was partially attributable to net earnings
of $265 million which, when adjusted for earnings from discontinued
operations, equity in losses from unconsolidated affiliates, gain on
sale of assets, depreciation and goodwill amortization, purchased
research and development, benefit for deferred income taxes and
restructuring costs, asset impairments and other charges, provided
$1,283 million of operating cash. Also contributing to net cash
provided by operating activities were a decrease in inventories of $128
million, an increase in liabilities excluding borrowings of $94
million, the cash receipt of $19 million in connection with the
Sterling Winthrop settlement, and the $130 million impact of the change
in other items, net, which were partially offset by an increase in
accounts receivable of $9 million. The net cash used in investing
activities of $1,267 million was utilized primarily for business
acquisitions of $697 million, of which $59 million related to the
purchase of minority interests in China and India, capital expenditures
of $506 million, investments in unconsolidated affiliates of $89
million, and net purchases of marketable securities of $1 million.
These uses of cash were partially offset by net proceeds from the sale
of assets of $26 million. The net cash provided by financing
activities of $270 million was primarily the result of the net increase
in borrowings of $588 million and the exercise of employee stock
options of $12 million, which were partially offset by dividend
payments of $330 million.
Net working capital, excluding short-term borrowings, increased to
$1,094 million from $474 million at year-end 2002. Including short-
term borrowings, net working capital increased to positive $148 million
from negative $968 million at year-end 2002. This increase is mainly
attributable to higher cash balances and a reduction in short-term
debt, partially offset by higher accounts payable and other current
liabilities. The decrease in short-term debt is primarily because the
Company no longer regularly accesses the commercial paper (short-term
debt) market in managing its working capital to fund its operating and
investing activities. During the second quarter of 2003, the Company
issued $550 million of long-term debt to replace $550 million of short-
term debt resulting in improved working capital. Additionally, on
October 10, 2003, the Company issued $1,075 million of long-term debt,
comprised of $500 million of Senior Notes due 2013 and $575 million of
Convertible Senior Notes due 2033, a portion of which has been used to
repay commercial paper, thus improving working capital. See further
discussion in this section relating to these long-term debt issuances.
66
The Company maintains $2,467 million in committed bank lines of credit
and $1,722 million in uncommitted bank lines of credit to ensure
continued access to short-term borrowing capacity. On September 5,
2003, the Company filed a shelf registration statement on Form S-3 (the
new debt shelf registration) for the issuance of up to $2,000 million
of new debt securities. Pursuant to Rule 429 under the Securities Act
of 1933, $650 million of remaining unsold debt securities under a prior
shelf registration statement were included in the new debt shelf
registration, thus giving the Company the ability to issue up to $2,650
million in public debt. These funding alternatives provide the Company
with sufficient flexibility and liquidity to meet its working capital
and investing needs. However, the success of future public debt
issuances will be dependent on market conditions at the time of such an
offering.
The Company's primary estimated future uses of cash for 2004 include
the following: dividend payments, debt reductions, and acquisitions.
The Company has a dividend policy whereby it makes semi-annual payments
which, when declared, will be paid on the Company's 10th business day
each July and December to shareholders of record on the first business
day of the preceding month. On April 15, 2003, the Company's Board of
Directors declared a semi-annual cash dividend of $.90 per share on the
outstanding common stock of the Company. This dividend was paid on
July 16, 2003 to shareholders of record at the close of business on
June 2, 2003. On September 24, 2003, the Company's Board of Directors
approved the reduction of the amount of the annual dividend to $.50 per
share. On that same date, the Company's Board of Directors declared a
semi-annual cash dividend of $.25 per share on the outstanding common
stock of the Company. This dividend was paid on December 12, 2003 to
the shareholders of record as of the close of business on November 3,
2003.
Capital additions were $506 million in 2003, 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 2004, the
Company expects its capital spending, excluding acquisitions, to be
approximately $550 million.
67
During 2003, the Company expended $252 million against the related
restructuring reserves, primarily for the payment of severance
benefits. Employees whose positions were eliminated could elect to
receive severance payments for up to two years following their date of
termination.
For 2004, the Company expects to generate $485 million to $615 million
in investable cash flow, which represents cash flow after dividends but
before acquisitions and excludes the impacts on cash from the purchase
and sale of marketable securities, the impacts from debt and
transactions in the Company's own equity, such as stock repurchases and
the proceeds from the exercise of stock options. The investable cash
flow range of $485 million to $615 million does not include $725
million of expected pre-tax cash proceeds from the February 2004
announced sale of the Remote Sensing Systems operation, including
Research Systems, Inc., to ITT Industries, Inc., nor does it consider
the cash impact of the NexPress acquisition, which was announced in
March 2004, once it becomes a Kodak wholly owned subsidiary. The
Company believes that its cash flow from operations will be sufficient
to cover its working capital and capital investment needs and the funds
required for future debt reduction, dividend payments, or modest
acquisitions. The Company's cash balances and financing arrangements
will be used to bridge timing differences between expenditures and cash
generated from operations.
The Company has $2,225 million in committed revolving credit
facilities, which are available for general corporate purposes
including the support of the Company's commercial paper program. The
credit facilities are comprised of the $1,000 million 364-day committed
revolving credit facility (364-Day Facility) expiring in July 2004 and
a 5-year committed facility at $1,225 million expiring in July 2006 (5-
Year Facility). If unused, they have a commitment fee of $4.5 million
per year at the Company's current credit rating of Baa3 and BBB- from
Moody's and Standard & Poors (S&P), respectively. Interest on amounts
borrowed under these facilities is calculated at rates based on spreads
above certain reference rates and the Company's credit rating. Under
the 364-Day Facility and 5-Year Facility, there is a financial covenant
that requires the Company to maintain a debt to EBITDA (earnings before
interest, income taxes, depreciation and amortization) ratio of not
greater than 3 to 1. 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 December 31, 2003. The Company does
not anticipate that a violation is likely to occur.
68
The Company has other committed and uncommitted lines of credit at
December 31, 2003 totaling $242 million and $1,722 million,
respectively. These lines primarily support borrowing needs of the
Company's subsidiaries, which include term loans, overdraft coverage,
letters of credit and revolving credit lines. Interest rates and other
terms of borrowing under these lines of credit vary from country to
country, depending on local market conditions. Total outstanding
borrowings against these other committed and uncommitted lines of
credit at December 31, 2003 were $138 million and $316 million,
respectively. These outstanding borrowings are reflected in the short-
term borrowings and long-term debt, net of current portion balances in
the accompanying Consolidated Statement of Financial Position at
December 31, 2003.
At December 31, 2003, the Company had $304 million in commercial paper
outstanding, with a weighted-average interest rate of 2.95%. To
provide additional financing flexibility, the Company has an accounts
receivable securitization program, which provides for borrowings up to
a maximum of $250 million. At December 31, 2003, the Company had no
outstanding borrowings under this program.
On October 10, 2003, the Company completed the offering and sale of
$500 million aggregate principal amount of Senior Notes due 2013 (the
Notes), which was made pursuant to the Company's new debt shelf
registration. Interest on the Notes will accrue at the rate of 7.25%
per annum and is payable semiannually. The Notes are not redeemable at
the Company's option or repayable at the option of any holder prior to
maturity. The Notes are unsecured and unsubordinated obligations and
rank equally with all of the Company's other unsecured and
unsubordinated indebtedness. After issuance of the above debt, the
Company has $2,150 million of availability remaining under the new debt
shelf registration.
Concurrent with the offering and sale of the Notes, on October 10,
2003, the Company completed the private placement of $575 million
aggregate principal amount of Convertible Senior Notes due 2033 (the
Convertible Securities) to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933. Interest on the
Convertible Securities will accrue at the rate of 3.375% per annum and
is payable semiannually. The Convertible Securities are unsecured and
rank equally with all of the Company's other unsecured and
unsubordinated indebtedness.
69
As a condition of the private placement, the Company agreed to
initially file within 90 days and make effective within 180 days after
the earliest date of original issuance of the Convertible Securities, a
shelf registration statement under the Securities Act of 1933 relating
to the resale of the Convertible Securities and the common stock to be
issued upon conversion of the Convertible Securities pursuant to a
registration rights agreement. The Company filed this shelf
registration statement on January 6, 2004, and made it effective on
February 6, 2004.
The Convertible Securities contain a number of conversion features that
include substantive contingencies. The Convertible Securities are
convertible by the holders at an initial conversion rate of 32.2373
shares of the Company's common stock for each $1,000 principal amount
of the Convertible Securities, which is equal to an initial conversion
price of $31.02 per share. The holders may convert their Convertible
Securities, in whole or in part, into shares of the Company's common
stock under any of the following circumstances: (1) during any
calendar quarter, if the price of the Company's common stock is greater
than or equal to 120% of the applicable conversion price for at least
20 trading days during a 30 consecutive trading day period ending on
the last trading day of the previous calendar quarter; (2) during any
five consecutive trading day period following any 10 consecutive
trading day period in which the trading price of the Convertible
Securities for each day of such period is less than 105% of the
conversion value, and the conversion value for each day of such period
was less than 95% of the principal amount of the Convertible Securities
(the Parity Clause); (3) if the Company has called the Convertible
Securities for redemption; (4) upon the occurrence of specified
corporate transactions such as a consolidation, merger or binding share
exchange pursuant to which the Company's common stock would be
converted into cash, property or securities; and (5) if the credit
rating assigned to the Convertible Securities by either Moody's or S&P
is lower than Ba2 or BB, respectively, which represents a three notch
downgrade from the Company's current standing, or if the Convertible
Securities are no longer rated by at least one of these services or
their successors (the Credit Rating Clause).
The Company may redeem some or all of the Convertible Securities at any
time on or after October 15, 2010 at a purchase price equal to 100% of
the principal amount of the Convertible Securities plus any accrued and
unpaid interest. Upon a call for redemption by the Company, a
conversion trigger is met whereby the holder of each $1,000 Convertible
Senior Note may convert such note to shares of the Company's common
stock.
The holders have the right to require the Company to purchase their
Convertible Securities for cash at a purchase price equal to 100% of
the principal amount of the Convertible Securities plus any accrued and
unpaid interest on October 15, 2010, October 15, 2013, October 15,
2018, October 15, 2023 and October 15, 2028, or upon a fundamental
change as described in the offering memorandum filed under Rule 144A in
conjunction with the private placement of the Convertible Securities.
As of December 31, 2003, the Company reserved 18,536,447 shares in
treasury stock to cover potential future conversions of these
Convertible Securities into common stock.
70
Certain of the conversion features contained in the Convertible
Securities are deemed to be embedded derivatives as defined under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." These embedded derivatives include the Parity Clause, the
Credit Rating Clause, and any specified corporate transaction outside
of the Company's control such as a hostile takeover. Based on an
external valuation, these embedded derivatives were not material to the
Company's financial position, results of operations or cash flows. In
addition, as the contingencies surrounding the conversion features are
substantive, the shares to be potentially issued upon triggering a
conversion event will be excluded from the earnings per share
calculation until such time as a contingency lapses and the effect of
issuing such shares is dilutive. If and when a contingency lapses and
the effect of issuing such shares is dilutive, then the shares issued
would be included in the denominator of the earnings per share
calculation, and the interest expense incurred on the Convertible
Securities would be excluded from the numerator of the earnings per
share calculation for the respective period.
Long-term debt and related maturities and interest rates were as
follows at December 31, 2003 and 2002 (in millions):
2003 2002
---------------- -----------------
Weighted- Amount Weighted- Amount
Average Out- Average Out-
Interest Stand- Interest Stand-
Country Type Maturity Rate ing Rate ing
U.S. Term note 2003 - $ - 9.38% $ 144
U.S. Term note 2003 - - 7.36% 110
U.S. Term note 2004 1.72% * 200 - -
U.S. Term note 2005 1.73% * 100 - -
U.S. Medium-term 2005 7.25% 200 7.25% 200
U.S. Medium-term 2006 6.38% 500 6.38% 500
U.S. Term note 2008 3.63% 249 - -
U.S. Term note 2008 9.50% 34 9.50% 34
U.S. Term note 2013 7.25% 500 - -
U.S. Term note 2018 9.95% 3 9.95% 3
U.S. Term note 2021 9.20% 10 9.20% 10
U.S. Convertible 2033 3.38% 575 - -
China Bank loans 2003 - - 5.49% 114
China Bank loans 2004 5.50% 225 5.58% 252
China Bank loans 2005 5.45% 106 5.53% 124
Qualex Term notes 2004-2008 5.53% 49 6.12% 44
Chile Bank loans 2004 - - 2.61% 10
Other 8 6
------ ------
$2,759 $1,551
====== ======
* Represents debt with a variable interest rate.
71
The Company's debt ratings were downgraded during 2003 by each of the
three major rating agencies. Moody's, Standard & Poors (S&P) and Fitch
ratings for long-term debt (L/T) and short-term debt (S/T), including
their outlook, at the beginning and end of 2003 were as follows:
December 31, 2002 December 31, 2003
--------------------- ---------------------
L/T S/T Outlook L/T S/T Outlook
---- --- ------- ---- --- --------
Moody's Baa1 P-2 Stable Baa3 P-3 Negative
S&P BBB+ A-2 Stable BBB- A-3 Negative
Fitch A- F2 Negative BBB- F3 Negative
The long-term and short-term debt rating downgrades and negative
outlooks reflect the rating agencies' concerns about (1) the Company's
weakened sales and profitability in the core photographic businesses
due to continuing pricing pressure from competitors, (2) continued
digital substitution, including doubts about the profit potential of
digital imaging relative to conventional photography, (3) unfavorable
economic factors, including reduced leisure travel, (4) potential
future restructuring actions that may restrict cash flow, slowing
efforts to reduce debt, (5) the likelihood that debt reduction will be
slowed in the short to medium term due to the Company's rising business
risk, investment strategies, and the rapid pace at which it has made
its recent acquisitions, and (6) the financial burden of its
significant unfunded postretirement benefit liabilities.
72
These credit rating actions have limited the Company's access to
commercial paper borrowings. As a result and as noted before, on
October 10, 2003, the Company issued $1,075 million of long-term debt
through an offering and sale of $500 million of Senior Notes due 2013
and a concurrent private placement of $575 million of Convertible
Senior Notes due 2033, which were filed in a shelf registration
statement on January 6, 2004 and made effective on February 6, 2004.
With the proceeds received from the $1,075 million of long-term debt
issued, the Company retired approximately $550 million of outstanding
commercial paper and all of the outstanding borrowings under the
accounts receivable securitization program, which amounted to
approximately $60 million. The remaining proceeds were used to fund
the PracticeWorks, Inc. acquisition. For 2004, the Company expects
interest expense to increase relative to 2003 as a result of the
replacement of outstanding commercial paper with new long-term debt.
For example, the Company's outstanding commercial paper at December 31,
2003 had a weighted-average annual interest rate of 2.95% as compared
with an annual interest rate of 7.25% on the Senior Notes and 3.375% on
the Convertible Senior Notes, representing a weighted-average
difference of 2.34 percentage points.
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: the outstanding borrowings, if any, under the accounts
receivable securitization program if the Company's credit ratings from
S&P or Moody's were to fall below BBB- and Baa3, respectively, and such
condition continued for a period of 30 days. However, as previously
noted, the Company had no outstanding borrowings under this program as
of December 31, 2003. Additionally, the Company estimates that letters
of credit or other financial support could be required in support of
insurance, environmental and supplier obligations of up to $117
million. 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 million in committed revolving credit facilities to meet
unanticipated funding needs should it be necessary.
73
The Company guarantees debt and other obligations under agreements with
certain affiliated companies and customers. At December 31, 2003, these
guarantees totaled a maximum of $363 million, with outstanding
guaranteed amounts of $161 million. The maximum guarantee amount
includes guarantees of up to: $160 million of debt for KPG ($50 million
outstanding); $7 million for other unconsolidated affiliates and third
parties ($7 million outstanding); and $196 million of customer amounts
due to banks in connection with various banks' financing of customers'
purchase of products and equipment from Kodak ($104 million
outstanding). The KPG debt facility and the related guarantee mature on
December 31, 2005, but may be renewed at KPG's, the joint ventures
partners' and the bank's discretion. The guarantees for the other
unconsolidated affiliates and third party debt mature between January
2004 and May 2006. The customer financing agreements and related
guarantees typically have a term of 90 days for product and short-term
equipment financing arrangements, and up to 5 years for long-term
equipment financing arrangements. These guarantees would require
payment from Kodak only in the event of default on payment by the
respective debtor. In some cases, particularly for guarantees related
to equipment financing, the Company has collateral or recourse
provisions to recover and sell the equipment to reduce any losses that
might be incurred in connection with the guarantee. Management believes
the likelihood is remote that material payments will be required under
any of the guarantees disclosed above. With respect to the guarantees
that the Company issued in the year ended December 31, 2003, the Company
assessed the fair value of its obligation to stand ready to perform
under these guarantees by considering the likelihood of occurrence of
the specified triggering events or conditions requiring performance as
well as other assumptions and factors. Through internal analyses and
external valuations, the Company determined that the fair value of the
guarantees was not material to the Company's financial position, results
of operations or cash flows.
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $592
million, and the outstanding debt under those guarantees, which is
recorded within the short-term borrowings and long-term debt, net of
current portion components in the accompanying Consolidated Statement of
Financial Position, is $423 million. These guarantees expire in 2004
and 2005, with the majority expiring in 2004.
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 December 31,
2003, the Company has not been required to guarantee any of the SK
Display Corporation's outstanding debt.
74
The Company issues indemnifications in certain instances when it sells
businesses and real estate, and in the ordinary course of business with
its customers, suppliers, service providers and business partners.
Further, the Company indemnifies its directors and officers who are, or
were, serving at Kodak's request in such capacities. Historically,
costs incurred to settle claims related to these indemnifications have
not been material to the Company's financial position, results of
operations or cash flows. Additionally, the fair value of the
indemnifications that the Company issued during the year ended December
31, 2003 was not material to the Company's financial position, results
of operations or cash flows.
Due to improved performance in the global equity markets in 2003,
partially offset by the decline in the discount rates from December 31,
2002 to December 31, 2003, the Company decreased its additional minimum
pension liability by $167 million and recorded a corresponding credit
to the accumulated other comprehensive (loss) income component of
equity of $122 million, net of tax benefits of $45 million. The
decrease in the additional minimum pension liability of $167 million
was recorded in the postretirement liabilities component on the
Consolidated Statement of Financial Position at December 31, 2003. The
decrease in this component of $68 million from December 31, 2002 to
December 31, 2003 is primarily attributable to the decrease in the
additional minimum pension liability and the decrease in the accrued
pension benefit liability, partially offset by the impact of foreign
exchange. The Company recorded the reduction in the deferred income
tax asset of $45 million in the other long-term assets component within
the Consolidated Statement of Financial Position. The net increase in
this component of $326 million from December 31, 2002 to December 31,
2003 is partially attributable to the increase in the prepaid pension
asset, partially offset by the decrease in the deferred income tax
asset. The increase in the prepaid pension asset is primarily
attributable to $47 million of pension income generated from the U.S.
pension plans in 2003 and the impact of foreign exchange.
During the fourth quarter of 2003, the Company funded one of its non-
U.S. defined benefit pension plans in the amount of approximately $18
million. The Company does not expect to have significant funding
requirements relating to its defined benefit pension plans in 2004.
75
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 a subsidiary of 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 and, therefore, these
receivables are removed from Qualex's books. ESF incurs 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.
Although 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. To date, the Company has incurred no such material claims, and
Qualex does not anticipate any significant situations where it would be
unable to fulfill its service obligations under the arrangement with
ESF. ESF's outstanding lease receivable amount was approximately $367
million at December 31, 2003.
76
Effective July 22, 2003, ESF entered into an agreement amending the
Receivables Purchase Agreement (RPA), which represents the financing
arrangement between ESF and its banks. Under the amended RPA
agreement, maximum borrowings were lowered to $257 million. Total
outstanding borrowings under the RPA at December 31, 2003 were $248
million. The amended RPA extends through July 2004, at which time the
RPA can be extended or terminated. If the RPA were terminated, ESF
would need to find an alternative financing solution for new
borrowings. Pursuant to the ESF partnership agreement between Qualex
and DCC, commencing October 6, 2003, Qualex no longer sells its lease
receivables to ESF. Qualex currently is utilizing the services of
Imaging Financial Services, Inc., a wholly owned subsidiary of General
Electric Capital Corporation, as an alternative financing solution for
prospective leasing activity with its customers.
At December 31, 2003, the Company had outstanding letters of credit
totaling $121 million and surety bonds in the amount of $113 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
As of December 31, 2003, the impact that our contractual obligations
are expected to have on our liquidity and cash flow in future periods
is as follows:
(in millions) Total 2004 2005 2006 2007 2008 2009+
Long-term debt $2,759 $457 $422 $507 $ 2 $283 $1,088
Operating lease
obligations 494 125 103 77 59 43 87
Purchase
obligations (1) 985 266 238 124 98 80 179
------ ---- ---- ---- ---- ---- ------
Total (2) $4,238 $848 $763 $708 $159 $406 $1,354
====== ==== ==== ==== ==== ==== ======
(1) Purchase obligations include agreements to purchase goods or
services that are enforceable and legally binding on the Company and
that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Purchase
obligations exclude agreements that are cancelable without penalty.
(2) Funding requirements for the Company's major defined benefit
retirement plans and other postretirement benefit plans are not
included as such amounts have not been determined. In 2003, the
Company made contributions to its major defined benefit retirement
plans and other postretirement benefit plans of $149 million ($24
million relating to its U.S. defined benefit plans) and $248 million
($245 million relating to its U.S. other postretirement benefits plan),
respectively. The Company expects to contribute approximately $5
million and $258 million, respectively, to its U.S. defined benefit
plans and other postretirement benefit plans in 2004.
77
2002
The Company's cash and cash equivalents increased $121 million during
2002 to $569 million at December 31, 2002. The increase resulted
primarily from $2,204 million of cash flows from operating activities,
partially offset by $758 million of cash flows used in investing
activities and $1,331 million of cash used in financing activities.
The net cash provided by operating activities of $2,204 million for the
year ended December 31, 2002 was partially attributable to (1) net
earnings of $770 million which, when adjusted for depreciation and
amortization, and restructuring costs, asset impairments and other
charges, provided $1,673 million of operating cash, (2) a decrease in
accounts receivable of $263 million, (3) a decrease in inventories of
$88 million, (4) proceeds from the surrender of its Company-owned life
insurance policies of $187 million, and (5) an increase in liabilities
excluding borrowings of $29 million, related primarily to severance
payments for restructuring programs. The net cash used in investing
activities of $758 million was utilized primarily for capital
expenditures of $577 million, investments in unconsolidated affiliates
of $123 million, business acquisitions of $72 million, of which $60
million related to the purchase of minority interests in China and
India, and net purchases of marketable securities of $13 million.
These uses of cash were partially offset by proceeds from the sale of
properties of $27 million. The net cash used in financing activities
of $1,331 million was primarily the result of net debt repayments of
$597 million, dividend payments of $525 million and the repurchase of
7.4 million Kodak shares held by KRIP for $260 million. Of the $260
million expended, $205 million was repurchased under the 1999 stock
repurchase program, which is now completed. The balance of the amount
expended of $55 million was repurchased under the 2000 stock repurchase
program.
Net working capital, excluding short-term borrowings, decreased to $474
million at December 31, 2002 from $797 million at December 31, 2001.
This decrease is primarily attributable to an increase in accounts
payable and other current liabilities, an increase in accrued income
taxes, lower receivables and lower inventories partially offset by a
higher cash balance.
78
On April 11, 2002, the Company's Board of Directors declared a semi-
annual cash dividend of $.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 was paid to the shareholders of record
at the close of business on December 13, 2002.
Capital additions were $577 million in 2002, with the majority of the
spending supporting new products, manufacturing productivity and
quality improvements, infrastructure improvements, and ongoing
environmental and safety initiatives.
The cash outflows for severance and exit costs associated with the
restructuring charges recorded in 2002 will be more than offset by the
tax savings associated with the restructuring actions, primarily due to
the tax benefit of $46 million relating to the consolidation of its
photofinishing operations in Japan recorded in the third quarter 2002
restructuring charge. During 2002, the Company expended $220 million
against the related restructuring reserves, primarily for the payment
of severance benefits, which were mostly attributable to the 2001
restructuring actions. The remaining severance-related actions
associated with the total 2001 restructuring charge were completed by
the end of the first quarter of 2003, and the remaining severance
payments of $6 million at December 31, 2003 will be made by the end of
2004. Employees whose positions were eliminated could elect to receive
severance payments for up to two years following their date of
termination.
2001
Net cash provided by operating activities in 2001 was $2,206 million,
as net earnings of $76 million, adjusted for depreciation and
amortization, and restructuring costs, asset impairments and other
charges, provided $1,408 million of operating cash. Also contributing
to operating cash was a decrease in receivables of $254 million and a
decrease in inventories of $465 million. This was partially offset by
decreases in liabilities, excluding borrowings, of $111 million related
primarily to severance payments for restructuring programs and
reductions in accounts payable and accrued benefit costs. Net cash
used in investing activities of $1,188 million in 2001 was utilized
primarily for capital expenditures of $743 million, investments in
unconsolidated affiliates of $141 million, and business acquisitions of
$306 million. Net cash used in financing activities of $808 million in
2001 was primarily the result of stock repurchases and dividend
payments as discussed below.
79
The Company declared cash dividends per share of $.44 in each of the
first three quarters and $.89 in the fourth quarter of 2001. Total
cash dividends of $643 million were paid in 2001. In October 2001, the
Company's Board of Directors approved a change in dividend policy from
quarterly dividend payments to semi-annual dividend payments.
Dividends, when declared, will be paid on the 10th business day of July
and December to shareholders of record on the first business day of the
preceding month. These payment dates serve to better align the
dividend disbursements with the seasonal cash flow pattern of the
business, which is more concentrated in the second half of the year.
This action resulted in the Company making five dividend payments in
2001.
Net working capital, excluding short-term borrowings, decreased to $797
million from $1,420 million at year-end 2000. This decrease is mainly
attributable to lower receivable and inventory balances, as discussed
above.
Capital additions, excluding equipment purchased for lease, were $680
million in 2001, with the majority of the spending supporting new
products, manufacturing productivity and quality improvements,
infrastructure improvements, ongoing environmental and safety
initiatives, and renovations due to relocations associated with
restructuring actions taken in 1999.
Under the $2,000 million stock repurchase program announced on April
15, 1999, the Company repurchased $44 million of its shares in 2001.
As of March 2, 2001, the Company suspended the stock repurchase program
in a move designed to accelerate debt reduction and increase financial
flexibility. At the time of the suspension of the program, the Company
had repurchased approximately $1,800 million of its shares under this
program.
The net cash cost of the restructuring charge recorded in 2001 was
approximately $182 million after tax, which was recovered through cost
savings in less than two years. The severance-related actions
associated with this charge were completed by the end of the first
quarter of 2003, and the remaining severance payments of $6 million at
December 31, 2003 will be made by the end of 2004.
