Kodak 2005 Annual Report Download - page 43

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in price/mix, which reduced gross profi t margins by approximately 4.0 percentage points. This decrease was driven primarily by price/mix declines in
traditional consumer fi lm products, photofi nishing, consumer digital cameras, and entertainment print fi lms in the D&FIS segment, analog medical fi lm
and digital capture equipment in the Health Group segment, and graphic arts products in the Graphic Communications Group segment. The decline
in price/mix was partially offset by favorable exchange, which increased gross margins by approximately 0.5 percentage points, and decreases in
manufacturing and other costs, which favorably impacted gross profi t margins by approximately 0.4 percentage points year-over-year primarily due
to reduced labor expense. Included in 2004 manufacturing and other costs were accelerated depreciation charges of $152 million related to actions
taken under the Company’s restructuring programs, compared with accelerated depreciation charges of $69 million in 2003.
Selling, General and Administrative Expenses
SG&A expenses were $2,491 million for 2004 as compared with $2,617 million for 2003, representing a decrease of $126 million, or 5%. SG&A
decreased as a percentage of sales from 20% for the prior year to 18% for the current year. The net decrease in SG&A is primarily attributable to
cost savings in the current year period realized from position eliminations resulting from focused cost reduction programs, a decrease in advertising
expense of $83 million compared with the prior year, and $58 million in one-time charges incurred in 2003 relating to four legal settlements, an asset
impairment, a strategic investment write-down, and a technology contribution, offset by the reversal of an environmental reserve. Such charges
amounted to approximately $6 million in the current year. These decreases were partially offset by unfavorable exchange of $69 million and SG&A
expense of the companies acquired of $192 million.
Research and Development Costs
R&D costs were $836 million for 2004 as compared with $760 million for 2003, representing an increase of $76 million, or 10%. The increase in
R&D is primarily due to increased spending to drive growth in digital product areas as well as acquisition-related R&D, partially offset by reductions
in spending on traditional products. Write-offs for in-process R&D associated with acquisitions made in the current year were $15 million compared
with $31 million in the prior year. As a percentage of sales, R&D costs remained fl at at 6% for both the current and prior years.
(Losses) Earnings From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes
Losses from continuing operations before interest, other income (charges), net and income taxes for 2004 were $87 million as compared with
earnings of $302 million for 2003, representing a decrease of $389 million, or 129%. The decrease is primarily attributable to the reasons
described above.
Interest Expense
Interest expense for 2004 was $168 million as compared with $147 million for 2003, representing an increase of $21 million, or 14%. The increase
in interest expense is almost entirely attributable to higher average interest rates resulting from the replacement of commercial paper debt with the
Senior Notes and Convertible Senior Notes issued in October 2003.
Other Income (Charges), Net
The other income (charges), net component includes investment income, income and losses from equity investments, gains and losses on foreign
exchange and on the sales of assets and investments, and other miscellaneous income and expense items. Other income for the current year was
$161 million as compared with a net charge of $51 million for 2003. The increase in income is primarily attributable to the proceeds from two
favorable legal settlements, increased income from the Company’s equity investment in Kodak Polychrome Graphics, and in the prior year, the
NexPress investments were accounted for under the equity method and included in other income (charges), net. As a result of the Company’s
purchase of the Heidelberg’s 50 percent interest in the NexPress joint venture, which closed in May 2004, NexPress is consolidated in the Company’s
Statement of Operations for the remaining portion of the year and included in the Graphic Communications Group segment.
Income Tax Provision (Benefi t)
The Company’s recorded benefi t from continuing operations was $175 million for the year ended December 31, 2004, representing an effective tax
rate benefi t from continuing operations of 186%. The effective tax rate benefi t from continuing operations of 186% differs from the U.S. statutory
tax rate of 35% primarily due to earnings from operations in certain lower-taxed jurisdictions outside the U.S., coupled with losses incurred in certain
jurisdictions that are benefi ted at a rate equal to or greater than the U.S. federal income tax rate.
The Company’s recorded benefi t from continuing operations was $85 million for the year ended December 31, 2003, representing an effective tax
rate benefi t from continuing operations of 82%, despite the fact that the Company had positive earnings from continuing operations before income
taxes. The effective tax rate benefi t from continuing operations of 82% differs from the U.S. statutory tax rate of 35% primarily due to earnings from
operations in certain lower-taxed jurisdictions outside the U.S., coupled with losses incurred in certain jurisdictions that are benefi ted at a rate equal to
or greater than the U.S. federal income tax rate.