Kodak 2004 Annual Report Download - page 17

Financials
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2 0 0 4 ฀ S U M M A R Y ฀ A N N U A L ฀ R E P O R T
Net฀worldwide฀sales฀of฀picture฀maker฀kiosks฀and฀related฀media฀
increased฀58%฀in฀2004฀as฀compared฀with฀2003,฀primarily฀due฀to฀strong฀
volume฀increases฀and฀favorable฀exchange.฀Sales฀continue฀to฀be฀driven฀by฀
strong฀market฀acceptance฀of฀Kodak’s฀new฀generation฀of฀kiosks฀as฀well฀as฀
an฀increase฀in฀consumer฀demand฀for฀digital฀printing฀at฀retail.฀฀
Net฀worldwide฀sales฀from฀the฀home฀printing฀solutions฀SPG,฀which฀
includes฀inkjet฀photo฀paper฀and฀printer฀docks/media,฀increased฀47%฀in฀
the฀current฀year฀as฀compared฀with฀the฀prior฀year.฀For฀inkjet฀paper,฀2004฀
was฀marked฀by฀increased฀competition฀from฀store฀brands฀and฀the฀mix฀shift฀
associated฀with฀consumer’s฀preference฀for฀smaller฀format฀papers.฀Kodak’s฀
printer฀dock฀products฀continued฀to฀experience฀strong฀sales฀growth฀during฀
2004.฀
฀
Traditional฀Strategic฀Product฀Groups’฀Revenues฀฀D&FIS฀segment฀tra-
ditional฀product฀sales฀were฀$6,509฀million฀for฀the฀current฀year฀as฀compared฀
with฀$7,446฀million฀for฀the฀prior฀year,฀representing฀a฀decrease฀of฀$937฀
million,฀or฀13%,฀primarily฀driven฀by฀declines฀in฀the฀film฀capture฀SPG฀and฀
the฀consumer฀output฀SPG.฀Net฀worldwide฀sales฀of฀the฀film฀capture฀SPG,฀
including฀consumer฀roll฀film฀(35mm฀film฀and฀Advantix฀film),฀one-time-use฀
cameras฀(OTUC),฀professional฀films,฀reloadable฀traditional฀film฀cameras,฀
and฀batteries/videotape,฀decreased฀16%฀in฀2004฀as฀compared฀with฀2003,฀
primarily฀reflecting฀volume฀declines฀and฀negative฀price/mix฀experienced฀for฀
all฀significant฀film฀capture฀product฀categories.฀These฀declines฀were฀partially฀
offset฀by฀favorable฀exchange.฀฀
U.S.฀consumer฀film฀industry฀sell-through฀volumes฀decreased฀approxi-
mately฀18%฀in฀2004฀as฀compared฀with฀2003.฀Kodak’s฀sell-in฀consumer฀
film฀volumes฀declined฀21%฀as฀compared฀with฀the฀prior฀year,฀reflecting฀a฀
decrease฀in฀U.S.฀retailers’฀inventories.฀฀
As฀previously฀announced,฀the฀Company’s฀current฀estimate฀of฀world-
wide฀consumer฀film฀industry฀volumes฀for฀2005฀could฀decline฀as฀much฀as฀
20%,฀with฀U.S.฀volumes฀declining฀as฀much฀as฀30%.฀
Net฀worldwide฀sales฀for฀the฀retail฀photofinishing฀SPG,฀which฀includes฀
color฀negative฀paper,฀equipment฀and฀services,฀chemistry,฀and฀photofinishing฀
services฀at฀retail,฀decreased฀6%฀in฀2004฀as฀compared฀with฀2003,฀primarily฀
reflecting฀lower฀volumes฀of฀Qualex฀retail฀photofinishing฀services,฀partially฀
offset฀by฀favorable฀exchange.฀฀
Net฀worldwide฀sales฀for฀the฀wholesale฀photofinishing฀SPG,฀which฀
includes฀color฀negative฀paper,฀equipment,฀chemistry,฀and฀photofinishing฀
services฀at฀Qualex฀in฀the฀U.S.฀and฀Consumer฀Imaging฀Services฀(CIS)฀
outside฀the฀U.S.,฀decreased฀31%฀in฀2004฀as฀compared฀with฀2003,฀primarily฀
reflecting฀lower฀volumes,฀partially฀offset฀by฀favorable฀exchange.฀The฀lower฀
volumes฀reflect฀the฀effects฀of฀digital฀replacement.฀฀฀
Net฀worldwide฀sales฀for฀the฀entertainment฀films฀SPG,฀including฀
origination฀and฀print฀films฀to฀the฀entertainment฀industry฀increased฀12%฀in฀
2004฀as฀compared฀with฀2003,฀reflecting฀volume฀increases฀and฀favorable฀
exchange฀that฀was฀partially฀offset฀by฀negative฀price/mix.฀
Gross฀Profit฀฀Gross฀profit฀for฀the฀D&FIS฀segment฀was฀$2,612฀million฀for฀
2004฀as฀compared฀with฀$2,864฀million฀for฀2003,฀representing฀a฀decrease฀
of฀$252฀million฀or฀9%.฀The฀gross฀profit฀margin฀was฀28.4%฀in฀the฀current฀
year฀as฀compared฀with฀31.0%฀in฀the฀prior฀year.฀The฀2.6฀percentage฀point฀
decrease฀was฀primarily฀attributable฀to฀decreases฀in฀price/mix฀that฀impacted฀
gross฀profit฀margins฀by฀approximately฀5.3฀percentage฀points,฀partially฀
offset฀by฀manufacturing฀cost฀improvements,฀which฀favorably฀impacted฀
gross฀margins฀by฀approximately฀2.4฀percentage฀points.฀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.฀฀
Selling,฀General฀and฀Administrative฀Expenses฀฀SG&A฀expenses฀for฀
the฀D&FIS฀segment฀were฀$1,665฀million฀for฀2004฀as฀compared฀with฀$1,967฀
million฀for฀2003,฀representing฀a฀decrease฀of฀$302฀million฀or฀15%.฀The฀net฀
decrease฀in฀SG&A฀spending฀is฀primarily฀attributable฀to฀cost฀savings฀realized฀
from฀position฀eliminations฀associated฀with฀ongoing฀focused฀cost฀reduction฀
programs฀and฀reductions฀in฀advertising฀expense,฀partially฀offset฀by฀unfavor-
able฀exchange฀of฀$50฀million.฀As฀a฀percentage฀of฀sales,฀SG&A฀expense฀
decreased฀from฀21%฀in฀the฀prior฀year฀to฀18%฀in฀the฀current฀year.