- -----------------------------------------------------------------------
80
OTHER
Cash expenditures for pollution prevention and waste treatment for the
Company's current facilities were as follows:
(in millions) 2003 2002 2001
Recurring costs for pollution
prevention and waste treatment $ 74 $ 67 $ 68
Capital expenditures for pollution
prevention and waste treatment 8 12 27
Site remediation costs 2 3 2
---- ---- ----
Total $ 84 $ 82 $ 97
==== ==== ====
At December 31, 2003 and 2002, the Company's undiscounted accrued
liabilities for environmental remediation costs amounted to $141 million
and $148 million, respectively. These amounts are 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 (RFI) and Corrective Measures Studies (CMS) for
areas at the site. The previous estimate for future investigation and
remediation costs was reduced by $8 million for the following reasons:
(1) approval of Final Corrective Measures for four investigation areas,
(2) approval for a single investigation approach for the site's
industrial sewers and building waste water collection system, and (3)
completion with no further action approvals at seventeen Solid Waste
Management Units. At December 31, 2003, estimated future investigation
and remediation costs of $57 million are accrued for this site and are
included in the $141 million reported in other long-term liabilities.
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. At the Ohio site,
agreements reached with the Ohio Environmental Protection Agency in
regard to the calculation of clean-up levels, as well as the long term
viability of the facility as an industrial site, allowed the previous
estimate to be reduced by $13 million. At December 31, 2003, estimated
future remediation costs of $35 million are accrued for these sites and
are included in the $141 million reported in other long-term
liabilities.
81
The Company has obligations relating to two former manufacturing sites
located outside of the United States. At December 31, 2003, estimated
future investigation, remediation and monitoring costs of $20 million
are accrued for these sites and are included in the $141 million
reported in other long-term liabilities.
As a result of the ongoing monitoring and identification process, the
Company has identified seven additional operating sites with an
estimated future investigation, remediation and monitoring cost of $21
million. These costs are accrued and are included in the $141 million
reported in other long-term liabilities.
Additionally, the Company has approximately $8 million accrued in the
$141 million reported in other long-term liabilities at December 31,
2003 for remediation relating to other facilities, which are not
material to the Company's financial position, results of operations,
cash flows or competitive position.
Cash expenditures for the aforementioned investigation, remediation and
monitoring activities are expected to be incurred over the next thirty
years for many of the sites. 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 $16 million over the next five
years. These expenditures are incurred as part of plant operations
and, therefore, are not included in the environmental accrual at
December 31, 2003.
82
The Company is presently designated as a potentially responsible party
(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 four such active sites. With respect to each of these
sites, the Company's liability is minimal. In addition, the Company
has been identified as a PRP in connection with the non-imaging health
businesses in four active Superfund sites. Numerous other PRPs have
also been designated at these sites. Although the law imposes joint
and several liability on PRPs, the Company's historical experience
demonstrates that these costs are shared with other PRPs. Settlements
and costs paid by the Company in Superfund matters to date have not
been material. Future costs are also not expected to be material to
the Company's financial position, results of operations or cash flows.
The Clean Air Act Amendments were enacted in 1990. Expenditures to
comply with the Clean Air Act implementing regulations issued to date
have not been material and have been primarily capital in nature. In
addition, future expenditures for existing regulations, which are
primarily capital in nature, are not expected to be material. Many of
the regulations to be promulgated pursuant to this Act have not been
issued.
Uncertainties associated with environmental remediation contingencies
are pervasive and often result in wide ranges of outcomes. Estimates
developed in the early stages of remediation can vary significantly. A
finite estimate of cost does not normally become fixed and determinable
at a specific time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities
that help to frame and define a liability, and the Company continually
updates its cost estimates. The Company has an ongoing monitoring and
identification process to assess how the activities, with respect to
the known exposures, are progressing against the accrued cost
estimates, as well as to identify other potential remediation sites
that are presently unknown.
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, 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.
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83
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," an Interpretation of
Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial
Statements." FIN 46 addresses the consolidation by business
enterprises of variable interest entities (VIEs) either: (1) that do
not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial
support, or (2) in which the equity investors lack an essential
characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46
(Revised Interpretations) resulting in multiple effective dates based
on the nature and creation date of the VIE. The Revised
Interpretations must be applied to all VIEs no later than the end of
the first interim or annual reporting period ending after March 15,
2004. However, prior to the required application of the Revised
Interpretations, its provisions must be adopted by the end of the first
interim or annual reporting period that ends after December 15, 2003
(for the year ended December 31, 2003 for the Company) for VIEs
considered to be special purpose entities (SPEs). SPEs for this
provision include any entity whose activities are primarily related to
securitizations or other forms of asset-backed financings or single-
lessee leasing arrangements. The Company's only material SPE as of
December 31, 2003 was related to its equity investment in ESF. Refer
to Note 7, "Investments," for the disclosures required under FIN 46 on
ESF. The Company is currently evaluating the effect that the adoption
of FIN 46 for non-SPE VIEs created prior to February 1, 2003 will have
on its financial position, results of operations and cash flows. The
Company did not have a material exposure to loss as of December 31,
2003 in relation to any VIEs which it had created or obtained an
interest in after January 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is
generally effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
The adoption of SFAS No. 149 did not have any impact on the Company's
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 requires that certain financial instruments,
which under previous guidance were recorded as equity, be recorded as
liabilities. The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash
or other assets, and certain obligations that can be settled with
shares of stock. The Company adopted SFAS No. 150 on June 1, 2003.
The adoption of this statement did not have any effect on the Company's
financial position, results of operations or cash flows.
84
EITF Issue No. 03-05, "Applicability of AICPA Statement of Position
(SOP) 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software," effective September 30, 2003, states
that, only software and software-related elements are in the scope of
SOP 97-2. The adoption of EITF No. 03-05 did not have a material
impact on the Company's financial position, results of operations or
cash flows.
In December 2003, the FASB issued a revision of SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 requires that companies disclose more
information about plan assets, benefit obligations, cash flows, benefit
costs and other relevant information. Companies are required to
disclose plan assets by category and a description of investment
policies, strategies and target allocation percentages for these asset
categories. Cash flows must include projections of future benefit
payments, and an estimate of contributions to be made in the next year
to fund pension and other postretirement benefit plans. In addition,
companies are required to disclose various elements of pension and
other postretirement benefit costs on a quarterly basis. Certain
provisions of SFAS No. 132 were effective and were implemented as of
and for the year ended December 31, 2003. Certain of the other
provisions will be effective for quarterly and annual periods beginning
after December 15, 2003. Refer to Note 17, "Retirement Plans," for
these new disclosures.
In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." FSP No.
106-1 allows the sponsor of a postretirement health care plan that
provides a prescription drug benefit to make a one-time election to
defer accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act). The Act, which
was signed into law in December 2003, introduces a prescription drug
benefit under Medicare as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare. The guidance in this FSP is
effective for interim or annual financial statements of fiscal years
ending after December 7, 2003. In accordance with FSP No. 106-1, the
Company has elected to defer accounting for the effects of the Act.
Refer to Note 18, "Other Postretirement Benefits," for disclosures
required by FSP No. 106-1.
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85
RISK FACTORS
Set forth below and elsewhere in this report and in other documents
that the Company files with the Securities and Exchange Commission are
risks and uncertainties that could cause the actual future results of
the Company to differ from those expressed or implied in the forward-
looking statements contained in this document and other public
statements the Company makes. Additionally, because of the following
risks and uncertainties, as well as other variables affecting our
operating results, the Company's past financial performance should not
be considered an indicator of future performance and investors should
not use historical trends to anticipate results or trends in future
periods.
Kodak recently announced plans to emphasize digital technology to
expand into a range of commercial businesses in order to create a more
balanced and diversified business portfolio while accelerating the
implementation of its existing digital product strategies in the
consumer markets. Kodak expects to incur restructuring charges in
relation to these initiatives. The expected benefits from these
initiatives are subject to many estimates and assumptions, including
assumptions regarding: (1) the amount and timing of cost savings and
cash flow that Kodak can achieve from its traditional consumer film and
paper businesses; (2) the speed at which consumer transition from
traditional photography to digital photography occurs; (3) Kodak's
ability to develop new digital businesses in its commercial, consumer
and health markets; (4) Kodak's ability to identify and complete
compatible strategic acquisitions consistent with its growth timeline;
and (5) the costs and timing of activities undertaken in connection
with these initiatives. In addition, these estimates and assumptions
are subject to significant economic, competitive and other
uncertainties that are beyond Kodak's control. If these assumptions
are not realized, or if other unforeseen events occur, Kodak's results
of operations could be adversely affected, as it may not be able to
grow its business, and its ability to compete could be negatively
affected.
Unanticipated delays in implementing certain product strategies
(including digital products, category expansion, digitization, and OLED
displays) could adversely affect Kodak's revenues. Kodak's ability to
successfully transition its existing products and develop and deploy
new products requires that Kodak make accurate predictions of the
product development schedule as well as volumes, product mix, customer
demand, sales channels, and configuration. The process of developing
new products and services is complex and often uncertain due to the
frequent introduction of new products that offer improved performance
and pricing. Kodak may anticipate demand and perceived market
acceptance that differs from the product's realizable customer demand
and revenue stream. Further, in the face of intense industry
competition, any delay in the development, production or marketing of a
new product could decrease any advantage Kodak may have to be the first
or among the first to market. Kodak's failure to carry out a product
rollout in the time frame anticipated and in the quantities appropriate
to customer demand, or at all, could adversely affect future demand for
Kodak's products and services and have an adverse effect on its
business.
86
Kodak's ability to implement its intellectual property licensing
strategies could also affect the Company's revenue and earnings. Kodak
has invested millions of dollars in technologies and needs to protect
its intellectual property. The establishment and enforcement of
licensing agreements provides a revenue stream in the form of royalties
that protects Kodak's ability to further innovate and help the
marketplace grow. Kodak's failure to properly manage the development
of its intellectual property could adversely affect the future of these
patents and the market opportunities that could result from the use of
this property. Kodak's failure to manage the costs associated with the
pursuit of these licenses could adversely affect the profitability of
these operations.
In the event Kodak were unable to develop and implement e-commerce
strategies that are in alignment with the trend toward industry
standards and services, the Company's business could be adversely
affected. The availability of software and standards related to e-
commerce strategies is of an emerging nature. Kodak's ability to
successfully align with the industry standards and services and ensure
timely solutions requires the Company to make accurate predictions of
the future accepted standards and services.
Kodak's completion of planned information systems upgrades, including
SAP, if delayed, could adversely affect its business. As Kodak
continues to expand the planned information services, the Company must
continue to balance the investment of the planned deployment with the
need to upgrade the vendor software. Kodak's failure to successfully
upgrade to the vendor-supported version could result in risks to system
availability, which could adversely affect the business.
Kodak has recently completed various business acquisitions and intends
to complete various other business acquisitions in the future,
particularly in its Health Imaging and Commercial Imaging segments, in
order to strengthen and diversify its portfolio of businesses. At the
same time, Kodak needs to streamline and simplify its traditional
businesses, including its photofinishing operations in the United
States and EAMER. In the event that Kodak fails to effectively manage
the portfolio of its more traditional businesses while simultaneously
integrating these acquisitions, it could fail to obtain the expected
synergies and favorable impact of these acquisitions. Such a failure
could cause Kodak to lose market opportunities and experience a
resulting adverse impact on its revenues and earnings.
In 2004, Kodak continues to focus on reduction of inventories and
capital expenditures, improvement in receivable performance, and
improvement in manufacturing productivity.
87
Unanticipated delays in the Company's plans to continue inventory
reductions in 2004 could adversely impact Kodak's cash flow outlook.
Planned inventory reductions could be compromised by slower sales that
could result from continued weak global economic conditions.
Purchasers' uncertainty about the extent of the global economic
downturn could result in lower demand for products and services. In
addition, the competitive environment and the transition to digital
products and services could also place pressures on Kodak's sales and
market share. In the event Kodak is unable to successfully manage
these issues in a timely manner, they could adversely impact the
planned inventory reductions.
If Kodak exceeds its 2004 capital spending plan, this factor could
adversely impact the Company's cash flow outlook. Further, if Kodak
deems it necessary to spend more on regulatory requirements or if
unanticipated general maintenance obligations arise that require more
capital spending than planned, the increased spending could have an
adverse impact on Kodak's cash flow.
Unanticipated delays in the Company's plans to continue the
improvement of its accounts receivable collection and to reduce the
number of days sales outstanding could also adversely impact Kodak's
cash outlook. A continued weak economy could slow customer payment
patterns. In addition, competitive pressures in major segments may
cause the financial condition of certain of Kodak's customers to
deteriorate. These same pressures may adversely affect the Company's
efforts to shorten customer payment terms. Kodak's ability to manage
customer risk while maintaining a competitive market share may
adversely affect continued accounts receivable improvement in 2004.
Delays in Kodak's plans to improve manufacturing productivity and
control costs of operations could negatively impact the gross margins
of the Company. Kodak's failure to successfully manage operational
performance factors could delay or curtail planned improvements in
manufacturing productivity. Accelerating digital substitution could
result in lower volumes in the factory than planned, which would also
negatively impact gross margins. If Kodak is unable to successfully
negotiate raw material costs with its suppliers, or incurs adverse
pricing on certain of its commodity-based raw materials, reduction in
the gross margins could occur. Additionally, delays in the Company's
execution of increasing manufacturing capabilities for certain of its
products in some of its emerging markets, particularly China where it
is more cost competitive, could adversely impact gross margins.
Kodak's planned improvement in supply chain efficiency, if delayed,
could adversely affect its business by preventing shipments of certain
products to be made in their desired quantities and in a timely manner.
The planned efficiencies could be compromised if Kodak expands into new
markets with new applications that are not fully understood or if the
portfolio broadens beyond that anticipated when the plans were
initiated. The unforeseen changes in manufacturing capacity could also
compromise the supply chain efficiencies.
88
Competition remains intense in the imaging sector in the photography,
commercial and health segments. On the photography side, price
competition has been driven somewhat by consumers' conservative
spending behaviors during times of a weak world economy, international
tensions and the accompanying concern over war and terrorism. On the
health and commercial side, aggressive pricing tactics intensified in
the contract negotiations as competitors were vying for customers and
market share domestically. If the pricing and programs are not
sufficiently competitive with those offered by Kodak's current and
future competitors, Kodak may lose market share, adversely affecting
its revenue and gross margins.
The impact of continuing customer consolidation and buying power could
have an adverse impact on Kodak's revenue, gross margins, and earnings.
In the competitive consumer retail environment, there is a movement
from small individually owned retailers to larger and commonly known
mass merchants. In the commercial environment, there is a continuing
consolidation of various group purchasing organizations. The resellers
and distributors may elect to use suppliers other than Kodak. Kodak's
challenge is to successfully negotiate contracts that provide the most
favorable conditions to the Company in the face of price and aggressive
competitors.
Kodak conducts business in developing markets with economies that tend
to be more volatile than those in the United States and Western Europe.
The risk of doing business in developing markets like China, India,
Brazil, Argentina, Mexico, Russia and other economically volatile areas
could adversely affect Kodak's operations and earnings. Such risks
include the financial instability among customers in these regions,
political instability and potential conflicts among developing nations
and other non-economic factors such as irregular trade flows that need
to be managed successfully with the help of the local governments.
Kodak's failure to successfully manage economic, political and other
risks relating to doing business in developing countries and
economically and politically volatile areas could adversely affect its
business.
Kodak, as a result of its global operating and financing activities, is
exposed to changes in currency exchange rates and interest rates, which
may adversely affect its results of operations and financial position.
Exchange rates and interest rates in certain markets in which the
Company does business tend to be more volatile than those in the United
States and Western Europe. For example, in early 2002, the United
States dollar was eliminated as Argentina's monetary benchmark,
resulting in significant currency devaluation. There can be no
guarantees that the economic situation in developing markets or
elsewhere will not worsen, which could result in future effects on
earnings should such events occur.
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89
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, cash flow expectations and future focused cost
reductions for 2004 are forward-looking statements.
Actual results may differ from those expressed or implied in forward-
looking statements. In addition, any forward-looking statements
represent the Company's estimates only as of the date they are made,
and should not be relied upon as representing the Company's estimates
as of any subsequent date. While the Company may elect to update
forward-looking statements at some point in the future, the Company
specifically disclaims any obligation to do so, even if its estimates
change. The forward-looking statements contained in this report are
subject to a number of factors and uncertainties, including the
successful: implementation of the recently announced digitally-oriented
growth strategy, including the related implementation of future focused
cost reductions; implementation of product strategies (including
digital products, category expansion, digitization, and OLED displays);
implementation of intellectual property licensing strategies;
development and implementation of e-commerce strategies; completion of
information systems upgrades, including SAP, our enterprise system
software; completion of various portfolio actions; reduction of
inventories and capital expenditures; improvement in receivables
performance; improvement in manufacturing productivity and techniques;
improvement in supply chain efficiency; and the 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 factors and
uncertainties: inherent unpredictability of currency fluctuations and
raw material costs; competitive actions, including pricing; the nature
and pace of technology evolution, including the analog-to-digital
transition; continuing customer consolidation and buying power; general
economic, business, geo-political and public health conditions; and
other factors and uncertainties disclosed herein and from time to time
in the Company's other filings with the Securities and Exchange
Commission, including but not limited to the items discussed in "Risk
Factors" as set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this
report.
Any forward-looking statements in this report should be evaluated in
light of these important factors and uncertainties as well as the risk
factors and other cautionary information contained herein.
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90
MARKET PRICE DATA
2003 2002
Price per
share: High Low High Low
1st Quarter $41.08 $26.88 $34.30 $25.58
2nd Quarter 32.46 26.99 35.49 28.15
3rd Quarter 30.10 20.39 32.36 26.30
4th Quarter 25.83 20.43 38.48 25.60
- -----------------------------------------------------------------------
SUMMARY OF OPERATING DATA
A summary of operating data for 2003 and for the four years prior is
shown on page 178.
- -----------------------------------------------------------------------
ITEM 7A. 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 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.
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 December 31, 2003 and 2002, the fair value of open
forward contracts would have increased $23 million and $13 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 December 31, 2003 and 2002, the
fair value of open forward contracts would have decreased $1 million
and $4 million, respectively. Such losses in fair value, if realized,
would be offset by lower costs of manufacturing silver-containing
products.
91
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 may utilize 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.
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 December 31, 2003, the fair
value of short-term and long-term borrowings would have decreased $2
million and $70 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 37 basis points)
higher at December 31, 2002, the fair value of short-term and long-term
borrowings would have decreased $1 million and $15 million,
respectively. The larger decrease in the fair value of long-term
borrowings in 2003 as compared with 2002 was entirely due to the
increase in the amount of long-term borrowings as a result of the
October 2003 issuances of $500 million of 7.25% Senior Notes due 2013
and $575 million of 3.375% Convertible Senior Notes due 2033.
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 December 31, 2003 was
not significant to the Company.
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92
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Eastman Kodak Company
In our opinion, the accompanying consolidated financial statements and
financial statement schedule listed in the index appearing under Item
15(a)(1) and (2) on page 182 of this Annual Report on Form 10-K present
fairly, in all material respects, the financial position of Eastman
Kodak Company (the Company) at December 31, 2003 and 2002, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. These
financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," and No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," on January 1, 2002.
PricewaterhouseCoopers LLP
Rochester, New York
February 10, 2004 except for Note 25, as to which the date is March 8,
2004
93
Eastman Kodak Company
CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended December 31,
(in millions, except per share
data)
2003 2002 2001
Net sales $13,317 $12,835 $13,229
Cost of goods sold 9,033 8,225 8,661
------- ------- -------
Gross profit 4,284 4,610 4,568
Selling, general and
administrative expenses 2,648 2,530 2,625
Research and development costs 781 762 779
Goodwill amortization - - 153
Restructuring costs and other 484 98 659
------- ------- -------
Earnings from continuing
operations before interest,
other charges, net, and
income taxes 371 1,220 352
Interest expense 148 173 219
Other charges, net 51 101 18
------- ------- -------
Earnings from continuing operations
before income taxes 172 946 115
(Benefit) provision for income
taxes (66) 153 34
------- ------- -------
Earnings from continuing operations $ 238 $ 793 $ 81
======= ======= =======
Earnings (loss) from discontinued
operations net of income tax
benefits of $13, $15
and $2, respectively $ 27 $ (23) $ (5)
======= ======= =======
NET EARNINGS $ 265 $ 770 $ 76
======= ======= =======
Basic and diluted net earnings
(loss) per share:
Continuing operations $ .83 $ 2.72 $ .28
Discontinued operations .09 (.08) (.02)
------- ------- -------
Total $ .92 $ 2.64 $ .26
======= ======= =======
Cash dividends per share $ 1.15 $ 1.80 $ 2.21
====== ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
94
Eastman Kodak Company
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions, except share and per
share data) At December 31,
2003 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,250 $ 569
Receivables, net 2,389 2,234
Inventories, net 1,075 1,062
Deferred income taxes 610 512
Other current assets 131 157
------- -------
Total current assets 5,455 4,534
------- -------
Property, plant and equipment, net 5,094 5,420
Goodwill 1,384 981
Other long-term assets 2,885 2,559
------- -------
TOTAL ASSETS $14,818 $13,494
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,707 $ 3,351
Short-term borrowings 946 1,442
Accrued income taxes 654 709
------- -------
Total current liabilities 5,307 5,502
Long-term debt, net of current portion 2,302 1,164
Postretirement liabilities 3,344 3,412
Other long-term liabilities 601 639
------- -------
Total liabilities 11,554 10,717
------- -------
Commitments and Contingencies (Note 11)
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value;
950,000,000 shares authorized;
391,292,760 shares issued in 2003
and 2002; 286,580,671 and
285,933,179 shares outstanding
in 2003 and 2002 978 978
Additional paid in capital 850 849
Retained earnings 7,527 7,611
Accumulated other comprehensive loss (231) (771)
Unearned restricted stock (8) -
------- -------
9,116 8,667
Treasury stock, at cost
104,712,089 shares in 2003 and
105,359,581 shares in 2002 5,852 5,890
------- -------
Total shareholders' equity 3,264 2,777
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,818 $13,494
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
95
Eastman Kodak Company
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in millions, except share and per share data)
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Stock* Capital Earnings (Loss) Income Stock Total
Shareholders' Equity December 31, 2000 $978 $ 871 $ 7,869 $(482) $(5,808) $3,428
Net earnings - - 76 - - 76
------
Other comprehensive income (loss):
Unrealized losses on available-for-sale
securities ($34 million pre-tax) - - - (21) - (21)
Reclassification adjustment for gains
on available-for-sale securities
included in net earnings
($13 million pre-tax) - - - 8 - 8
Unrealized gain arising from
hedging activity ($6 million pre-tax) - - - 4 - 4
Reclassification adjustment for hedging
related losses included in net earnings
($48 million pre-tax) - - - 29 - 29
Currency translation adjustments - - - (98) - (98)
Minimum pension liability adjustment
($60 million pre-tax) - - - (37) - (37)
----- ------
Other comprehensive loss - - - (115) - (115)
----- ------
Comprehensive loss (39)
Cash dividends declared ($2.21 per common
share) - - (514) - - (514)
Treasury stock repurchased (947,670 shares) - - - - (41) (41)
Treasury stock issued under employee plans
(1,393,105 shares) - (25) - - 82 57
Tax reductions - employee plans - 3 - - - 3
---- ----- ------- ----- ------- ------
Shareholders' Equity December 31, 2001 $978 $ 849 $ 7,431 $(597) $(5,767) $2,894
96
Eastman Kodak Company
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Cont'd.
(in millions, except share and per share data)
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Stock* Capital Earnings (Loss) Income Stock Total
Shareholders' Equity December 31, 2001 $978 $ 849 $ 7,431 $(597) $(5,767) $2,894
Net earnings - - 770 - - 770
------
Other comprehensive income (loss):
Unrealized gains on available-for-sale
securities ($11 million pre-tax) - - - 6 - 6
Unrealized loss arising from
hedging activity ($27 million pre-tax) - - - (19) - (19)
Reclassification adjustment for hedging
related losses included in net earnings
($24 million pre-tax) - - - 15 - 15
Currency translation adjustments - - - 218 - 218
Minimum pension liability adjustment
($577 million pre-tax) - - - (394) - (394)
----- ------
Other comprehensive loss - - - (174) - (174)
----- ------
Comprehensive income 596
Cash dividends declared ($1.80 per common
share) - - (525) - - (525)
Treasury stock repurchased (7,354,316
shares) - - - - (260) (260)
Treasury stock issued under employee plans
(2,357,794 shares) - (1) (65) - 137 71
Tax reductions - employee plans - 1 - - - 1
---- ----- ------- ----- ------- ------
Shareholders' Equity December 31, 2002 $978 $ 849 $ 7,611 $(771) $(5,890) $2,777
97
Eastman Kodak Company
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Cont'd.
(in millions, except share and per share data)
Accumulated Unearned
Additional Other Restrict-
Common Paid In Retained Comprehensive ed Treasury
Stock* Capital Earnings (Loss) Income Stock Stock Total
Shareholders' Equity December 31, 2002 $978 $ 849 $ 7,611 $(771) $ - $(5,890) $2,777
Net earnings - - 265 - - - 265
------
Other comprehensive income (loss):
Unrealized gains on available-for-sale
securities ($18 million pre-tax) - - - 11 - - 11
Unrealized loss arising from
hedging activity ($42 million pre-tax) - - - (25) - - (25)
Reclassification adjustment for hedging
related losses included in net earnings
($29 million pre-tax) - - - 19 - - 19
Currency translation adjustments - - - 413 - - 413
Minimum pension liability adjustment
($167 million pre-tax) - - - 122 - - 122
----- ------
Other comprehensive income - - - 540 - - 540
----- ------
Comprehensive income 805
Cash dividends declared ($1.15 per common
share) - - (330) - - - (330)
Treasury stock issued for stock option
exercises (337,940 shares) - - (10) - - 21 11
Unearned restricted stock issuances - - (9) - (8) 17 -
(309,552 shares)
Tax reductions - employee plans - 1 - - - - 1
---- ----- ------- ----- --- ------- ------
Shareholders' Equity December 31, 2003 $978 $ 850 $ 7,527 $(231) $(8) $(5,852) $3,264
==== ===== ======= ===== === ======= ======
* There are 100 million shares of $10 par value preferred stock authorized,
none of which have been issued.
The accompanying notes are an integral part of these consolidated financial
statements.
