Kodak 2003 Annual Report Download - page 15

Financials
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outside the U.S., decreased 15% in 2003 as compared with 2002, reflect-
ing lower volumes and declines in price/mix, partially offset by favorable
exchange. In the U.S., Qualex’s sales for photofinishing services decreased
19% in 2003 as compared with 2002, and outside of the U.S., CIS sales
decreased 8%. These decreases reflect the effects of a continued weak
film industry.
Net sales from the Company’s consumer digital products and servic-
es, which include picture maker kiosks/media and retail consumer digital
services revenue primarily from Picture CD and Retail.com, increased 6%
in 2003 as compared with 2002, driven primarily by an increase in sales
of kiosks and consumer digital services.
The Company’s Ofoto business increased its sales 57% in 2003 as
compared with 2002. Ofoto’s sales represented less than 1% of the
Company’s consolidated net worldwide sales for 2003. Ofoto now has
more than 11 million members and continues to be the market leader in
the online photo services space.
Net worldwide sales of consumer digital cameras increased 79% in
2003 as compared with 2002, driven almost entirely by strong increases
in volume, which were partially offset by declines in price/mix. Sales con-
tinue to be driven by strong consumer acceptance of the EasyShare digital
camera system, as reflected in increased market share in a rapidly grow-
ing market.
Although some of Kodak’s largest channels do not report share data,
Kodak continues to hold one of the top U.S. digital camera market share
positions in channels reporting share data, attaining the number three
share position for the full year, after attaining the top spot for the fourth
quarter alone. Outside of the U.S., Kodak placed in the top four market
share positions in 6 out of 9 key markets in the fourth quarter, and in the
top four in 5 out of 9 key markets for the full year. Consumer digital cam-
eras were profitable on a fully allocated basis for the second half of 2003.
Kodak’s new Printer Dock products, initially launched in the spring of
2003, experienced strong sales growth in the fourth quarter of 2003,
strengthening their number two share position in the U.S. snapshot printer
market and putting them on track to be a $100 million business in the
first full year of sales.
Net worldwide sales of inkjet photo paper increased 32% in 2003 as
compared with 2002, primarily due to higher volumes. Kodak continued to
maintain its shared leader market share position in the U.S. in 2003. The
double-digit revenue growth and the maintenance of market share are pri-
marily attributable to strong underlying market growth and the continued
growth and acceptance of a new line of small format inkjet papers.
Net worldwide sales of professional film capture products, including
color negative, color reversal and commercial black and white films,
decreased 13% in 2003 as compared with 2002, primarily reflecting
declines in volume and negative price/mix, partially offset by favorable
exchange. Sales declines of professional film capture products resulted
primarily from the ongoing impact of digital substitution. Net worldwide
sales of professional sensitized output, including color negative paper and
display materials, increased 2% in 2003 as compared with 2002, primarily
reflecting an increase related to favorable exchange, partially offset by
declines in volume and negative price/mix. In addition, net worldwide
sales of professional digital cameras and digital writers increased during
2003.
Net worldwide sales of origination and print film to the entertainment
industry increased 11% in 2003 as compared with 2002, primarily reflect-
ing higher print film volumes and favorable exchange, partially offset by
negative price/mix.
Gross profit for the Photography segment was $2,861 million for
2003 as compared with $3,219 million for 2002, representing a decrease
of $358 million or 11%. The gross profit margin was 31.0% in the current
year as compared with 35.8% in the prior year. The 4.8 percentage point
decrease was primarily attributable to decreases in price/mix that impact-
ed gross profit margins by approximately 6.6 percentage points, partially
offset by an increase in manufacturing cost improvements and favorable
exchange, which impacted gross margins by approximately 0.7 and 1.1
percentage points, respectively. The decrease in price/mix was primarily
due to the impact of digital substitution, resulting in a decrease in sales of
higher margin traditional products, the impact of which was only partially
offset by increased sales of lower margin digital products.
SG&A expenses for the Photography segment were $1,962 million
for 2003 as compared with $1,935 million for 2002, representing an
increase of $27 million or 1%. The net increase in SG&A spending is pri-
marily attributable to unfavorable exchange of $96 million and an increase
in the benefit rate, partially offset by cost savings realized from position
eliminations associated with ongoing focused cost reduction programs. As
a percentage of sales, SG&A expense decreased slightly from 21.5% in
the prior year to 21.3% in the current year.
R&D costs for the Photography segment decreased $32 million or
6% from $513 million in 2002 to $481 million in 2003. As a percentage of
sales, R&D costs decreased slightly from 5.7% in the prior year to 5.2% in
the current year. The decrease in R&D is primarily due to cost savings
realized from position eliminations associated with ongoing focused cost
reduction programs. These cost savings were partially offset by $21 mil-
lion of write-offs for purchased in-process R&D associated with an acqui-
sition made in 2003.
Earnings from continuing operations before interest, other charges,
net, and income taxes for the Photography segment decreased $353 mil-
lion, or 46%, from $771 million in 2002 to $418 million in 2003, primarily
as a result of the factors described above.
Health Imaging On October 7, 2003, the Company completed the acqui-
sition of all of the outstanding shares of PracticeWorks, Inc., a leading
provider of dental practice management software and digital radiographic
imaging systems for approximately $475 million in cash, inclusive of
transaction costs, and assumed net debt of approximately $20 million.
This acquisition is expected to contribute approximately $200 million in
sales to the Health Imaging segment during the first full year. At the time
of the acquisition, it was anticipated that the transaction would be slightly
dilutive to earnings from the date of acquisition through the end of 2005
and accretive to earnings thereafter. However, based on ongoing success
in the execution of the integration, it is anticipated to become accretive to
earnings sometime during 2005, ahead of the original execution plan. This
acquisition will enable Kodak to offer its customers a full spectrum of den-
tal imaging products and services from traditional film to digital radiogra-
phy and photography, and is expected to move Health Imaging into the
leading position in the dental practice management and dental radi-
ographic markets.