Kodak 2004 Annual Report Download - page 22

Financials
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E A S T M A N฀ K OD A K ฀ C O M PA N Y
Gross฀Profit฀฀Gross฀profit฀was฀$4,175฀million฀for฀2003฀as฀compared฀with฀
$4,527฀million฀for฀2002,฀representing฀a฀decrease฀of฀$352฀million,฀or฀8%.฀
The฀gross฀profit฀margin฀was฀32.3%฀in฀2003฀as฀compared฀with฀36.1%฀in฀
2002.฀The฀decrease฀of฀3.8฀percentage฀points฀was฀attributable฀to฀declines฀
in฀price/mix,฀which฀reduced฀gross฀profit฀margins฀by฀approximately฀5.1฀per-
centage฀points.฀This฀decrease฀was฀driven฀primarily฀by฀price/mix฀declines฀in฀
traditional฀consumer฀film฀products,฀photofinishing,฀consumer฀digital฀cam-
eras,฀and฀entertainment฀print฀films฀in฀the฀D&FIS฀segment,฀analog฀medical฀
film฀and฀digital฀capture฀equipment฀in฀the฀Health฀segment,฀and฀graphic฀arts฀
products฀in฀the฀Graphic฀Communications฀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฀0.3฀
percentage฀points฀year-over-year฀due฀to฀reduced฀labor฀expense,฀favorable฀
materials฀pricing฀and฀improved฀product฀yields.฀The฀acquisition฀of฀Practice-
Works฀in฀the฀fourth฀quarter฀of฀2003฀did฀not฀have฀a฀significant฀impact฀on฀the฀
gross฀profit฀margin.
฀
Selling,฀General฀and฀Administrative฀Expenses฀฀SG&A฀expenses฀
were฀$2,618฀million฀for฀2003฀as฀compared฀with฀$2,504฀million฀for฀2002,฀
representing฀an฀increase฀of฀$114฀million,฀or฀5%.฀SG&A฀remained฀consistent฀
as฀a฀percentage฀of฀sales฀at฀20%฀for฀both฀years.฀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฀outstand-
ing฀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฀unfa-
vorable฀exchange฀of฀$118฀million฀due฀to฀an฀increased฀level฀of฀SG&A฀costs฀in-
curred฀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฀Costs฀฀R&D฀costs฀were฀$776฀million฀for฀
2003฀as฀compared฀with฀$757฀million฀for฀2002,฀representing฀an฀increase฀of฀
$19฀million,฀or฀3%.฀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฀6%฀for฀
both฀2003฀and฀2002.
Earnings฀(Losses)฀From฀Continuing฀Operations฀Before฀Interest,฀
Other฀Income฀(Charges),฀Net฀and฀Income฀Taxes฀฀Earnings฀from฀
continuing฀operations฀before฀interest,฀other฀income฀(charges),฀net฀and฀
income฀taxes฀for฀2003฀were฀$302฀million฀as฀compared฀with฀$1,168฀million฀
for฀2002,฀representing฀a฀decrease฀of฀$866฀million,฀or฀74%.฀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฀$479฀million฀in-
curred฀during฀2003฀as฀compared฀with฀$98฀million฀for฀2002,฀an฀increase฀of฀
$381฀million฀which฀was฀primarily฀due฀to฀the฀costs฀incurred฀under฀the฀Third฀
Quarter,฀2003฀Restructuring฀Program.฀฀฀฀฀
Interest฀Expense฀฀Interest฀expense฀for฀2003฀was฀$147฀million฀as฀com-
pared฀with฀$173฀million฀for฀2002,฀representing฀a฀decrease฀of฀$26฀million,฀
or฀15%.฀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฀com-
mercial฀paper฀during฀2003.฀฀
Other฀Income฀(Charges),฀Net฀฀The฀other฀income฀(charges),฀net฀compo-
nent฀includes฀principally฀investment฀income,฀income฀and฀losses฀from฀equity฀
investments,฀foreign฀exchange,฀and฀gains฀and฀losses฀on฀the฀sales฀of฀assets฀
and฀investments.฀Other฀income฀(charges),฀net฀for฀2003฀were฀a฀net฀charge฀
of฀$51฀million฀as฀compared฀with฀a฀net฀charge฀of฀$101฀million฀for฀2002.฀
The฀decrease฀in฀other฀income฀(charges),฀net฀is฀primarily฀attributable฀to฀
increased฀income฀from฀the฀Company’s฀equity฀investment฀in฀KPG,฀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.
฀
Income฀Tax฀Provision฀(Benefit)฀฀The฀Company’s฀effective฀tax฀benefit฀
from฀continuing฀operations฀was฀$85฀million฀for฀the฀year฀ended฀December฀
31,฀2003,฀representing฀an฀effective฀tax฀rate฀benefit฀from฀continuing฀opera-
tions฀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฀earnings฀from฀operations฀in฀certain฀lower-taxed฀
jurisdictions฀outside฀the฀U.S.,฀coupled฀with฀losses฀incurred฀in฀certain฀juris-
dictions฀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฀15%฀
for฀the฀year฀ended฀December฀31,฀2002.฀The฀effective฀tax฀rate฀from฀continu-
ing฀operations฀of฀15%฀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฀15.5%฀and฀26.5%฀in฀2003฀and฀2002,฀re-
spectively.฀The฀decrease฀from฀26.5%฀in฀2002฀to฀15.5%฀in฀2003฀is฀primarily฀
due฀to฀increased฀earnings฀in฀certain฀lower-taxed฀jurisdictions฀outside฀the฀
U.S.฀relative฀to฀total฀consolidated฀earnings.
Earnings฀From฀Continuing฀Operations฀฀Net฀earnings฀from฀continuing฀
operations฀for฀2003฀were฀$189฀million,฀or฀$.66฀per฀basic฀and฀diluted฀share,฀
as฀compared฀with฀net฀earnings฀from฀continuing฀operations฀for฀2002฀of฀
$761฀million,฀or฀$2.61฀per฀basic฀and฀diluted฀share,฀representing฀a฀decrease฀