98
Eastman Kodak Company
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31,
(in millions) 2003 2002 2001
Cash flows from operating activities:
Net earnings $ 265 $ 770 $ 76
Adjustments to reconcile to net cash
provided by operating activities:
(Earnings) loss from discontinued
operations (27) 23 5
Equity in losses from unconsolidated
affiliates 52 105 84
Depreciation and goodwill amortization 830 818 917
Gain on sales of businesses/assets (11) (24) -
Purchased research and development 32 - -
Restructuring costs, asset impairments
and other charges 156 85 415
Benefit for deferred income taxes (14) (224) (41)
(Increase) decrease in receivables (9) 263 254
Decrease in inventories 128 88 465
Increase (decrease) in liabilities
excluding borrowings 94 29 (111)
Other items, net 130 285 149
------ ------ ------
Total adjustments 1,361 1,448 2,137
------ ------ ------
Net cash provided by continuing
operations 1,626 2,218 2,213
------ ------ ------
Net cash provided by (used in)
discontinued operations 19 (14) (7)
------ ------ ------
Net cash provided by operating
activities 1,645 2,204 2,206
------ ------ ------
Cash flows from investing activities:
Additions to properties (506) (577) (743)
Net proceeds from sales of
businesses/assets 26 27 -
Acquisitions, net of cash acquired (697) (72) (306)
Investments in unconsolidated
affiliates (89) (123) (141)
Marketable securities - sales 86 88 54
Marketable securities - purchases (87) (101) (52)
------ ------ ------
Net cash used in investing
activities (1,267) (758) (1,188)
------ ------ ------
Cash flows from financing activities:
Net decrease in borrowings with
maturities of 90 days or less (574) (210) (695)
Proceeds from other borrowings 1,693 759 1,907
Repayment of other borrowings (531) (1,146) (1,355)
Dividends to shareholders (330) (525) (643)
Exercise of employee stock options 12 51 22
Stock repurchase programs - (260) (44)
------ ------ ------
Net cash provided by (used in)
financing activities 270 (1,331) (808)
------ ------ ------
Effect of exchange rate changes on cash 33 6 (8)
------ ------ ------
Net increase in cash and cash
equivalents 681 121 202
Cash and cash equivalents, beginning
of year 569 448 246
------ ------ ------
Cash and cash equivalents, end of year $1,250 $ 569 $ 448
====== ====== ======
99
Eastman Kodak Company
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(in millions)
Cash paid for interest and income taxes was:
2003 2002 2001
Interest, net of portion capitalized
of $2, $3 and $12 $137 $173 $214
Income taxes 66 201 120
The following non-cash transactions are not reflected in the
Consolidated Statement of Cash Flows:
2003 2002 2001
Minimum pension liability adjustment $122 $394 $ 37
Liabilities assumed in acquisitions 109 30 142
Issuance of restricted stock,
net of forfeitures 13 1 5
Issuance of stock related to
an acquisition - 25 -
The accompanying notes are an integral part of these consolidated
financial statements.
100
Eastman Kodak Company
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
COMPANY OPERATIONS
Eastman Kodak Company (the Company or Kodak) is engaged primarily in
developing, manufacturing, and marketing traditional and digital
imaging products, services and solutions to consumers, the
entertainment industry, professionals, healthcare providers and other
customers. The Company's products are manufactured in a number of
countries in North and South America, Europe, Australia and Asia. The
Company's products are marketed and sold in many countries throughout
the world.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Kodak and
its majority owned subsidiary companies. Intercompany transactions are
eliminated and net earnings are reduced by the portion of the net
earnings of subsidiaries applicable to minority interests. The equity
method of accounting is used for joint ventures and investments in
associated companies over which Kodak has significant influence, but
does not have effective control. Significant influence is generally
deemed to exist when the Company has an ownership interest in the
voting stock of the investee of between 20% and 50%, although other
factors, such as representation on the investee's Board of Directors,
voting rights and the impact of commercial arrangements, are considered
in determining whether the equity method of accounting is appropriate.
The cost method of accounting is used for investments in which Kodak
has less than a 20% ownership interest, and the Company does not have
the ability to exercise significant influence. These investments are
carried at cost and are adjusted only for other-than-temporary declines
in fair value. The carrying value of these investments is reported in
other long-term assets in the accompanying Consolidated Statement of
Financial Position. The Company's equity in the net income and losses
of these investments is reported in other charges, net, in the
accompanying Consolidated Statement of Earnings. See Note 7,
"Investments," and Note 14, "Other Charges, Net."
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at year end, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
101
FOREIGN CURRENCY
For most subsidiaries and branches outside the U.S., the local currency
is the functional currency. In accordance with the Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency
Translation," the financial statements of these subsidiaries and
branches are translated into U.S. dollars as follows: assets and
liabilities at year-end exchange rates; income, expenses and cash flows
at average exchange rates; and shareholders' equity at historical
exchange rates. For those subsidiaries for which the local currency is
the functional currency, the resulting translation adjustment is
recorded as a component of accumulated other comprehensive income in
the accompanying Consolidated Statement of Financial Position.
Translation adjustments are not tax-effected since they relate to
investments, which are permanent in nature.
For certain other subsidiaries and branches, operations are conducted
primarily in U.S. dollars, which is therefore the functional currency.
Monetary assets and liabilities, and the related revenue, expense, gain
and loss accounts, of these foreign subsidiaries and branches are
remeasured at year-end exchange rates. Non-monetary assets and
liabilities, and the related revenue, expense, gain and loss accounts,
are remeasured at historical rates. Adjustments which result from the
remeasurement of the assets and liabilities of these subsidiaries are
included in net income.
Foreign exchange gains and losses arising from transactions denominated
in a currency other than the functional currency of the entity involved
are included in net income. The effects of foreign currency
transactions, including related hedging activities, were losses of $11
million, $19 million, and $9 million in the years 2003, 2002, and 2001,
respectively, and are included in other charges, net, in the
accompanying Consolidated Statement of Earnings. Refer to the
"Derivative Financial Instruments" section of Note 1, "Significant
Accounting Policies," for a description of how hedging activities are
reflected in the Company's Consolidated Statement of Earnings.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents, receivables, foreign currency forward contracts,
commodity forward contracts and interest rate swap arrangements. The
Company places its cash and cash equivalents with high-quality
financial institutions and limits the amount of credit exposure to any
one institution. With respect to receivables, such receivables arise
from sales to numerous customers in a variety of industries, markets,
and geographies around the world. Receivables arising from these sales
are generally not collateralized. The Company performs ongoing credit
evaluations of its customers' financial conditions and no single
customer accounts for greater than 10% of the sales of the Company.
The Company maintains reserves for potential credit losses and such
losses, in the aggregate, have not exceeded management's expectations.
With respect to the foreign currency forward contracts, commodity
forward contracts and interest rate swap arrangements, the
counterparties to these contracts are major financial institutions.
The Company has never experienced non-performance by any of its
counterparties.
102
Additionally, the Company guarantees debt and other obligations with
certain unconsolidated affiliates and customers, which could
potentially subject the Company to significant concentrations of credit
risk. However, with the exception of the Company's total debt
guarantees for which there is a concentration with one of Kodak's
unconsolidated affiliate companies, these guarantees relate to numerous
customers in a variety of industries, markets and geographies around
the world. The Company does not believe that material payments will be
required under any of its guarantee arrangements. See Note 12,
"Guarantees."
CASH EQUIVALENTS
All highly liquid investments with a remaining maturity of three months
or less at date of purchase are considered to be cash equivalents.
MARKETABLE SECURITIES AND NONCURRENT INVESTMENTS
The Company classifies its investment securities as either held-to-
maturity, available-for-sale or trading. The Company's debt and equity
investment securities are classified as held-to-maturity and available-
for-sale, respectively. Held-to-maturity investments are carried at
amortized cost and available-for-sale securities are carried at fair
value, with the unrealized gains and losses reported in shareholders'
equity under the caption accumulated other comprehensive income (loss).
The Company records losses that are other than temporary to earnings.
At December 31, 2003 and 2002, the Company had short-term investments
classified as held-to-maturity of $11 million and $9 million,
respectively. These investments were included in other current assets
in the accompanying Consolidated Statement of Financial Position. In
addition, at December 31, 2003 and 2002, the Company had available-for-
sale equity securities of $31 million and $24 million, respectively,
included in other long-term assets in the accompanying Consolidated
Statement of Financial Position.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of
most inventories in the U.S. is determined by the "last-in, first-out"
(LIFO) method. The cost of all of the Company's remaining inventories
in and outside the U.S. is determined by the "first-in, first-out"
(FIFO) or average cost method, which approximates current cost. The
Company provides inventory reserves for excess, obsolete or slow-moving
inventory based on changes in customer demand, technology developments
or other economic factors.
103
PROPERTIES
Properties are recorded at cost, net of accumulated depreciation. The
Company principally calculates depreciation expense using the straight-
line method over the assets' estimated useful lives, which are as
follows:
Years
Buildings and building improvements 10-40
Machinery and equipment 3-20
Maintenance and repairs are charged to expense as incurred. Upon sale
or other disposition, the applicable amounts of asset cost and
accumulated depreciation are removed from the accounts and the net
amount, less proceeds from disposal, is charged or credited to income.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
net assets acquired. Effective January 1, 2002, the Company adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." In
accordance with SFAS No. 142, goodwill is no longer amortized, but is
required to be assessed for impairment at least annually. 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, if potential losses were identified, step two to measure
the impairment loss. The Company completed step one in its first
quarter ended March 31, 2002, and determined that there were no such
impairments. Accordingly, the performance of step two was not required.
The Company has elected to make September 30 the annual impairment
assessment date for all of its reporting units, and will perform
additional impairment tests when events or changes in circumstances
occur that would more likely than not reduce the fair value of the
reporting unit below its carrying amount. SFAS No. 142 defines a
reporting unit as an operating segment or one level below an operating
segment. If the Company believes the carrying amount of a reporting
unit exceeds its fair value, the Company would record an impairment loss
in earnings to the extent the carrying amount of the reporting unit's
goodwill exceeded the fair value of such goodwill. The Company
estimates the fair value of its reporting units through internal
analysis and external valuations, which utilize income and market
approaches through the application of capitalized earnings, discounted
cash flow and market comparable methods.
104
For the year ended December 31, 2001, goodwill amortization was charged
to earnings on a straight-line basis over the period estimated to be
benefited, generally ten years. Earnings and earnings per share from
continuing operations for the year ended December 31, 2001, as adjusted
for the exclusion of goodwill amortization expense, were as follows (in
millions, except per share amounts):
Year Ended Impact of
December 31, 2001 Exclusion of
------------------------ Goodwill
As Reported As Adjusted Amort. Exp.
----------- ----------- ------------
Earnings from continuing
operations before income
taxes (as originally
reported) $ 115 $ 115 $ -
Adjustment for the
exclusion of goodwill
amortization - 153 153
----- ----- ----
Earnings from continuing
operations before income
taxes 115 268 153
Provision for income
taxes 34 58 24
----- ----- ----
Earnings from continuing
operations $ 81 $ 210 $ 129
===== ===== ====
Basic and diluted
earnings per share from
continuing operations $ .28 $ .72 $ .44
===== ===== ====
See Note 5, "Goodwill and Other Intangible Assets."
105
REVENUE
The Company's revenue transactions include sales of the following:
products; equipment; software; services; equipment bundled with
products and/or services; and integrated solutions. The Company
recognizes revenue when realized or realizable and earned, which is
when the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred; the sales price is fixed or
determinable; and collectibility is reasonably assured. At the time
revenue is recognized, the Company provides for the estimated costs of
warranties and reduces revenue for estimated returns.
For product sales, the recognition criteria are generally met when
title and risk of loss have transferred from the Company to the buyer,
which may be upon shipment or upon delivery to the customer site, based
on contract terms or legal requirements in foreign jurisdictions.
Service revenues are recognized as such services are rendered.
For equipment sales, the recognition criteria are generally met when
the equipment is delivered and installed at the customer site. Revenue
is recognized for equipment upon delivery as opposed to upon
installation when there is objective and reliable evidence of fair
value for the installation, and the amount of revenue allocable to the
equipment is not legally contingent upon the completion of the
installation. In instances in which the agreement with the customer
contains a customer acceptance clause, revenue is deferred until
customer acceptance is obtained, provided the customer acceptance
clause is considered to be substantive. For certain agreements, the
Company does not consider these customer acceptance clauses to be
substantive because the Company can and does replicate the customer
acceptance test environment and performs the agreed upon product
testing prior to shipment. In these instances, revenue is recognized
upon installation of the equipment.
Revenue for the sale of software licenses is recognized when: (1) the
Company enters into a legally binding arrangement with a customer for
the license of software; (2) the Company delivers the software; (3)
customer payment is deemed fixed or determinable and free of
contingencies or significant uncertainties; and (4) collection from the
customer is probable. If the Company determines that collection of a
fee is not reasonably assured, the fee is deferred and revenue is
recognized at the time collection becomes reasonably assured, which is
generally upon receipt of payment. Software maintenance and support
revenue is recognized ratably over the term of the related maintenance
period.
106
The Company's transactions may involve the sale of equipment, software,
and related services under multiple element arrangements. The Company
allocates revenue to the various elements based on verifiable objective
evidence of fair value (if software is not included or is incidental to
the transaction) or Kodak-specific objective evidence of fair value if
software is included and is other than incidental to the sales
transaction as a whole. Revenue allocated to an individual element is
recognized when all other revenue recognition criteria are met for that
element.
Revenue from the sale of integrated solutions, which includes
transactions that require significant production, modification or
customization of software, is recognized in accordance with contract
accounting. Under contract accounting, revenue is recognized by
utilizing either the percentage-of-completion or completed-contract
method. The Company currently utilizes the completed-contract method
for all solution sales, as sufficient history does not currently exist
to allow the Company to accurately estimate total costs to complete
these transactions. Revenue from other long-term contracts, primarily
government contracts, is generally recognized using the percentage-of-
completion method.
At the time revenue is recognized, the Company also records reductions
to revenue for customer incentive programs in accordance with the
provisions of Emerging Issues Task Force (EITF) Issue No. 01-09,
"Accounting for Consideration Given from a Vendor to a Customer
(Including a Reseller of the Vendor's Products)." Such incentive
programs include cash and volume discounts, price protection,
promotional, cooperative and other advertising allowances, and coupons.
For those incentives that require the estimation of sales volumes or
redemption rates, such as for volume rebates or coupons, the Company
uses historical experience and internal and customer data to estimate
the sales incentive at the time revenue is recognized.
In instances where the Company provides slotting fees or similar
arrangements, this incentive is recognized as a reduction in revenue
when payment is made to the customer (or at the time the Company has
incurred the obligation, if earlier) unless the Company receives an
identifiable benefit, in which case the incentive is recorded as an
asset and is amortized as a reduction of revenue over the term of the
arrangement. Arrangements in which the Company receives an
identifiable benefit include arrangements that have enforceable
exclusivity provisions and those that provide a clawback provision
entitling the Company to a pro rata reimbursement if the customer does
not fulfill its obligations under the contract.
The Company may offer customer financing to assist customers in their
acquisition of Kodak's products, primarily in the area of on-site
photofinishing equipment. At the time a financing transaction is
consummated, which qualifies as a sales-type lease, the Company records
equipment revenue equal to the total lease receivable net of unearned
income. Unearned income is recognized as finance income using the
effective interest method over the term of the lease. Leases not
qualifying as sales-type leases are accounted for as operating leases.
The Company recognizes revenue from operating leases on an accrual
basis as the rental payments become due.
107
The Company's sales of tangible products are the only class of revenues
that exceeds 10% of total consolidated net sales. All other sales
classes are individually less than 10%, and therefore, have been
combined with the sales of tangible products on the same line in
accordance with Regulation S-X.
RESEARCH AND DEVELOPMENT COSTS
Research and development (R&D) costs, which include costs in connection
with new product development, fundamental and exploratory research,
process improvement, product use technology and product accreditation,
are charged to operations in the period in which they are incurred. In
connection with a business combination, the purchase price allocated to
research and development projects that have not yet reached
technological feasibility and for which no alternative future use
exists is charged to operations in the period of acquisition.
ADVERTISING
Advertising costs are expensed as incurred and included in selling,
general and administrative expenses in the accompanying Consolidated
Statement of Earnings. Advertising expenses amounted to $598 million,
$632 million and $634 million in 2003, 2002 and 2001, respectively.
SHIPPING AND HANDLING COSTS
Amounts charged to customers and costs incurred by the Company related
to shipping and handling are included in net sales and cost of goods
sold, respectively, in accordance with EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs."
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 2002, the Company adopted the provisions of SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Under the guidance of SFAS No. 144, the Company's current
policy is substantially unchanged from its previous policy. The
Company reviews the carrying value of its long-lived assets, other than
goodwill and purchased intangible assets with indefinite useful lives,
for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. The Company assesses
the recoverability of the carrying value of long-lived assets by first
grouping its long-lived assets with other assets and liabilities at the
lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities (the asset group)
and, secondly, by estimating the undiscounted future cash flows that
are directly associated with and that are expected to arise from the
use of and eventual disposition of such asset group. The Company
estimates the undiscounted cash flows over the remaining useful life of
the primary asset within the asset group. If the carrying value of the
asset group exceeds the estimated undiscounted cash flows, the Company
records an impairment charge to the extent the carrying value of the
long-lived asset exceeds its fair value. The Company determines fair
value through quoted market prices in active markets or, if quoted
market prices are unavailable, through the performance of internal
analyses of discounted cash flows or external appraisals.
108
In connection with its assessment of recoverability of its long-lived
assets and its ongoing strategic review of the business and its
operations, the Company continually reviews the remaining useful lives
of its long-lived assets. If this review indicates that the remaining
useful life of the long-lived asset has been reduced, the Company
adjusts the depreciation on that asset to facilitate full cost recovery
over its revised estimated remaining useful life.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for derivative financial instruments in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." All derivative instruments are recognized as either
assets or liabilities and are measured at fair value. Certain
derivatives are designated and accounted for as hedges. The Company
does not use derivatives for trading or other speculative purposes.
The Company has cash flow hedges to manage foreign currency exchange
risk, commodity price risk, and interest rate risk related to
forecasted transactions. The Company also uses foreign currency
forward contracts to offset currency-related changes in foreign
currency denominated assets and liabilities. These foreign currency
forward contracts are not designated as accounting hedges and all
changes in fair value are recognized in earnings in the period of
change.
The fair value of foreign currency forward contracts designated as
hedges of forecasted foreign currency denominated intercompany sales is
reported in other current assets and/or current liabilities, and is
recorded in other comprehensive income. When the related inventory is
sold to third parties, the hedge gains or losses as of the date of the
intercompany sale are transferred from other comprehensive income to
cost of goods sold.
The fair value of silver forward contracts designated as hedges of
forecasted worldwide silver purchases is reported in other current
assets and/or current liabilities, and is recorded in other
comprehensive income. When the silver-containing products are sold to
third parties, the hedge gains or losses as of the date of the purchase
of raw silver are transferred from other comprehensive income to cost
of goods sold.
The fair value of the interest rate swap designated as a hedge of
forecasted floating-rate interest payments is reported in current
liabilities, and is recorded in other comprehensive income. As
interest expense is accrued, an amount equal to the difference between
the fixed and floating-rate interest payments is transferred from other
comprehensive income to interest expense.
109
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are
expensed or capitalized, as appropriate. Expenditures that relate to
an existing condition caused by past operations and that do not provide
future benefits are expensed as incurred. Costs that are capital in
nature and that provide future benefits are capitalized. Liabilities
are recorded when environmental assessments are made or the requirement
for remedial efforts is probable, and the costs can be reasonably
estimated. The timing of accruing for these remediation liabilities is
generally no later than the completion of feasibility studies.
The Company has an ongoing monitoring and identification process to
assess how the activities, with respect to the known exposures, are
progressing against the accrued cost estimates, as well as to identify
other potential remediation sites that are presently unknown.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The asset and liability approach
underlying SFAS No. 109 requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and tax basis of the
Company's assets and liabilities. Management provides valuation
allowances against the net deferred tax asset for amounts that are not
considered more likely than not to be realized.
EARNINGS PER SHARE
Basic earnings-per-share computations are based on the weighted-average
number of shares of common stock outstanding during the year. Diluted
earnings-per-share calculations reflect the assumed exercise and
conversion of employee stock options that have an exercise price that
is below the average market price of the common shares for the
respective periods.
The reconciliation between the denominator of the basic and diluted
earnings-per-share computations is as follows:
For the Year Ended December 31,
(in millions)
2003 2002 2001
Number of common shares used in
basic earnings per share 286.5 291.5 290.6
Incremental shares from
assumed conversion of options 0.1 0.2 0.4
------ ------- -------
Number of common shares used in
diluted earnings per share 286.6 291.7 291.0
====== ======= =======
110
Options to purchase 35.9 million, 26.8 million and 43.7 million shares
of common stock at weighted-average per share prices of $51.63, $58.83
and $61.30 for the years ended December 31, 2003, 2002 and 2001,
respectively, were outstanding during the years presented but were not
included in the computation of diluted earnings per share because the
effect would be anti-dilutive, meaning that the options' exercise price
was greater than the average market price of the common shares for the
respective periods. Diluted earnings per share for the year ended
December 31, 2003 also excludes 18.5 million shares related to the
Company's Convertible Senior Notes, which were issued in October 2003
and are due 2033 because the contingencies surrounding the conversion
features have not yet lapsed, and because the effect of issuing such
shares would be anti-dilutive as of December 31, 2003.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock incentive plans under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and the related interpretations under Financial
Accounting Standards Board (FASB) Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation." Accordingly,
no stock-based employee compensation cost is reflected in net earnings
for the years ended December 31, 2003, 2002 and 2001, as all options
granted had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The Company has determined the pro forma net earnings (loss) and net
earnings (loss) per share information as if the fair value method of
SFAS No. 123, "Accounting for Stock-Based Compensation," had been
applied to its stock-based employee compensation. The pro forma
information is as follows:
(in millions, except per share data)
Year Ended December 31,
2003 2002 2001
Net earnings, as reported $ 265 $ 770 $ 76
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net
of related tax effects (16) (105) (79)
----- ------ ------
Pro forma net earnings (loss) $ 249 $ 665 $ (3)
===== ====== ======
Earnings (loss) per share:
Basic and diluted - as reported $ .92 $ 2.64 $ .26
Basic and diluted - pro forma $ .87 $ 2.28 $ (.01)
111
The total stock-based employee compensation amount, net of related tax
effects, for the year ended December 31, 2002, of $105 million includes
a net of tax expense impact of $50 million representing the grant of
approximately 16 million new options awarded on August 26, 2002 in
relation to the voluntary stock option exchange program. These options
were essentially fully vested at the date of grant.
Additionally, the 2002 total stock-based employee compensation expense
amount of $105 million, net of taxes, includes a net of tax expense
impact of $34 million representing the unamortized compensation cost of
the options that were cancelled in connection with the 2002 voluntary
stock option exchange program. See Note 20, "Stock Option and
Compensation Plans."
The Black-Scholes option pricing model was used with the following
weighted-average assumptions for options issued in each year:
2000 Exchange
Plan Program
------ --------
2003 2003
Risk-free interest rates 3.6% N/A
Expected option lives 7 years N/A
Expected volatilities 35% N/A
Expected dividend yields 3.89% N/A
2002 2002
Risk-free interest rates 3.8% 2.9%
Expected option lives 7 years 4 years
Expected volatilities 34% 37%
Expected dividend yields 5.76% 5.76%
2001 2001
Risk-free interest rates 4.2% N/A
Expected option lives 6 years N/A
Expected volatilities 34% N/A
Expected dividend yields 4.43% N/A
The weighted-average fair value of options granted in 2003 was $7.70.
The weighted-average fair value of options granted in 2002 was $8.22
for the 2000 Plan and $5.99 for the voluntary stock option exchange
program. The weighted-average fair value of options granted in 2001
was $8.37.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to compensation expense over the options' vesting
period (1-3 years).
112
On February 18, 2004, the Company announced that it will begin
expensing stock options starting January 1, 2005 using the fair value
recognition provisions of SFAS No. 123. The FASB is expected to issue
an exposure draft during 2004 relating to a new accounting standard
that will require the expensing of stock options. This new accounting
standard may become effective on January 1, 2005, in which case the
Company will follow the stock option expensing rules of the new
standard.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for the reporting and display of comprehensive income and its
components in financial statements. SFAS No. 130 requires that all
items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
with the same prominence as other financial statements. Comprehensive
income consists of net earnings, the net unrealized gains or losses on
available-for-sale marketable securities, foreign currency translation
adjustments, minimum pension liability adjustments, and unrealized
gains and losses on financial instruments qualifying for hedge
accounting, and is presented in the accompanying Consolidated Statement
of Shareholders' Equity in accordance with SFAS No. 130.
113
SEGMENT REPORTING
The Company reports net sales, operating income, net income, and
certain expense, asset and geographical information about its
reportable segments. Reportable segments are components of the Company
for which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. For 2003, the Company
has three reportable segments (Photography, Health Imaging, and
Commercial Imaging) and All Other. On August 21, 2003, the Company
announced an organizational realignment, effective January 1, 2004,
that will change the current reportable segment structure. See Note
23, "Segment Information," for a discussion of this change.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," an Interpretation of
Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial
Statements." FIN 46 addresses the consolidation by business
enterprises of variable interest entities (VIEs) either: (1) that do
not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial
support, or (2) in which the equity investors lack an essential
characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46
(Revised Interpretations) resulting in multiple effective dates based
on the nature and creation date of the VIE. The Revised
Interpretations must be applied to all VIEs no later than the end of
the first interim or annual reporting period ending after March 15,
2004. However, prior to the required application of the Revised
Interpretations, its provisions must be adopted by the end of the first
interim or annual reporting period that ends after December 15, 2003
(for the year ended December 31, 2003 for the Company) for VIEs
considered to be special purpose entities (SPEs). SPEs for this
provision include any entity whose activities are primarily related to
securitizations or other forms of asset-backed financings or single-
lessee leasing arrangements. The Company's only material SPE as of
December 31, 2003 was related to its equity investment in ESF. Refer
to Note 7, "Investments," for the disclosures required under FIN 46 on
ESF. The Company is currently evaluating the effect that the adoption
of FIN 46 for non-SPE VIEs created prior to February 1, 2003 will have
on its financial position, results of operations and cash flows. The
Company did not have a material exposure to loss as of December 31,
2003 in relation to any VIEs that it had created or obtained an
interest in after January 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is
generally effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
The adoption of SFAS No. 149 did not have any impact on the Company's
financial position, results of operations or cash flows.
114
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 requires that certain financial instruments,
which under previous guidance were recorded as equity, be recorded as
liabilities. The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash
or other assets, and certain obligations that can be settled with
shares of stock. The Company adopted SFAS No. 150 on June 1, 2003.
The adoption of this statement did not have any effect on the Company's
financial position, results of operations or cash flows.
EITF Issue No. 03-05, "Applicability of AICPA Statement of Position
(SOP) 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software," effective September 30, 2003, states
that, only software and software-related elements are in the scope of
SOP 97-2. The adoption of EITF No. 03-05 did not have a material
impact on the Company's financial position, results of operations or
cash flows.
In December 2003, the FASB issued a revision of SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 requires that companies disclose more
information about plan assets, benefit obligations, cash flows, benefit
costs and other relevant information. Companies are required to
disclose plan assets by category and a description of investment
policies, strategies and target allocation percentages for these asset
categories. Cash flows must include projections of future benefit
payments, and an estimate of contributions to be made in the next year
to fund pension and other postretirement benefit plans. In addition,
companies are required to disclose various elements of pension and
other postretirement benefit costs on a quarterly basis. Certain
provisions of SFAS No. 132 were effective and were implemented as of
and for the year ended December 31, 2003. Certain of the other
provisions will be effective for quarterly and annual periods beginning
after December 15, 2003. Refer to Note 17, "Retirement Plans," for
these new disclosures.
In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." FSP No.
106-1 allows the sponsor of a postretirement health care plan that
provides a prescription drug benefit to make a one-time election to
defer accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act). The Act, which
was signed into law in December 2003, introduces a prescription drug
benefit under Medicare as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare. The guidance in this FSP is
effective for interim or annual financial statements of fiscal years
ending after December 7, 2003. In accordance with FSP No. 106-1, the
Company has elected to defer accounting for the effects of the Act.
Refer to Note 18, "Other Postretirement Benefits," for disclosures
required by FSP No. 106-1.
