Kodak 2004 Annual Report Download - page 20

Financials
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E A S T M A N฀ K OD A K ฀ C O M PA N Y
by฀the฀impact฀of฀the฀purchase฀accounting฀for฀the฀inventory฀that฀was฀ac-
quired฀with฀Kodak฀Versamark฀at฀its฀fair฀value,฀which฀was฀sold฀during฀2004.฀฀
This฀negative฀impact฀was฀partially฀offset฀by฀a฀positive฀impact฀of฀purchase฀
accounting฀for฀the฀inventory฀that฀was฀acquired฀with฀the฀NexPress-related฀
entities฀at฀its฀fair฀value.฀Excluding฀the฀impact฀of฀purchase฀accounting,฀
Kodak฀Versamark฀and฀the฀NexPress-related฀entities฀would฀have฀favorably฀
impacted฀gross฀profit฀margins฀by฀approximately฀14.3฀percentage฀points฀
during฀the฀current฀year฀period.฀Partially฀offsetting฀the฀favorable฀impact฀of฀
acquisitions฀were:฀(1)฀an฀increase฀in฀manufacturing฀cost,฀which฀negatively฀
impacted฀gross฀profit฀margins฀by฀approximately฀7.1฀percentage฀points,฀
primarily฀due฀to฀an฀increase฀in฀silver฀prices฀and฀additional฀costs฀incurred฀in฀
relation฀to฀the฀relocation฀of฀manufacturing฀facilities฀for฀graphics฀products฀
from฀Mexico฀to฀Great฀Britain฀and฀the฀U.S.,฀(2)฀negative฀exchange,฀which฀
reduced฀gross฀profit฀margins฀by฀approximately฀0.9฀percentage฀points฀and฀
(3)฀negative฀price/mix฀of฀1.0฀percentage฀points.฀฀
฀
Selling,฀General฀and฀Administrative฀Expenses฀฀SG&A฀expenses฀for฀
the฀Graphic฀Communications฀segment฀were฀$160฀million฀for฀2004฀as฀
compared฀with฀$37฀million฀in฀the฀prior฀year,฀representing฀an฀increase฀of฀
$123฀million,฀or฀332%,฀and฀increased฀as฀a฀percentage฀of฀sales฀from฀11%฀in฀
the฀prior฀year฀to฀22%฀in฀the฀current฀year.฀The฀increase฀in฀SG&A฀expenses฀
is฀primarily฀attributable฀to฀the฀acquisitions฀of฀Kodak฀Versamark฀and฀the฀
NexPress-related฀entities,฀which฀together฀accounted฀for฀$120฀million฀of฀
SG&A฀expenses฀in฀the฀current฀year฀period.
Research฀and฀Development฀Costs฀฀R&D฀costs฀for฀the฀Graphic฀Com-
munications฀segment฀increased฀$88฀million,฀or฀383%,฀from฀$23฀million฀for฀
2003฀to฀$111฀million฀for฀the฀current฀year,฀and฀increased฀as฀a฀percentage฀
of฀sales฀from฀7%฀in฀the฀prior฀year฀to฀15%฀in฀the฀current฀year.฀The฀increase฀
was฀primarily฀attributable฀to฀the฀acquisitions฀of฀Kodak฀Versamark฀and฀the฀
NexPress-related฀entities,฀which฀together฀accounted฀for฀$90฀million฀of฀R&D฀
in฀the฀current฀period,฀and฀includes฀a฀$10฀million฀charge฀for฀purchased฀in-
process฀R&D฀associated฀with฀the฀Kodak฀Versamark฀and฀NexPress-related฀
entities฀acquisition.฀฀
Earnings฀(Losses)฀From฀Continuing฀Operations฀Before฀Inter-
est,฀Other฀Income฀(Charges),฀Net฀and฀Income฀Taxes฀฀Losses฀from฀
continuing฀operations฀before฀interest,฀other฀income฀(charges),฀net฀and฀
income฀taxes฀for฀the฀Graphic฀Communications฀segment฀increased฀$129฀
million฀from฀losses฀of฀$11฀million฀in฀2003฀to฀losses฀of฀$140฀million฀in฀2004.฀฀
This฀increase฀in฀losses฀is฀primarily฀attributable฀to฀the฀acquisition฀of฀the฀
NexPress-related฀entities฀on฀May฀1,฀2004,฀the฀purchase฀of฀Scitex฀Digital฀
Printing฀(renamed฀Kodak฀Versamark)฀on฀January฀5,฀2004,฀and฀the฀other฀
factors฀described฀above.฀As฀noted฀above,฀the฀NexPress-related฀entities฀are฀
expected฀to฀become฀accretive฀by฀2007,฀and฀Kodak฀Versamark฀is฀expected฀
to฀be฀slightly฀dilutive฀through฀2004฀and฀accretive฀thereafter.฀฀
฀KPG’s฀earnings฀performance฀continued฀to฀improve฀on฀the฀strength฀
of฀its฀leading฀position฀in฀digital฀printing฀plates฀and฀digital฀proofing,฀coupled฀
with฀favorable฀operating฀expense฀management฀and฀foreign฀exchange.฀The฀
Company’s฀equity฀in฀the฀earnings฀of฀KPG฀contributed฀positive฀results฀to฀
other฀income฀(charges),฀net฀during฀2004.
