<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-87
EASTMAN KODAK COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 16-0417150
(State of incorporation) (IRS Employer
Identification No.)
343 STATE STREET, ROCHESTER, NEW YORK 14650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 716-724-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class September 30, 1999
Common Stock, $2.50 par value 315,603,811
<PAGE> 2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS
<CAPTION>
(in millions, except per share data)
Third Quarter Three Quarters
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Sales $3,580 $3,391 $10,290 $9,843
Cost of goods sold 2,087 1,777 5,842 5,190
------ ------ ------- ------
Gross profit 1,493 1,614 4,448 4,653
Selling, general and
administrative expenses 923 761 2,479 2,348
Research and development costs 193 224 598 671
------ ------ ------- ------
Earnings from operations 377 629 1,371 1,634
Interest expense 39 32 107 96
Other income (charges) 17 6 125 156
------ ------ ------- ------
Earnings before income taxes 355 603 1,389 1,694
Provision for income taxes 120 205 472 576
------ ------ ------- ------
NET EARNINGS $ 235 $ 398 $ 917 $1,118
====== ====== ======= ======
Basic earnings per share $ .74 $ 1.23 $ 2.87 $ 3.46
====== ====== ======= ======
Diluted earnings per share $ .73 $ 1.21 $ 2.84 $ 3.41
====== ====== ======= ======
Earnings used in basic and
diluted earnings per share $ 235 $ 398 $ 917 $1,118
Number of common shares used in
basic earnings per share 316.2 323.9 319.1 323.3
Incremental shares from
assumed conversion of options 4.1 6.0 3.7 4.5
------ ------ ------- ------
Number of common shares used in
diluted earnings per share 320.3 329.9 322.8 327.8
====== ====== ======= ======
CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
Retained earnings at beginning
of period $6,563 $5,778 $ 6,163 $5,343
Net earnings 235 398 917 1,118
Cash dividends declared (139) (142) (421) (427)
------ ------ ------- ------
Retained earnings
at end of period $6,659 $6,034 $ 6,659 $6,034
====== ====== ======= ======
- --------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 3
<TABLE>
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<CAPTION>
(in millions)
Sept. 30, Dec. 31,
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 580 $ 457
Marketable securities 24 43
Receivables 2,787 2,527
Inventories 1,563 1,424
Deferred income tax charges 958 855
Other 308 293
------- -------
Total current assets 6,220 5,599
------- -------
PROPERTIES
Land, buildings and equipment at cost 13,370 13,482
Less: Accumulated depreciation 7,488 7,568
------- -------
Net properties 5,882 5,914
------- -------
OTHER ASSETS
Goodwill (net of accumulated amortization
of $630 and $534) 1,029 1,232
Long-term receivables and other
noncurrent assets 1,860 1,705
Deferred income tax charges 250 283
------- -------
TOTAL ASSETS $15,241 $14,733
======= =======
- -----------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payables $ 3,698 $ 3,906
Short-term borrowings 1,879 1,518
Taxes - income and other 828 593
Dividends payable 139 142
Deferred income tax credits 26 19
------- -------
Total current liabilities 6,570 6,178
OTHER LIABILITIES
Long-term borrowings 920 504
Postemployment liabilities 2,872 2,962
Other long-term liabilities 905 1,032
Deferred income tax credits 82 69
------- -------
Total liabilities 11,349 10,745
SHAREHOLDERS' EQUITY
Common stock at par* 978 978
Additional paid in capital 884 902
Retained earnings 6,659 6,163
Accumulated other comprehensive loss (151) (111)
------- -------
8,370 7,932
Less: Treasury stock at cost* 4,478 3,944
------- -------
Total shareholders' equity 3,892 3,988
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $15,241 $14,733
======= =======
<FN>
* Common stock: $2.50 par value, 950 million shares authorized,
391 million shares issued at September 30, 1999 and December 31,
1998. Treasury stock at cost consists of approximately 76
million shares at September 30, 1999 and 68 million shares at
December 31, 1998.
Total comprehensive income was $294 million and $432 million for
the quarters, and $877 million and $1,173 million for the year to
date periods, ended September 30, 1999 and September 30, 1998,
respectively.
- -----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
</TABLE>
<PAGE> 4
<TABLE>
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
(in millions)
Three Quarters
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 917 $1,118
Adjustments to reconcile to
net cash used in operating activities:
Depreciation and amortization 670 619
Restructuring costs, asset impairments
and other charges 453 -
Benefit for deferred taxes (50) (63)
Gain on sale/retirement of assets (52) (107)
Increase in receivables (326) (216)
Increase in inventories (240) (334)
Decrease in liabilities excluding borrowings (310) (553)
Other items, net (183) (26)
------ ------
Total adjustments (38) (680)
------ ------
Net cash provided by operating activities 879 438
------ ------
Cash flows from investing activities:
Additions to properties (749) (619)
Proceeds from sale of assets 114 181
Cash flows related to sales of businesses 44 -
Acquisitions, net of cash acquired (3) (415)
Sales of marketable securities 93 100
Purchases of marketable securities (73) (130)
------ ------
Net cash used in investing activities (574) (883)
------ ------
Cash flows from financing activities:
Net increase in borrowings
with original maturity of
90 days or less 467 645
Proceeds from other borrowings 1,135 867
Repayment of other borrowings (811) (996)
Dividends to shareholders (424) (427)
Exercise of employee stock options 35 163
Stock repurchase programs (583) (158)
------ ------
Net cash (used in) provided by financing
activities (181) 94
------ ------
Effect of exchange rate changes on cash (1) 4
------ ------
Net increase (decrease) in cash and cash
equivalents 123 (347)
Cash and cash equivalents, beginning of year 457 728
------ ------
Cash and cash equivalents, end of quarter $ 580 $ 381
====== ======
The following transactions are not reflected in the Consolidated
Statement of Cash Flows:
(in millions)
Three Quarters
1999 1998
Liabilities assumed in acquisitions $ - $228
- -----------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 5
Eastman Kodak Company and Subsidiary Companies
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company in
accordance with the accounting policies stated in the 1998 Annual Report
and should be read in conjunction with the Notes to Financial Statements
appearing therein. In the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation have been included in the financial statements. Certain
reclassifications of 1998 financial statement and related footnote amounts
have been made to conform with the 1999 presentation. The financial
statements are based in part on estimates and have not been audited by
independent accountants. PricewaterhouseCoopers LLP will audit the annual
statements.