฀
Research฀and฀Development฀Costs฀฀R&D฀costs฀for฀the฀D&FIS฀segment฀
decreased฀$113฀million฀or฀23%฀from฀$481฀million฀in฀2003฀to฀$368฀million฀
in฀2004.฀As฀a฀percentage฀of฀sales,฀R&D฀costs฀decreased฀from฀5%฀in฀the฀
prior฀year฀to฀4%฀in฀the฀current฀year.฀The฀decrease฀in฀R&D฀is฀primarily฀due฀
to฀a฀decline฀in฀spending฀related฀to฀consumer฀and฀professional฀imaging฀
traditional฀products฀and฀services.฀In฀addition,฀the฀decline฀was฀partly฀at-
tributable฀to฀a฀$21฀million฀write-off฀for฀purchased฀in-process฀R&D฀in฀2003,฀
with฀no฀such฀charge฀incurred฀in฀the฀current฀year.฀฀
Earnings฀(Losses)฀From฀Continuing฀Operations฀Before฀Interest,฀
Other฀Income฀(Charges),฀Net฀and฀Income฀Taxes฀฀Earnings฀from฀con-
tinuing฀operations฀before฀interest,฀other฀income฀(charges),฀net฀and฀income฀
taxes฀for฀the฀D&FIS฀segment฀increased฀$164฀million,฀or฀39%,฀from฀$416฀
million฀in฀2003฀to฀$580฀million฀in฀2004,฀primarily฀as฀a฀result฀of฀the฀factors฀
described฀above.
Health฀
On฀October฀7,฀2003,฀the฀Company฀completed฀the฀acquisition฀of฀all฀of฀the฀
outstanding฀shares฀of฀PracticeWorks,฀Inc.฀(PracticeWorks),฀a฀leading฀
provider฀of฀dental฀practice฀management฀software.฀As฀part฀of฀this฀transac-
tion,฀Kodak฀also฀acquired฀100%฀of฀PracticeWorks’฀Paris-based฀subsidiary,฀
Trophy฀Radiologie,฀S.A.,฀a฀developer฀and฀manufacturer฀of฀dental฀digital฀ra-
diographic฀equipment,฀which฀PracticeWorks฀purchased฀in฀December฀2002.฀
The฀acquisition฀of฀PracticeWorks฀and฀Trophy฀was฀expected฀to฀contribute฀
approximately฀$200฀million฀in฀sales฀to฀the฀Health฀segment฀during฀the฀first฀
full฀year.฀Full฀year฀2004฀net฀sales฀for฀PracticeWorks฀(acquired฀in฀October฀
2003)฀were฀$212฀million,฀which฀resulted฀in฀incremental฀net฀sales฀of฀$164฀
million฀for฀the฀Health฀segment.฀฀฀฀
It฀is฀anticipated฀that฀this฀transaction฀will฀be฀slightly฀dilutive฀to฀earn-
ings฀from฀the฀date฀of฀acquisition฀through฀the฀end฀of฀2005฀and฀accretive฀to฀
earnings฀thereafter.฀This฀acquisition฀enables฀Kodak฀to฀offer฀its฀customers฀a฀
full฀spectrum฀of฀dental฀imaging฀products฀and฀services฀from฀traditional฀film฀
to฀digital฀radiography฀and฀photography,฀and฀moved฀the฀Health฀segment฀into฀
the฀leading฀position฀in฀the฀dental฀practice฀management฀and฀dental฀digital฀
radiographic฀markets.฀฀
Worldwide฀Revenues฀฀Net฀worldwide฀sales฀for฀the฀Health฀segment฀were฀
$2,686฀million฀for฀2004฀as฀compared฀with฀$2,431฀million฀for฀2003,฀repre-