Kodak Reports Q3: Sales to KPG Decline, KPG Earnings Strong
Press release from the issuing company
ROCHESTER, N.Y.--Oct. 22, 2003-- Eastman Kodak Company said that third-quarter net income, in accordance with Generally Accepted Accounting Principles (GAAP) in the U.S., totaled 42 cents per share and that sales rose 3% compared with the year-ago period.
Excluding the impact of previously announced focused cost reductions and a one-time charitable donation, earnings from continuing operations were 88 cents per share.
Commercial Imaging Segment
Net worldwide sales for the Commercial Imaging segment were $373 million for the third quarter of 2003 as compared with $352 million for the prior year quarter, representing an increase of $21 million,or 6% as reported, or an increase of 3% excluding the favorable impact of exchange. The increase in net sales was primarily comprised of:
* Volume: increases in volume contributed approximately 5.0 percentage points to third quarter sales driven by Imaging Services and document scanners.
* Price/Mix: price/mix negatively impacted sales by approximately 2.0 percentage points driven by graphics products.
* Exchange: favorable exchange contributed approximately 3.0 percentage points to third quarter sales.
Net sales in the U.S. were $223 million for the current year quarter as compared with $200 million for the prior year quarter, representing an increase of $23 million, or 12%. Net sales outside the U.S. were $150 million in the third quarter of 2003 as compared with $152 million for the prior year quarter, representing a decrease of $2 million or 1% as reported, a decrease of 7% excluding the favorable impact of exchange.
Net worldwide sales of graphic arts products to Kodak Polychrome Graphics ("KPG"), an unconsolidated joint venture affiliate in which the Company has a 50% ownership interest, decreased 14% in the current quarter as compared with the third quarter of 2002, primarily reflecting volume and negative price/mix in graphic arts film. This reduction resulted largely from digital technology transition and the effect of continuing economic weakness in the commercial printing market.
Despite continued weakness in the global economy, KPG's earnings performance continues to improve driven primarily by its leading position in the growth segments of digital proofing and digital printing plates, coupled with favorable foreign exchange. KPG's operating profit has been positive for 13 consecutive quarters and continued to contribute positively to Kodak's "Other Charges" during the third quarter of 2003.
NexPress, the unconsolidated joint venture between Kodak and Heidelberg in which the Company has a 50% ownership interest, continues to experience good customer acceptance on its sales of NexPress 2100 Digital Production Color Presses despite a weak printing market, with average monthly page volumes for these units running higher than planned.
Gross profit for the Commercial Imaging segment was $93 million for the third quarter of 2003 as compared with $109 million in the prior year quarter, representing a decrease of $16 million, or 15%. The gross profit margin was 24.9% in the current quarter as compared with 31.0% in the prior year quarter. The decrease in the gross profit margin of 6.1 percentage points was primarily attributable to:
* Price/Mix: declines due to price/mix reduced gross profit margins by approximately 1.5 percentage point driven by graphics products.
* Manufacturing Cost: an increase in manufacturing cost reduced gross profit margins by approximately 4.0 percentage points.
* Exchange: unfavorable exchange reduced gross profit margins by approximately .5 percentage point.
SG&A expenses for the Commercial Imaging segment remained unchanged at $49 million for the current quarter as compared with the third quarter of 2002, but decreased as a percentage of sales from 13.9% to 13.1%.
Third quarter R&D costs for the Commercial Imaging segment decreased $7 million, or 39%, from $18 million in the third quarter of 2002 to $11 million for the current quarter, and decreased as a percentage of sales from 5.1% to 2.9% in the current quarter.
Earnings from operations for the Commercial Imaging segment decreased $9 million, or 21%, from $42 million in the third quarter of 2002 to $33 million in the current quarter primarily as a result of declining margin contributions from traditional graphic arts products.
Overfall for the third quarter of 2003:
Sales totaled $3.447 billion, up 3% from $3.352 billion in the third quarter of 2002. Excluding foreign exchange, sales declined 1%.
The company reported net income of $122 million, or 42 cents per share, compared with net income of $334 million, or $1.15 per share, in the third quarter of 2002.
Earnings from continuing operations, excluding the impact of focused cost reductions and a non-operational item, were $252 million, or 88 cents per share. The after-tax non-operational items include a charge of $125 million, or 44 cents per share, related to previously announced cost reductions, and a charge of $5 million, or 2 cents per share, for a charitable contribution to the Infotonics Technology Center. The company also adjusted its estimated annual effective tax rate to 19% from 24%, which contributed 10 cents per share to both operational and GAAP earnings. In the third quarter of 2002, earnings from continuing operations, excluding non-operational items, totaled $306 million, or $1.05 per share. The after-tax non-operational items from the year-ago quarter added, on a net basis, 11 cents per share to reported earnings and included the restructuring of Japanese photofinishing operations; a one-time write-down of venture investments; adjustments related to previously announced restructuring programs; and a one-time tax benefit related to the Japanese photofinishing operations.