- ---------------------------------------------------------------------------
NOTE 2: SEGMENT INFORMATION
Refer to Management's Discussion and Analysis.
- ---------------------------------------------------------------------------
NOTE 3: COMMITMENTS AND CONTINGENCIES
The Company and its subsidiary companies are involved in lawsuits, claims,
investigations and proceedings, including product liability, commercial,
environmental, and health and safety matters, which are being handled and
defended in the ordinary course of business. There are no such matters
pending that the Company and its General Counsel expect to be material in
relation to the Company's business, financial position or results of
operations. Refer to Item 1, Legal Proceedings, on page 25.
- ---------------------------------------------------------------------------
<PAGE> 6
NOTE 4: DIVESTITURES
In April 1999, the Company sold its digital printer, copier-duplicator, and
roller assembly operations primarily associated with its Office Imaging
business to Heidelberger Druckmaschinen AG ("Heidelberg"), which included
its operations in Rochester, NY, Muehlhausen, Germany and Tijuana, Mexico.
The transaction did not have a material effect on the Company's results of
operations or financial position.
In connection with this transaction, the Company and Heidelberg also
announced an agreement to expand their joint venture company, NexPress, to
include the black-and-white electrophotographic business. The Company
contributed research and development resources to NexPress, as well as its
toner and developer operations in Rochester and Kirkby, England. Kodak and
Heidelberg established the NexPress joint venture in September 1997 for the
purpose of developing and marketing new digital color printing solutions
for the graphic arts industry. In connection with these arrangements, the
Company serves as a supplier both to Heidelberg and NexPress for
consumables such as photoconductors and raw materials for toner/developer
manufacturing.
On September 21, 1999, the Company entered into an agreement with Getty
Images, Inc. for Getty to acquire The Image Bank, a wholly-owned subsidiary
of the Company, for $183 million in cash. The transaction is expected to be
completed in the fourth quarter of 1999 and result in a gain.
- ---------------------------------------------------------------------------
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<TABLE>
SUMMARY
<CAPTION>
(in millions, except per share data)
Third Quarter Three Quarters
1999 1998 Change 1999 1998
Change
<S> <C> <C> <C> <C> <C> <C>
Sales $3,580 $3,391 + 6% $10,290 $9,843 + 5%
Earnings from operations 377 629 -40 1,371 1,634 -16
Net earnings 235 398 -41 917 1,118 -18
Basic earnings per share .74 1.23 -40 2.87 3.46 -17
Diluted earnings per share .73 1.21 -40 2.84 3.41 -17
</TABLE>
1999
Sales for the first three quarters were positively impacted by strong
volume gains in consumer papers and films, health imaging analog film,
digital cameras, and the contribution of the medical imaging business
acquired from Imation, but negatively impacted by the sale of the Office
Imaging business and certain retail operations, as well as lower effective
selling prices. Net earnings were reduced by after-tax charges in the
first quarter totaling $68 million or $.21 per share related to portfolio
adjustments to exit non-strategic or under-performing businesses and
product lines and in the third quarter totaling $231 million or $.72 per
share for restructuring charges relating to manufacturing and
photofinishing consolidation, and reductions in selling, general and
administrative positions (see Restructuring Programs and Cost Reduction).
Excluding these charges, diluted earnings per share for the first three
quarters would have been $3.77, or 14% over adjusted 1998 three quarters
diluted earnings per share of $3.32, the latter excluding an after-tax gain
of $44 million in connection with the Gretag Imaging initial public
offering, and a charge of $12 million for a litigation settlement.
During the first three quarters, the Company sold its digital printer,
copier-duplicator and roller assembly operations primarily associated with
the Office Imaging business to Heidelberg (see Note 4, Divestitures). In
addition, the Company announced a new stock repurchase program for up to $2
billion of the Company's outstanding common stock.
