Kodak 2005 Annual Report Download - page 46

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Traditional Strategic Product Groups’ Revenues
The Health Group segment’s traditional product sales, including analog fi lm, equipment, and chemistry, were $954 million for the current year as
compared with $994 million for 2003, representing a decrease of $40 million or 4%, with the decrease mainly attributable to decreases in volume and
negative price/mix from analog medical fi lm, partially offset by favorable exchange.
Gross Profi t
Gross profi t for the Health Group segment was $1,134 million for 2004 as compared with $1,059 million for 2003, representing an increase of
$75 million, or 7%. The gross profi t margin was 42.2% in 2004 as compared with 43.6% in 2003. The decrease in the gross profi t margin of
1.4 percentage points was primarily attributable to: (1) price/mix, which negatively impacted gross profi t margins by 2.0 percentage points due to
digital media, digital capture equipment and analog medical fi lm; and (2) an increase in manufacturing and other costs, which decreased gross profi t
margins by 1.3 percentage points primarily due to increases in silver prices and petroleum based materials during the current year. These decreases
were partially offset by increases attributable to favorable exchange, which contributed approximately 0.8 percentage points to the gross profi t
margin, and the acquisition of PracticeWorks in the fourth quarter of 2003, which increased gross profi t margins by approximately 1.1 percentage
points for the current year.
Selling, General and Administrative Expenses
SG&A expenses for the Health Group segment increased $91 million, or 23%, from $389 million for 2003 to $480 million for 2004. Although the
dollar increase in SG&A expenses was signifi cant, the increase as a percent of sales was 2 percentage points from 16% in 2003 to 18% in 2004. The
increase in SG&A expenses is primarily due to the acquisition of PracticeWorks, which accounted for $65 million of the increase in SG&A expenses in
2004, increased spending on growth initiatives and the unfavorable impact of exchange, which accounted for $12 million of the increase.
Research and Development Costs
R&D costs for the Health Group segment increased $29 million, or 17%, from $173 million in 2003 to $202 million in 2004, and increased as a
percentage of sales from 7% in 2003 to 8% in 2004. The increase is primarily attributable to increased spending to drive growth in selected areas of
the product portfolio.
Earnings 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 the Health Group segment decreased
$45 million, or 9%, from $497 million for 2003 to $452 million for 2004 due primarily to the reasons described above.
Graphic Communications Group
On May 1, 2004, Kodak completed the acquisition of the NexPress-related entities, which included the following:
• Heidelberg’s 50% interest in NexPress Solutions LLC (Kodak and Heidelberg formed the NexPress 50/50 JV in 1997 to develop high quality,
on-demand, digital color printing systems)
• 100% of the stock of Heidelberg Digital LLC (Hdi), a manufacturer of digital black & white printing systems
• 100% of the stock of NexPress GMBH – a R&D center located in Kiel, Germany
• Certain sales and service employees, inventory and related assets and liabilities of Heidelberg’s sales and service units located throughout
the world
There was no consideration paid to Heidelberg at closing. Under the terms of the acquisition, Kodak and Heidelberg agreed to use a
performance-based earn-out formula whereby Kodak will make periodic payments to Heidelberg over a two-year period, if certain sales goals are met.
If all sales goals are met during the two calendar years ending December 31, 2005, the Company will pay a maximum of $150 million in cash. During
the fi rst calendar year, no amounts were paid. Additional payments may also be made relating to the incremental sales of certain products in excess
of a stated minimum number of units sold during a fi ve-year period following the closing of the transaction. The acquisition is expected to become
accretive by 2007. During the eight months since closing, the NexPress-related entities contributed $177 million in sales to the Graphic
Communications Group segment.
On January 5, 2004, Kodak announced the completion of its acquisition of Scitex Digital Printing, the world leader in high-speed, variable data
inkjet printing systems. Kodak acquired the business for $239 million in net cash. Scitex Digital Printing now operates under the name
Kodak Versamark, Inc. During 2004, Kodak Versamark contributed $198 million in sales to the Graphic Communications Group segment.