Kodak 2004 Annual Report Download - page 16

Financials
14
E A S T M A N฀ K OD A K ฀ C O M PA N Y
year.฀These฀decreases฀were฀partially฀offset฀by฀unfavorable฀exchange฀of฀$69฀
million฀and฀SG&A฀expense฀of฀acquisitions฀of฀$192฀million.฀฀฀฀
฀
Research฀and฀Development฀Costs฀฀Research฀and฀development฀(R&D)฀
costs฀were฀$854฀million฀for฀2004฀as฀compared฀with฀$776฀million฀for฀2003,฀
representing฀an฀increase฀of฀$78฀million,฀or฀10%.฀The฀increase฀in฀R&D฀is฀
primarily฀due฀to฀increased฀spending฀to฀drive฀growth฀in฀digital฀product฀areas฀
as฀well฀as฀acquisition-related฀R&D,฀partially฀offset฀by฀reductions฀in฀spend-
ing฀on฀traditional฀products.฀Write-offs฀for฀in-process฀R&D฀associated฀with฀
acquisitions฀made฀in฀the฀current฀year฀were฀$15฀million฀compared฀with฀$31฀
million฀in฀the฀prior฀year.฀As฀a฀percentage฀of฀sales,฀R&D฀costs฀remained฀flat฀
at฀6%฀for฀both฀the฀current฀and฀prior฀years.
Earnings฀(Losses)฀From฀Continuing฀Operations฀Before฀Interest,฀
Other฀Income฀(Charges),฀Net฀and฀Income฀Taxes฀฀Losses฀from฀con-
tinuing฀operations฀before฀interest,฀other฀income฀(charges),฀net฀and฀income฀
taxes฀for฀2004฀were฀$87฀million฀as฀compared฀with฀earnings฀of฀$302฀million฀
for฀2003,฀representing฀a฀decrease฀of฀$389฀million,฀or฀129%.฀The฀decrease฀
is฀primarily฀attributable฀to฀the฀reasons฀described฀above.฀
Interest฀Expense฀฀Interest฀expense฀for฀2004฀was฀$168฀million฀as฀com-
pared฀with฀$147฀million฀for฀2003,฀representing฀an฀increase฀of฀$21฀million,฀
or฀14%.฀The฀increase฀in฀interest฀expense฀is฀almost฀entirely฀attributable฀to฀
higher฀average฀interest฀rates฀resulting฀from฀the฀replacement฀of฀commercial฀
paper฀debt฀with฀the฀Senior฀Notes฀and฀Convertible฀Senior฀Notes฀issued฀in฀
October฀2003.฀
Other฀Income฀(Charges),฀Net฀฀The฀other฀income฀(charges),฀net฀compo-
nent฀includes฀investment฀income,฀income฀and฀losses฀from฀equity฀invest-
ments,฀gains฀and฀losses฀on฀foreign฀exchange฀and฀on฀the฀sales฀of฀assets฀
and฀investments,฀and฀other฀miscellaneous฀income฀and฀expense฀items.฀฀
Other฀income฀for฀the฀current฀year฀was฀$161฀million฀as฀compared฀with฀a฀net฀
charge฀of฀$51฀million฀for฀2003.฀The฀increase฀in฀income฀is฀primarily฀attribut-
able฀to฀the฀proceeds฀from฀two฀favorable฀legal฀settlements,฀increased฀in-
come฀from฀the฀Company’s฀equity฀investment฀in฀Kodak฀Polychrome฀Graphics฀
(KPG),฀and฀in฀the฀prior฀year,฀the฀NexPress฀investments฀were฀accounted฀for฀
under฀the฀equity฀method฀and฀included฀in฀other฀income฀(charges),฀net.฀As฀a฀
result฀of฀the฀Company’s฀purchase฀of฀Heidelberg’s฀50฀percent฀interest฀in฀the฀
NexPress฀joint฀venture,฀which฀closed฀in฀May฀2004,฀NexPress฀is฀consoli-
dated฀in฀the฀Company’s฀Statement฀of฀Earnings฀for฀the฀remaining฀portion฀of฀
the฀year฀and฀included฀in฀the฀Graphic฀Communications฀segment.฀
Income฀Tax฀Provision฀(Benefit)฀฀The฀Company’s฀effective฀tax฀benefit฀
from฀continuing฀operations฀was฀$175฀million฀for฀the฀year฀ended฀December฀
31,฀2004,฀representing฀an฀effective฀tax฀rate฀benefit฀from฀continuing฀opera-
tions฀of฀186%.฀The฀effective฀tax฀rate฀benefit฀from฀continuing฀operations฀
of฀186%฀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฀benefit฀from฀continuing฀operations฀was฀
$85฀million฀for฀the฀year฀ended฀December฀31,฀2003,฀representing฀an฀effec-
tive฀tax฀rate฀benefit฀from฀continuing฀operations฀of฀82%,฀despite฀the฀fact฀
that฀the฀Company฀had฀positive฀earnings฀from฀continuing฀operations฀before฀
income฀taxes.฀The฀effective฀tax฀rate฀benefit฀from฀continuing฀operations฀of฀
82%฀differs฀from฀the฀U.S.฀statutory฀tax฀rate฀of฀35%฀primarily฀due฀to฀earn-
ings฀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.