- ---------------------------------------------------------------------------
<PAGE> 8
<TABLE>
Sales by Operating Segment
<CAPTION>
(in millions)
Third Quarter Three Quarters
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Consumer Imaging
Inside the U.S. $ 917 $ 849 + 8% $ 2,596 $2,422 + 7%
Outside the U.S. 1,054 1,024 + 3 2,840 2,867 - 1
------ ------ --- ------- ------ ---
Total Consumer Imaging 1,971 1,873 + 5 5,436 5,289 + 3
------ ------ --- ------- ------ ---
Kodak Professional
Inside the U.S. 191 182 + 5 539 534 + 1
Outside the U.S. 275 272 + 1 861 810 + 6
------ ------ --- ------- ------ ---
Total Kodak Professional 466 454 + 3 1,400 1,344 + 4
------ ------ --- ------- ------ ---
Health Imaging
Inside the U.S. 222 155 +43 691 477 +45
Outside the U.S. 281 190 +48 858 607 +41
------ ------ --- ------- ------ ---
Total Health Imaging 503 345 +46 1,549 1,084 +43
------ ------ --- ------- ------ ---
Other Imaging
Inside the U.S. 324 403 -20 941 1,175 -20
Outside the U.S. 316 316 0 964 951 + 1
------ ------ --- ------- ------ ---
Total Other Imaging 640 719 -11 1,905 2,126 -10
------ ------ --- ------- ------ ---
Total Sales $3,580 $3,391 + 6% $10,290 $9,843 + 5%
====== ====== === ======= ====== ===
</TABLE>
- ---------------------------------------------------------------------------
<TABLE>
Earnings from Operations by Operating Segment
<CAPTION>
(in millions)
Third Quarter Three Quarters
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Consumer Imaging $425 $360 +18% $ 983 $ 858 +15%
Percent of Sales 21.6% 19.2% 18.1% 16.2%
Kodak Professional $107 $ 70 +53% $ 268 $ 225 +19%
Percent of Sales 23.0% 15.4% 19.1% 16.7%
Health Imaging $117 $ 92 +27% $ 344 $ 283 +22%
Percent of Sales 23.3% 26.7% 22.2% 26.1%
Other Imaging $ 78 $107 -27% $ 126 $ 268 -53%
Percent of Sales 12.2% 14.9% 6.6% 12.6%
---- ---- --- ------ ------ ---
Total of segments $727 $629 +16% $1,721 $1,634 + 5%
Percent of Sales 20.3% 18.5% 16.7% 16.6%
Restructuring costs,
asset impairments,
and other charges (350) (350)
---- ---- ------ ------
Consolidated total $377 $629 $1,371 $1,634
==== ==== ====== ======
</TABLE>
- ---------------------------------------------------------------------------
<PAGE> 9
<TABLE>
Net Earnings by Operating Segment
<CAPTION>
(in millions)
Third Quarter Three Quarters
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Consumer Imaging $296 $228 +30% $ 690 $ 623 +11%
Percent of Sales 15.0% 12.2% 12.7% 11.8%
Kodak Professional $ 66 $ 47 +40% $ 204 $ 157 +30%
Percent of Sales 14.2% 10.4% 14.6% 11.7%
Health Imaging $ 73 $ 59 +24% $ 230 $ 177 +30%
Percent of Sales 14.5% 17.1% 14.8% 16.3%
Other Imaging $ 53 $ 77 -31% $ 86 $ 212 -59%
Percent of Sales 8.3% 10.7% 4.5% 10.0%
---- ---- --- ------ ------ ---
Total of segments $488 $411 +19% $1,210 $1,169 + 4%
Percent of Sales 13.6% 12.1% 11.8% 11.9%
Restructuring costs,
asset impairments,
and other charges (350) (350)
Interest expense (39) (32) (107) (96)
Corporate interest income 5 12 15 20
Income tax effects on
above items and taxes
not allocated to
segments 131 7 149 25
---- ---- ---- ------
Total Net Earnings $235 $398 $ 917 $1,118
==== ==== ==== ======
</TABLE>
- ---------------------------------------------------------------------------
<TABLE>
COSTS AND EXPENSES
<CAPTION>
(in millions)
Third Quarter Three Quarters
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Gross profit $1,493 $1,614 - 7% $4,448 $4,653 - 4%
Percent of Sales 41.7% 47.5% 43.2% 47.3%
Selling, general and
administrative expenses $ 923 $ 761 +21% $2,479 $2,348 + 6%
Percent of Sales 25.8% 22.4% 24.1% 23.9%
Research and development
costs $ 193 $ 224 -14% $ 598 $ 671 -11%
Percent of Sales 5.4% 6.6% 5.8% 6.8%
</TABLE>
- ---------------------------------------------------------------------------
<PAGE> 10
1999 COMPARED WITH 1998
Third Quarter
Consolidated
Third quarter 1999 sales increased 6% compared with the third quarter of
1998. Excluding the effects of portfolio actions, sales increased 7%.
Portfolio actions had a small impact in the quarter-to-quarter comparison,
as the benefits of the acquisition of the Imation medical imaging business
were substantially offset by divestitures including the sale of the Office
Imaging business to Heidelberg, the divestiture of significant elements of
Consumer Imaging's retail operations (primarily Fox Photo), the elimination
of the personal computer service business, and the transfer of the Japanese
graphics business to the Kodak Polychrome Graphics joint venture.
Sales in emerging markets increased 10%, continuing and accelerating the
positive trend since the fourth quarter of 1998. Sales in emerging markets
accounted for approximately 16% of the Company's worldwide sales. The
emerging markets portfolio showed growth across a wide geographical range,
with China up 45%, Korea up 34%, and India up 23%. Strong growth in Mexico
(23%), coupled with a reduction in the rate of decline in Brazil (-8%),
permitted the Latin American Region to report 2% sales growth year over
year.
Sales of digital and digitization products were $541 million, up 44% from
$376 million in the quarter a year ago. Sales of digital and digitization
products accounted for 15% of the Company's worldwide sales.
Gross profit declined 5.8 percentage points, from 47.5% of sales to 41.7%
of sales. Excluding restructuring charges, gross profit increased .8
percentage points, from 47.5% of sales to 48.3% of sales. Improvement was
driven by portfolio impacts, higher manufacturing volumes, and strong
manufacturing productivity, which more than offset the negative impact of
price and foreign exchange.
Selling, general and administrative (SG&A) expenses increased as a
percentage of sales from 22.4% to 25.8%. Excluding restructuring charges,
SG&A expenses increased slightly as a percentage of sales from 22.4% to
22.6%. SG&A excluding advertising expenses increased from 17.0% to 17.2%
of sales. The increases in absolute spending and in percentage of sales
were caused by a higher level of advertising for digitization initiatives
and the portfolio impact of the higher SG&A rate of the medical imaging
business acquired from Imation.
Research and development (R&D) expenditures declined both as a percentage
of sales (from 6.6% to 5.4%) and in dollars (from $224 million to $193
million), resulting in an overall 14% reduction. This reflects the
benefits of a number of factors, including improvement in R&D cost
structure; a more tightly focused portfolio, resulting in more effort
devoted to a narrower range of inquiry; and more joint development, with
more work shared with partners. This level of R&D spending is somewhat
below the Company's target of 6% of the previous year's sales.
<PAGE> 11
Earnings from operations decreased 40%. Excluding restructuring charges,
earnings from operations increased 16%, as the benefits of higher unit
volumes, manufacturing productivity, and lower R&D spending more than
offset lower effective selling prices and the unfavorable effects of
foreign exchange.