115
RECLASSIFICATIONS
Certain reclassifications have been made to the prior periods to
conform to the 2003 presentation.
- -----------------------------------------------------------------------
NOTE 2: RECEIVABLES, NET
(in millions) 2003 2002
Trade receivables $2,028 $1,896
Miscellaneous receivables 361 338
------ ------
Total (net of allowances of $112 and $137) $2,389 $2,234
====== ======
Of the total trade receivable amounts of $2,028 million and $1,896
million as of December 31, 2003 and 2002, respectively, approximately
$528 million and $371 million, respectively, are expected to be settled
through customer deductions in lieu of cash payments. 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) 2003 2002
At FIFO or average cost (approximates
current cost)
Finished goods $ 818 $ 831
Work in process 302 322
Raw materials 317 301
------ ------
1,437 1,454
LIFO reserve (362) (392)
------ ------
Total $1,075 $1,062
====== ======
Inventories valued on the LIFO method are approximately 41% and 47% of
total inventories in 2003 and 2002, respectively. During 2003 and
2002, inventory usage resulted in liquidations of LIFO inventory
quantities. In the aggregate, these inventories were carried at the
lower costs prevailing in prior years as compared with the cost of
current purchases. The effect of these LIFO liquidations was to reduce
cost of goods sold by $53 million and $31 million in 2003 and 2002,
respectively.
The Company reduces the carrying value of inventories to a lower of
cost or market basis for those items that are potentially excess,
obsolete or slow-moving based on management's analysis of inventory
levels and future sales forecasts. The Company also reduces the
carrying value of inventories whose net book value is in excess of
market. Aggregate reductions in the carrying value with respect to
inventories that were still on hand at December 31, 2003 and 2002, and
that were deemed to be excess, obsolete, slow-moving or that had a
carrying value in excess of market, were $75 million and $65 million,
respectively.
- -----------------------------------------------------------------------
116
NOTE 4: PROPERTY, PLANT AND EQUIPMENT, NET
(in millions) 2003 2002
Land $ 116 $ 123
Buildings and building improvements 2,680 2,658
Machinery and equipment 10,211 10,182
Construction in progress 270 325
------- -------
13,277 13,288
Accumulated depreciation (8,183) (7,868)
------- -------
Net properties $ 5,094 $ 5,420
======= =======
Depreciation expense was $830 million, $818 million and $765 million
for the years 2003, 2002 and 2001, respectively, of which approximately
$70 million, $19 million and $52 million, respectively, represented
accelerated depreciation in connection with restructuring actions.
- -----------------------------------------------------------------------
117
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets," under which goodwill
is no longer amortized, but is required to be assessed for impairment
at least annually. Goodwill was $1,384 million and $981 million at
December 31, 2003 and 2002, respectively. The changes in the carrying
amount of goodwill by reportable segment for 2003 and 2002 were as
follows:
Commer- Consol-
Photo- Health cial idated
(in millions) graphy Imaging Imaging Total
Balance at
December 31, 2001 $ 669 $ 169 $ 110 $ 948
Goodwill related to
acquisitions 19 1 6 26
Goodwill written off
related to disposals - - (17)
(17)
Finalization of purchase
accounting (1) 4 3 6
Currency translation
adjustments 15 2 1 18
----- ----- ----- ------
Balance at
December 31, 2002 702 176 103 981
Goodwill related to
acquisitions 30 350 - 380
Goodwill written off
related to disposals/
divestitures (21) - (6)
(27)
Finalization of purchase
accounting 13 (2) - 11
Currency translation
adjustments 17 15 7 39
----- ----- ----- ------
Balance at
December 31, 2003 $ 741 $ 539 $ 104 $1,384
===== ===== ===== ======
The aggregate amount of goodwill acquired during 2003 of $380 million
was attributable to $350 million for the purchase of PracticeWorks
within the Health Imaging segment, $16 million for the purchase of
Applied Science Fiction within the Photography segment and $14 million
related to additional acquisitions within the Photography segment. The
$21 million of goodwill written off in relation to
disposals/divestitures during 2003 for the Photography segment was
attributable to the divesture of Consumer Imaging Services (CIS) in
Germany.
The aggregate amount of goodwill acquired during 2002 of $26 million was
attributable to acquisitions that are all individually immaterial. The
goodwill written off related to disposals during 2002 of $17 million was
attributable to the disposal of Kodak Global Imaging, Inc. within the
Commercial Imaging segment. The $17 million charge to earnings relating
to the write-off of goodwill is included in the loss from discontinued
operations in the Consolidated Statement of Earnings. See Note 22,
"Discontinued Operations."
118
The gross carrying amount and accumulated amortization by major
intangible asset category for 2003 and 2002 were as follows:
(in millions) As of December 31, 2003
Gross Carrying Accumulated
Amount Amortization Net
-------------- ------------ ----
Technology-based $201 $76 $125
Customer-related 176 17 159
Other 14 4 10
---- --- ----
Total $391 $97 $294
==== === ====
As of December 31, 2002
Gross Carrying Accumulated
Amount Amortization Net
-------------- ------------ ----
Technology-based $132 $58 $ 74
Customer-related 47 9 38
Other 8 2 6
---- --- ----
Total $187 $69 $118
==== === ====
The aggregate amount of intangible assets acquired during 2003 of $204
million was attributable to $169 million for the purchase of
PracticeWorks as described in Note 21 "Acquisitions," and $35 million
related to additional acquisitions that are all individually
immaterial. The aggregate amount of intangible assets acquired during
2002 of $15 million was attributable to acquisitions that were all
individually immaterial.
Amortization expense related to intangible assets was $28 million, $21
million and $15 million in 2003, 2002 and 2001, respectively.
Estimated future amortization expense related to purchased intangible
assets at December 31, 2003 is as follows:
(in millions)
2004 $ 42
2005 40
2006 34
2007 30
2008 26
2009+ 122
----
Total $294
====
- -----------------------------------------------------------------------
119
NOTE 6: OTHER LONG-TERM ASSETS
(in millions) 2003 2002
Prepaid pension costs $1,147 $ 988
Investments in unconsolidated
affiliates 426 382
Deferred income taxes 378 421
Intangible assets other than
goodwill 294 118
Non-current receivables 254 328
Miscellaneous other long-term assets 386 322
------ ------
Total $2,885 $2,559
====== ======
The miscellaneous component above consists of other miscellaneous long-
term assets that, individually, are less than 5% of the Company's total
long-term assets, and therefore, have been aggregated in accordance
with Regulation S-X.
- -----------------------------------------------------------------------
NOTE 7: INVESTMENTS
Equity Method -
At December 31, 2003, the Company's significant equity method investees
and the Company's approximate ownership interest in each investee were
as follows:
Kodak Polychrome Graphics (KPG) 50%
Express Stop Financing (ESF) 50%
NexPress Solutions LLC 50%
SK Display Corporation 34%
Matsushita-Ultra Technologies
Battery Corporation 30%
At December 31, 2003 and 2002, the Company's equity investment in these
unconsolidated affiliates was $417 million and $381 million,
respectively, and is reported within other long-term assets in the
accompanying Consolidated Statement of Financial Position. The Company
records its equity in the income or losses of these investees and
reports such amounts in other charges, net, in the accompanying
Consolidated Statement of Earnings. See Note 14, "Other Charges, Net."
These investments do not meet the Regulation S-X significance test
requiring the inclusion of the separate investee financial statements.
The Company sells graphics film and other products to its equity
affiliate, KPG. Sales to KPG for the years ended December 31, 2003,
2002 and 2001 amounted to $271 million, $315 million and $350 million,
respectively. These sales are reported in the Consolidated Statement of
Earnings. The Company eliminates profits on these sales, to the extent
the inventory has not been sold through to third parties, on the basis
of its 50% interest. At December 31, 2003 and 2002, amounts due from
KPG relating to these sales were $6 million and $31 million,
respectively, and are reported in receivables, net in the accompanying
Consolidated Statement of Financial Position. Additionally, the Company
has guaranteed certain debt obligations of KPG up to $160 million, which
is included in the total guarantees amount of $363 million at December
31, 2003, as discussed in Note 12, "Guarantees."
120
Kodak sells certain of its long-term lease receivables relating to the
sale of photofinishing equipment to ESF without recourse to the Company.
Sales of long-term lease receivables to ESF were approximately $15
million, $9 million and $83 million in 2003, 2002 and 2001,
respectively. See Note 11, "Commitments and Contingencies."
As disclosed in Note 1, the provisions of FIN 46 were applied to ESF for
the year ended December 31, 2003 because ESF qualifies as a variable
interest entity (VIE) and meets the definition of a special purpose
entity as defined in FIN 46. The Company's wholly owned subsidiary,
Qualex, is not the primary beneficiary of ESF as determined in
accordance with FIN 46 and, therefore, is not required to consolidate
ESF. ESF is an operating entity formed between Qualex and Dana Credit
Corporation in October 1993 to provide 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 (see Note 11 under "Other Commitments and
Contingencies"). Qualex's estimated maximum exposure to loss as a
result of its continuing involvement with ESF is $51 million as of
December 31, 2003, which is equal to the carrying value of Qualex's
investment balance in the entity. As of December 31, 2003, the Company
does not intend to nor is committed to fund any amounts to ESF in the
future, and there are no debt guarantees under which Qualex could
potentially be required to perform in relation to its investment in ESF.
The Company was not involved with any other entities that would qualify
as VIEs under the Revised Interpretations of FIN 46.
The Company also sells chemical products to its 50% owned equity
affiliate, NexPress. These sales transactions are not material to the
Company's financial position, results of operations or cash flows.
On March 8, 2004, the Company announced that it had agreed with
Heidelberger Druckmaschinen AG (Heidelberg) to purchase Heidelberg's 50
percent interest in NexPress. Refer to Note 25, "Subsequent Events,"
for further discussion of this purchase.
Kodak has no other material activities with its equity method investees.
Cost Method -
The Company also has certain investments with less than a 20% ownership
interest in various private companies whereby the Company does not have
the ability to exercise significant influence. These investments are
accounted for under the cost method. The remaining carrying value of
the Company's investments accounted for under the cost method at
December 31, 2003 and 2002 of $25 million and $29 million, respectively,
is included in other long-term assets in the accompanying Consolidated
Statement of Financial Position.
121
The Company recorded total charges for the years ended December 31, 2003
and 2002 of $7 million and $45 million, respectively, for other than
temporary impairments relating to certain of its strategic and non-
strategic venture investments, which were accounted for under the cost
method. There were no such charges incurred for the year ended December
31, 2001. The strategic venture investment impairment charges for the
years ended December 31, 2003 and 2002 of $3 million and $27 million,
respectively, were recorded in selling, general and administrative
expenses in the accompanying Consolidated Statement of Earnings. The
non-strategic venture investment impairment charges for the years ended
December 31, 2003 and 2002 of $4 million and $18 million, respectively,
were recorded in other charges, net, in the accompanying Consolidated
Statement of Earnings. The charges were taken in the respective periods
in which the available evidence, including subsequent financing rounds,
independent valuations, and other factors indicated that the underlying
investments were permanently impaired.
- ------------------------------------------------------------------------
NOTE 8: ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
(in millions) 2003 2002
Accounts payable, trade $ 834 $ 720
Accrued advertising and promotional
expenses 738 574
Accrued employment-related liabilities 958 968
Other 1,177 1,089
------ ------
Total $3,707 $3,351
====== ======
The other component above consists of other miscellaneous current
liabilities that, individually, are less than 5% of the total current
liabilities component within the Consolidated Statement of Financial
Position, and therefore, have been aggregated in accordance with
Regulation S-X.
- ---------------------------------------------------------------------
NOTE 9: SHORT-TERM BORROWINGS AND LONG-TERM DEBT
SHORT-TERM BORROWINGS
The Company's short-term borrowings at December 31, 2003 and 2002 were
as follows:
(in millions) 2003 2002
Commercial paper $ 304 $ 837
Current portion of long-term debt 457 387
Short-term bank borrowings 185 218
------ ------
Total $ 946 $1,442
====== ======
The weighted-average interest rates for commercial paper outstanding at
December 31, 2003 and 2002 were 2.95% and 1.97%, respectively. The
weighted-average interest rates for short-term bank borrowings
outstanding at December 31, 2003 and 2002 were 3.79% and 3.83%,
respectively.
122
LINES OF CREDIT
The Company has $2,225 million in committed revolving credit
facilities, which are available for general corporate purposes
including the support of the Company's commercial paper program. The
credit facilities are comprised of the $1,000 million 364-day committed
revolving credit facility (364-Day Facility) expiring in July 2004 and
a 5-year committed facility at $1,225 million expiring in July 2006 (5-
Year Facility). If unused, they have a commitment fee of $4.5 million
per year at the Company's current credit rating of Baa3 and BBB- from
Moody's and Standard & Poors (S&P), respectively. Interest on amounts
borrowed under these facilities is calculated at rates based on spreads
above certain reference rates and the Company's credit rating. The
Company issues letters of credit under the 5-Year Facility. As of
December 31, 2003, there were $118 million of letters of credit
outstanding under the 5-Year Facility. The remainder of the 5-Year
Facility and the 364-Day Facility was unused at December 31, 2003.
Under the 364-Day Facility and 5-Year Facility, there is a financial
covenant that requires the Company to maintain a debt to EBITDA
(earnings before interest, income taxes, depreciation and amortization)
ratio of not greater than 3 to 1. 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 December 31, 2003. The Company
does not anticipate that a violation is likely to occur.
The Company has other committed and uncommitted lines of credit at
December 31, 2003 totaling $242 million and $1,722 million,
respectively. These lines primarily support borrowing needs of the
Company's subsidiaries, which include term loans, overdraft coverage,
letters of credit and revolving credit lines. Interest rates and other
terms of borrowing under these lines of credit vary from country to
country, depending on local market conditions. Total outstanding
borrowings against these other committed and uncommitted lines of
credit at December 31, 2003 were $138 million and $316 million,
respectively. These outstanding borrowings are reflected in the short-
term borrowings and long-term debt, net of current portion balances in
the accompanying Consolidated Statement of Financial Position at
December 31, 2003.
123
Accounts Receivable Securitization Program
In March 2002, the Company entered into an accounts receivable
securitization program (the Program), which provided the Company with
borrowings up to a maximum of $400 million. The Program, which is
renewable annually subject to the bank's approval, was renewed in March
2003 with a maximum borrowing level of $250 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 December 31,
2003, representing the outstanding balance of the gross accounts
receivable sold to EKFC, totaled approximately $585 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. At December 31, 2003, the Company had no outstanding
secured borrowings under the Program.
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. Interest expense for the year ended
December 31, 2003 in relation to the Program 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
December 31, 2003.
124
LONG-TERM DEBT
Long-term debt and related maturities and interest rates were as
follows at December 31, 2003 and 2002 (in millions):
2003 2002
---------------- -----------------
Weighted- Amount Weighted- Amount
Average Out- Average Out-
Interest Stand- Interest Stand-
Country Type Maturity Rate ing Rate ing
U.S. Term note 2003 - $ - 9.38% $ 144
U.S. Term note 2003 - - 7.36% 110
U.S. Term note 2004 1.72% * 200 - -
U.S. Term note 2005 1.73% * 100 - -
U.S. Medium-term 2005 7.25% 200 7.25% 200
U.S. Medium-term 2006 6.38% 500 6.38% 500
U.S. Term note 2008 3.63% 249 - -
U.S. Term note 2008 9.50% 34 9.50% 34
U.S. Term note 2013 7.25% 500 - -
U.S. Term note 2018 9.95% 3 9.95% 3
U.S. Term note 2021 9.20% 10 9.20% 10
U.S. Convertible 2033 3.38% 575 - -
China Bank loans 2003 - - 5.49% 114
China Bank loans 2004 5.50% 225 5.58% 252
China Bank loans 2005 5.45% 106 5.53% 124
Qualex Term notes 2004-2008 5.53% 49 6.12% 44
Chile Bank loans 2004 - - 2.61% 10
Other 8 6
------ ------
2,759 1,551
Current portion of long-term debt (457) (387)
------ ------
Long-term debt, net of current portion $2,302 $1,164
====== ======
* Represents debt with a variable interest rate.
Annual maturities (in millions) of long-term debt outstanding at
December 31, 2003 are as follows: $457 in 2004, $422 in 2005, $507 in
2006, $2 in 2007, $283 in 2008, and $1,088 in 2009 and beyond.
In May 2003, the Company issued Series A fixed rate notes and Series A
floating rate notes under its then existing debt shelf registration
totaling $250 million and $300 million, respectively, as follows:
(in millions)
Annual
Interest
Type Principal Rate Maturity
- -------- --------- -------- -----------
Series A
fixed rate $250 3.625% May 2008
3-month
Series A LIBOR plus
floating rate 200 0.55% November 2004
3-month
Series A LIBOR plus
floating rate 100 0.55% November 2005
----
Total $550
====
125
Interest on the notes will be paid quarterly, and the Company may not
redeem or repay these notes prior to their stated maturities. After
these issuances, the Company had $650 million of remaining unsold debt
securities under its then existing debt shelf registration.
On September 5, 2003, the Company filed a shelf registration statement
on Form S-3 (the new debt shelf registration) for the issuance of up to
$2,000 million of new debt securities. The new debt shelf registration
became effective on September 19, 2003. Pursuant to Rule 429 under the
Securities Act of 1933, $650 million of remaining unsold debt
securities were included in the new debt shelf registration, giving
the Company the ability to issue up to $2,650 million in public debt.
On October 10, 2003, the Company completed the offering and sale of
$500 million aggregate principal amount of Senior Notes due 2013 (the
Notes), which was made pursuant to the Company's new debt shelf
registration. Interest on the Notes will accrue at the rate of 7.25%
per annum and is payable semiannually. The Notes are not redeemable at
the Company's option or repayable at the option of any holder prior to
maturity. The Notes are unsecured and unsubordinated obligations, and
rank equally with all of the Company's other unsecured and
unsubordinated indebtedness. After issuance of the above debt, the
Company has $2,150 million of availability remaining under the new debt
shelf registration.
Concurrent with the offering and sale of the Notes, on October 10,
2003, the Company completed the private placement of $575 million
aggregate principal amount of Convertible Senior Notes due 2033 (the
Convertible Securities) to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933. Interest on the
Convertible Securities will accrue at the rate of 3.375% per annum and
is payable semiannually. The Convertible Securities are unsecured and
rank equally with all of the Company's other unsecured and
unsubordinated indebtedness.
As a condition of the private placement, the Company agreed to
initially file within 90 days and make effective within 180 days after
the earliest date of original issuance of the Convertible Securities, a
shelf registration statement under the Securities Act of 1933 relating
to the resale of the Convertible Securities and the common stock to be
issued upon conversion of the Convertible Securities pursuant to a
registration rights agreement. The Company filed this shelf
registration statement on January 6, 2004, and made it effective on
February 6, 2004.
126
The Convertible Securities contain a number of conversion features that
include substantive contingencies. The Convertible Securities are
convertible by the holders at an initial conversion rate of 32.2373
shares of the Company's common stock for each $1,000 principal amount
of the Convertible Securities, which is equal to an initial conversion
price of $31.02 per share. The holders may convert their Convertible
Securities, in whole or in part, into shares of the Company's common
stock under any of the following circumstances: (1) during any
calendar quarter, if the price of the Company's common stock is greater
than or equal to 120% of the applicable conversion price for at least
20 trading days during a 30 consecutive trading day period ending on
the last trading day of the previous calendar quarter; (2) during any
five consecutive trading day period following any 10 consecutive
trading day period in which the trading price of the Convertible
Securities for each day of such period is less than 105% of the
conversion value, and the conversion value for each day of such period
was less than 95% of the principal amount of the Convertible Securities
(the Parity Clause); (3) if the Company has called the Convertible
Securities for redemption; (4) upon the occurrence of specified
corporate transactions such as a consolidation, merger or binding share
exchange pursuant to which the Company's common stock would be
converted into cash, property or securities; and (5) if the credit
rating assigned to the Convertible Securities by either Moody's or S&P
is lower than Ba2 or BB, respectively, which represents a three notch
downgrade from the Company's current standing, or if the Convertible
Securities are no longer rated by at least one of these services or
their successors (the Credit Rating Clause).
The Company may redeem some or all of the Convertible Securities at any
time on or after October 15, 2010 at a purchase price equal to 100% of
the principal amount of the Convertible Securities plus any accrued and
unpaid interest. Upon a call for redemption by the Company, a
conversion trigger is met whereby the holder of each $1,000 Convertible
Senior Note may convert such note to shares of the Company's common
stock.
The holders have the right to require the Company to purchase their
Convertible Securities for cash at a purchase price equal to 100% of
the principal amount of the Convertible Securities plus any accrued and
unpaid interest on October 15, 2010, October 15, 2013, October 15,
2018, October 15, 2023 and October 15, 2028, or upon a fundamental
change as described in the offering memorandum filed under Rule 144A in
conjunction with the private placement of the Convertible Securities.
As of December 31, 2003, the Company reserved 18,536,447 shares in
treasury stock to cover potential future conversions of these
Convertible Securities into common stock.
127
Certain of the conversion features contained in the Convertible
Securities are deemed to be embedded derivatives as defined under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." These embedded derivatives include the Parity Clause, the
Credit Rating Clause, and any specified corporate transaction outside
of the Company's control such as a hostile takeover. Based on an
external valuation, these embedded derivatives were not material to the
Company's financial position, results of operations or cash flows. In
addition, as the contingencies surrounding the conversion features are
substantive, the shares to be potentially issued upon triggering a
conversion event, along with the interest expense incurred on the
Convertible Securities, will be excluded from the earnings per share
calculation until such time as a contingency lapses and the effect of
issuing such shares is dilutive. If and when a contingency lapses and
the effect of issuing such shares is dilutive, then the shares issued
would be included in the denominator of the earnings per share
calculation, and the interest expense incurred on the Convertible
Securities would be excluded from the numerator of the earnings per
share calculation for the respective period.
- ----------------------------------------------------------------------
NOTE 10: OTHER LONG-TERM LIABILITIES
(in millions) 2003 2002
Deferred compensation $ 164 $ 160
Environmental liabilities 141 148
Deferred income taxes 81 52
Minority interest in Kodak companies 45 70
Other 170 209
------ ------
Total $ 601 $ 639
====== ======
The other component above consists of other miscellaneous long-term
liabilities that, individually, are less than 5% of the total
liabilities component in the accompanying Consolidated Statement of
Financial Position, and therefore, have been aggregated in accordance
with Regulation S-X.
- -----------------------------------------------------------------------
NOTE 11: COMMITMENTS AND CONTINGENCIES
Environmental
Cash expenditures for pollution prevention and waste treatment for the
Company's current facilities were as follows:
(in millions) 2003 2002 2001
Recurring costs for
pollution prevention and waste
treatment $ 74 $ 67 $ 68
Capital expenditures for pollution
prevention and waste
treatment 8 12 27
Site remediation costs 2 3 2
---- ---- ----
Total $ 84 $ 82 $ 97
==== ==== ====
128
At December 31, 2003 and 2002, the Company's undiscounted accrued
liabilities for environmental remediation costs amounted to $141
million and $148 million, respectively. These amounts are reported in
the 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 (RFI) and Corrective Measures Studies (CMS) for
areas at the site. The previous estimate for future investigation and
remediation costs was reduced by $8 million for the following reasons:
(1) approval of Final Corrective Measures for four investigation areas,
(2) approval for a single investigation approach for the site's
industrial sewers and building waste water collection system, and (3)
completion with no further action approvals at seventeen Solid Waste
Management Units. At December 31, 2003, estimated future investigation
and remediation costs of $57 million are accrued for this site and are
included in the $141 million reported in other long-term liabilities.
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. At the Ohio site,
agreements reached with the Ohio Environmental Protection Agency in
regard to the calculation of clean-up levels, as well as the long term
viability of the facility as an industrial site, allowed the previous
estimate to be reduced by $13 million. At December 31, 2003, estimated
future remediation costs of $35 million are accrued for these sites and
are included in the $141 million reported in other long-term
liabilities.
The Company has obligations relating to two former manufacturing sites
located outside of the United States. At December 31, 2003, estimated
future investigation, remediation and monitoring costs of $20 million
are accrued for these sites and are included in the $141 million
reported in other long-term liabilities.
As a result of the ongoing monitoring and identification process, the
Company has identified seven additional operating sites with an
estimated future investigation, remediation and monitoring cost of $21
million. These costs are accrued and included in the $141 million
reported in other long-term liabilities.
129
Additionally, the Company has approximately $8 million accrued in the
$141 million reported in other long-term liabilities at December 31,
2003 for remediation relating to other facilities, which are not
material to the Company's financial position, results of operations,
cash flows or competitive position.
Cash expenditures for the aforementioned investigation, remediation and
monitoring activities are expected to be incurred over the next thirty
years for many of the sites. 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 $16 million over the next five
years. These expenditures are incurred as part of plant operations
and, therefore, are not included in the environmental accrual at
December 31, 2003.
The Company is presently designated as a potentially responsible party
(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 four such active sites. With respect to each of these
sites, the Company's liability is minimal. In addition, the Company
has been identified as a PRP in connection with the non-imaging health
businesses in four active Superfund sites. Numerous other PRPs have
also been designated at these sites. 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.
130
The Clean Air Act Amendments were enacted in 1990. Expenditures to
comply with the Clean Air Act implementing regulations issued to date
have not been material and have been primarily capital in nature. In
addition, future expenditures for existing regulations, which are
primarily capital in nature, are not expected to be material. Many of
the regulations to be promulgated pursuant to this Act have not been
issued.
Uncertainties associated with environmental remediation contingencies
are pervasive and often result in wide ranges of outcomes. Estimates
developed in the early stages of remediation can vary significantly. A
finite estimate of cost does not normally become fixed and determinable
at a specific time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities
that help to frame and define a liability, and the Company continually
updates its cost estimates. The Company has an ongoing monitoring and
identification process to assess how the activities, with respect to
the known exposures, are progressing against the accrued cost
estimates, as well as to identify other potential remediation sites
that are presently unknown.
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, 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 has entered into agreements with several companies, which
provide Kodak with products and services to be used in its normal
operations. The minimum payments for these agreements are approximately
$266 million in 2004, $238 million in 2005, $124 million in 2006, $98
million in 2007, $80 million in 2008 and $179 million in 2009 and
thereafter.
131
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 a subsidiary of 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 and, therefore, these
receivables are removed from Qualex's books. ESF incurs 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.
Although 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. To date, the Company has incurred no such material claims, and
Qualex does not anticipate any significant situations where it would be
unable to fulfill its service obligations under the arrangement with
ESF. ESF's outstanding lease receivable amount was approximately $367
million at December 31, 2003.
Effective July 22, 2003, ESF entered into an arrangement amending the
Receivables Purchase Agreement (RPA), which represents the financing
arrangement between ESF and the banks. Under the amended RPA agreement,
maximum borrowings were lowered to $257 million. Total outstanding
borrowings under the RPA at December 31, 2003 were $248 million. The
amended RPA extends through July 2004, at which time the RPA can be
extended or terminated. If the RPA were terminated, ESF would need to
find an alternative financing solution for new borrowings. Pursuant to
the ESF partnership agreement between Qualex and DCC, commencing October
6, 2003, Qualex no longer sells its lease receivables to ESF. Qualex
currently is utilizing the services of Imaging Financial Services, Inc.,
a wholly owned subsidiary of General Electric Capital Corporation, as an
alternative financing solution for prospective leasing activity with its
customers.