฀Excluding฀the฀effect฀of฀discrete฀period฀items,฀the฀effective฀tax฀rate฀
from฀continuing฀operations฀was฀18%฀and฀15.5%฀in฀2004฀and฀2003,฀
respectively.฀The฀increase฀from฀15.5%฀in฀2003฀to฀18%฀in฀2004฀is฀primarily฀
due฀to฀an฀increase฀in฀interest฀expense฀on฀tax฀reserves฀and฀an฀increase฀in฀
valuation฀allowances.
Earnings฀From฀Continuing฀Operations฀฀Net฀earnings฀from฀continuing฀
operations฀for฀2004฀were฀$81฀million,฀or฀$.28฀per฀basic฀and฀diluted฀share,฀
as฀compared฀with฀net฀earnings฀from฀continuing฀operations฀for฀2003฀of฀
$189฀million,฀or฀$.66฀per฀basic฀and฀diluted฀share,฀representing฀a฀decrease฀
of฀$108฀million,฀or฀57%.฀The฀decrease฀in฀net฀earnings฀from฀continuing฀
operations฀is฀primarily฀attributable฀to฀the฀reasons฀outlined฀above.
Digital฀&฀Film฀Imaging฀Systems
Worldwide฀Revenues฀฀Net฀worldwide฀sales฀for฀the฀D&FIS฀segment฀were฀
$9,186฀million฀for฀2004฀as฀compared฀with฀$9,248฀million฀for฀2003,฀repre-
senting฀a฀decrease฀of฀$62฀million,฀or฀a฀decrease฀of฀1%฀as฀reported,฀or฀a฀
decrease฀of฀4%฀excluding฀the฀favorable฀impact฀of฀exchange.฀Approximately฀
4.1฀percentage฀points฀of฀the฀decrease฀in฀net฀sales฀was฀attributable฀to฀price/
mix฀declines฀driven฀primarily฀by฀declines฀in฀traditional฀film฀products฀as฀well฀
as฀consumer฀digital฀cameras฀and฀inkjet฀media.฀This฀decrease฀was฀partially฀
offset฀by฀favorable฀exchange,฀which฀increased฀revenues฀by฀approximately฀
3.2฀percentage฀points.฀฀
D&FIS฀segment฀net฀sales฀in฀the฀U.S.฀were฀$3,823฀million฀for฀the฀cur-
rent฀year฀as฀compared฀with฀$3,828฀million฀for฀the฀prior฀year,฀representing฀
a฀decrease฀of฀$5฀million.฀D&FIS฀segment฀net฀sales฀outside฀the฀U.S.฀were฀
$5,363฀million฀for฀the฀current฀year฀as฀compared฀with฀$5,420฀million฀for฀the฀
prior฀year,฀representing฀a฀decrease฀of฀$57฀million,฀or฀1%฀as฀reported,฀or฀a฀
decrease฀of฀6%฀excluding฀the฀favorable฀impact฀of฀exchange.
Digital฀Strategic฀Product฀Groups’฀Revenues฀฀D&FIS฀segment฀digital฀
product฀sales฀were฀$2,677฀million฀for฀the฀current฀year฀as฀compared฀with฀
$1,802฀million฀for฀the฀prior฀year,฀representing฀an฀increase฀of฀$875฀million,฀
or฀49%,฀primarily฀driven฀by฀the฀consumer฀digital฀capture฀SPG.฀Net฀world-
wide฀sales฀of฀consumer฀digital฀capture฀products,฀which฀include฀consumer฀
digital฀cameras,฀accessories,฀memory฀products,฀and฀royalties,฀increased฀
61%฀in฀2004฀as฀compared฀with฀2003,฀primarily฀reflecting฀strong฀volume฀
increases฀and฀favorable฀exchange,฀partially฀offset฀by฀negative฀price/mix.฀฀
Sales฀continue฀to฀be฀driven฀by฀strong฀consumer฀acceptance฀of฀the฀EasyShare฀
digital฀camera฀system฀and฀the฀success฀of฀new฀digital฀camera฀product฀
introductions฀during฀the฀current฀year.฀฀
The฀Company฀gained฀worldwide฀digital฀camera฀unit฀market฀share฀
when฀compared฀with฀the฀prior฀year.฀According฀to฀market฀research฀firm฀
IDC’s฀full฀year฀2004฀digital฀camera฀study,฀Kodak฀leads฀the฀industry฀in฀the฀
U.S.฀with฀a฀21.9%฀market฀share.฀Digital฀camera฀market฀share฀has฀also฀
improved฀internationally,฀giving฀Kodak฀the฀number฀one฀market฀share฀in฀
Australia,฀Argentina,฀Peru฀and฀Chile฀as฀well฀as฀putting฀it฀among฀the฀top฀
three฀positions฀in฀Germany,฀United฀Kingdom,฀Mexico฀and฀Brazil.฀฀