Interest expense increased 22%, due to higher levels of short-term and long-
term borrowings. Other income (charges) increased $11 million primarily
due to gains associated with sales of investments. The effective tax rate
was 34% in both periods.
Consumer Imaging
Sales in the Consumer Imaging segment increased 5% compared with the prior
year third quarter. However, sales were reduced by the divestiture of the
Fox Photo operating unit in September 1998, and a number of small retail
operations in Europe and Latin America. Adjusting for portfolio impacts,
segment sales increased 8%, as the benefits of higher unit volumes more
than offset lower effective selling prices and the negative effects of
foreign exchange.
Sales inside the U.S. increased 8% as reported, or 11% excluding the
effects of the divested retail operations. Outside the U.S., sales were up
3% as reported, and up 5% with non-U.S. divestitures excluded. Overall, the
primary contributors to sales growth include Advantix film and cameras,
color paper, photofinishing, and one-time-use cameras. The segment
experienced continued growth in emerging markets, with sales up 3%, or 7%
excluding Russia. Growth was led by Mexico (+25%), Southeast Asia (+24%),
China (+21%), and India (+19%), which more than offset the weakness in
Brazil (-15%).
Worldwide film sales to dealers increased 8%, reflecting a 14% volume
increase, partially offset by a 5% price decline and no significant foreign
exchange impact. U.S. film sales to dealers were up 7%, reflecting volume
growth of 18%, partially offset by a 9% price decline. Outside the U.S.,
film sales to dealers were up 9%, reflecting 12% volume growth, partially
offset by a 2% price decline.
Worldwide color paper sales were up 5%, due to 8% volume gains partially
offset by a combination of lower prices and unfavorable foreign exchange.
U.S. color paper sales were up 14%, due to 12% volume gains and higher
prices. Outside the U.S., paper sales were up 1%, with 5% volume gains
offset by lower prices and unfavorable foreign exchange.
SG&A expenses for the segment increased 5%, but decreased from 25.0% of
sales to 24.9% of sales. Excluding advertising expenses, SG&A expenses
increased 3%, but decreased from 17.1% of sales to 16.8% of sales.
Research and development expenses decreased 10%, from 5.0% of sales to 4.3%
of sales.
Segment earnings from operations increased $65 million or 18%, as higher
unit volumes and manufacturing productivity more than offset lower
effective selling prices. The increased earnings were led by 35mm color
negative film and paper, Advantix film and cameras, and photofinishing
operations. Net earnings were $296 million, an increase of 30% from the
prior year, as a result of the increase in earnings from operations and
gains associated with sales of investments.
<PAGE> 12
Kodak Professional
Sales in the Kodak Professional segment increased 3%. Adjusting the year-
over-year comparison for the effect of the formation of the Kodak
Polychrome Graphics joint venture in Japan, sales were up 8%. Sales were
led by growth in the Portrait/Social and Graphics product lines. Sales
inside the U.S. increased 5%. Sales outside the U.S. increased 1%, with
good growth in the Asia Pacific Region (+26%), Greater China (+25%), and
Latin America (+9%), offset by sales declines of 36% in Japan.
Sales in the Portrait/Social product line grew 12%, primarily due to the
continued success of the new Portra family of films and paper. Sales in
the sensitized products portion of the Commercial product line declined, as
share advances in new color reversal products were not sufficient to offset
slow industry growth and ongoing digital substitution of conventional
products.
SG&A expenses for the segment decreased 6%, from 19.8% of sales to 18.2% of
sales. Excluding advertising expenses, SG&A expenses decreased 4%, from
16.7% of sales to 15.7% of sales. Research and development expenses
decreased 39%, from 9.7% of sales to 5.8% of sales. The decrease in R&D
reflects the formation of the NexPress joint venture, whose results,
including the Company's investments in R&D, are reflected in other income
(charges).
Earnings from operations increased 53%, as the benefits of manufacturing
productivity, lower R&D, and higher unit sales volumes more than offset
lower effective selling prices. Net earnings increased 40%, due to the
increase in earnings from operations.
Health Imaging
Sales in the Health Imaging segment increased 46% from the third quarter of
1998. Sales inside the U.S. increased 43%, and sales outside the U.S.
increased 48%. Excluding the impact of the acquired Imation medical
business, worldwide sales were up 2%.
Worldwide analog film sales increased 28%, reflecting volume growth of 32%
and unfavorable price/mix impact. In the U.S., analog film sales were up
11%, reflecting 18% volume increases partially offset by unfavorable 6%
price/mix. Outside the U.S., analog film sales were up 37%, reflecting 39%
volume gains and 2% unfavorable price/mix. Outside the U.S., the Company
continues to gain market share for analog film, with growth in Greater
China (+51%), Latin America (+33%), and the Asia Pacific Region (+22%).
Overall, significant volume growth worldwide is primarily attributed to the
acquisition of Imation's medical imaging business. The specialty medical
film business continues to be robust, led by double-digit gains in both
mammography and oncology. Dryview Laser Printer placements showed 8%
volume growth year over year.
SG&A expenses for the segment increased 45%, but decreased from 20.6% of
sales to 20.5% of sales. Excluding advertising expenses, SG&A expenses
increased 44%, but decreased from 19.7% of sales to 19.5% of sales.
Research and development expenses increased 8%, but decreased from 7.5% of
sales to 5.6% of sales.
<PAGE> 13
Earnings from operations increased 27%, as higher unit sales volumes
primarily related to the acquired Imation medical imaging business, as well
as improved productivity, were partially offset by lower effective selling
prices. Net earnings increased as a result of the increase in earnings
from operations.
Other Imaging
Sales in the Other Imaging segment decreased 11% from the third quarter of
1998, primarily due to the divestiture of the Office Imaging business.
Sales inside the U.S. decreased 20%, and sales outside the U.S. were level.
Excluding the impact of the divestitures of the Office Imaging business and
of the personal computer service business, segment sales were up 6%, due to
higher volumes.
