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42 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of OperationsÌ2005 Compared to 2004
Net Sales
Net sales were $35.3 billion in 2005, up 19% from $29.7 billion in 2004. Net sales increased in all three of the
Company's segments in 2005 compared to 2004. The overall increase in net sales reflected: (i) a $4.4 billion
increase in net sales by the Mobile Devices segment, driven by a 40% increase in unit shipments, reflecting strong
demand for GSM handsets, (ii) a $737 million increase in net sales by the Networks and Enterprise segment,
reflecting higher net sales in North America and EMEA, partially offset by lower net sales in Asia and Latin
America, and (iii) a $536 million increase in net sales by the Connected Home Solutions segment, primarily driven
by increases in both ASP and unit shipments of digital entertainment devices.
Gross Margin
Gross margin was $11.4 billion, or 32.4% of net sales, in 2005, compared to $10.0 billion, or 33.6% of net
sales, in 2004. All three of the Company's operating segment had higher gross margin in 2005 compared to 2004.
The increase in gross margin in the Mobile Devices segment was primarily due to a 25% increase in net sales, driven
by a 40% increase in unit shipments, partially offset by: (i) a 10% decline in ASP, and (ii) a charge for past use of
Kodak intellectual property. The increase in gross margin in the Networks and Enterprise segment was primarily
due to: (i) a 7% increase in net sales, and (ii) improvements in the cost structure of the public networks business.
The increase in gross margin in the Connected Home Solutions segment was primarily due to a 23% increase in net
sales.
In 2005 compared to 2004, gross margin as a percentage of net sales: (i) decreased in the Mobile Devices and
Connected Home Solutions segments, and (ii) increased in the Networks and Enterprise segment. The Company's
overall gross margin as a percentage of net sales can be impacted by the proportion of overall net sales generated
by its various businesses. The decrease in overall gross margin as a percentage of net sales in 2005 compared to
2004 can be partially attributed to the fact that an increased percentage of the Company's net sales were generated
by the Mobile Devices segment, which generates lower gross margins than the overall Company average.
Selling, General and Administrative Expenses
SG&A expenses increased 3% to $3.6 billion, or 10.3% of net sales, in 2005, compared to $3.5 billion, or
11.8% of net sales, in 2004. The Mobile Devices and Networks and Enterprise segments had increased SG&A
expenses in 2005 compared to 2004. The increase in SG&A expenses in 2005 compared to 2004 was due to:
(i) increased marketing expenses to support higher sales and promote brand awareness, and (ii) increased selling
and sales support expenses, driven by the increase in sales commissions from the increase in net sales. SG&A
expense as a percentage of net sales decreased, driven by decreases in the Mobile Devices and Connected Home
Solutions segments.
Research and Development Expenditures
R&D expenditures increased 9% to $3.6 billion, or 10.2% of net sales, in 2005, compared to $3.3 billion, or
11.2% of net sales, in 2004. All three of the Company's segments had increased R&D expenditures in 2005
compared to 2004. The increase in R&D expenditures was primarily due to developmental engineering expenditures
for new product development and investment in next-generation technologies across all segments. R&D
expenditures as a percentage of net sales decreased, driven by decreases in the Mobile Devices and Networks and
Enterprise segments, partially offset by an increase in the Connected Home Solutions segment.
Other Charges (Income)
The Company recorded net income of $404 million in Other charges (income) in 2005, compared to net
charges of $149 million in 2004. The net income in 2005 primarily consisted of $515 million in income for
collections relating to the Telsim settlement, partially offset by: (i) $67 million of charges relating to the
amortization of intangibles, (ii) $54 million net of charges for reorganization of businesses, and (iii) $2 million
from acquisition-related IPR&D charges. The net charges of $149 million in 2004 primarily consisted of:
(i) a $125 million charge for goodwill impairment, related to the sensor business that was divested in 2005,
(ii) $52 million of charges relating to the amortization of intangibles, and (iii) $34 million from acquisition-related
IPR&D, partially offset by: (i) $44 million in income from the reversal of financing receivable reserves due to the