Kodak 2004 Annual Report Download - page 61

Financials
59
2 0 0 4 ฀ S U M M A R Y ฀ A N N U A L ฀ R E P O R T
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฀Com-
pany฀does฀not฀use฀derivatives฀for฀trading฀or฀other฀speculative฀purposes.
The฀Company฀uses฀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฀denomi-
nated฀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฀values฀of฀foreign฀currency฀forward฀contracts฀designated฀as฀
cash฀flow฀hedges฀of฀forecasted฀foreign฀currency฀denominated฀intercom-
pany฀sales฀are฀reported฀in฀other฀current฀assets฀and/or฀current฀liabilities,฀
and฀the฀effective฀portion฀of฀the฀gain฀or฀loss฀on฀the฀derivatives฀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฀values฀of฀silver฀forward฀contracts฀designated฀as฀hedges฀of฀
forecasted฀worldwide฀silver฀purchases฀are฀reported฀in฀other฀current฀assets฀
and/or฀current฀liabilities,฀and฀the฀effective฀portion฀of฀the฀gain฀or฀loss฀on฀the฀
derivative฀is฀recorded฀in฀other฀comprehensive฀income.฀When฀the฀silver-con-
taining฀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฀compre-
hensive฀income฀to฀cost฀of฀goods฀sold.
Environmental฀Expenditures฀฀Environmental฀expenditures฀that฀relate฀to฀
current฀operations฀are฀expensed฀or฀capitalized,฀as฀appropriate.฀Expendi-
tures฀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฀require-
ment฀for฀remedial฀efforts฀is฀probable,฀and฀the฀costs฀can฀be฀reasonably฀
estimated.฀The฀timing฀of฀accruing฀for฀these฀remediation฀liabilities฀is฀gener-
ally฀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฀฀In฀November฀2004,฀the฀Emerging฀Issues฀Task฀Force฀
finalized฀the฀consensus฀in฀Issue฀No.฀04-8,฀“The฀Effect฀of฀Contingently฀
Convertible฀Debt฀on฀Diluted฀Earnings฀per฀Share”฀(EITF฀04-8).฀EITF฀04-8฀
requires฀that฀contingent฀convertible฀instruments฀be฀included฀in฀diluted฀
earnings฀per฀share฀regardless฀of฀whether฀a฀market฀price฀trigger฀or฀other฀
contingent฀feature฀has฀been฀met.฀EITF฀04-8฀is฀effective฀for฀reporting฀peri-
ods฀ending฀after฀December฀15,฀2004฀and฀requires฀restatement฀of฀prior฀pe-
riods.฀The฀Company฀currently฀has฀approximately฀$575฀million฀in฀contingent฀
convertible฀notes฀(the฀Convertible฀Securities)฀outstanding฀that฀were฀issued฀
in฀October฀2003.฀Interest฀on฀the฀Convertible฀Securities฀accrues฀at฀a฀rate฀
of฀3.375%฀and฀is฀payable฀semi-annually.฀The฀Convertible฀Securities฀are฀
convertible฀at฀an฀initial฀conversion฀rate฀of฀32.2373฀shares฀of฀the฀Company’s฀
common฀stock฀for฀each฀$1,000฀principal฀of฀the฀Convertible฀Securities.฀The฀
Company’s฀diluted฀net฀earnings฀per฀share฀includes฀the฀effect฀of฀EITF฀04-8,฀
which฀had฀no฀material฀impact฀on฀the฀Company’s฀reported฀diluted฀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฀respec-
tive฀periods฀as฀well฀as฀shares฀related฀to฀the฀assumed฀conversion฀of฀the฀
Convertible฀Securities,฀if฀dilutive.฀The฀reconciliation฀between฀the฀numerator฀
and฀denominator฀of฀the฀basic฀and฀diluted฀earnings-per-share฀computations฀
is฀presented฀as฀follows:
฀2004฀2003฀ 2002
฀฀ (Restated)฀
Numerator:฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Earnings฀from฀continuing฀
฀ operations฀used฀in฀basic฀
฀฀฀ net฀earnings฀per฀share฀ $฀ 81฀ $฀189฀ $฀ 761
Effect฀of฀dilutive฀securities:฀
Interest฀expense฀on฀
฀ contingent฀convertible฀฀
฀ notes,฀net฀of฀taxes฀฀฀฀฀฀฀฀฀฀฀฀ ฀ —฀ ฀ 3฀ ฀ ฀—฀
Earnings฀from฀continuing฀
฀ operations฀used฀in฀diluted฀
฀฀฀ net฀earnings฀per฀share฀ $฀ 81฀ $฀192฀ $฀ 761
Denominator:
Number฀of฀common฀shares฀
฀ used฀in฀basic฀net฀
฀฀฀ earnings฀per฀share฀ ฀286.6฀ ฀286.5฀ ฀291.5฀
Effect฀of฀dilutive฀securities:฀
฀฀Employee฀stock฀options฀฀ ฀ 0.2฀ ฀ 0.1฀ ฀ 0.2฀฀
฀฀Contingent฀convertible฀notes฀ ฀฀ —฀ ฀ 4.2฀ ฀ —
Number฀of฀common฀shares฀
฀ used฀in฀diluted฀net฀
฀฀฀ earnings฀per฀share฀ ฀286.8฀ ฀290.8฀ ฀291.7
Options฀to฀purchase฀32.5฀million,฀35.9฀million฀and฀26.8฀million฀shares฀
of฀common฀stock฀at฀weighted-average฀per฀share฀prices฀of฀$52.47,฀$51.63฀
and฀$58.83฀for฀the฀years฀ended฀December฀31,฀2004,฀2003฀and฀2002,฀
respectively,฀were฀outstanding฀during฀the฀years฀presented฀but฀were฀not฀in-