Kodak 2006 Annual Report Download - page 47

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Graphic Communications Group
On May 1, 2004, Kodak completed the acquisition of the NexPress-related entities, which develop high quality on-demand digital color printing
systems and manufacture digital black and white printing systems. 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 Heidel-
berg over a two-year period, if certain sales goals are met. If all sales goals were met during the two calendar years ended December 31, 2005, the
Company would have paid a maximum of $150 million in cash. For both the first calendar year (2004) and for the second calendar year (2005), there
were no amounts paid to Heidelberg. 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 five-year period following the closing of the transaction.
On April 1, 2005, the Company became the sole owner of KPG through the redemption of Sun Chemical Corporation’s 50 percent interest in the KPG
joint venture. This transaction further established the Company as a leader in the graphic communications industry and complements the Company’s
existing business in this market. Under the terms of the transaction, the Company redeemed all of Sun Chemical’s shares in KPG by providing $317
million in cash (excluding $7 million in transaction costs) at closing and by entering into two notes payable arrangements, one that will be payable
within the U.S. (the U.S. note) and one that will be payable outside of the U.S. (the non-U.S. note), that will require principal and interest payments of
$200 million in the third quarter of 2006, and $50 million annually from 2008 through 2013. The total payments due under the U.S. note and the non-
U.S. note are $100 million and $400 million, respectively. The aggregate fair value of these note payable arrangements of approximately $395 million
as of the acquisition date was recorded as long-term debt in the Company’s Consolidated Statement of Financial Position.
On June 15, 2005, the Company completed the acquisition of Creo Inc. (Creo), a premier supplier of prepress and workflow systems used by com-
mercial printers around the world. The acquisition of Creo uniquely positions the Company to be the preferred partner for its customers, helping them
improve efficiency, expand their offerings and grow their businesses. The Company paid $954 million (excluding approximately $13 million in transac-
tion related costs), or $16.50 per share, for all of the outstanding shares of Creo. The Company used its bank lines to initially fund the acquisition,
which has been refinanced through a 7-Year Term Loan under the Company’s new Secured Credit Facilities completed on October 18, 2005.
Worldwide Revenues
Net worldwide sales for the Graphic Communications Group segment were $2,990 million for 2005 as compared with $1,344 million for the prior year
period, representing an increase of $1,646 million, or 122%, which includes a favorable impact from exchange of less than 1%. The increase in net
sales was primarily due to the KPG, Creo and NexPress acquisitions, which contributed $1,561 million in sales.
Net sales in the U.S. were $1,079 million for 2005 as compared with $587 million for the prior year, representing an increase of $492 million, or 84%.
Net sales outside the U.S. were $1,911 million in 2005 as compared with $757 million for the prior year period, representing an increase of $1,154
million, or 152% as reported, which includes a favorable impact from exchange of approximately 1%.
Digital Strategic Product Groups’ Revenues
The Graphic Communications Group segment’s digital product sales consist of KPG digital revenues; Creo, a supplier of prepress systems; NexPress
Solutions, a producer of digital color and black and white printing solutions; Kodak Versamark, a leader in continuous inkjet technology; document
scanners; Encad, Inc., a maker of wide-format inkjet printers; and service and support.
Digital product sales for the Graphic Communications Group segment were $2,437 million for 2005 as compared with $1,048 million for the prior year,
representing an increase of $1,389 million, or 133%. The increase in digital product sales was primarily attributable to the KPG, Creo and NexPress
acquisitions.
Traditional Strategic Product Groups’ Revenues
The Graphic Communications Group segment’s traditional product sales are primarily comprised of sales of traditional graphics products, KPG’s analog
plates and other films, and microfilm products. These sales were $553 million for 2005 compared with $296 million for the prior year, representing an
increase of $257 million, or 87%. This increase is primarily attributable to the acquisition of KPG.
Gross Profit
Gross profit for the Graphic Communications Group segment was $799 million for 2005 as compared with $337 million in the prior year, representing
an increase of $462 million, or 137%. The gross profit margin was 26.7% in 2005 as compared with 25.1% in the prior year. The increase in the gross
profit margin of 1.6 percentage points was primarily attributable to: (1) reductions in manufacturing and other costs, which positively impacted gross
profit margins by approximately 3.3 percentage points, and (2) volume increases related to Versamark products and services of approximately 1.7
percentage points. These positive impacts on gross profit margin were partially offset by the negative impact of acquisitions on gross profit margins of
approximately 2.9 percentage points, and by negative price/mix of approximately 0.5 percentage points. Foreign exchange did not have a significant
impact on segment gross profit margin.
Selling, General and Administrative Expenses
SG&A expenses for the Graphic Communications Group segment were $562 million for 2005 as compared with $283 million in the prior year, repre-
senting an increase of $279 million, or 99%, and decreased as a percentage of sales from 21% in 2004 to 19% in 2005. The dollar increase in SG&A
is primarily attributable to the acquisitions of KPG, Creo and NexPress, while the decrease in SG&A as a percentage of sales is primarily attributable