"Our third-quarter results reinforce the rationale behind the strategy we unveiled to investors on Sept. 25," said Kodak Chairman and Chief Executive Officer Daniel A. Carp. "Our digital businesses - both commercial and consumer - continue to demonstrate solid growth. In Health Imaging, for example, we are selling more computed radiography and digital radiography systems. With the completion this month of the PracticeWorks acquisition, we are now the leader in the market for digital dentistry.
"On the consumer side, Kodak's EasyShare family of digital cameras and printer docks continue to gain widespread acceptance," Carp said. "Popular Photography & Imaging magazine, for example, recently hailed the new Kodak EasyShare DX6490 digital camera for its ease-of-use and image quality. And during the third quarter, Kodak posted its first-ever profit in consumer digital cameras on a fully allocated basis. The EasyShare printer dock also is selling briskly, providing more evidence that Kodak knows how to satisfy the consumer's demand for simple, high-quality prints at home.
"The company enjoyed solid cash generation in the third quarter, which confirms our belief that we will continue to produce a substantial amount of cash from our traditional businesses," Carp said. "We are investing in a highly disciplined manner to fund the transformation of Kodak into a digitally oriented imaging company.
"In markets where film continues to grow, we will continue to invest smartly," Carp said. "Today, we announced that Kodak and China Lucky Film Corp. have signed a 20-year agreement to expand each other's market opportunities. This is an example of the kind of disciplined investments that will help maximize the value of our traditional businesses and create funding sources for the digital transformation."
Other third-quarter 2003 details from continuing operations:
Kodak's operating cash flow was lower than the year-ago quarter, primarily reflecting lower net income from continuing operations.
For the quarter, operating cash flow was $243 million, compared with $345 million in the third quarter of 2002. (Kodak defines operating cash flow as net cash provided by continuing operations, as determined under GAAP, plus proceeds from the sale of assets minus capital expenditures, acquisitions, investments in unconsolidated affiliates and dividends.)
The company's debt totaled $2.890 billion at the end of the quarter, compared with $2.742 billion in the year-ago quarter. The company held $983 million in cash on its balance sheet at the end of the quarter, up from $561 million at the end of the third quarter of 2002. Net debt, or total debt minus cash, totaled $1.907 billion at the end of the third quarter, down $274 million from the year-ago quarter. These figures don't include the $1.075 billion in debt that Kodak issued in October.
Gross profit on an operational basis was 33.7%, compared with 38.5% in the year-ago period.
Selling, general and administrative expenses on an operational basis were 18.3% of sales, down from 18.4% in the year-ago quarter.
The segment results for the third quarter of 2003 are as follows:
Photography segment sales totaled $2.475 billion, up 3%. The segment had earnings from operations of $204 million on an operational and GAAP basis, compared with earnings from operations of $324 million a year ago. Highlights for the quarter included a 117% increase in consumer digital camera sales, a 43% increase in sales at Ofoto, a 33% increase in inkjet paper sales, and a 14% increase in the sale of photo kiosks and related media.
Health Imaging segment sales were $571 million, up 1%. Earnings from operations on an operational and GAAP basis for the segment were $117 million, down from $126 million in the year-ago period. Highlights included higher sales of digital capture equipment, digital media and services.
Commercial Imaging segment sales were $373 million, up 6%. Earnings from operations on an operational and GAAP basis were $33 million, compared with $42 million in the year-ago period.
All Other sales were $28 million, up from $26 million. Losses from operations on an operational and GAAP basis totaled $19 million, compared with losses of $8 million in the year-ago period. The All Other category includes the Kodak Display business, as well as Sensors, Optics and miscellaneous businesses.
The company expects operational earnings of $2.10 to $2.20 per share, and GAAP earnings of $1.15 to $1.30 per share, for all of 2003.
"As we said on Sept. 25, Kodak intends to harness the power of digital technology to become a bigger, more diversified company, pursuing markets as varied as consumer digital cameras, digital medical imaging equipment, commercial printing and organic displays," Carp said. "In keeping with the Sept. 25 announcement, we will change the way Kodak reports its financial results so that investors benefit from a consistent, transparent presentation that aligns with the markets we are pursuing."
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