Segment sales were favorably impacted by an approximately 20% increase in
sales of Business Imaging Systems document scanners, a more than 60%
increase in sales of consumer digital cameras, and a more than 70% increase
in inkjet media. Entertainment Imaging sales increased slightly as the
unit continues to experience a cyclical industry slowdown and increased
cost reduction emphasis within the motion picture industry.
SG&A expenses for the segment decreased 2%, but increased from 18.5% of
sales to 20.5% of sales. Excluding advertising expenses, SG&A expenses
decreased 2%, but increased from 15.9% of sales to 17.5% of sales. These
increased SG&A rates are primarily a consequence of the divestiture of the
Office Imaging business, which had a very low rate. Research and
development expenses decreased 15%, from 8.5% of sales to 8.1% of sales.
Earnings from operations decreased 27%, as manufacturing productivity and
higher volumes were more than offset by lower prices, unfavorable foreign
exchange, and the sale of the Office Imaging business, which was profitable
in the year-ago quarter. Earnings from consumer digital cameras were
negatively impacted in the quarter due to the strengthening yen. In
addition, Business Imaging Systems earnings were impacted by unfavorable
product mix and declining sales of high margin Computer Output Microfiche
equipment. Net earnings decreased 31%, primarily due to the decrease in
earnings from operations.
<PAGE> 14
Year to date
Consolidated
Sales increased 5% compared with the first three quarters of 1998. The
impact of portfolio actions on the year-to-year comparisons was essentially
neutral. Currency changes against the dollar favorably affected sales by
$33 million in the first three quarters of 1999 compared with the first
three quarters of 1998.
The Company achieved growth in sales of Health Imaging film (analog film as
well as laser imaging products of the acquired medical imaging business),
consumer and professional digital cameras, Consumer Imaging color paper and
film (especially Advantix film and one-time-use cameras), CD media, and
inkjet media. These increases were partially offset by decreases from the
sale of the Office Imaging business, the divestiture of certain Consumer
Imaging retail operations, the transfer of the Japanese graphics business
to Kodak Polychrome Graphics, and the elimination of the personal computer
service business.
Sales in emerging markets increased 3%, and accounted for approximately 16%
of the Company's worldwide sales. The emerging markets portfolio showed
growth across a wide geographical range, with China up 34% and Korea up
35%. Strong growth in Mexico of 13% was offset by a 19% decline in Brazil,
resulting in a 5% decline in the Latin American Region.
Sales of digital and digitization products were $1,634 million, up 51% from
$1,084 million in the first three quarters of 1998.
Gross profit declined 4.1 percentage points, from 47.3% of sales to 43.2%
of sales. Excluding the charges recorded in the first quarter of 1999
related to sticker kiosks, CalComp, and Eastman Software, and restructuring
charges recorded in the third quarter of 1999, gross profit declined .9
percentage points, from 47.3% of sales to 46.4% of sales. Gross profit came
under pressure from lower prices, increased levels of goodwill
amortization, startup costs in the China manufacturing project, and the
acquired Imation medical imaging business, which has a gross profit rate
lower than the Company average. These pressures were offset, in part, by
gains in manufacturing productivity, improvements in digital businesses,
and the beneficial effects of portfolio actions taken, including the
divestiture of Office Imaging and a significant portion of Consumer
Imaging's retail business.
Selling, general and administrative (SG&A) expenses increased as a
percentage of sales from 23.9% to 24.1%, while SG&A excluding advertising
expenses also increased from 18.3% to 19.1%. Excluding restructuring
charges, SG&A expenses decreased as a percentage of sales from 23.9% to
22.9%, while SG&A excluding advertising expenses also decreased from 18.3%
to 17.9%. The decreases in rates, excluding restructuring charges, were
driven by Consumer Imaging and Kodak Professional, where sales increased as
SG&A decreased, and by Digital & Applied Imaging, where sales increased
more than SG&A increased.
<PAGE> 15
Research and development (R&D) expenditures declined both as a percentage
of sales (from 6.8% to 5.8%) and in dollars (from $671 million to $598
million), resulting in an overall 11% reduction. This reflects the
benefits of a number of factors, including improvement in R&D cost
structure; a more tightly focused portfolio, resulting in more effort
devoted to a narrower range of inquiry; and more joint development, with
more work shared with partners.
Earnings from operations declined 16%. Excluding the first quarter 1999
charges for Eastman Software, the exit of the sticker print kiosk product
line, the CalComp write-off, and the third quarter 1999 restructuring
charges, earnings from operations increased 12%, as the benefits of higher
unit sales volumes across many of the Company's key products, manufacturing
productivity, and cost reduction more than offset lower effective selling
prices.
Interest expense increased 11% as a result of higher levels of debt. Other
income (charges) decreased $31 million, primarily due to the net effect of
a $66 million pre-tax gain on Gretag and an $18 million pre-tax litigation
charge in 1998, and increased earnings from the Company's equity investment
in the Kodak Polychrome Graphics joint venture. The effective tax rate was
34% in both periods.
In the fourth quarter of 1998, other income (charges) was $172 million as
reported, or $103 million excluding the gain on the sale of NanoSystems and
litigation settlements. In the fourth quarter of 1999, other income
(charges), exclusive of any potential gain from the sale of The Image Bank
(see Note 4, Divestitures), is expected to be more closely aligned with
reported results in the third quarter of 1999. This will result in a
substantially reduced year-over-year contribution from earnings below
operations in the fourth quarter of 1999.
Consumer Imaging
Sales in the Consumer Imaging segment increased 3%. Adjusting for the
impact of the divestiture of the Fox Photo operating unit in September
1998, and a number of small retail operations in Europe and Latin America,
segment sales increased 6%.