On฀January฀12,฀2005,฀the฀Company฀announced฀that฀it฀had฀entered฀
into฀a฀Redemption฀agreement฀with฀Sun฀Chemical฀Corporation฀(Sun฀Chemi-
cal)฀to฀purchase฀Sun฀Chemical’s฀50฀percent฀interest฀in฀Kodak฀Polychrome฀
Graphics฀(KPG),฀a฀50/50฀joint฀venture฀of฀Kodak฀and฀Sun฀Chemical฀that฀was฀
established฀in฀1998.฀KPG฀is฀one฀of฀the฀world’s฀leading฀suppliers฀of฀products฀
and฀services฀to฀the฀graphic฀communications฀market,฀with฀operations฀in฀
six฀continents฀and฀an฀extensive฀global฀sales฀force.฀Under฀the฀terms฀of฀the฀
transaction,฀Kodak฀will฀redeem฀all฀of฀Sun฀Chemical’s฀shares฀in฀KPG฀by฀
providing฀$317฀million฀in฀cash฀at฀closing,฀$200฀million฀in฀cash฀in฀the฀third฀
quarter฀of฀2006฀and฀$50฀million฀in฀cash฀annually฀from฀2008฀through฀2013,฀
for฀a฀total฀of฀$817฀million.฀Kodak฀will฀fund฀the฀acquisition฀through฀internally฀
generated฀cash฀flow.฀This฀transaction฀will฀expand฀the฀Company’s฀global฀
distribution฀network฀for฀Graphic฀Communications฀digital฀printing฀systems฀
and฀broaden฀the฀Company’s฀solutions฀portfolio.฀The฀Company฀expects฀this฀
acquisition฀to฀incrementally฀increase฀revenue฀by฀approximately฀$1.1฀billion฀
in฀2005฀and฀be฀immediately฀accretive฀to฀earnings,฀adding฀approximately฀
five฀cents฀to฀diluted฀earnings฀per฀share฀from฀continuing฀operations฀in฀2005฀
and฀approximately฀14฀cents฀to฀diluted฀earnings฀per฀share฀from฀continuing฀
operations฀in฀2006.฀The฀Company฀completed฀its฀acquisition฀of฀KPG฀on฀April฀
1,฀2005.
On฀January฀31,฀2005,฀the฀Company฀announced฀that฀it฀had฀entered฀
into฀a฀definitive฀agreement฀with฀Creo฀Inc.฀(Creo)฀to฀acquire฀100%฀of฀its฀
outstanding฀shares.฀Creo฀is฀based฀in฀Vancouver,฀Canada฀and฀is฀the฀world’s฀
number฀one฀provider฀of฀workflow฀software฀used฀by฀printers฀to฀manage฀
efficiently฀the฀movement฀of฀text,฀graphics,฀and฀images฀from฀the฀computer฀
screen฀to฀the฀printing฀press.฀Under฀the฀terms฀of฀the฀agreement,฀Kodak฀
will฀pay฀approximately฀$980฀million฀in฀cash,฀or฀$16.50฀per฀share,฀for฀all฀
outstanding฀shares฀of฀Creo,฀on฀a฀fully฀diluted฀basis.฀The฀transaction฀is฀
subject฀to฀regulatory฀approvals,฀the฀approval฀of฀Creo’s฀shareholders฀and฀
court฀approval.฀The฀acquisition฀will฀provide฀Kodak฀with฀an฀innovative฀digital฀
pre-press฀product฀portfolio฀and฀established฀relationships฀in฀the฀commercial฀
printing฀segment,฀the฀largest฀market฀opportunity฀within฀the฀graphic฀com-
munications฀industry.฀This฀transaction฀also฀reinforces฀Graphic฀Communica-
tions’฀status฀as฀a฀leading฀industry฀participant฀to฀provide฀customers฀with฀
all฀of฀the฀products฀and฀services฀they฀need฀to฀be฀successful฀in฀a฀blended฀
product฀environment,฀where฀digital,฀traditional฀and฀hybrid฀print฀jobs฀are฀
converging.฀This฀acquisition฀is฀expected฀to฀result฀in฀modest฀earnings฀
dilution฀in฀2005฀and฀approximately฀$700฀million฀in฀incremental฀revenue฀in฀
2006.฀The฀impact฀on฀2006฀net฀earnings฀per฀share฀cannot฀be฀accurately฀
estimated฀until฀the฀transaction฀is฀completed,฀but฀is฀expected฀to฀be฀accretive฀
to฀earnings฀in฀2006.
All฀Other
Worldwide฀Revenues฀฀Net฀worldwide฀sales฀for฀All฀Other฀were฀$118฀
million฀for฀2004฀as฀compared฀with฀$93฀million฀for฀2003,฀representing฀an฀
increase฀of฀$25฀million,฀or฀27%.฀Net฀sales฀in฀the฀U.S.฀were฀$53฀million฀in฀
2004฀as฀compared฀with฀$42฀million฀for฀2003,฀representing฀an฀increase฀
of฀$11฀million,฀or฀26%.฀Net฀sales฀outside฀the฀U.S.฀were฀$65฀million฀in฀the฀
current฀year฀as฀compared฀with฀$51฀million฀in฀the฀prior฀year,฀representing฀an฀
increase฀of฀$14฀million,฀or฀27%.
Losses฀From฀Continuing฀Operations฀Before฀Interest,฀Other฀Income฀
(Charges),฀Net฀and฀Income฀Taxes฀฀Losses฀from฀continuing฀operations฀
before฀interest,฀other฀income฀(charges),฀net฀and฀income฀taxes฀for฀All฀Other฀
increased฀$105฀million฀from฀a฀loss฀of฀$77฀million฀in฀2003฀to฀a฀loss฀of฀$182฀
million฀in฀2004.฀Increased฀levels฀of฀investment฀for฀the฀Company’s฀display฀