132
At December 31, 2003, the Company had outstanding letters of credit
totaling $121 million and surety bonds in the amount of $113 million
primarily to ensure the completion of environmental remediations and
payment of possible casualty and workers' compensation claims.
Rental expense, net of minor sublease income, amounted to $159 million
in 2003, $158 million in 2002 and $126 million in 2001. The
approximate amounts of noncancelable lease commitments with terms of
more than one year, principally for the rental of real property,
reduced by minor sublease income, are $125 million in 2004, $103
million in 2005, $77 million in 2006, $59 million in 2007, $43 million
in 2008 and $87 million in 2009 and thereafter.
In December 2003, the Company sold a property in France for
approximately $65 million, net of direct selling costs, and then leased
back a portion of this property for a nine-year term. In accordance
with SFAS No. 98, "Accounting for Leases," the entire gain on the
property sale of approximately $57 million was deferred and will be
amortized over the nine-year lease term. No gain was recognizable upon
the closing of the sale as the Company's continuing involvement in the
property is deemed to be significant. The noncancelable lease
commitment amounts noted above include approximately $5 million per
year for 2004 through 2008, and approximately $20 million for 2009 and
thereafter, in relation to this transaction.
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.
- ---------------------------------------------------------------------
133
NOTE 12: GUARANTEES
The Company guarantees debt and other obligations under agreements
with certain affiliated companies and customers. At December 31, 2003,
these guarantees totaled a maximum of $363 million, with outstanding
guaranteed amounts of $161 million. The maximum guarantee amount
includes guarantees of up to: $160 million of debt for Kodak Polychrome
Graphics (KPG), an unconsolidated affiliate in which the Company has a
50% ownership interest ($50 million outstanding); $7 million for other
unconsolidated affiliates and third parties ($7 million outstanding);
and $196 million of customer amounts due to banks in connection with
various banks' financing of customers' purchase of product and equipment
from Kodak ($104 million outstanding). The KPG debt facility and the
related guarantee mature on December 31, 2005, but may be renewed at
KPG's, the joint venture partners' and the bank's discretion. The
guarantees for the other unconsolidated affiliates and third party debt
mature between January 2004 and May 2006. The customer financing
agreements and related guarantees typically have a term of 90 days for
product and short-term equipment financing arrangements, and up to 5
years for long-term equipment financing arrangements. These guarantees
would require payment from Kodak only in the event of default on payment
by the respective debtor. In some cases, particularly for guarantees
related to equipment financing, the Company has collateral or recourse
provisions to recover and sell the equipment to reduce any losses that
might be incurred in connection with the guarantee. Management believes
the likelihood is remote that material payments will be required under
any of the guarantees disclosed above. With respect to the guarantees
that the Company issued in the year ended December 31, 2003, the Company
assessed the fair value of its obligation to stand ready to perform
under these guarantees by considering the likelihood of occurrence of
the specified triggering events or conditions requiring performance, as
well as other assumptions and factors. Through internal analyses and
external valuations, the Company determined that the fair value of the
guarantees was not material to the Company's financial position, results
of operations or cash flows.
The Company also guarantees debt owed to banks for some of its
consolidated subsidiaries. The maximum amount guaranteed is $592
million, and the outstanding debt under those guarantees, which is
recorded within the short-term borrowings and long-term debt, net of
current portion components in the accompanying Consolidated Statement of
Financial Position, is $423 million. These guarantees expire in 2004
and 2005, with the majority expiring in 2004.
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
December 31, 2003, the Company has not been required to guarantee any
of SK Display Corporation's outstanding debt.
134
Indemnifications
The Company issues indemnifications in certain instances when it sells
businesses and real estate, and in the ordinary course of business with
its customers, suppliers, service providers and business partners.
Further, the Company indemnifies its directors and officers who are, or
were, serving at Kodak's request in such capacities. Historically,
costs incurred to settle claims related to these indemnifications have
not been material to the Company's financial position, results of
operations or cash flows. Additionally, the fair value of the
indemnifications that the Company issued during the year ended December
31, 2003 was not material to the Company's financial position, results
of operations or cash flows.
Warranty Costs
The Company has warranty obligations in connection with the sale of its
equipment. The original warranty period for equipment products is
generally one year. The costs incurred to provide for these warranty
obligations are estimated and recorded as an accrued liability at the
time of sale. The Company estimates its warranty cost at the point of
sale for a given product based on historical failure rates and related
costs to repair. The change in the Company's accrued warranty
obligations balance, which is reflected in accounts payable and other
current liabilities in the accompanying Consolidated Statement of
Financial Position, was as follows:
(in millions)
Accrued warranty obligations at December 31, 2001 $50
Actual warranty experience during 2002 (47)
2002 warranty provisions 48
Adjustment for changes in estimates (8)
---
Accrued warranty obligations at December 31, 2002 $43
Actual warranty experience during 2003 (53)
2003 warranty provisions 59
---
Accrued warranty obligations at December 31, 2003 $49
===
135
The Company also offers extended warranty arrangements to its
customers, which are generally one year in duration beginning after the
original warranty period. The Company provides both repair services
and routine maintenance services under these arrangements. The Company
has not separated the extended warranty revenues and costs from the
routine maintenance service revenues and costs, as it is not
practicable to do so. Costs incurred under these extended warranty
arrangements for the year ended December 31, 2003 amounted to $198
million. The change in the Company's deferred revenue balance in
relation to these extended warranty arrangements, which is reflected in
accounts payable and other current liabilities in the accompanying
Consolidated Statement of Financial Position, was as follows:
(in millions)
Deferred revenue at December 31, 2001 $ 91
New extended warranty arrangements in 2002 330
Recognition of extended warranty arrangement
revenue in 2002 (318)
-----
Deferred revenue at December 31, 2002 $ 103
New extended warranty arrangements in 2003 372
Recognition of extended warranty arrangement
revenue in 2003 (355)
Adjustments for changes in estimates (2)
-----
Deferred revenue at December 31, 2003 $ 118
=====
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136
NOTE 13: FINANCIAL INSTRUMENTS
The following table presents the carrying amounts of the assets
(liabilities) and the estimated fair values of financial instruments at
December 31, 2003 and 2002:
(in millions) 2003 2002
Carrying Fair Carrying Fair
Amount Value Amount Value
Marketable securities:
Current $ 11 $ 11 $ 9 $ 9
Long-term 26 32 25 26
Long-term borrowings (2,302) (2,450) (1,164) (1,225)
Foreign currency forwards (1) (1) 2 2
Silver forwards 1 1 2 2
Marketable securities are valued at quoted market prices. The fair
values of long-term borrowings are determined by reference to quoted
market prices or by obtaining quotes from dealers. The fair values for
the remaining financial instruments in the above table are based on
dealer quotes and reflect the estimated amounts the Company would pay
or receive to terminate the contracts. The carrying values of cash and
cash equivalents, receivables, short-term borrowings and payables
approximate their fair values.
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.
The Company does not utilize financial instruments for trading or other
speculative purposes.
The Company has entered into foreign currency forward contracts that
are designated as cash flow hedges of exchange rate risk related to
forecasted foreign currency denominated intercompany sales. At
December 31, 2003, the Company had cash flow hedges for the euro, the
Australian dollar, and the Canadian dollar, with maturity dates ranging
from January 2004 to November 2004.
137
At December 31, 2003, the fair value of all open foreign currency
forward contracts hedging foreign currency denominated intercompany
sales was an unrealized loss of $15 million (pre-tax), recorded in
accumulated other comprehensive (loss) income in the accompanying
Consolidated Statement of Shareholders' Equity. 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 less
than $1 million (pre-tax), related to closed foreign currency contracts
hedging foreign currency denominated intercompany sales, have been
deferred in accumulated other comprehensive (loss) income. These
losses will be reclassified into cost of goods sold as the inventory
transferred in connection with the intercompany sales is sold to third
parties, all within the next twelve months. During 2003, a pre-tax
loss of $24 million was reclassified from accumulated other
comprehensive (loss) income to cost of goods sold. Hedge
ineffectiveness was insignificant.
The Company does not apply hedge accounting to the foreign currency
forward contracts used to offset currency-related changes in the fair
value of foreign currency denominated assets and liabilities. These
contracts are marked to market through earnings at the same time that
the exposed assets and liabilities are remeasured through earnings
(both in other charges, net). The majority of the contracts of this
type held by the Company are denominated in euros, Australian dollars,
Hong Kong dollars, and British pounds. At December 31, 2003, the fair
value of these open contracts was an unrealized gain of $14 million
(pre-tax).
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 2001, 2002,
and 2003. At December 31, 2003, the Company had open forward contracts
with maturities in January 2004.
At December 31, 2003, the fair value of open silver forward contracts
was an unrealized gain of $1 million (pre-tax), recorded in accumulated
other comprehensive (loss) income. If this amount were to be realized,
all of it would be reclassified into cost of goods sold during the next
twelve months. Additionally, realized gains of $3 million (pre-tax),
related to closed silver contracts, have been deferred in accumulated
other comprehensive (loss) income. These gains will be reclassified
into cost of goods sold as silver-containing products are sold, all
within the next twelve months. During 2003, a realized gain of $7
million (pre-tax) was recorded in cost of goods sold. Hedge
ineffectiveness was insignificant.
138
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 December 31, 2003 was
not significant to the Company.
The Company has a 50 percent ownership interest in KPG, a joint venture
accounted for under the equity method. The Company's proportionate
share of KPG's other comprehensive income is therefore included in its
presentation of other comprehensive (loss) income displayed in the
Consolidated Statement of Shareholders' Equity.
KPG 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, primarily
those denominated in euros, Japanese yen, Australian dollars, and
Canadian dollars. At December 31, 2003, KPG had open forward contracts
with maturity dates ranging from January 2004 to June 2005. At
December 31, 2003, Kodak's share of the fair value of all open foreign
currency forward contracts hedging foreign currency denominated
intercompany sales was an unrealized loss of $7 million (pre-tax),
recorded in accumulated other comprehensive (loss) income, and reducing
Kodak's investment in KPG. If this amount were to be realized,
virtually all of it would be reclassified into KPG's cost of goods sold
during the next twelve months. Additionally, realized losses of $4
million (pre-tax), related to closed foreign currency contracts hedging
foreign currency denominated intercompany sales, have been deferred in
accumulated other comprehensive (loss) income. These losses will be
reclassified into KPG's 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 2003, a pre-tax loss of $10
million (Kodak's share) was reclassified from accumulated other
comprehensive (loss) income to KPG's cost of goods sold. Hedge
ineffectiveness was insignificant.
KPG has used aluminum forward contracts that are designated as cash
flow hedges of price risk related to forecasted aluminum purchases. At
December 31, 2003, there were no open contracts, and the losses
reclassified into KPG's cost of goods sold during 2003 were negligible.
Hedge ineffectiveness was insignificant.
KPG has interest rate swap agreements, maturing in December 2005,
designated as cash flow hedges of floating-rate interest payments. At
December 31, 2003, Kodak's share of its fair value was a gain of less
than $1 million (pre-tax), recorded in accumulated other comprehensive
(loss) income, and increasing Kodak's investment in KPG. If realized,
nearly half of this amount would be reclassified into KPG's interest
expense during the next twelve months. During 2003, a pre-tax loss of
$1 million (Kodak's share) was reclassified from accumulated other
comprehensive (loss) income to KPG's interest expense. Hedge
ineffectiveness was insignificant.
139
KPG has an interest rate swap agreement, maturing in December 2007,
designated as a cash flow hedge of variable rental payments. At
December 31, 2003, Kodak's share of its fair value was a $1 million
loss (pre-tax), recorded in accumulated other comprehensive (loss)
income, and reducing Kodak's investment in KPG. If realized, less than
half of this amount would be reclassified into KPG's rental expense
during the next twelve months. During 2003, a pre-tax loss of $1
million (Kodak's share) was reclassified from accumulated other
comprehensive (loss) income to KPG's rental expense. There was no
hedge ineffectiveness.
- -------------------------------------------------------------------------
NOTE 14: OTHER CHARGES, NET
(in millions) 2003 2002 2001
(Income)/charges:
Investment income $ (19) $ (20) $ (15)
Loss on foreign exchange transactions 11 19 9
Equity in losses of unconsolidated
affiliates 41 106 79
Gain on sales of investments - - (18)
Gain on sales of capital assets (13) (24) (3)
Interest on past-due receivables
and finance revenue on sales (5) (6) (10)
Minority interest 24 17 (11)
Non-strategic venture investment
impairments 4 18 3
Other 8 (9) (16)
----- ----- -----
Total $ 51 $ 101 $ 18
===== ===== =====
- ------------------------------------------------------------------------
NOTE 15: INCOME TAXES
The components of earnings from continuing operations before income
taxes and the related (benefit) provision for U.S. and other income
taxes were as follows:
(in millions) 2003 2002 2001
Earnings (loss) before income
taxes
U.S. $ (124) $ 217 $ (266)
Outside the U.S. 296 729 381
------ ------ ------
Total $ 172 $ 946 $ 115
====== ====== ======
U.S. income taxes
Current (benefit) provision $ (69) $ 56 $ (65)
Deferred benefit (38) (31) (67)
Income taxes outside the U.S.
Current provision 133 101 177
Deferred (benefit) provision (90) 22 (5)
State and other income taxes
Current (benefit) provision (6) 12 3
Deferred provision (benefit) 4 (7) (9)
------ ------ ------
Total $ (66) $ 153 $ 34
====== ====== ======
140
The Company recognized net income of $27 million from discontinued
operations for 2003, which included a tax benefit of $13 million. This
tax benefit included $18 million related to the reversal of tax reserves
upon elimination of uncertainties surrounding the realizability of such
benefits. The net losses from discontinued operations for 2002 and 2001
were $23 million and $5 million, respectively, which included tax
benefits of $15 million and $2 million, respectively.
The differences between income taxes computed using the U.S. federal
income tax rate and the (benefit) provision for income taxes for
continuing operations were as follows:
(in millions) 2003 2002 2001
Amount computed using the statutory
rate $ 60 $331 $ 40
Increase (reduction) in taxes
resulting from:
State and other income taxes,
net of federal (1) 3 (4)
Goodwill amortization - - 45
Export sales and manufacturing
credits (25) (23) (19)
Operations outside the U.S. (99) (96) (10)
Valuation allowance 29 56 (18)
Business closures, restructuring
and land donation (13) (99) -
Tax settlement - - (11)
Other, net (17) (19) 11
---- ---- ----
(Benefit) provision for
income taxes $(66) $153 $ 34
==== ==== ====
During 2003, the Company recorded a tax benefit of $13 million related
to the donation of intellectual property in the form of technology
patents to a tax-qualified organization.
During 2002, the Company recorded a tax benefit of $91 million relating
to business closures and restructuring of certain subsidiaries.
Additionally, the Company recorded a tax benefit of $8 million relating
to a land donation. Also, during the fourth quarter of 2002, the
Company recorded an adjustment of $22 million to reduce its income tax
provision due to a decrease in the estimated effective tax rate for the
full year. The decrease in the effective tax rate was attributable to
an increase in earnings in lower tax rate jurisdictions relative to
original estimates.
141
During 2001, the Company reached a favorable tax settlement, which
resulted in a tax benefit of $11 million. In addition, during the
fourth quarter of 2001, the Company recorded an adjustment of $20
million to reduce its income tax provision due to a decrease in the
estimated effective tax rate for the full year. The decrease in the
effective tax rate was primarily attributable to an increase in
earnings in lower tax rate jurisdictions relative to original
estimates, and an increase in creditable foreign tax credits as
compared to estimates.
The significant components of deferred tax assets and liabilities were
as follows:
(in millions) 2003 2002
Deferred tax assets
Pension and postretirement
obligations $ 892 $ 988
Restructuring programs 69 144
Foreign tax credit 137 99
Employee deferred compensation 162 187
Inventories 82 75
Tax loss carryforwards 258 16
Other 637 558
------ ------
Total deferred tax assets 2,237 2,067
------ ------
Deferred tax liabilities
Depreciation 663 700
Leasing 135 156
Other 475 341
------ ------
Total deferred tax liabilities 1,273 1,197
------ ------
Valuation allowance 101 72
------ ------
Net deferred tax assets $ 863 $ 798
====== ======
Deferred tax assets (liabilities) are reported in the following
components within the Consolidated Statement of Financial Position:
(in millions) 2003 2002
Deferred income taxes (current) $ 610 $ 512
Other long-term assets 378 421
Accrued income taxes (44) (83)
Other long-term liabilities (81) (52)
------ ------
Net deferred tax assets $ 863 $ 798
====== ======
At December 31, 2003, the Company had available net operating loss
carryforwards of approximately $704 million for income tax purposes, of
which approximately $237 million has an indefinite carryforward period.
The remaining $467 million expires between years 2004 and 2023. The
Company has $137 million of unused foreign tax credits at December 31,
2003, with various expiration dates through 2008.
142
The valuation allowances as of December 31, 2003 and 2002 of $101
million and $72 million, respectively, are attributable to both foreign
tax credits and certain net operating loss carryforwards outside the
U.S. Based on projections of future taxable income, the Company would
be able to utilize the foreign tax credits only if it were to forgo
other tax benefits. Accordingly, a valuation allowance of $56 million
has been recorded against these credits, as management believes it is
more likely than not that the Company will be unable to realize these
other tax benefits. The remaining $45 million of valuation allowance
is attributable to net operating losses in jurisdictions outside the
U.S. During 2003, the Company increased the valuation allowance by $29
million on these net operating losses, as management believes it is
more likely than not that the Company will be unable to realize these
net operating losses.
During 2002, the Company reduced the valuation allowance that had been
provided for as of December 31, 2001 by $40 million. The $40 million
decrease included $34 million related to net operating loss
carryforwards in non-U.S. jurisdictions that expired in 2002. The
balance of the reduction of $6 million related to net operating loss
carryforwards for certain of its subsidiaries in Japan for which
management believed that it was more likely than not that the Company
would generate sufficient taxable income to realize these benefits.
The Company is currently utilizing net operating loss carryforwards to
offset taxable income from its operations in China that have become
profitable. The Company has been granted a tax holiday in China that
becomes effective once the net operating loss carryforwards have been
fully utilized. When the tax holiday becomes effective, the Company's
tax rate in China will be zero percent for the first two years. For
the following three years, the Company's tax rate will be 50% of the
normal tax rate for the jurisdiction in which Kodak operates, which is
currently 15%. Thereafter, the Company's tax rate will be 15%.
Retained earnings of subsidiary companies outside the U.S. were
approximately $1,955 million and $1,817 million at December 31, 2003 and
2002, respectively. Deferred taxes have not been provided on such
undistributed earnings, as it is the Company's policy to permanently
reinvest its retained earnings, and it is not practicable to determine
the deferred tax liability on such undistributed earnings in the event
they were to be remitted. However, the Company periodically repatriates
a portion of these earnings to the extent that it can do so tax-free.
- -------------------------------------------------------------------------
143
NOTE 16: RESTRUCTURING COSTS AND OTHER
Currently, the Company is being adversely impacted by the progressing
digital substitution. As the Company continues to adjust its operating
model in light of changing business conditions, it is probable that
ongoing cost reduction activities will be required from time to time.
In accordance with this, the Company periodically announces planned
restructuring programs (Programs), which often consist of a number of
restructuring initiatives. These Program announcements provide
estimated ranges relating to the number of positions to be eliminated
and the total restructuring charges to be incurred. The actual charges
for initiatives under a Program are recorded in the period in which the
Company commits to formalized restructuring plans or executes the
specific actions contemplated by the Program and all criteria for
restructuring charge recognition under the applicable accounting
guidance have been met.
144
Restructuring Programs Summary
The activity in the accrued restructuring balances and the non-cash
charges incurred in relation to all of the restructuring programs
described below was as follows for fiscal 2003:
Non-
Balance Cash cash Balance
(in millions) Dec. 31, Costs Adjust- Pay- Settle- Dec. 31,
2002 Incurred ments ments ments 2003
Q3 2003 Program:
Severance reserve $ - $231 $ - $ (51) $ - $180
Exit costs reserve - 40 - (28) - 12
---- ---- ---- ----- ----- ----
Total reserve $ - $271 $ - $ (79) $ - $192
==== ==== ==== ===== ===== ====
Long-lived asset
impairments $ - $109 $ - $ - $(109) $ -
Accelerated depreciation
and inventory write-downs - 22 - - (22) -
Q1 2003 Program:
Severance reserve $ - $ 67 $ - $ (44) $ - $ 23
Exit costs reserve - 8 - (4) - 4
---- ---- ---- ----- ----- ----
Total reserve $ - $ 75 $ - $ (48) $ - $ 27
==== ==== ==== ===== ===== ====
Long-lived asset
impairments $ - $ 5 $ - $ - $ (5) $ -
Accelerated depreciation
and inventory write-downs - 25 - - (25) -
Phogenix:
Exit costs reserve $ - $ 9 $ - $ - $ - $ 9
Long-lived asset
impairments - 6 - - (6) -
Inventory write-downs - 2 - - (2) -
Q4 2002 Program:
Severance reserve $ 53 $ 21 $ - $ (62) $ - $ 12
Exit costs reserve 17 - - (9) - 8
---- ---- ---- ----- ----- ----
Total reserve $ 70 $ 21 $ - $ (71) $ - $ 20
==== ==== ==== ===== ===== ====
Accelerated depreciation
and inventory write-downs $ - $ 24 $ - $ - $ (24) $ -
2001 Programs:
Severance reserve $ 67 $ - $(12) $ (49) $ - $ 6
Exit costs reserve 18 - - (5) - 13
---- ---- ---- ----- ----- ----
Total reserve $ 85 $ - $(12) $ (54) $ - $ 19
==== ==== ==== ===== ===== ====
Total of all
restructuring programs $155 $569 $(12) $(252) $(193) $267
==== ==== ==== ===== ===== ====
145
The costs incurred and adjustments, which total $557 million for the
year ended December 31, 2003, include $73 million of charges related to
accelerated depreciation and inventory write-downs, which were reported
in cost of goods sold in the accompanying Consolidated Statement of
Earnings for the year ended December 31, 2003. The remaining costs
incurred and adjustments of $484 million were reported as restructuring
costs and other in the accompanying Consolidated Statement of Earnings
for the year ended December 31, 2003.
2004-2006 Restructuring Program
In addition to completing the remaining initiatives under the Third
Quarter, 2003 Restructuring Program, the Company announced on January
22, 2004 that it plans to develop and execute a new cost reduction
program throughout the 2004 to 2006 timeframe. The objective of these
actions is to achieve a business model appropriate for the Company's
traditional businesses, and to sharpen the Company's competitiveness in
digital markets.
The Program is expected to result in total charges of $1.3 billion to
$1.7 billion over the three-year period, of which $700 million to $900
million are related to severance, with the remainder relating to the
disposal of buildings and equipment. Overall, Kodak's worldwide
facility square footage will be reduced by approximately one-third.
Approximately 12,000 to 15,000 positions worldwide are expected to be
eliminated through these actions primarily in global manufacturing,
selected traditional businesses and corporate administration. Maximum
single year cash usage under the new program is expected to be
approximately $200 million.
Third Quarter, 2003 Restructuring Program
During the third quarter of 2003, the Company announced that it intends
to implement a series of cost reduction actions during the last two
quarters of 2003 and the first two quarters of 2004, which were
expected to result in pre-tax charges totaling $350 million to $450
million. It is anticipated that these actions will result in a
reduction of approximately 4,500 to 6,000 positions worldwide primarily
relating to the rationalization of global manufacturing assets,
reduction of corporate administration and R&D, and the consolidation of
the infrastructure and administration supporting the Company's consumer
imaging and professional products and services operations.
146
The Company implemented certain actions under this Program during 2003.
As a result of these actions, the Company recorded charges of $381
million in continuing operations in 2003, which was composed of
severance, long-lived asset impairments, exit costs and inventory write-
downs of $231 million, $109 million, $40 million and $1 million,
respectively. The severance costs related to the elimination of
approximately 3,850 positions, including approximately 1,675
manufacturing, 1,125 administrative, 800 photofinishing and 250
research and development positions. The geographic composition of the
positions to be eliminated includes approximately 2,550 in the United
States and Canada and 1,300 throughout the rest of the world. The
reduction of the 3,850 positions and the $271 million charges for
severance and exit costs are reflected in the Third Quarter, 2003
Restructuring Program table below. The $109 million charge for long-
lived asset impairments was included in restructuring costs and other
in the accompanying Consolidated Statement of Earnings for the year
ended December 31, 2003. The charges taken for inventory write-downs
of $1 million were reported in cost of goods sold in the accompanying
Consolidated Statement of Earnings for the year ended December 31,
2003.
The following table summarizes the activity with respect to the
severance charges and exit costs recorded in connection with the
focused cost reductions that were announced in the third quarter of
2003 and the remaining balances in the related reserves at December 31,
2003:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- -------- ------- -----
Q3, 2003 charges 1,700 $123 - $ 123
Q3, 2003 utilization (100) (3) - (3)
----- ---- --- -----
Balance at 9/30/03 1,600 120 - 120
Q4, 2003 charges 2,150 108 40 148
Q4, 2003 utilization (2,025) (48) (28) (76)
----- ---- --- -----
Balance at 12/31/03 1,725 $180 $12 $ 192
===== ==== === =====
The severance charges of $231 million and the exit costs of $40 million
taken in 2003 were reported in restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The severance costs and exit costs require the
outlay of cash, while the long-lived asset impairments and inventory
write-downs represent non-cash items. Severance payments relating to
the third quarter restructuring actions will be paid during the period
through 2005, since, in many instances, the employees whose positions
were eliminated can elect or are required to receive their severance
payments over an extended period of time. Most exit costs are expected
to be paid during 2004. However, certain costs, such as long-term
lease payments, will be paid over periods after 2004.
147
As a result of initiatives implemented under the Third Quarter, 2003
Restructuring Program, the Company recorded $21 million of accelerated
depreciation on long-lived assets in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The accelerated depreciation relates to long-lived
assets accounted for under the held and used model of SFAS No. 144.
The year-to-date amount of $21 million relates to $20 million of
manufacturing facilities and equipment and $1 million of photofinishing
facilities and equipment that will be used until their abandonment.
The Company will incur accelerated depreciation charges of $10 million,
$8 million and $1 million in the first, second and third quarters of
2004, respectively, as a result of the initiatives implemented under
the Third Quarter, 2003 Restructuring Program.
With respect to the Third Quarter, 2003 Program, the Company
anticipates completing the remaining initiatives originally
contemplated under the Program by the end of the second quarter of
2004. As a result of these initiatives, an additional 1,700 to 1,900
positions will be eliminated throughout the world by the end of the
second quarter of 2004. The estimated cost to complete these remaining
initiatives will be in the range of $150 million to $170 million.
First Quarter, 2003 Restructuring Program
In the early part of the first quarter of 2003, as part of its
continuing focused cost reduction efforts and in addition to the
remaining initiatives under the Fourth Quarter, 2002 Restructuring
Program, the Company announced its First Quarter, 2003 Restructuring
Program that included new initiatives to further reduce employment
within a range of 1,800 to 2,200 employees. A significant portion of
these new initiatives relate to the rationalization of the Company's
photofinishing operations in the U.S. and Europe. Specifically, as a
result of declining film and photofinishing volumes and in response to
global economic and political conditions, the Company began to
implement initiatives to 1) close certain photofinishing operations in
the U.S. and EAMER, 2) rationalize manufacturing capacity by
eliminating manufacturing positions on a worldwide basis, and 3)
eliminate selling, general and administrative positions, particularly
in the Photography segment.