Sales inside the U.S. increased 7% as reported, or 12% excluding the
effects of the divested retail operations. Outside the U.S., sales were
down 1% as reported, and up 1% with non-U.S. divestitures excluded. The
non-U.S. reported sales decline reflected a decline of 2% in Western
Europe. Excluding the effects of the divested retail operations and
foreign exchange, sales in Western Europe were up 1%. Sales in Russia
declined 63% while sales in Latin America declined 10%. These decreases
were partially offset by 19% gains in China, 13% gains in Japan, and 6%
gains in other Asian countries.
Worldwide film sales to dealers increased 2%, as a 9% volume increase was
partially offset by price declines. U.S. film sales to dealers were up 1%,
reflecting volume growth of 13% offset by price declines. Outside the
U.S., film sales were up 3%, with 6% volume increases partially offset by
lower prices, and no foreign exchange impact.
<PAGE> 16
Worldwide color paper sales were up 5%, as 8% volume gains were partially
offset by lower prices. U.S. color paper sales were particularly strong,
up 12%, due to volume gains. Outside the U.S., paper sales increased 2%,
as 5% volume gains were partially offset by lower prices, and no foreign
exchange impact.
SG&A expenses for the segment decreased 4%, from 27.3% of sales to 25.6% of
sales, reflecting the benefits of Consumer Imaging's cost reduction
efforts. Excluding advertising expenses, SG&A expenses decreased 2%, from
18.8% of sales to 17.9% of sales. Research and development expenses
decreased 9%, from 5.3% of sales to 4.7% of sales.
Earnings from operations increased 15%, as higher sales volumes and
manufacturing productivity were partially offset by lower prices. Net
earnings were $690 million, an increase of 11% from the prior year, which
included the $44 million after-tax gain related to the Gretag Imaging
initial public offering. Excluding the year-ago Gretag gain, net earnings
increased 19%, as a result of increases in earnings from operations.
Kodak Professional
Sales in the Kodak Professional segment increased 4%. Adjusting for the
transfer of the graphics business in Japan to the Kodak Polychrome Graphics
joint venture, sales increased 8%, as higher volumes and the favorable
effects of foreign exchange were partially offset by lower prices. Sales
in the U.S. increased 1%, while sales outside the U.S. increased 6%.
SG&A expenses for the segment decreased 5%, from 20.3% of sales to 18.5% of
sales. Excluding advertising expenses, SG&A expenses decreased 5%, from
17.7% of sales to 16.1% of sales. Research and development expenses
decreased 23%, from 10.0% of sales to 7.4% of sales. The decrease in R&D
reflects the formation of the NexPress joint venture, whose results,
including the Company's investments in R&D, are reflected in other income
(charges).
Earnings from operations increased 19%. Excluding from 1999 the first
quarter CalComp charge, earnings from operations increased 28%, as the
benefits of manufacturing productivity and higher unit sales volumes more
than offset lower effective selling prices. Net earnings increased 30%,
reflecting strong contributions to earnings from operations, improved
results from the Kodak Polychrome Graphics joint venture, and gains on the
sales of investments.
Health Imaging
Sales in the Health Imaging segment increased 43%, primarily due to the
acquisition of Imation's medical imaging business. Sales in the U.S.
increased 45%, while sales outside the U.S. increased 41%. Excluding the
effect of the acquisition, sales increased 2%, as the benefits of higher
volumes and the favorable effects of foreign exchange were partially offset
by lower prices.
<PAGE> 17
Worldwide analog film sales increased 19%, reflecting volume growth of 22%
and negative 3% price/mix. In the U.S., analog film sales were up 7%,
reflecting volume growth of 14% and negative price/mix. Outside the U.S.,
analog film sales were up 25%, due to 27% volume growth and slightly
favorable foreign exchange, partially offset by lower prices. Overall,
significant volume growth worldwide is primarily attributed to the
acquisition of Imation's medical imaging business.
SG&A expenses for the segment increased 45%, due primarily to the
acquisition of Imation's medical imaging business, but rose only 0.3
percentage points from 19.9% of sales to 20.2% of sales. Excluding
advertising expenses, SG&A expenses increased 45%, from 19.1% of sales to
19.4% of sales. Research and development expenses increased 14%, but
decreased from 7.5% of sales to 5.9% of sales.
Earnings from operations increased 22%, as the benefits of manufacturing
productivity, as well as higher unit sales volumes, were partially offset
by lower effective selling prices. Net earnings increased 30%. Excluding
from 1998 the $12 million after-tax charge for litigation, net earnings
increased 22% primarily as a result of the increase in earnings from
operations.
Other Imaging
Sales in the Other Imaging segment decreased 10%, as higher unit volumes
were more than offset by portfolio changes and lower prices. Excluding the
impact of portfolio adjustments, segment sales increased 4%. Sales of
digital cameras and CD media increased significantly, but sales of motion
picture films decreased due to softness in the motion picture industry.
SG&A expenses for the segment decreased 3%, but increased from 19.6% of
sales to 21.3% of sales. Excluding advertising expenses, SG&A expenses
decreased 3%, but increased from 17.1% of sales to 18.5% of sales. These
increased SG&A rates are a consequence of the divestiture of the Office
Imaging business, which had a very low rate. Research and development
expenses decreased 17%, from 8.2% of sales to 7.7% of sales.
Earnings from operations were $126 million, down $142 million or 53% from
the prior year. The 1999 results include $83 million of charges related to
the repositioning of the Eastman Software business and the exit of the
sticker kiosk business recorded in the first quarter of 1999. Excluding
these charges, earnings from operations decreased 22%, as the benefits of
higher unit volumes and manufacturing productivity were more than offset by
lower effective selling prices and the unfavorable effects of foreign
currency rate changes.
Net earnings for the segment were $86 million, down 59% from the prior
year. Excluding the $55 million after-tax charges in the first quarter of
1999, net earnings decreased 33%, primarily as a result of gains on sales
of assets in the first three quarters of 1998.
