Kodak 2004 Annual Report Download - page 73

Financials
71
2 0 0 4 ฀ S U M M A R Y ฀ A N N U A L ฀ R E P O R T
(in฀millions)
Deferred฀revenue฀at฀December฀31,฀2002฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ $฀ 103
New฀extended฀warranty฀arrangements฀in฀2003฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀ 372฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Recognition฀of฀extended฀warranty฀arrangement฀
฀ revenue฀in฀2003฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀(355)
Adjustments฀for฀changes฀in฀estimates฀ ฀ (2)
Deferred฀revenue฀at฀December฀31,฀2003฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ $฀ 118
New฀extended฀warranty฀arrangements฀in฀2004฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀ 411฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Recognition฀of฀extended฀warranty฀arrangement฀
฀ revenue฀in฀2004฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀(388)฀
Deferred฀revenue฀at฀December฀31,฀2004฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ $฀ 141฀
NOTE฀13:฀FINANCIAL฀INSTRUMENTS
The฀following฀table฀presents฀the฀carrying฀amounts฀of฀the฀assets฀(liabilities)฀
and฀the฀estimated฀fair฀values฀of฀financial฀instruments฀at฀December฀31,฀
2004฀and฀2003:
฀2004฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀2003
฀ Carrying฀฀฀฀฀฀฀ Fair฀฀฀฀฀฀฀฀฀Carrying฀฀฀฀฀฀฀ Fair
(in฀millions)฀ Amount฀ Value฀ Amount฀ Value
Marketable฀securities:
฀ Current฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ $฀ 3฀ $฀ 3฀ $฀ 11฀ $฀ 11฀฀฀฀฀฀
฀ Long-term฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀ 24฀ ฀ 26฀ ฀ 24฀ ฀ 35฀฀฀฀
Long-term฀borrowings฀฀฀ ฀ (1,852)฀ ฀ (2,039)฀ ฀ (2,302)฀ ฀ (2,450)
Foreign฀currency฀forwards฀฀฀฀ ฀ 25฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ 25฀ ฀ (1)฀ ฀ (1)
Silver฀forwards฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀ —฀ ฀ —฀ ฀ 1฀ ฀ 1฀฀
Marketable฀securities฀are฀valued฀at฀quoted฀market฀prices.฀The฀fair฀
values฀of฀long-term฀borrowings฀are฀determined฀by฀reference฀to฀quoted฀
market฀prices฀or฀by฀obtaining฀quotes฀from฀dealers.฀The฀fair฀values฀for฀the฀
remaining฀financial฀instruments฀in฀the฀above฀table฀are฀based฀on฀dealer฀
quotes฀and฀reflect฀the฀estimated฀amounts฀the฀Company฀would฀pay฀or฀
receive฀to฀terminate฀the฀contracts.฀The฀carrying฀values฀of฀cash฀and฀cash฀
equivalents,฀receivables,฀short-term฀borrowings฀and฀payables฀approximate฀
their฀fair฀values.
The฀Company,฀as฀a฀result฀of฀its฀global฀operating฀and฀financing฀activi-
ties,฀is฀exposed฀to฀changes฀in฀foreign฀currency฀exchange฀rates,฀commodity฀
prices฀and฀interest฀rates฀which฀may฀adversely฀affect฀its฀results฀of฀opera-
tions฀and฀financial฀position.฀The฀Company฀manages฀such฀exposures,฀in฀
part,฀with฀derivative฀financial฀instruments.฀The฀fair฀value฀of฀these฀derivative฀
contracts฀is฀reported฀in฀other฀current฀assets฀or฀accounts฀payable฀and฀other฀
current฀liabilities฀in฀the฀accompanying฀Consolidated฀Statement฀of฀Financial฀
Position.
Foreign฀currency฀forward฀contracts฀are฀used฀to฀hedge฀existing฀
foreign฀currency฀denominated฀assets฀and฀liabilities,฀especially฀those฀of฀the฀
Company’s฀International฀Treasury฀Center,฀as฀well฀as฀forecasted฀foreign฀cur-
rency฀denominated฀intercompany฀sales.฀Silver฀forward฀contracts฀are฀used฀
to฀mitigate฀the฀Company’s฀risk฀to฀fluctuating฀silver฀prices.฀The฀Company’s฀
exposure฀to฀changes฀in฀interest฀rates฀results฀from฀its฀investing฀and฀borrow-
ing฀activities฀used฀to฀meet฀its฀liquidity฀needs.฀Long-term฀debt฀is฀generally฀
used฀to฀finance฀long-term฀investments,฀while฀short-term฀debt฀is฀used฀to฀
meet฀working฀capital฀requirements.฀The฀Company฀does฀not฀utilize฀financial฀
instruments฀for฀trading฀or฀other฀speculative฀purposes.