The total restructuring charge for continuing operations recorded in
2003 relating to the First Quarter, 2003 Restructuring Program was $81
million, which was composed of severance, exit costs, long-lived asset
impairments and inventory write-downs of $67 million, $8 million, $5
million and $1 million, respectively. The severance charge related to
the elimination of 1,850 positions, including approximately 1,225
photofinishing, 325 administrative and 300 manufacturing positions.
The geographic composition of the 1,850 positions to be eliminated
includes approximately 1,100 in the United States and Canada and 750
throughout the rest of the world. The reduction of 1,850 positions and
the total severance and exit charges of $75 million are reflected in
the First Quarter, 2003 Restructuring Program table below. The
remaining actions anticipated under the First Quarter, 2003
Restructuring Program are expected to be completed during the first
quarter of 2004.
148
The following table summarizes the activity with respect to the
severance and exit costs charges recorded in connection with the
focused cost reductions that were announced in the first quarter of
2003 and the remaining balances in the related reserves at December 31,
2003:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- -------- ------- -----
Q1, 2003 charges 425 $ 28 $ - $ 28
Q1, 2003 utilization (150) (2) - (2)
----- ---- ---- ----
Balance at 3/31/03 275 26 - 26
Q2, 2003 charges 500 20 4 24
Q2, 2003 utilization (500) (13) - (13)
---- ---- ---- ----
Balance at 6/30/03 275 33 4 37
Q3, 2003 charges 925 19 4 23
Q3, 2003 utilization (400) (12) (1) (13)
---- ---- ---- ----
Balance at 9/30/03 800 40 7 47
Q4, 2003 utilization (625) (17) (3) (20)
---- ---- ---- ----
Balance at 12/31/03 175 $ 23 $ 4 $ 27
==== ==== ==== ====
The charges of $80 million for severance, long-lived asset impairments
and exit costs reserves were reported in restructuring costs and other
in the accompanying Consolidated Statement of Earnings for the year
ended December 31, 2003. The charges taken for inventory write-downs
of $1 million were reported in cost of goods sold in the accompanying
Consolidated Statement of Earnings for the year ended December 31,
2003. The severance and exit costs require the outlay of cash, while
the inventory write-downs and long-lived asset impairments represent
non-cash items. Severance payments will be paid during the period
through 2005 since, in many instances, the employees whose positions
were eliminated can elect or are required to receive their severance
payments over an extended period of time. Most exit costs are expected
to be paid during 2004. However, certain costs, such as long-term
lease payments, will be paid over periods after 2004.
As a result of initiatives implemented under the First Quarter, 2003
Restructuring Program, the Company recorded $24 million of accelerated
depreciation on long-lived assets in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The accelerated depreciation relates to long-lived
assets accounted for under the held and used model of SFAS No. 144.
The year-to-date amount of $24 million relates to lab equipment used in
photofinishing that will be used until their abandonment. The Company
will incur accelerated depreciation charges of $8 million in the first
quarter of 2004 and $1 million in the second quarter of 2004 as a
result of the initiatives implemented under the First Quarter, 2003
Restructuring Program.
149
In addition to the $105 million of restructuring charges recorded in
2003 under the First Quarter, 2003 Restructuring Program, the Company
recorded $17 million of charges in the second quarter associated with
the Company's exit from the Photography segment's Phogenix joint
venture with Hewlett Packard. The $17 million charge included
approximately $2 million of inventory write-downs, $6 million of long-
lived asset impairments and $9 million of exit costs. The inventory
write-downs were reported in cost of goods sold in the accompanying
Consolidated Statement of Earnings for the year ended December 31,
2003. The long-lived asset impairments and exit costs were reported in
restructuring costs and other in the accompanying Consolidated
Statement of Earnings for the year ended December 31, 2003. The exit
costs, which represent the only cash portion of the charge, are
expected to be paid during 2004.
Fourth Quarter, 2002 Restructuring Program
During the fourth quarter of 2002, the Company announced a planned
Program consisting of a number of focused cost reduction initiatives
designed to deploy manufacturing assets more effectively in order to
provide competitively-priced products to the global market. In the
announcement, the Company discussed the restructuring initiatives under
its Fourth Quarter, 2002 Restructuring Program that would begin in the
fourth quarter of 2002 and extend into 2003. These initiatives were
expected to affect a total of 1,300 to 1,700 positions worldwide,
including approximately 150 positions in the Company's U.S. research
and development organizations, 500 positions in its U.S. one-time-use
camera assembly operations, 300 positions in its Mexico sensitizing
operations and 550 positions in its global manufacturing and logistics
organization. Specific initiatives included the relocation of the one-
time-use camera assembly operations in Rochester, New York and the
graphic arts and x-ray film sensitizing operations in Mexico to other
Kodak locations.
The total restructuring charge for continuing operations recorded in
2002 for these initiatives that were implemented was $116 million,
which was composed of severance, inventory write-downs, long-lived
asset impairments and exit costs of $55 million, $7 million, $37
million and $17 million, respectively. The severance charge related to
the elimination of 1,150 positions, including approximately 525
manufacturing and logistics, 300 service and photofinishing, 175
administrative and 150 research and development positions. The
geographic composition of the 1,150 positions eliminated included
approximately 775 in the United States and Canada and 375 throughout
the rest of the world. The charge for the long-lived asset impairments
includes the write-off of $13 million relating to equipment used in the
manufacture of cameras and printers, $13 million for sensitized
manufacturing equipment, $5 million for lab equipment used in
photofinishing and $6 million for other assets that were scrapped or
abandoned immediately. The reduction of 1,150 positions and the $72
million charge for severance and exit costs are reflected in the Fourth
Quarter, 2002 Restructuring Program table below. These amounts exclude
the fourth quarter elimination of 150 positions and the restructuring
charges relating to the shutdown of Kodak Global Imaging, Inc., as
these charges were reflected in the loss from discontinued operations
for the year ended December 31, 2002.
150
During 2003, the Company recorded additional severance charges of $21
million in continuing operations relating to 675 positions that were
contemplated under its Fourth Quarter, 2002 Restructuring Program,
including the relocation of Mexican sensitizing operations and the U.S.
one-time-use camera assembly operations. The 675 positions that were
eliminated included approximately 500 manufacturing and 175
administrative positions. The geographic composition of the 675
positions included approximately 425 in the U.S. and Canada and 250
throughout the rest of the world. The reduction of 675 positions and
the related severance charges of $21 million are reflected in the
Fourth Quarter, 2002 Restructuring Program table below. All actions
anticipated under the Fourth Quarter, 2002 Restructuring Program were
completed in the third quarter of 2003. A total of 1,825 positions
were eliminated under the Fourth Quarter, 2002 Restructuring Program.
The following table summarizes the activity with respect to the
severance and exit costs charges recorded in connection with the
focused cost reductions that were announced in the fourth quarter of
2002 and the remaining balance in the related reserves at December 31,
2003:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- -------- ------- -------
Q4, 2002 charges l,l50 $ 55 $ 17 $ 72
Q4, 2002 utilization (250) (2) - (2)
------ ----- ---- ----
Balance at 12/31/02 900 53 17 70
Q1, 2003 charges 450 16 - 16
Q1, 2003 utilization (850) (24) (2) (26)
------ ----- ---- ----
Balance at 3/31/03 500 45 15 60
Q2, 2003 charges 25 1 - 1
Q2, 2003 utilization (500) (11) (4) (15)
------ ----- ---- ----
Balance at 6/30/03 25 35 11 46
Q3, 2003 charges 200 4 - 4
Q3, 2003 utilization (225) (8) (2) (10)
------ ----- ---- ----
Balance at 9/30/03 0 31 9 40
Q4, 2003 utilization 0 (19) (1) (20)
------ ----- ---- ----
Balance at 12/31/03 0 $ 12 $ 8 $ 20
====== ===== ==== ====
The severance charges taken in 2003 of $21 million were reported in
restructuring costs and other in the accompanying Consolidated
Statement of Earnings for the year ended December 31, 2003. The
severance and exit costs require the outlay of cash, while the
inventory write-downs and long-lived asset impairments represent non-
cash items. Severance payments will continue into 2004 since, in many
instances, the employees whose positions were eliminated can elect or
are required to receive their severance payments over an extended
period of time. Most exit costs are expected to be paid during 2004.
However, certain costs, such as long-term lease payments, will be paid
over periods after 2004.
151
As a result of initiatives implemented under the Fourth Quarter, 2002
Restructuring Program, the Company recorded $24 million of accelerated
depreciation on long-lived assets in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The accelerated depreciation relates to long-lived
assets accounted for under the held and used model of SFAS No. 144, and
the full year amount of $24 million was comprised of $15 million
relating to equipment used in the manufacture of cameras, $6 million
for lab equipment used in photofinishing and $3 million for sensitized
manufacturing equipment that was used until their abandonment in 2003.
2001 Restructuring Programs
At December 31, 2002, the Company had remaining severance and exit
costs reserves of $67 million and $18 million, respectively, relating
to the restructuring plans it implemented during 2001. During the
first quarter of 2003, the Company completed the severance actions
associated with the 2001 Restructuring Programs and recorded a reversal
of $12 million of reserves through restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The completion of the 2001 Restructuring Programs
resulted in the elimination of the remaining 200 positions included in
the original plans. A total of 6,425 positions were eliminated under
the 2001 Restructuring Programs.
The remaining severance reserve of $6 million as of December 31, 2003
has not been paid since, in many instances, the employees whose
positions were eliminated could elect or were required to receive their
severance payments over an extended period of time. However, these
payments will be made by the end of 2004. Most of the remaining exit
costs reserves of $13 million as of December 31, 2003 represent long-
term lease payments, which will be paid over periods after 2004.
- ----------------------------------------------------------------------
152
NOTE 17: RETIREMENT PLANS
Substantially all U.S. employees are covered by a noncontributory
defined benefit plan, the Kodak Retirement Income Plan (KRIP), which is
funded by Company contributions to an irrevocable trust fund. The
funding policy for KRIP is to contribute amounts sufficient to meet
minimum funding requirements as determined by employee benefit and tax
laws plus additional amounts the Company determines to be appropriate.
Generally, benefits are based on a formula recognizing length of service
and final average earnings. Assets in the fund are held for the sole
benefit of participating employees and retirees. The assets of the
trust fund are comprised of corporate equity and debt securities, U.S.
government securities, partnership and joint venture investments,
interests in pooled funds, and various types of interest rate, foreign
currency and equity market financial instruments. At December 31, 2001,
Kodak common stock represented approximately 3.4% of trust assets. In
December 2002, in connection with Wilshire Associates' recommendation
that KRIP eliminate its investments in specialty sector U.S. equities,
the Company purchased the 7.4 million shares of Kodak common stock held
by KRIP for $260 million.
On March 25, 1999, the Company amended this plan to include a separate
cash balance formula for all U.S. employees hired after February 1999.
All U.S. employees hired prior to that date were granted the option to
choose the KRIP plan or the Cash Balance Plus plan. Written elections
were made by employees in 1999, and were effective January 1, 2000. The
Cash Balance Plus plan credits employees' accounts with an amount equal
to 4% of their pay, plus interest based on the 30-year treasury bond
rate. In addition, for employees participating in this plan and the
Company's defined contribution plan, the Savings and Investment Plan
(SIP), the Company will match SIP contributions for an amount up to 3%
of pay, for employee contributions of up to 5% of pay. Company
contributions to SIP were $15 million, $14 million and $15 million for
2003, 2002 and 2001, respectively. As a result of employee elections to
the Cash Balance Plus plan, the reductions in future pension expense
will be almost entirely offset by the cost of matching employee
contributions to SIP. The impact of the Cash Balance Plus plan is shown
as a plan amendment.
The Company also sponsors unfunded defined benefit plans for certain
U.S. employees, primarily executives. The benefits of these plans are
obtained by applying KRIP provisions to all compensation, including
amounts being deferred, and without regard to the legislated qualified
plan maximums, reduced by benefits under KRIP.
Most subsidiaries and branches operating outside the U.S. have defined
benefit retirement plans covering substantially all employees.
Contributions by the Company for these plans are typically deposited
under government or other fiduciary-type arrangements. Retirement
benefits are generally based on contractual agreements that provide for
benefit formulas using years of service and/or compensation prior to
retirement. The actuarial assumptions used for these plans reflect the
diverse economic environments within the various countries in which the
Company operates.
153
The measurement date used to determine the pension obligation for all
major funded and unfunded U.S. and Non-U.S. defined benefit plans
comprising a majority of the plan assets and benefit obligations is
December 31.
The net pension amounts recognized on the Consolidated Statement of
Financial Position at December 31, 2003 and 2002 for all major funded
and unfunded U.S. and Non-U.S. defined benefit plans are as follows:
(in millions) 2003 2002
Non- Non-
U.S. U.S. U.S. U.S.
Change in Benefit Obligation
Projected benefit obligation
at January 1 $ 6,213 $2,594 $ 5,939 $2,099
New plans - - 25 13
Service cost 119 38 106 33
Interest cost 408 148 421 131
Participant contributions - 14 - 9
Plan amendment - 18 3 (46)
Benefit payments (692) (173) (713) (141)
Actuarial loss 512 92 432 227
Curtailments (1) (2) - -
Settlements - (6) - -
Special termination benefits - 26 - -
Currency adjustments - 382 - 269
------- ------ ------- ------
Projected benefit obligation
at December 31 $ 6,559 $3,131 $ 6,213 $2,594
======= ====== ======= ======
Change in Plan Assets
Fair value of plan assets
at January 1 $ 5,790 $1,805 $ 6,372 $1,731
New plans - - 33 13
Actual return on plan assets 1,381 378 75 (106)
Employer contributions 24 126 23 105
Participant contributions - 14 - 10
Settlements - (6) - -
Benefit payments (692) (173) (713) (141)
Currency adjustments - 288 - 193
------- ------ ------- ------
Fair value of plan assets
at December 31 $ 6,503 $2,432 $ 5,790 $1,805
======= ====== ======= ======
Funded Status at December 31 $ (56) $ (699) $ (423) $ (789)
Unrecognized:
Net transition obligation
(asset) - (3) 2 (7)
Net actuarial loss 682 856 975 899
Prior service cost (gain) 7 36 8 (21)
------- ------ ------- ------
Net amount recognized at
December 31 $ 633 $ 190 $ 562 $ 82
======= ====== ======= ======
154
Amounts recognized in the Statement of Financial Position for all major
funded and unfunded U.S. and Non-U.S. defined benefit plans are as
follows:
(in millions) 2003 2002
Non- Non-
U.S. U.S. U.S. U.S.
Prepaid pension cost $ 790 $ 350 $ 712 $ 260
Accrued benefit liability (157) (160) (150) (178)
Additional minimum pension
liability (91) (572) (78) (706)
Intangible asset 3 95 5 112
Accumulated other comprehensive
income 88 477 73 594
------- ------ ------- ------
Net amount recognized at
December 31 $ 633 $ 190 $ 562 $ 82
======= ====== ======= ======
The prepaid pension cost asset amounts for the U.S. and Non-U.S. at
December 31, 2003 and 2002 are included in other long-term assets. The
accrued benefit liability and additional minimum pension liability
amounts (net of the intangible asset amounts) for the U.S. and Non-U.S.
at December 31, 2003 and 2002 are included in postretirement
liabilities. The accumulated other comprehensive income amounts for the
U.S. and Non-U.S. at December 31, 2003 and 2002 are included as a
component of shareholders' equity, net of taxes.
The accumulated benefit obligations for all the major funded and
unfunded U.S. and Non-U.S. defined benefit plans are as follows:
(in millions) 2003 2002
Non- Non-
U.S. U.S. U.S. U.S.
Accumulated benefit obligation $5,657 $2,864 $5,411 $2,376
Information with respect to the major funded and unfunded U.S. and Non-
U.S. defined benefit plans with an accumulated benefit obligation in
excess of plan assets is as follows:
(in millions) 2003 2002
Non- Non-
U.S. U.S. U.S. U.S.
Projected benefit obligation $ 342 $2,754 $ 315 $2,333
Accumulated benefit obligation 315 2,514 284 2,137
Fair value of plan assets 67 2,075 52 1,557
155
Pension expense (income) for all defined benefit plans included:
(in millions) 2003 2002 2001
Non- Non- Non-
U.S. U.S. U.S. U.S. U.S. U.S.
Service cost $ 119 $ 38 $ 106 $ 33 $ 102 $ 41
Interest cost 408 148 421 131 426 120
Expected return on plan
assets (582) (177) (677) (165) (599) (159)
Amortization of:
Transition obligation
(asset) 2 (3) (54) (3) (57) (3)
Prior service cost 2 (30) 1 (21) 1 (15)
Actuarial loss 4 31 3 39 2 4
----- ----- ----- ----- ------ -----
(47) 7 (200) 14 (125) (12)
Special termination benefits - 30 - 27 - 13
Settlements - 2 - - - -
----- ----- ----- ----- ------ -----
Net pension (income) expense (47) 39 (200) 41 (125) 1
Other plans including
unfunded plans - 17 3 49 16 66
----- ----- ----- ----- ------ -----
Total net pension (income)
expense $ (47) $ 56 $(197) $ 90 $(109) $ 67
===== ===== ===== ===== ====== =====
The special termination benefits of $30 million, $27 million and $13
million for the years ended December 31, 2003, 2002 and 2001,
respectively, were incurred as a result of the Company's restructuring
actions and, therefore, have been included in restructuring costs and
other in the Consolidated Statement of Earnings.
The increase (decrease) in the additional minimum liability (net of the
change in the intangible asset) included in other comprehensive income
for the major funded and unfunded U.S. and Non-U.S. defined benefit
plans is as follows:
2003 2002
Non- Non-
U.S. U.S. U.S. U.S.
Increase (decrease) in the
additional minimum liability
(net of the change in the
intangible asset) included in
other comprehensive income $ 14 $(175) $ 26 $ 544
The weighted-average assumptions used to determine the benefit
obligation amounts for all major funded and unfunded U.S. and Non-U.S.
defined benefit plans were as follows:
2003 2002
Non- Non-
U.S. U.S. U.S. U.S.
Discount rate 6.00% 5.40% 6.50% 5.40%
Salary increase rate 4.25% 3.20% 4.25% 3.30%
156
The weighted-average assumptions used to determine net pension (income)
expense for all the major funded and unfunded U.S. and Non-U.S. defined
benefit plans were as follows:
2003 2002
Non- Non-
U.S. U.S. U.S. U.S.
Discount rate 6.50% 5.40% 7.25% 5.90%
Salary increase rate 4.25% 3.30% 4.25% 3.10%
Expected long-term rate of
return on plan assets 9.00% 7.90% 9.50% 8.60%
Of the total plan assets attributable to the major U.S. defined benefit
plans at December 31, 2003 and 2002, 98% and 99%, respectively, relate
to the KRIP plan. The expected long-term rate of return on plan assets
assumption (EROA) is determined from the plan's asset allocation using
forward-looking assumptions in the context of historical returns,
correlations and volatilities. The plan lowered its EROA from 9.5% in
2002 to 9% in 2003 based on an asset and liability modeling study that
was completed in September 2002. A 9% EROA will be maintained for
2004.
The investment strategy is to manage the assets of the plan to meet the
long-term liabilities while maintaining sufficient liquidity to pay
current benefits. This is primarily achieved by holding equity-like
investments while investing a portion of the assets in long duration
bonds in order to match the long-term nature of the liabilities. The
Company will periodically undertake an asset and liability modeling
study because of a material shift in the plan's liability profile or
changes in the capital markets.
The Company's weighted-average asset allocations for its major U.S.
defined benefit pension plans at December 31, 2003 and 2002, by asset
category, are as follows:
Asset Category 2003 2002 Target
Equity securities 43% 41% 40%-46%
Debt securities 34% 33% 31%-37%
Real estate 6% 7% 6%-7%
Other 17% 19% 23%-10%
--- --- ------
Total 100% 100% 100%
The Other asset category in the table above is primarily composed of
private equity, venture capital, cash and other investments.
The Company expects to contribute approximately $5 million in 2004 to
one of its defined benefit pension plans in the U.S.
- -----------------------------------------------------------------------
157
NOTE 18: OTHER POSTRETIREMENT BENEFITS
The Company provides healthcare, dental and life insurance benefits to
U.S. eligible retirees and eligible survivors of retirees. Generally,
to be eligible for the plan, individuals retiring prior to January 1,
1996 were required to be 55 years of age with ten years of service or
their age plus years of service must have equaled or exceeded 75. For
those retiring after December 31, 1995, the individuals must be 55
years of age with ten years of service or have been eligible as of
December 31, 1995. Based on the eligibility requirements, these
benefits are provided to U.S. retirees who are covered by the Company's
KRIP plan and are funded from the general assets of the Company as they
are incurred. However, those under the Cash Balance portion of the
KRIP plan would be required to pay the full cost of their benefits
under the plan. The Company's subsidiaries in the United Kingdom and
Canada offer similar healthcare benefits.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act
introduces two new features, including (1) a subsidy to plan sponsors
based on 28 percent of an individual beneficiary's annual prescription
drug costs between $250 and $5,000, and (2) the opportunity for a
retiree to obtain a prescription drug benefit under Medicare. Given
the uncertainty as to whether an employer that provides postretirement
prescription drug coverage should recognize the effects of the Act on
its benefit obligation and benefit cost, when those effects should be
recognized, and how they should be accounted for, the FASB issued FSP
106-1 on January 12, 2004. Due to the timing of the signing of the
Act, FSP 106-1 recognized that companies may not have sufficient time
to gather the necessary information to measure the impacts of the Act
prior to the issuance of their financial statements, as well as
sufficient guidance to ensure that the accounting is in accordance with
accounting principles generally accepted in the U.S. Due to the fact
that the specific authoritative accounting guidance for the features
under the Act are pending, FSP 106-1 provides companies the option to
defer the accounting for the effects of the Act until such time as the
guidance is finalized, and the Company has made such election.
Accordingly, the measures of net benefit obligation and net
postretirement benefit cost included in the accompanying consolidated
financial statements do not reflect any effects from the Act. However,
if the Company's postretirement plan in the U.S. experiences an event
such as a significant amendment, curtailment or settlement prior to the
finalization of the guidance, the Company will be required to account
for the estimated impacts. When the accounting guidance is ultimately
issued, any previously reported information on the impacts of the Act
may need to change.
The measurement date used to determine the net benefit obligation for the
Company's other postretirement benefit plans is December 31.
158
Changes in the Company's benefit obligation and funded status for the
U.S., United Kingdom and Canada postretirement benefit plans are as
follows:
(in millions) 2003 2002
Net benefit obligation at beginning
of year $ 3,687 $ 3,110
Service cost 17 16
Interest cost 213 213
Plan participants' contributions 6 4
Plan amendments (30) 31
Actuarial (gain) loss (117) 549
Curtailments 1 -
Benefit payments (254) (239)
Currency adjustments 15 3
------- -------
Net benefit obligation at end of year $ 3,538 $ 3,687
======= =======
Funded status at end of year $(3,538) $(3,687)
Unamortized net actuarial loss 1,415 1,600
Unamortized prior service cost (326) (360)
------- -------
Net amount recognized and recorded
at end of year $(2,449) $(2,447)
======= =======
Postretirement benefit cost for the Company's U.S., United Kingdom and
Canada postretirement benefit plans included:
(in millions) 2003 2002 2001
Components of net postretirement
benefit cost
Service cost $ 17 $ 16 $ 15
Interest cost 213 213 199
Amortization of:
Prior service cost (61) (60) (60)
Actuarial loss 68 58 39
------ ------ ------
237 227 193
Curtailments 1 - -
------ ------ ------
Total net postretirement benefit cost $ 238 $ 227 $ 193
====== ====== ======
The U.S. plan represents approximately 97% and 98% of the total other
postretirement net benefit obligation as of December 31, 2003 and 2002,
respectively, and, therefore, the weighted-average assumptions used to
compute the other postretirement benefit amounts approximate the U.S.
assumptions.
The weighted-average assumptions used to determine the net benefit
obligations were as follows:
2003 2002
Discount rate 6.00% 6.50%
Salary increase rate 4.25% 4.25%
The weighted-average assumptions used to determine the net
postretirement benefit cost were as follows:
2003 2002
Discount rate 6.50% 7.25%
Salary increase rate 4.25% 4.25%
159
The weighted-average assumed healthcare cost trend rates used to
compute the other postretirement amounts were as follows:
2003 2002
Healthcare cost trend 11.00% 12.00%
Rate to which the cost trend rate
is assumed to decline (the ultimate
trend rate) 5.00% 5.00%
Year that the rate reaches the
ultimate trend rate 2010 2010
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one percentage point
change in assumed healthcare cost trend rates would have the following
effects:
1% 1%
increase decrease
Effect on total service and interest
cost $ 7 $ (7)
Effect on postretirement benefit
obligation 119 (108)
The Company expects to pay benefits of $258 million for its U.S. other
postretirement benefits plan in 2004.
- ---------------------------------------------------------------------
NOTE 19: ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive (loss) income at
December 31, 2003, 2002 and 2001 were as follows:
(in millions) 2003 2002 2001
Accumulated unrealized holding
gains (losses) related to
available-for-sale securities $ 11 $ - $ (6)
Accumulated unrealized losses
related to hedging activity (15) (9) (5)
Accumulated translation
adjustments 107 (306) (524)
Accumulated minimum pension
liability adjustments (334) (456) (62)
----- ----- -----
Total $(231) $(771) $(597)
===== ===== =====
- ----------------------------------------------------------------------
NOTE 20: STOCK OPTION AND COMPENSATION PLANS
The Company's stock incentive plans consist of the 2000 Omnibus Long-
Term Compensation Plan (the 2000 Plan), the 1995 Omnibus Long-Term
Compensation Plan (the 1995 Plan), and the 1990 Omnibus Long-Term
Compensation Plan (the 1990 Plan). The Plans are administered by the
Executive Compensation and Development Committee of the Board of
Directors.
160
Under the 2000 Plan, 22 million shares of the Company's common stock may
be granted to a variety of employees between January 1, 2000 and
December 31, 2004. The 2000 Plan is substantially similar to, and is
intended to replace, the 1995 Plan, which expired on December 31, 1999.
Stock options are generally non-qualified and are at prices not less
than 100% of the per share fair market value on the date of grant, and
the options generally expire ten years from the date of grant, but may
expire sooner if the optionee's employment terminates. The 2000 Plan
also provides for Stock Appreciation Rights (SARs) to be granted, either
in tandem with options or freestanding. SARs allow optionees to receive
payment equal to the increase in the Company's stock market price from
the grant date to the exercise date. At December 31, 2003, 52,215
freestanding SARs were outstanding at option prices ranging from $23.25
to $62.44. Compensation expense recognized in 2003 on those
freestanding SARs, which had option prices less than the market value of
the Company's underlying common stock, was not material.