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<PAGE> 18
RESTRUCTURING PROGRAMS AND COST REDUCTION
During the third quarter of 1999, the Company recorded a pre-tax
restructuring charge of $350 million relating to worldwide manufacturing
and photofinishing consolidation and reductions in selling, general and
administrative positions worldwide. Cost of goods sold for the third
quarter includes $236 million for employee severance costs, asset write-
downs, and shutdown costs related to these actions and SG&A includes $114
million for employee severance payments. In connection with this program,
approximately 3,400 positions will be eliminated worldwide, with
approximately $250 million of the restructuring charge for severance
payments. Approximately $90 million of the $350 million charge is for asset
write-downs, primarily for vacant buildings to be sold and equipment to be
shut down as part of the Company's sale and exit of its Elmgrove
manufacturing facility. In addition, approximately $10 million of the
charge is for other shutdown costs. The net cash cost of the restructuring
program will be approximately $140 million after tax. The Company
anticipates completing all severance-related actions associated with this
charge by the end of the third quarter of 2000.
In addition to the third-quarter charge, the Company will incur future
charges associated with this program, totaling approximately $90 million
(pre-tax) related primarily to accelerated depreciation of assets still in
use but scheduled to be sold and exited, as well as for relocation costs
for manufacturing and photofinishing consolidation. This amount is
estimated to be recorded at approximately $15 million per quarter over the
next six quarters to cost of goods sold.
The Company expects approximate savings associated with this program of
$100 million in 2000, and an additional $70 million in 2001, resulting in a
total run rate savings of $170 million. The Company anticipates recovering
the net cash cost of the restructuring program in less than two years.
Net savings from cost reduction activities under the Company's $1.2 billion
cost reduction program were approximately $125 million for the quarter and
$340 million year to date. The year-to-date amount includes approximately
$50 million of savings from lower pension and health care costs due to
reduced headcount resulting from the 1997 restructuring program and
approximately $29 million of savings related to the sale of the Office
Imaging business, which was included in the gain on the sale of the
business. The Company expects to meet its commitment to achieve a full
year net cost savings of $470 million in 1999, to bring the total two-year
savings under this program to $1.2 billion.
The Company anticipates that actions under its 1996 and 1997 restructuring
programs will be substantially completed by the end of 1999. It is
anticipated that by program end, approximately 17,700 employees will have
been separated.
<PAGE> 19
Estimated employment at September 30, 1999 is 83,500, level with the
headcount reported at June 30, 1999, and down from the 86,200 at December
31, 1998. During the third quarter of 1999, approximately 1,000 employees
left under provisions of restructuring plans. The balance of the change
reflects the net of seasonal staffing increases in photofinishing
operations. Since the beginning of the fourth quarter of 1997,
approximately 16,000 employees have been separated under the provisions of
the 1996 and 1997 restructuring programs, against a revised total program
expectation of 17,700 employees.
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YEAR 2000
In 1996, the Company established a formal global program office to assess
the impact of the Year 2000 issue on the software and hardware utilized in
the Company's internal operations and included in its product offerings to
customers. The assessment addresses software applications, systems
software, information technology (IT) infrastructure, embedded
manufacturing control technology, and products and services.
Representatives of the global program office and operating divisions meet
monthly with the Chief Financial Officer to monitor program status and
address issues. In June 1998, an independent third party completed a
comprehensive review of the Company's overall Year 2000 program. Since
October 1998, senior line management has presented status reports to the
Board of Directors on a bi-monthly basis.
The project phases include: inventorying affected technology and assessing
the impact of the Year 2000 issue; developing solution plans; modification;
testing and certification; implementation; and developing contingency
plans. All components of software and hardware of the Company are
presently certified or are being audited for certification. As of the end
of September 1999, the Company's mission-critical IT systems and server
infrastructure, along with the manufacturing control systems, have
successfully concluded testing and attained certification. Certification
of the Company's actively supported products and services was 99% complete.
Compliance efforts for the remainder of the portfolio were completed in
October 1999. The product commercialization process has been modified so
that it will produce compliant products.
During the third quarter of 1999, the project team completed the validation
of its global mission-critical IT compliance, using mainframe test
facilities to simulate support for mission-critical operations, completing
any remaining remediation and solution plans for the Company's U.S. server
network, and finalizing plans to support the year-end cutover. The
business unit project teams are making significant progress in the
distribution and implementation of remediated products and services,
developing operating division contingencies and compliance validation of
third parties.
The Company relies on third-party suppliers for many systems, products and
services including telecommunications and data center support. The Company
will be adversely impacted if these suppliers do not make necessary changes
to their own systems and products successfully and in a timely manner. The
Company has a formalized comprehensive supplier compliance program in
place. As a third-party supplier to other companies, the Company has
posted its own product compliance plan on its Internet web site
(www.kodak.com/go/year2000), which was recently updated in response to the
changing Year 2000 information needs of customers and business partners.
<PAGE> 20
Costs of software and hardware remediation were $13 million in 1997, $27
million in 1998, and are estimated to be $12 million and $6 million in 1999
and 2000, respectively. These remediation efforts, almost entirely for
software, will not materially increase the Company's spending on
information technology because some normal development and maintenance work
has been postponed. Furthermore, some non-compliant systems will be
eliminated in 1999 as the Company installs Year 2000 compliant globally
deployed ERP/SAP software in connection with its enterprise resource
planning project. A charge of $20 million for the total cost of customer
product modification was accrued in 1997. At September 30, 1999, the
Company had a reserve of $4 million to cover remaining product
modifications.
Management of the Company believes its program has effectively addressed
the Year 2000 issue in a timely manner. However, since it is not possible
to anticipate all possible future outcomes, especially when third parties
are involved, there could be "worst-case scenarios" in which the Company
would be unable to take customer orders, manufacture and ship products,
invoice customers or collect payments. In addition, the Company could be
subject to litigation for Year 2000-related product failure, including
equipment shutdown or failure to properly date business or medical records,
and for health, environmental and safety issues relating to its facilities.
The amount of potential liability and lost revenue cannot be reasonably
estimated.
