Kodak 2002 Annual Report Download - page 8

Financials
8
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 analysis 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.
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 perform the second step in its assessment
process and 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 analysis 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 Kodak’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 none of the 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 area 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 $29 million at
December 31, 2002.
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, 2002, the Company has deferred
tax assets for its net operating loss and foreign tax credit
carryforwards of $16 million and $99 million, respectively,
relating to which the Company has a valuation allowance of $16
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 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
will pay dividends to the U.S. Material changes in the Company’s
working capital and long-term investment requirements could
impact the level and source of future remittances and, as a
result, the Company’s effective tax rate. See Note 13, “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