Under the 1995 Plan, 22 million shares of the Company's common stock
were eligible for grant to a variety of employees between February 1,
1995 and December 31, 1999. Stock options are generally non-qualified
and are at prices not less than 100% of the per share fair market value
on the date of grant, and the options generally expire ten years from
the date of grant, but may expire sooner if the optionee's employment
terminates. The 1995 Plan also provides for SARs to be granted, either
in tandem with options or freestanding. At December 31, 2003, 319,409
freestanding SARs were outstanding at option prices ranging from $31.30
to $90.63.
Under the 1990 Plan, 22 million shares of the Company's common stock
were eligible for grant to key employees between February 1, 1990 and
January 31, 1995. The stock options, which were generally non-
qualified, could not have prices less than 50% of the per share fair
market value on the date of grant; however, no options below fair market
value were granted. The options generally expire ten years from the
date of grant, but may expire sooner if the optionee's employment
terminates. The 1990 Plan also provided that options with dividend
equivalents, tandem SARs and freestanding SARs could be granted. At
December 31, 2003, 41,034 freestanding SARs were outstanding at option
prices ranging from $30.25 to $44.50.
161
In January 2002, the Company's shareholders voted in favor of a
voluntary stock option exchange program for its employees. Under the
program, employees were given the opportunity, if they so chose, to
cancel outstanding stock options previously granted to them at exercise
prices ranging from $26.90 to $92.31, in exchange for new options to be
granted on or shortly after August 26, 2002, over six months and one
day from February 22, 2002, the date the old options were canceled.
The number of shares subject to the new options was determined by
applying an exchange ratio in the range of 1:1 to 1:3 (i.e., one new
option share for every three canceled option shares) based on the
exercise price of the canceled option. As a result of the exchange
program, approximately 23.7 million old options were canceled on
February 22, 2002, with approximately 16 million new options granted
on, or shortly after, August 26, 2002. The exchange program did not
result in variable accounting, as it was designed to comply with FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions
Involving Stock-Based Compensation." Also, the new options had an
exercise price equal to the fair market value of the Company's common
stock on the new grant date, so no compensation expense was recorded as
a result of the exchange program.
Further information relating to options is as follows:
(Amounts in thousands, except per share amounts)
Weighted-
Average
Exercise
Shares Range of Price Price
Under Option Per Share Per Share
Outstanding on December 31, 2000 44,846 $32.50 - $92.31 $60.87
Granted 8,575 $26.90 - $48.34 $36.49
Exercised 615 $32.50 - $43.18 $35.91
Terminated, Canceled or
Surrendered 2,351 $32.50 - $90.75 $50.33
------
Outstanding on December 31, 2001 50,455 $25.92 - $92.31 $57.53
Granted 20,155 $26.30 - $38.04 $32.72
Exercised 1,581 $26.90 - $37.74 $32.05
Terminated, Canceled or
Surrendered 26,752 $26.90 - $92.31 $54.58
------
Outstanding on December 31, 2002 42,277 $25.92 - $92.31 $48.52
Granted 1,595 $22.58 - $38.85 $28.45
Exercised 392 $29.31 - $32.50 $31.28
Terminated, Canceled or
Surrendered 3,931 $26.82 - $86.94 $44.49
------
Outstanding on December 31, 2003 39,549 $22.58 - $92.31 $48.30
Exercisable on December 31, 2001 31,571 $26.90 - $92.31 $63.54
Exercisable on December 31, 2002 31,813 $25.92 - $92.31 $52.49
Exercisable on December 31, 2003 32,593 $22.58 - $92.31 $51.30
The table above excludes approximately 68 (in thousands) options granted
by the Company in 2001 at an exercise price of $.05-$21.91 as part of an
acquisition. At December 31, 2003, approximately 30 (in thousands)
stock options were outstanding in relation to this acquisition.
162
The following table summarizes information about stock options at December
31, 2003:
(Number of options in thousands)
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Range of Weighted-
Exercise Average Weighted- Weighted-
Prices Remaining Average Average
At Less Contractual Exercise Exercise
Least Than Options Life Price Options Price
$20 - $30 1,524 8.82 $26.87 491 $29.12
$30 - $40 18,831 6.60 $32.42 13,506 $31.85
$40 - $50 2,431 1.90 $43.78 2,220 $43.96
$50 - $60 3,738 4.21 $55.28 3,466 $55.37
$60 - $70 6,054 4.50 $65.42 5,941 $65.43
$70 - $80 4,642 3.04 $73.26 4,640 $73.26
Over $80 2,329 3.17 $89.94 2,329 $89.94
------ ------
39,549 32,593
====== ======
- -------------------------------------------------------------------------
NOTE 21: ACQUISITIONS
2003
The Company had a commitment under a put option arrangement with the
Burrell Companies, unaffiliated entities, whereby the shareholders of
those Burrell Companies had the ability to put 100% of the stock to
Kodak for a fixed price plus the assumption of debt. The option first
became exercisable on October 1, 2002 and was ultimately exercised
during the Company's fourth quarter ended December 31, 2002.
Accordingly, on February 5, 2003, the Company acquired the Burrell
Companies for a total purchase price of approximately $63 million,
which was composed of approximately $54 million in cash and $9 million
in assumed debt. As the Company did not want to operate the business,
they immediately entered into negotiations to sell the operations. As
negotiations proceeded, the Company determined that the consideration
expected in connection with the sale would not be sufficient to recover
the carrying value of the assets. Accordingly, the Company recorded
an impairment charge of $9 million in the second quarter of 2003.
This charge is reflected in the selling, general and administrative
component within the accompanying Consolidated Statement of Earnings
for the year ended December 31, 2003. The Company ultimately closed
on the sale of the Burrell Companies on October 6, 2003. The
difference between the sale proceeds and the carrying value of the
net assets in the Burrell Companies upon disposition was not material.
163
During the first quarter, the Company paid approximately $21 million
for the rights to certain technology. As this technology was still in
the development phase and not yet ready for commercialization, it
qualified as in-process research and development. Additionally,
management determined that there are no alternative future uses for
this technology beyond its initial intended application. Accordingly,
the entire purchase price was expensed in the year ended December 31,
2003 as research and development costs in the accompanying Consolidated
Statement of Earnings.
During the second quarter, the Company purchased Applied Science
Fiction's proprietary rapid film processing technology and other assets
for approximately $32 million in cash. Of the $32 million in purchase
price, approximately $16 million represented goodwill. The balance of
the purchase price of approximately $16 million was allocated to the
acquired intangible assets, consisting of developed technologies, which
have useful lives ranging from two to six years.
On October 7, 2003, Kodak acquired all of the outstanding shares of
PracticeWorks, Inc. (PracticeWorks), a leading provider of dental
practice management software (DPMS) and digital radiographic imaging
systems, for approximately $475 million in cash, inclusive of
transaction costs. Accordingly, Kodak also became the 100% owner of
Paris-based subsidiary, Trophy Radiologie, S.A., a developer and
manufacturer of dental digital radiography equipment, which
PracticeWorks acquired in December 2002. This acquisition will enable
Kodak's Health Imaging business to offer its customers a full spectrum
of dental imaging products and services from traditional film to
digital radiography and photography. Earnings from continuing
operations for 2003 include the results of PracticeWorks from the date
of acquisition.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. The
allocation of the purchase price presented below is subject to
refinement.
At October 7, 2003 - (in millions)
Current assets $ 52
Intangible assets (including in-process R&D) 179
Other non-current assets (including PP&E) 53
Goodwill 350
----
Total assets acquired $634
----
Current liabilities $ 71
Long-term debt 23
Other non-current liabilities 65
----
Total liabilities assumed $159
----
Net assets acquired $475
====
164
Of the $179 million of acquired intangible assets, $10 million was
assigned to research and development assets that were written off at
the date of acquisition. This amount was determined by identifying
research and development projects that had not yet reached
technological feasibility and for which no alternative future uses
exist. As of the acquisition date, there were two projects that met
these criteria. The value of the projects identified to be in progress
was determined by estimating the future cash flows from the projects
once commercialized, less costs to complete development, and
discounting these net cash flows back to their present value. The
discount rate used for these projects was 14%. The charges for the
write-off were included as research and development costs in the
Company's Consolidated Statement of Earnings for the year ended
December 31, 2003.
The remaining $169 million of intangible assets have useful lives
ranging from three to eighteen years. The intangible assets that make
up that amount include customer relationships of $123 million (eighteen-
year weighted-average useful life), developed technology of $44 million
(seven-year weighted-average useful life), and other assets of $2
million (three-year weighted-average useful life). The $350 million of
goodwill will be assigned to the Health Imaging segment and is not
expected to be deductible for tax purposes.
The unaudited pro forma combined historical results, as if
PracticeWorks had been acquired at the beginning of 2003 and 2002,
respectively, are estimated to be:
(in millions, except per share data) 2003 2002
Net sales $13,447 $12,922
Earnings from continuing operations $ 232 $ 766
Basic and diluted earnings per share from
continuing operations $ .81 $ 2.63
The pro forma results include amortization of the intangible assets
presented above and interest expense on debt assumed to finance the
purchase. The interest expense was calculated based on the assumption
that approximately $450 million of the purchase price was financed
through debt with an annual interest rate of approximately 5%. The pro
forma results exclude the write-off of research and development assets
that were acquired from the acquisition. The number of common shares
used in basic earnings per share for 2003 and 2002 were 286.5 million
and 291.5 million, respectively. The number of common shares used in
diluted earnings per share for 2003 and 2002 were 286.6 million and
291.7 million, respectively. The pro forma results are not necessarily
indicative of what actually would have occurred if the acquisition had
been completed as of the beginning of each fiscal period presented, nor
are they necessarily indicative of future consolidated results.
165
On October 31, 2003, the Company announced that it had completed the
acquisition of Laser-Pacific Media Corporation (Laser-Pacific), a
leading Hollywood-based post-production company for approximately $31
million or $4.22 per share. At the time of the closing, Laser-Pacific
had approximately $6 million of net debt. The acquisition will allow
the Company to establish a major presence in television post-production
and further extends Kodak's current digital services capabilities in
the feature film market. Approximately $2 million of the purchase
price was allocated to customer-related intangible assets that have a
useful life of four years. Approximately $10 million of the purchase
price was allocated to goodwill, which is reported in the Company's
Photography segment. The goodwill is not expected to be deductible for
tax purposes. Earnings from continuing operations for 2003 include the
results of Laser-Pacific from the date of acquisition.
On November 26, 2003, the Company announced that it had completed the
acquisition of Algotec Systems Ltd. (Algotec), a leading developer of
advanced picture-archiving-and-communications systems (PACS) in
Raanana, Israel, for approximately $43 million in cash. The
acquisition improves the Company's position in the growing market for
Healthcare Information Systems (HCIS), which enable radiology
departments worldwide to digitally manage and store medical images and
information. The Company is currently in the process of valuing the
acquired assets and liabilities and completing the purchase price
allocation.
On December 26, 2003, an unaffiliated investor in Kodak Wuxi China
Limited (KWCL) exercised its rights under a put option arrangement,
which required Kodak to repurchase a 30% outstanding minority equity
interest in this subsidiary for approximately $15 million in cash. Due
to the timing of this acquisition, the purchase price allocation was
not complete as of December 31, 2003. Accordingly, the purchase price
in excess of the fair value of the net assets acquired of approximately
$3 million has been recorded in other long-term assets in the
accompanying Consolidated Statement of Financial Position. The
purchase price allocation will be completed in the first quarter of
2004, at which time the excess purchase price will be allocated to
goodwill and other identifiable assets.
On December 31, 2003, an unaffiliated investor in Kodak China Company
Limited (KCCL) exercised its rights under a put option arrangement,
which required Kodak to repurchase a 10% outstanding minority equity
interest in this subsidiary for approximately $42 million in cash. Due
to the timing of this acquisition, the purchase price allocation was
not complete as of December 31, 2003. Accordingly, the purchase price
in excess of the fair value of the net assets acquired of approximately
$3 million has been recorded in other long-term assets in the
accompanying Consolidated Statement of Financial Position. The
purchase price allocation will be completed in the first quarter of
2004, at which time the excess purchase price will be allocated to
goodwill and other identifiable assets.
166
During 2003, the Company completed a number of additional acquisitions
with an aggregate purchase price of approximately $3 million, which were
individually immaterial to the Company's financial position, results of
operations or cash flows.
2002
On January 24, 2002, the Company completed the acquisition of 100% of
the voting common stock of ENCAD, Inc., (ENCAD) for a total purchase
price of approximately $25 million. The purchase price was paid almost
entirely in Kodak common stock. The purchase price in excess of the
fair value of the net assets acquired of approximately $6 million has
been allocated to goodwill. Earnings from continuing operations for
2002 include the results of ENCAD from the date of acquisition.
On September 11, 2002, the Company initiated an offer to acquire all of
the outstanding minority equity interests in Kodak India Ltd., (Kodak
India), a majority owned subsidiary of the Company. The voluntary offer
to the minority equity interest holders of Kodak India was for the
acquisition of approximately 2.8 million shares representing the full
25.24% minority ownership in the subsidiary. In the fourth quarter of
2002, the Company purchased 2.1 million shares for approximately $16
million in cash. Because the purchase price allocation was not complete
as of December 31, 2002, the excess purchase price of approximately $8
million was recorded in other long-term assets in the Company's 2002
Consolidated Statement of Financial Position. Upon completion of the
purchase price allocation in 2003, the Company reclassified essentially
all of the excess purchase price to goodwill. In December 2002, the
Company also made an offer to purchase the remaining 6.04% outstanding
minority interest in Kodak India for approximately $4.9 million. This
additional repurchase was mostly completed before the end of 2003.
Kodak India operates in each of the Company's reportable segments and is
engaged in the manufacture, trading and marketing of cameras, films,
photo chemicals and other imaging products.
On December 31, 2002, an unaffiliated investor in KCCL exercised its
rights under a put option arrangement, which required Kodak to
repurchase a 10% outstanding minority equity interest in this subsidiary
for approximately $44 million in cash. Due to the timing of this
acquisition, the purchase price allocation was not complete as of
December 31, 2002. Accordingly, the purchase price in excess of the
fair value of the net assets acquired of approximately $18 million was
recorded in other long-term assets in the Company's 2002 Consolidated
Statement of Financial Position. During 2003, the Company completed the
purchase price allocation. As a result of this allocation, the Company
recorded goodwill of approximately $13 million and recognized
approximately $5 million in amortizable intangible assets.
During 2002, the Company completed a number of additional acquisitions
with an aggregate purchase price of approximately $14 million, which
were individually immaterial to the Company's financial position,
results of operations or cash flows.
167
2001
On December 4, 2001, the Company and SANYO Electric Co., Ltd. announced
the formation of a global business venture, the SK Display Corporation,
to manufacture organic light emitting diode (OLED) displays for consumer
devices such as cameras, personal data assistants (PDAs), and portable
entertainment machines. Kodak has a 34% interest in the business
venture and contributed approximately $17 million in cash to this
venture during 2003. Kodak is also committed to contribute $100 million
in loan guarantees. However, the Company was not required to make these
loan guarantees as of December 31, 2003. SANYO, which holds a 66%
interest in the business venture, contributed approximately $33 million
in cash during 2003 and is committed to contribute $194 million in loan
guarantees.
On June 4, 2001, the Company completed its acquisition of Ofoto, Inc.
The purchase price of this stock acquisition was approximately $58
million in cash. The acquisition was accounted for as a purchase with
$10 million allocated to tangible net assets, $37 million allocated to
goodwill and $11 million allocated to other intangible assets. The
acquisition of Ofoto has accelerated Kodak's growth in the online
photography market and has helped drive more rapid adoption of digital
and online services. Ofoto offers digital processing of digital images
and traditional film, top-quality prints, private online image storage,
sharing, editing and creative tools, frames, cards and other
merchandise.
On February 7, 2001, the Company completed its acquisition of
substantially all of the imaging services operations of Bell & Howell
Company. The purchase price of this stock and asset acquisition was
$141 million in cash, including acquisition and other costs of $6
million. The acquisition was accounted for as a purchase with $15
million allocated to tangible net assets, $70 million allocated to
goodwill, and $56 million allocated to other intangible assets,
primarily customer contracts. The acquired units provide customers
worldwide with maintenance for document imaging components, micrographic-
related equipment, supplies, parts and service.
During 2001, the Company also completed additional acquisitions with an
aggregate purchase price of approximately $122 million in cash and
stock, none of which were individually material to the Company's
financial position, results of operations or cash flows.
- ------------------------------------------------------------------------
168
NOTE 22: DISCONTINUED OPERATIONS
2003
During the three month period ended March 31, 2003, the Company
repurchased certain properties that were initially sold in connection
with the 1994 divestiture of Sterling Winthrop Inc., which represented
a portion of the Company's non-imaging health businesses. The
repurchase of these properties allows the Company to directly manage
the environmental remediation that the Company is required to perform
in connection with those properties, which will result in better
overall cost control (see Note 11, "Commitments and Contingencies").
In addition, the repurchase eliminated the uncertainty regarding the
recoverability of tax benefits associated with the indemnification
payments that were previously being made to the purchaser.
Accordingly, the Company reversed a tax reserve of approximately $15
million through earnings from discontinued operations in the
accompanying Consolidated Statement of Earnings for the twelve months
ended December 31, 2003, which was previously established through
discontinued operations.
During the three month period ended March 31, 2003, the Company
received cash relating to the favorable outcome of litigation
associated with the 1994 sale of Sterling Winthrop Inc. The related
gain of $19 million was recognized in loss from discontinued operations
in the Consolidated Statement of Earnings for the year ended December
31, 2002. The cash receipt is reflected in the net cash provided by
(used in) discontinued operations component in the accompanying
Consolidated Statement of Cash Flows for the twelve months ended
December 31, 2003.
During the fourth quarter of 2003, the Company recorded a net of tax
credit of $7 million through discontinued operations for the reversal
of an environmental reserve, which was primarily attributable to
positive developments in the Company's remediation efforts relating to
a formerly owned manufacturing site in the U.S. In addition, during
the fourth quarter of 2003, the Company reversed state income tax
reserves of $3 million, net of tax, through discontinued operations due
to the favorable outcome of tax audits in connection with a formerly
owned business.
2002
The net loss from discontinued operations of $23 million in the
accompanying Consolidated Statement of Earnings for the twelve months
ended December 31, 2002 reflects losses incurred from the shutdown of
Kodak Global Imaging, Inc., which amounted to $35 million net of tax,
partially offset by net of tax earnings of $12 million related to the
favorable outcome of litigation associated with the 1994 sale of
Sterling Winthrop Inc.
- ------------------------------------------------------------------------
169
NOTE 23: SEGMENT INFORMATION
Current Segment Reporting Structure
The Company currently reports financial information for three reportable
segments (Photography, Health Imaging, and Commercial Imaging) and All
Other. This operational structure, which is centered around strategic
product groups, reflects how senior management reviews the business,
makes investing and resource allocation decisions, and assesses
operating performance. 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.
The Photography segment derives revenues from consumer film products,
sales of origination and print film to the entertainment industry, sales
of professional film products, traditional and inkjet photo paper,
chemicals, traditional and digital cameras, photoprocessing equipment
and services, and digitization services, including online services. The
Health Imaging segment derives revenues from the sale of digital
products, including laser imagers, media, computed and direct
radiography equipment and healthcare information systems, as well as
traditional medical products, including analog film, equipment,
chemistry, services and specialty products for the mammography, oncology
and dental fields. The Commercial Imaging segment derives revenues from
microfilm equipment and media, wide-format inkjet printers, inks and
media, scanners, other business equipment, media sold to commercial and
government customers, long-term government contracts, and graphics film
products sold to the Kodak Polychrome Graphics joint venture. The All
Other group derives revenues from the sale of OLED displays, imaging
sensor solutions and optical products to other manufacturers.
Transactions between segments, which are immaterial, are made on a basis
intended to reflect the market value of the products, recognizing
prevailing market prices and distributor discounts. Differences between
the reportable segments' operating results and net assets and the
Company's consolidated financial statements relate primarily to items
held at the corporate level, and to other items excluded from segment
operating measurements.
No single customer represented 10% or more of the Company's total net
sales in any period presented.
Segment financial information is shown below.
170
(in millions) 2003 2002 2001
Net sales from continuing operations:
Photography $ 9,232 $ 9,002 $ 9,403
Health Imaging 2,431 2,274 2,262
Commercial Imaging 1,559 1,456 1,454
All Other 95 103 110
------- ------- -------
Consolidated total $13,317 $12,835 $13,229
======= ======= =======
Earnings from continuing operations
before interest, other charges,
net, and income taxes:
Photography $ 418 $ 771 $ 787
Health Imaging 481 431 323
Commercial Imaging 166 192 172
All Other (78) (28) (60)
------- ------- -------
Total of segments 987 1,366 1,222
Strategic asset impairments (3) (32) (12)
Impairment of Burrell Companies'
net assets held for sale (9) - -
Restructuring costs and other (557) (114) (720)
Donation to technology enterprise (8) - -
GE settlement (12) - -
Patent infringement claim settlement (14) - -
Prior year acquisition settlement (14) - -
Legal settlements (8) - -
Environmental reserve reversal 9 - -
Wolf charge - - (77)
Environmental reserve - - (41)
Kmart charge - - (20)
------- ------- -------
Consolidated total $ 371 $ 1,220 $ 352
======= ======= =======
Net earnings from continuing
operations:
Photography $ 347 $ 550 $ 535
Health Imaging 382 313 221
Commercial Imaging 99 83 84
All Other (73) (23) (38)
------- ------- -------
Total of segments 755 923 802
Strategic asset and venture
investment impairments (7) (50) (15)
Impairment of Burrell Companies'
net assets held for sale (9) - -
Restructuring costs and other (557) (114) (720)
Donation to technology enterprise (8) - -
GE settlement (12) - -
Patent infringement claim settlement (14) - -
Prior year acquisition settlement (14) - -
Legal settlements (8) - -
Environmental reserve reversal 9 - -
Wolf charge - - (77)
Environmental reserve - - (41)
Kmart charge - - (20)
Interest expense (148) (173) (219)
Other corporate items 11 14 8
Tax benefit - contribution of patents 13 - -
Tax benefit - PictureVision
subsidiary closure - 45 -
Tax benefit - Kodak Imagex Japan - 46 -
Income tax effects on above items
and taxes not allocated to segments 227 102 363
------- ------- -------
Consolidated total $ 238 $ 793 $ 81
======= ======= =======
171
(in millions) 2003 2002 2001
Segment total assets:
Photography $ 8,905 $ 8,798 $ 9,255
Health Imaging 2,600 2,011 2,038
Commercial Imaging 1,396 1,405 1,438
All Other 10 66 (16)
------- ------- -------
Total of segments 12,911 12,280 12,715
LIFO inventory reserve (362) (392) (444)
Cash and marketable securities 1,261 577 451
Deferred income tax assets 988 933 722
Other corporate assets/(reserves) 20 (29) (82)
------- ------- -------
Consolidated total assets $14,818 $13,369 $13,362
======= ======= =======
Depreciation expense from continuing
operations:
Photography $ 646 $ 634 $ 599
Health Imaging 105 107 96
Commercial Imaging 69 74 69
All Other 10 3 1
------- ------- -------
Consolidated total $ 830 $ 818 $ 765
======= ======= =======
Goodwill amortization expense from
continuing operations:
Photography $ - $ - $ 110
Health Imaging - - 28
Commercial Imaging - - 15
All Other - - -
------- ------- -------
Consolidated total $ - $ - $ 153
======= ======= =======
Capital additions from continuing
operations:
Photography $ 377 $ 408 $ 555
Health Imaging 81 81 128
Commercial Imaging 39 83 56
All Other 9 5 4
------- ------- -------
Consolidated total $ 506 $ 577 $ 743
======= ======= =======
172
(in millions) 2003 2002 2001
Net sales to external customers attributed to (1):
The United States $ 5,858 $ 6,008 $ 6,419
Europe, Middle East and Africa 3,794 3,363 3,275
Asia Pacific 2,347 2,242 2,215
Canada and Latin America 1,318 1,222 1,320
------- ------- -------
Consolidated total $13,317 $12,835 $13,229
======= ======= =======
(1) Sales are reported in the geographic area in which they originate.
Property, plant and equipment, net located in:
The United States $ 3,217 $ 3,501 $ 3,738
Europe, Middle East and Africa 734 769 672
Asia Pacific 920 943 977
Canada and Latin America 223 207 272
------- ------- -------
Consolidated total $ 5,094 $ 5,420 $ 5,659
======= ======= =======
New Kodak Operating Model and Change in Reporting Structure
As of and for the year ended December 31, 2003, the Company reported
financial information for three reportable segments (Photography,
Health Imaging and Commercial Imaging) and All Other. However, in
August of 2003, the Company announced the realignment of its operations
to accelerate growth in the commercial and consumer digital imaging
markets. In connection with the realignment, the Company's new
reporting structure will be implemented beginning in the first quarter
of 2004 as outlined below:
Digital and Film Imaging Systems Segment: The Digital and Film Imaging
Systems segment comprises the same products and services as the current
Photography segment without change.
Health Imaging Segment: There were no changes to the Health Imaging
segment.
Commercial Imaging Segment: Subsequent to the realignment, the
Commercial Imaging segment is composed of document imaging products and
services, commercial and government systems products and services, and
optics. Prior to the realignment, optics was included in All Other.
Beginning in the first quarter of 2004, this segment will exclude the
results of Remote Sensing Systems and Research Systems, Inc., which
were part of the commercial and government systems products and
services, as a result of the sale of these businesses to ITT
Industries, Inc. that was announced in February 2004.
173
Commercial Printing Segment: As of January 1, 2004, the Commercial
Printing Segment is composed of the Company's equity investments in
NexPress (Kodak's 50/50 joint venture with Heidelberg) and Kodak
Polychrome Graphics (Kodak's 50/50 joint venture with Sun Chemical),
and the graphics and wide-format inkjet businesses. All of the above
were formerly included in the Commercial Imaging Segment prior to the
realignment. This segment will also include the results of Scitex
Digital Printing, which was acquired in January 2004 and has since been
renamed Kodak Versamark, and the results of Heidelberg Digital LLC and
Heidelberg's 50% share of NexPress upon the closing of this
acquisition, which is expected to occur in May 2004.
All Other: All Other is composed of Kodak's display and components
business for organic light emitting diode (OLED) displays, sensors and
other small, miscellaneous businesses.
174
NOTE 24: QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
(in millions, except per share data)
2003
Net sales from continuing
operations $3,778 $3,447 $3,352 $2,740
Gross profit from continuing
operations 1,217 1,127 1,116 824
Earnings (loss) from continuing
operations 7 (5) 122 (4) 112 (3) (3)(1)
Earnings from discontinued
operations (10) 12 (6) - - 15 (2)
Net earnings 19 122 112 12
Basic and diluted net earnings
(loss) per share (11)
Continuing operations .03 .42 .39 (.01)
Discontinued operations .04 .00 .00 .05
Total .07 .42 .39 .04
2002
Net sales from continuing
operations $3,441 $3,352 $3,336 $2,706
Gross profit from continuing
operations 1,206 1,290 1,254 860
Earnings from continuing
operations 130 (9) 336 (8) 286 (7) 41
Loss from discontinued
operations (10) (17) (2) (2) (2)
Net earnings 113 334 284 39
Basic and diluted net earnings
(loss) per share (11)
Continuing operations .45 1.16 .98 .14
Discontinued operations (.06) (.01) (.01) (.01)
Total .39 1.15 .97 .13
- --------------------------------------------------------------------------
(1) Includes $46 million ($14 million included in cost of goods sold and
$32 million included in restructuring costs and other) of restructuring
charges, which reduced net earnings by $30 million; $21 million of
purchased R&D, which reduced net earnings by $13 million; $12 million
(included in SG&A) for a charge related to an intellectual property
settlement, which reduced net earnings by $7 million; and an $8 million
(included in benefit for income taxes) tax benefit related to the
donation of certain patents.