The฀Company฀periodically฀enters฀into฀foreign฀currency฀forward฀
contracts฀that฀are฀designated฀as฀cash฀flow฀hedges฀of฀exchange฀rate฀risk฀
related฀to฀forecasted฀foreign฀currency฀denominated฀intercompany฀sales.฀At฀
December฀31,฀2004,฀the฀Company฀had฀no฀open฀cash฀flow฀hedges฀related฀
to฀these฀foreign฀currency฀forward฀contracts.฀During฀2004,฀as฀a฀result฀of฀
the฀sale฀of฀the฀intercompany฀foreign฀currency฀denominated฀assets฀and฀
liabilities฀to฀third฀parties,฀a฀pre-tax฀loss฀of฀$16฀million฀was฀reclassified฀from฀
accumulated฀other฀comprehensive฀(loss)฀income฀to฀cost฀of฀goods฀sold.฀
Hedge฀ineffectiveness฀was฀insignificant.฀
The฀Company฀does฀not฀apply฀hedge฀accounting฀to฀the฀foreign฀cur-
rency฀forward฀contracts฀used฀to฀offset฀currency-related฀changes฀in฀the฀
fair฀value฀of฀foreign฀currency฀denominated฀assets฀and฀liabilities.฀These฀
contracts฀are฀marked฀to฀market฀through฀earnings฀at฀the฀same฀time฀that฀the฀
exposed฀assets฀and฀liabilities฀are฀remeasured฀through฀earnings฀(both฀in฀
other฀income฀(charges),฀net).฀The฀majority฀of฀the฀contracts฀of฀this฀type฀held฀
by฀the฀Company฀are฀denominated฀in฀euros,฀Australian฀dollars,฀and฀Canadian฀
dollars.฀At฀December฀31,฀2004,฀the฀fair฀value฀of฀these฀open฀contracts฀was฀
an฀unrealized฀gain฀of฀$25฀million฀(pre-tax).
The฀Company฀has฀entered฀into฀silver฀forward฀contracts฀that฀are฀des-
ignated฀as฀cash฀flow฀hedges฀of฀price฀risk฀related฀to฀forecasted฀worldwide฀
silver฀purchases.฀The฀Company฀used฀silver฀forward฀contracts฀to฀minimize฀
its฀exposure฀to฀increases฀in฀silver฀prices฀in฀2002,฀2003,฀and฀2004.฀At฀De-
cember฀31,฀2004,฀the฀Company฀had฀open฀forward฀contracts฀with฀maturities฀
through฀March฀2005.
฀At฀December฀31,฀2004,฀the฀fair฀value฀of฀open฀silver฀forward฀contracts฀
was฀an฀unrealized฀loss฀of฀less฀than฀$1฀million฀(pre-tax),฀which฀is฀included฀
in฀accumulated฀other฀comprehensive฀(loss)฀income.฀If฀this฀amount฀were฀
to฀be฀realized,฀all฀of฀it฀would฀be฀reclassified฀into฀cost฀of฀goods฀sold฀during฀
the฀next฀twelve฀months.฀Additionally,฀realized฀gains฀of฀$2฀million฀(pre-tax),฀
related฀to฀closed฀silver฀contracts,฀have฀been฀deferred฀in฀accumulated฀other฀
comprehensive฀(loss)฀income.฀These฀gains฀will฀be฀reclassified฀into฀cost฀of฀
goods฀sold฀as฀silver-containing฀products฀are฀sold,฀all฀within฀the฀next฀twelve฀
months.฀During฀2004,฀resulting฀from฀the฀sale฀of฀silver-containing฀products,฀
a฀realized฀gain฀of฀$10฀million฀(pre-tax)฀was฀recorded฀in฀cost฀of฀goods฀sold.฀
Hedge฀ineffectiveness฀was฀insignificant.
The฀Company’s฀financial฀instrument฀counterparties฀are฀high-quality฀
investment฀or฀commercial฀banks฀with฀significant฀experience฀with฀such฀
instruments.฀The฀Company฀manages฀exposure฀to฀counterparty฀credit฀risk฀
by฀requiring฀specific฀minimum฀credit฀standards฀and฀diversification฀of฀coun-
terparties.฀The฀Company฀has฀procedures฀to฀monitor฀the฀credit฀exposure฀
amounts.฀The฀maximum฀credit฀exposure฀at฀December฀31,฀2004฀was฀not฀
significant฀to฀the฀Company.
The฀Company฀has฀a฀50฀percent฀ownership฀interest฀in฀KPG,฀a฀joint฀
venture฀accounted฀for฀under฀the฀equity฀method.฀The฀Company’s฀propor-
tionate฀share฀of฀KPG’s฀other฀comprehensive฀income฀is฀therefore฀included฀
in฀its฀presentation฀of฀other฀comprehensive฀(loss)฀income฀displayed฀in฀the฀
Consolidated฀Statement฀of฀Shareholders’฀Equity.