(2) Represents the reversal of a tax reserve resulting from the
Company's repurchase of certain properties that were initially sold
in connection with the 1994 divestiture of Sterling Winthrop Inc.
(3) Includes $54 million ($10 million included in cost of goods sold and
$44 million included in restructuring costs and other) of
restructuring charges, which reduced net earnings by $36 million; $14
million (included in SG&A) for a charge connected with the settlement
of a patent infringement claim, which reduced net earnings by $9
million; $14 million (included in SG&A) for a charge connected with a
prior-year acquisition, which reduced net earnings by $9 million; and
$9 million (included in SG&A) for a charge to write down certain
assets held for sale following the acquisition of the Burrell
Companies, which reduced net earnings by $6 million.
175
(4) Includes $185 million ($33 million included in cost of goods sold
and $152 million included in restructuring costs and other) of
restructuring charges, which reduced net earnings by $125 million;
and $8 million (included in SG&A) for a donation to a technology
enterprise, which reduced net earnings by $5 million.
(5) Includes $272 million ($16 million included in cost of goods sold
and $256 million included in restructuring costs and other) of
restructuring charges, which reduced net earnings by $187 million; $8
million (included in SG&A) for legal settlements, which reduced net
earnings by $5 million; $3 million (included in SG&A) for strategic
asset impairments, which reduced net earnings by $2 million; $4
million (included in other charges) for non-strategic asset write-
downs, which reduced net earnings by $2 million; $10 million of
purchased R&D (included in R&D), which reduced net earnings by $6
million; a $9 million reversal (included in SG&A) for an
environmental reserve, which increased net earnings by $6 million;
and a $5 million (included in benefit for income taxes) tax benefit
related to the donation of certain patents.
(6) Includes $12 million for the reversal of environmental reserves at a
formerly owned manufacturing site, which increased net earnings by $7
million; and a $3 million increase to net earnings in relation to the
reversal of state income tax reserves.
(7) Includes $13 million ($10 million included in SG&A and $3 million
included in other charges) for a charge related to asset impairments,
which reduced net earnings by $9 million; and a $45 million (included
in provision for income taxes) tax benefit related to the closure of
the Company's PictureVision subsidiary.
(8) Includes $29 million (included in restructuring costs and other)
reversal of restructuring charges related to costs originally
recorded as part of the Company's 2001 restructuring programs, which
increased net earnings by $18 million; $20 million (included in
restructuring costs and other) of restructuring costs, which reduced
net earnings by $20 million; $21 million ($13 million included in
SG&A and $8 million included in other charges) for a charge related
to asset impairments, which reduced net earnings by $13 million; and
a $46 million (included in provision for income taxes) tax benefit
related to the consolidation of its photofinishing operations in
Japan.
(9) Includes $123 million ($16 million included in cost of goods sold
and $107 million included in restructuring costs and other) of
restructuring charges, which reduced net earnings by $78 million; $16
million ($9 million included in SG&A and $7 million included in other
charges) for a charge related to asset impairments and other asset
write-offs, which reduced net earnings by $12 million; and a $30
million (included in provision for income taxes) tax benefit related
to changes in the corporate tax rate and asset write-offs.
(10)Refer to Note 22, "Discontinued Operations" for a discussion
regarding loss from discontinued operations.
(11)Each quarter is calculated as a discrete period and the sum of the
four quarters may not equal the full year amount.
Changes in Estimates Recorded During the Fourth Quarter Ended December 31,
2003
During the fourth quarter ended December 31, 2003, the Company recorded
approximately $38 million relating to changes in estimates with respect
to certain of its employee benefit and incentive compensation accruals.
These changes in estimates favorably impacted the results for the
fourth quarter by $.11 per share.
176
NOTE 25: SUBSEQUENT EVENTS
On October 22, 2003, the Company announced that it signed a 20-year
agreement with China Lucky Film Corp. On February 10, 2004, the
Chinese government approved the Company's acquisition of 20 percent of
Lucky Film Co. Ltd. (Lucky Film), the largest maker of photographic
film in China, in exchange for approximately $100 million in cash, plus
approximately $30 million in additional net cash to build and upgrade
manufacturing assets, and other Kodak assets. Also, under the
arrangement, the Company will provide Lucky Film with technical
support, training and equipment upgrades, and Lucky Film will pay Kodak
a royalty fee for the use of certain of the Company's technologies as
well as dividends on the Lucky Film shares that Kodak will acquire.
On November 25, 2003, the Company announced that it had entered an
agreement to acquire the assets of Scitex Digital Printing (SDP) from
its parent for $250 million, net of any cash on hand at closing which
totaled approximately $13 million, resulting in a net cash price of
$237 million. SDP is the leading supplier of high-speed, continuous
inkjet printing systems, primarily serving the commercial and
transactional printing sectors. Customers use SDP's products to print
utility bills, banking and credit card statements, direct mail
materials, as well as invoices, financial statements and other
transactional documents. The acquisition will provide the Company with
additional capabilities in the transactional printing and direct mail
sectors while creating another path to commercialize proprietary inkjet
technology. The acquisition was completed on January 5, 2004. Kodak
is in the process of obtaining a third-party valuation to assist in the
purchase price allocation.
On February 9, 2004, the Company announced its intent to sell the
assets and business of the Remote Sensing Systems operation, including
the stock of Kodak's wholly owned subsidiary, Research Systems, Inc.,
collectively known as RSS, to ITT Industries for $725 million in cash.
RSS, a leading provider of specialized imaging solutions to the
aerospace and defense community, is part of the Company's Commercial &
Government Systems' operation within the Commercial Imaging segment and
its customers include NASA, other U.S. government agencies, and
aerospace and defense companies. Kodak's RSS operation had sales in
2003 of approximately $425 million. The sale of RSS is expected to
result in an after-tax gain of approximately $390 million (unaudited).
The after-tax gain excludes the potential impacts from any settlement
or curtailment gains or losses that may be incurred in connection
with the Company's pension and postretirement benefit plans, as these
amounts are not currently determinable. The Company is currently
evaluating whether the sale of RSS will be accounted for as a
discontinued operation beginning in the first quarter of 2004 in
accordance with SFAS No. 144.
177
On March 8, 2004, the Company announced that it had agreed with
Heidelberger Druckmaschinen AG (Heidelberg) to purchase Heidelberg's 50
percent interest in NexPress Solutions LLC, a 50/50 joint venture of
Kodak and Heidelberg that makes high-end, on-demand digital color
printing systems, and the equity of Heidelberg Digital LLC, a leading
maker of digital black-and-white variable-data printing systems. Kodak
also will acquire NexPress GmbH, a German subsidiary of Heidelberg that
provides engineering and development support, and certain inventory,
assets, and employees of Heidelberg's regional operations or market
centers. The Company will not pay any cash at closing for the
businesses being acquired. Under the terms of the acquisition, Kodak
and Heidelberg agreed to use a performance-based earn-out formula
whereby Kodak will make periodic payments to Heidelberg over a two-year
period, if certain sales goals are met. If all sales goals are met
during the next two calendar years ending December 31, 2005, the
Company will pay a maximum of $150 million in cash. Additional
payments may also be made if certain sales goals are met during a five-
year period following the closing of the transaction. This
acquisition, which is expected to close in May 2004, advances the
Company's strategy of diversifying its business portfolio, and
accelerates its participation in the digital commercial printing
industry.
178
Eastman Kodak Company
SUMMARY OF OPERATING DATA (in millions, except per share data,
shareholders, and employees)
2003 2002 2001 2000 1999
Net sales from continuing
operations $13,317 $12,835 $13,229 $13,994 $14,089
Earnings from continuing
operations before interest,
other charges, net,
and income taxes 371 1,220 352 2,214 1,990
Earnings (loss) from:
Continuing operations 238 (1) 793(2) 81(3) 1,407(4) 1,392(5)
Discontinued operations 27 (6) (23)(6) (5)(6) - -
NET EARNINGS 265 770 76 1,407 1,392
EARNINGS AND DIVIDENDS
Net earnings
- % of sales 2.0% 6.0% 0.6% 10.1% 9.9%
- % return on average
shareholders' equity 8.8% 27.2% 2.4% 38.3% 35.2%
Basic earnings (loss) per
share:
Continuing operations .83 2.72 .28 4.62 4.38
Discontinued operations .09 (.08) (.02) - -
Total .92 2.64 .26 4.62 4.38
Diluted earnings (loss) per
share:
Continuing operations .83 2.72 .28 4.59 4.33
Discontinued operations .09 (.08) (.02) - -
Total .92 2.64 .26 4.59 4.33
Cash dividends declared and
paid
- on common shares 330 525 643 545 563
- per common share 1.15 1.80 2.21 1.76 1.76
Common shares outstanding at
year end 286.6 285.9 290.9 290.5 310.4
Shareholders at year end 85,712 89,988 91,893 113,308 131,719
STATEMENT OF FINANCIAL
POSITION DATA
Operational working
capital (7) $ 1,094 $ 474 $ 797 $ 1,420 $ 777
Working capital 148 (968) (737) (786) (385)
Property, plant and
equipment, net 5,094 5,420 5,659 5,919 5,947
Total assets 14,818 13,494 13,362 14,212 14,370
Short-term borrowings
and current portion of
long-term debt 946 1,442 1,534 2,206 1,163
Long-term debt, net of
current portion 2,302 1,164 1,666 1,166 936
Total shareholders' equity 3,264 2,777 2,894 3,428 3,912
SUPPLEMENTAL INFORMATION
Net sales from continuing
operations - Photography $ 9,232 $ 9,002 $ 9,403 $10,231 $10,265
- Health Imaging 2,431 2,274 2,262 2,220 2,159
- Commercial
Imaging 1,559 1,456 1,454 1,417 1,479
- All Other 95 103 110 126 186
Research and development
costs 781 762 779 784 817
Depreciation 830 818 765 738 773
Taxes (excludes payroll,
sales and excise taxes) 24 288 154 933 806
Wages, salaries and employee
benefits 4,090 3,991 3,824 3,726 3,962
Employees at year end
- in the U.S. 35,400 39,000 42,000 43,200 43,300
- worldwide 63,900 70,000 75,100 78,400 80,650
(see footnotes on next page)
179
SUMMARY OF OPERATING DATA
Eastman Kodak Company
(footnotes for previous page)
(1) Includes $557 million of restructuring charges; $31 million of
purchased R&D; $7 million for a charge related to asset impairments
and other asset write-offs; a $12 million charge related to an
intellectual property settlement; $14 million for a charge connected
with the settlement of a patent infringement claim; $14 million for
a charge connected with a prior-year acquisition; $9 million for a
charge to write down certain assets held for sale following the
acquisition of the Burrell Companies; $8 million for a donation to a
technology enterprise; $8 million for legal settlements; a $9
million reversal for an environmental reserve; and a $13 million tax
benefit related to patent donations. These items reduced net
earnings by $423 million.
(2) Includes $143 million of restructuring charges; $29 million
reversal of restructuring charges; $50 million for a charge related
to asset impairments and other asset write-offs; and a $121 million
tax benefit relating to the closure of the Company's PictureVision
subsidiary, the consolidation of the Company's photofinishing
operations in Japan, asset write-offs and a change in the corporate
tax rate. These items improved net earnings by $7 million.
(3) Includes $678 million of restructuring charges; $42 million for a
charge related to asset impairments associated with certain of the
Company's photofinishing operations; $15 million for asset
impairments related to venture investments; $41 million for a charge
for environmental reserves; $77 million for the Wolf bankruptcy; a
$20 million charge for the Kmart bankruptcy; $18 million of
relocation charges related to the sale and exit of a manufacturing
facility; an $11 million tax benefit related to a favorable tax
settlement; and a $20 million tax benefit representing a decline in
the year-over-year effective tax rate. These items reduced net
earnings by $594 million.
(4) Includes accelerated depreciation and relocation charges related to
the sale and exit of a manufacturing facility of $50 million, which
reduced net earnings by $33 million.
(5) Includes $350 million of restructuring charges, and an additional
$11 million of charges related to this restructuring program; $103
million of charges associated with business exits; a gain of $95
million on the sale of The Image Bank; and a gain of $25 million on
the sale of the Motion Analysis Systems Division. These items
reduced net earnings by $227 million.
(6) Refer to Note 22, "Discontinued Operations" for a discussion
regarding the earnings (loss) from discontinued operations.
(7) Excludes short-term borrowings and current portion of long-term
debt.
180
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of
the Company's disclosure controls and procedures were effective. There
has been no change in the Company's internal control over financial
reporting that occurred during the quarter covered by this report that
has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
- ----------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 regarding directors is incorporated
by reference from the information under the caption "Board Structure and
Corporate Governance - Board of Directors" in the Company's Notice of
2004 Annual Meeting and Proxy Statement (the Proxy Statement), which
will be filed within 120 days after December 31, 2003. The information
required by Item 10 regarding audit committee financial expert
disclosure is incorporated by reference from the information under the
caption "Board Structure and Corporate Governance - Audit Committee
Financial Qualifications" in the Proxy Statement. The information
required by Item 10 regarding executive officers is contained in Part I
under the caption "Executive Officers of the Registrant" on page 16.
The information required by Item 10 regarding the Company's written code
of ethics is incorporated by reference from the information under the
captions "Board Structure and Corporate Governance - Corporate
Governance Guidelines" and "Board Structure and Corporate Governance -
Business Conduct Guide and Directors' Code of Conduct."
- ------------------------------------------------------------------------
181
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information under the following captions in the Proxy Statement: "Board
Structure and Corporate Governance - Director Compensation," "Compensation
of Named Executive Officers," "Summary Compensation Table," "Option/SAR
Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in Last
Fiscal Year and Fiscal Year-End Option/SAR Values," "Stock Options
Outstanding under Shareholder and Non-Shareholder Approved Plans," "Long-
Term Incentive Plan," "Long-Term Incentive Plan - Awards in Last Fiscal
Year," "Employment Contracts and Arrangements," "Change in Control
Arrangements," "Retirement Plan," "Report of the Executive Compensation
and Development Committee," and "Performance Graph - Shareholder Return."
- --------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
information under the caption "Beneficial Security Ownership of Directors,
Nominees and Executive Officers" in the Proxy Statement.
- --------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None to report.
- -------------------------------------------------------------------------
ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES
The information required by Item 14 regarding principal auditor fees and
services is incorporated by reference from the information under the
caption "Report of the Audit Committee" in the Proxy Statement.
182
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page No.
(a) 1. Consolidated financial statements:
Report of independent auditors 92
Consolidated statement of earnings 93
Consolidated statement of financial position 94
Consolidated statement of shareholders' equity 95-97
Consolidated statement of cash flows 98-99
Notes to financial statements 100-177
2. Financial statement schedules:
II - Valuation and qualifying accounts 185
All other schedules have been omitted because they are
not applicable or the information required is shown in
the financial statements or notes thereto.
3. Additional data required to be furnished:
Exhibits required as part of this report are listed in the
index appearing on pages 186 through 193.
(b) Report on Form 8-K.
On October 7, 2003, the Company filed under Item 5 the October 6,
2003 press release announcing its intention to offer up to $575
million of Convertible Senior Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933. On
October 7, the Company also filed exhibits under Item 7 relating to
the 5-Year and the 364-Day Credit Agreements between Eastman Kodak
Company, the banks, and others.
On October 10, 2003, the Company filed under Item 5 the press
release announcing the completion of the private placement of $575
million of 3.375% Convertible Senior Notes due 2033 to qualified
institutional buyers pursuant to Rule 144A under the Securities Act
of 1933. On October 10, the Company also filed exhibits under Item
7 for certain agreements and instruments related to this
transaction.
On October 10, 2003, the Company filed under Item 5 the press release
announcing the completion of the offering and sale of $500 million
of 7.25% Senior Notes due 2013 made pursuant to the Company's
registration statement on Form S-3. On October 10, the Company also
filed exhibits under Item 7 for certain agreements, instruments, and
calculations related to this transaction.
On October 22, 2003, the Company furnished (not filed) pursuant to
Item 12 under Item 9 (in accordance with the interim filing guidance
for these items) the press release and related financial discussion
document relating to the results of its third fiscal quarter ended
September 30, 2003, which was also filed as an exhibit under Item 7.
183
On December 17, 2003, the Company filed a report on Form 8-K under
Item 5 announcing that the Board of Directors approved a number of
changes to the Company's by-laws and amended and restated the by-
laws to effect those changes. The Company also filed an exhibit
under Item 7 relating to the amended and restated by-laws.
On December 29, 2003, the Company filed a report on Form 8-K under
Item 4 announcing that the Company's management approved a change
in the independent accountants of the Eastman Kodak Employees'
Savings and Investment Plan from PricewaterhouseCoopers LLP to
Insero, Kasperski, Ciaccia & Co., P.C. for the fiscal year ending
December 30, 2003. The Company also filed an exhibit under Item 7
relating to the letter from the prior independent accountants.
184
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: By:
Daniel A. Carp Robert H. Brust
Chairman & Chief Executive Officer Chief Financial Officer, and
Executive Vice President
Richard G. Brown
Chief Accounting Officer, and
Corporate Controller
Date: March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Richard S. Braddock, Director Durk I. Jager, Director
William W. Bradley, Director Debra L. Lee, Director
Daniel A. Carp, Director Delano E. Lewis, Director
Martha Layne Collins, Director Paul H. O'Neill, Director
Timothy M. Donahue, Director Hector de J. Ruiz, Director
William H. Hernandez, Director Laura D'Andrea Tyson, Director
Date: March 15, 2004
185
Schedule II
Eastman Kodak Company
Valuation and Qualifying Accounts
(in millions)
Balance at Balance
Beginning Charges Amounts at End of
of Period to Earnings Written Off Period
Year ended December 31, 2003
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $104 $ 28 $56 $ 76
Reserve for loss on
returns and allowances 33 17 14 36
---- ---- --- ----
TOTAL $137 $ 45 $70 $112
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 53 $ 4 $41 $ 16
==== ==== === ====
Year ended December 31, 2002
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $ 92 $ 92 $80 $104
Reserve for loss on
returns and allowances 17 17 1 33
---- ---- --- ----
TOTAL $109 $109 $81 $137
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 51 $ 13 $11 $ 53
==== ==== === ====
Year ended December 31, 2001
Deducted in the Statement
of Financial Position:
From Current Receivables
Reserve for doubtful
accounts $ 62 $ 95 $65 $ 92
Reserve for loss on
returns and allowances 27 12 22 17
---- ---- --- ----
TOTAL $ 89 $107 $87 $109
==== ==== === ====
From Long-Term Receivables
and Other Noncurrent
Assets
Reserve for doubtful
accounts $ 8 $ 46 $ 3 $ 51
==== ==== === ====
186
Eastman Kodak Company
Index to Exhibits
Exhibit
Number
(3) A. Certificate of Incorporation.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 25, 1988, Exhibit 3.)
B. By-laws, as amended through December 16, 2003.
(Incorporated by reference to the Eastman Kodak Company
Current Report on Form 8-K for the date December 16, 2003
as filed on December 17, 2003, Exhibit 3.)
(4) A. Indenture dated as of January 1, 1988 between Eastman Kodak
Company as issuer of (i) 9.95% Debentures Due 2018, (ii) 9
1/2% Notes Due 2008, (iii) 9.20% Debentures Due 2021, and
(iv) 7.25% Notes Due 2005, and The Bank of New York as
Trustee.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 25, 1988, Exhibit 4.)
B. First Supplemental Indenture dated as of September 6, 1991
and Second Supplemental Indenture dated as of September 20,
1991, each between Eastman Kodak Company and The Bank of New
York as Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, Exhibit 4.)
C. Third Supplemental Indenture dated as of January 26, 1993,
between Eastman Kodak Company and The Bank of New York as
Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, Exhibit 4.)
D. Fourth Supplemental Indenture dated as of March 1, 1993,
between Eastman Kodak Company and The Bank of New York as
Trustee, supplementing the Indenture described in A.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, Exhibit 4.)
187
Eastman Kodak Company
Index to Exhibits
Exhibit
Number
(4) E. Five-Year Credit Agreement among Eastman Kodak Company,
The Banks named therein, J.P. Morgan Securities Inc. as
Syndication Agent and Citibank, N.A. as Administrative
Agent, Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc. as Co-Advisors, Co-Lead Arrangers and Co-
Bookrunners, dated as of July 13, 2001, $1,225,000,000.
(Incorporated by reference to the Eastman Kodak Company
Current Report on Form 8-K for the date October 6, 2003
as filed on October 7, 2003, Exhibit 4.)
F. AMENDMENT NO. 1 to the Five-Year Credit Agreement among
Eastman Kodak Company, The Banks named therein, J.P.
Morgan Securities Inc. as Syndication Agent and Citibank,
N.A. as Administrative Agent, Salomon Smith Barney Inc.
and J.P. Morgan Securities Inc. as Co-Advisors, Co-Lead
Arrangers and Co-Bookrunners, dated as of July 12, 2002,
$1,225,000,000.
(Incorporated by reference to the Eastman Kodak Company
Current Report on Form 8-K for the date October 6, 2003
as filed on October 7, 2003, Exhibit 4.)
G. 364-Day Credit Agreement among Eastman Kodak Company,
The Banks named therein, Citibank, N.A., as
Administrative Agent, BNP Paribas as Syndication Agent
and The Bank of Nova Scotia as Documentation Agent,
Citigroup Global Markets Inc. and Scotia Capital as Joint
Lead Arrangers, Citigroup Global Markets Inc. as
Bookrunner, dated as of July 11, 2003, $1,000,000,000.
(Incorporated by reference to the Eastman Kodak Company
Current Report on Form 8-K for the date October 6, 2003
as filed on October 7, 2003, Exhibit 4.)
H. Form of the 7.25% Senior Notes due 2013.
(Incorporated by reference to the Eastman Kodak Company
Current Report on Form 8-K for the date October 10, 2003
as filed on October 10, 2003, Exhibit 4.)
I. Resolutions of the Committee of the Board of Directors
of Eastman Kodak Company, adopted on October 7, 2003,
establishing the terms of the Securities.
(Incorporated by reference to the Eastman Kodak Company
Current Report on Form 8-K for the date October 10, 2003
as filed on October 10, 2003, Exhibit 4.)
J. Fifth Supplemental Indenture, dated October 10, 2003,
between Eastman Kodak Company and The Bank of New York,
as Trustee.
(Incorporated by reference to the Eastman Kodak Company
Current Report on Form 8-K for the date October 10, 2003
as filed on October 10, 2003, Exhibit 4.)
188
Eastman Kodak Company
Index to Exhibits (continued)
Exhibit
Number
Eastman Kodak Company and certain subsidiaries are parties to
instruments defining the rights of holders of long-term debt
that was not registered under the Securities Act of 1933.
Eastman Kodak Company has undertaken to furnish a copy of
these instruments to the Securities and Exchange Commission
upon request.
(10) B. Eastman Kodak Company Insurance Plan for Directors.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 29, 1985, Exhibit 10.)
C. Eastman Kodak Company Deferred Compensation Plan for
Directors, as amended February 11, 2000.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999, and the Eastman Kodak Company Annual
Report on Form 10-K for the fiscal year ended December 31,
1999, Exhibit 10.)
E. 1982 Eastman Kodak Company Executive Deferred
Compensation Plan, as amended effective December 9, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999, and the
Eastman Kodak Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, Exhibit 10.)
G. Eastman Kodak Company 1990 Omnibus Long-term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997, the Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1998, the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999, the Annual Report on Form
10-K for the fiscal year ended December 31, 1999, and the
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
189
Eastman Kodak Company
Index to Exhibits (continued)
Exhibit
Number
I. Eastman Kodak Company 1995 Omnibus Long-Term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, the Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1998, the
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998, the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998, the Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1999, the Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, and the Annual Report on Form 10-K
for the fiscal year ended December 31, 2001, Exhibit 10.)
J. Kodak Executive Financial Counseling Program.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, Exhibit 10.)
K. Personal Umbrella Liability Insurance Coverage.
Eastman Kodak Company provides $5,000,000 personal umbrella
liability insurance coverage to its directors and
approximately 160 key executives. The coverage, which is
insured through The Mayflower Insurance Company, Ltd.,
supplements participants' personal coverage. The Company
pays the cost of this insurance. Income is imputed to
participants.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, Exhibit 10.)
L. Kodak Executive Health Management Plan, as amended
effective January 1, 1995.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and the Annual Report on Form 10-K for
the fiscal year ended December 31, 2001, Exhibit 10.)
M. Martin M. Coyne Agreement dated November 9, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
190
Eastman Kodak Company
Index to Exhibits (continued)
Exhibit
Number
N. Kodak Stock Option Plan, as amended and restated August
26, 2002.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, Exhibit 10.)
O. Eastman Kodak Company 1997 Stock Option Plan, as amended
effective as of March 13, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2001, Exhibit 10.)
P. Eric Steenburgh Agreement dated March 12, 1998.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998, Exhibit 10.)
Notice of Award of Restricted Stock Units dated February 11,
2000 under the 2000 Omnibus Long-Term Compensation Plan.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000, Exhibit 10.)
Amendment, dated December 1, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
Letter, dated December 28, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
Q. Eastman Kodak Company 2001 Short-Term Variable Pay to
Named Executive Officers.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2002, Exhibit 10.)
191
Eastman Kodak Company
Index to Exhibits (continued)
Exhibit
Number
R. Eastman Kodak Company 2000 Omnibus Long-Term Compensation
Plan, as amended effective as of November 12, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999, and the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, the Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, and
the Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
S. Executive Compensation for Excellence and Leadership Plan,
(formerly known as the 2000 Management Variable Compensation
Plan), as amended and restated effective as of January 1, 2002.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2002, Exhibit 10.)
Amendment, effective January 1, 2004.
T. Eastman Kodak Company Executive Protection Plan, effective
July 25, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and the Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2001, Exhibit 10.)
U. Eastman Kodak Company Estate Enhancement Plan, as adopted
effective March 6, 2000.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
V. Michael P. Morley Agreement dated March 13, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, Exhibit 10.)
Amendment, dated February 19, 2003, to Agreement dated
March 13, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, Exhibit 10.)
Amendment, dated October 23, 2003, to Agreement dated
March 13, 2001.
192
Eastman Kodak Company
Index to Exhibits (continued)
Exhibit
Number
W. Daniel A. Carp Agreement dated November 22, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
$1,000,000 Promissory Note dated March 2, 2001.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, Exhibit 10.)
X. Robert H. Brust Agreement dated December 20, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Exhibit 10.)
Amendment, dated February 8, 2001, to Agreement dated
December 20, 1999.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001, Exhibit 10.)
Amendment, dated November 12, 2001, to Agreement dated
December 20, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Exhibit 10.)
Amendment, dated October 2, 2003, to Agreement dated
December 20, 1999.
Y. Patricia F. Russo Agreement dated April 1, 2001.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001, Exhibit 10.)
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of Eastman Kodak Company.
(23) Consent of Independent Accountants.
193
Eastman Kodak Company
Index to Exhibits (continued)
Exhibit
Number
(31.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(31.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(32.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(32.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.