The Company has contingency plans for most mission-critical applications
and is working on plans for others. For example, plans for the U.S.
payroll system have been in place since January 1998, while detailed plans
for sensitized goods manufacturing are undergoing quality audits. An
Executive Steering Committee is closely monitoring the progress of
enterprise and business process contingency plans involving, among other
actions, manual workarounds, increased inventories and extra staffing.
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THE EURO
The Treaty on European Union provided that an economic and monetary union
(EMU) be established in Europe whereby a single European currency, the
euro, replaces the currencies of participating member states. The euro was
introduced on January 1, 1999, at which time the value of participating
member state currencies was irrevocably fixed against the euro and the
European Currency Unit (ECU) was replaced at the rate of one euro to one
ECU. For the three-year transitional period ending December 31, 2001, the
national currencies of member states will continue to circulate but be sub-
units of the euro. New public debt will be issued in euro and existing
debt may be re-denominated into euro. At the end of the transitional
period, euro banknotes and coins will be issued, and the national
currencies of the member states will cease to be legal tender no later than
June 30, 2002. The countries that adopted the euro on January 1, 1999 are
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, and Spain. Other countries are expected to follow
later. The Company has operations in all of these countries.
<PAGE> 21
As a result of the euro conversion, it is probable that selling prices of
the Company's products and services will experience downward pressure, as
current price variations among countries are reduced due to easy
comparability of euro prices across countries. Prices will tend to
harmonize, although value added taxes and transportation costs will still
justify price differentials. Adoption of the euro will probably accelerate
existing market and pricing trends including pan-European buying and
general price erosion.
On the other hand, currency exchange and hedging costs will be reduced;
lower prices and pan-European buying will benefit the Company in its
purchasing endeavors; the number of banks and suppliers needed will be
reduced; there will be less variation in payment terms; and it will be
easier for the Company to expand into new marketing channels such as mail
order and Internet marketing.
The Company is in the process of making changes in areas such as marketing
and pricing, purchasing, contracts, payroll, taxes, cash management and
treasury operations. Billing systems have been modified so that, in 1999,
the Company is able to show total gross, value added tax, and net in euros
on national currency invoices, to enable customers to pay in the new euro
currency if they wish to do so. Countries that have installed ERP/SAP
software in connection with the Company's enterprise resource planning
project are able to invoice and receive payments in euros as well as in
other currencies. Systems for pricing, payroll and expense reimbursements
will continue to use national currencies until year-end 2001. The
functional currencies of the Company's operations in affected countries
will remain the national currencies until approximately mid-year 2001, when
they will change to the euro. By that time, all affected countries will
have converted to the new ERP/SAP software.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the first three quarters of 1999 was
$879 million. Net earnings, adjusted for depreciation and amortization and
restructuring, asset impairment and other charges, provided $2,040 million
of operating cash. This was partially offset by increases in receivables
of $326 million (primarily seasonal), decreases in liabilities (excluding
borrowings) of $310 million (related primarily to severance payments for
restructuring programs, and litigation settlement and employee wage
dividend payments for amounts accrued in prior years), and increases in
inventories of $240 million. Net cash used in investing activities of $574
million for the first three quarters of 1999 was utilized primarily for
capital expenditures of $749 million, offset by proceeds from the sale of
assets and businesses of $158 million. Net cash used in financing
activities of $181 million for the first three quarters of 1999 was
primarily due to net increases in total borrowings of $791 million, reduced
by $548 million for stock repurchases net of stock issued and $424 million
of dividend payments.
Cash dividends per share of $.44, payable quarterly, were declared in the
third quarter of 1999 and 1998. Total cash dividends of $421 million and
$427 million were declared in the first three quarters of 1999 and 1998,
respectively.
<PAGE> 22
Net working capital (excluding short-term borrowings) at the end of the
quarter was $1,529 million, compared with $939 million at year-end 1998.
This increase is due to the strong sales performance in the first three
quarters of 1999, coupled with the seasonality of the Company's operating
cash flow.
On August 12, 1999, the Company issued $150 million of 6.50% Medium Term
Notes, Series A, due August 15, 2000. These notes were issued under the
Company's existing shelf registration statement. The proceeds from this
issue were used to reduce commercial paper borrowings.
Capital additions were $749 million for the first three quarters. The
Company anticipates total capital spending of approximately $1.2 billion in
1999, with the majority of the spending relating to the Company's China
manufacturing operations, productivity improvements and ongoing
environmental and safety spending. Capital spending (excluding
acquisitions) in 2000 is expected to be slightly less than the $1.2 billion
in 1999.
During the second quarter of 1999, the Company completed stock repurchases
under its $2 billion authorization. That program, initiated in May 1996,
resulted in 26.8 million shares being repurchased. Under the new $2
billion program announced on April 15, 1999, the Company repurchased an
additional 1.2 million shares for $92 million during the third quarter of
1999. Total year- to-date repurchases under both programs amounted to $583
million. During the remainder of 1999, repurchases will continue but at
lower levels, as the Company returns to its target debt-to-total-capital
ratio of about 34%. The Company expects to spend a total of approximately
$700 million on stock repurchases during 1999.
On April 14, 1999, the Company announced a series of worldwide
environmental goals to provide for greater reductions in emissions, waste
generated, water usage and energy consumption, preservation of natural
resources and improvements to the Company's environmental management
system. These goals will result in spending, primarily capital in nature,
of approximately $100 million over the next five years.
The Company anticipates the net cash cost of the restructuring charge
recorded in the third quarter of 1999 (see Restructuring Programs and Cost
Reduction) to be approximately $140 million after tax, which will be
recovered through cost savings in less than two years. Severance-related
actions associated with this charge will be completed by the end of the
third quarter of 2000.
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<PAGE> 23
OTHER
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement requires
that an entity recognize all derivatives as either assets or liabilities
and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This
Statement must be adopted by the Company by the year 2001, but may be
adopted in any earlier fiscal quarter, and is not to be
applied retroactively. If the Company had adopted SFAS No. 133 in the
third quarter of 1999, the impact would not have been material to its
results of operations or financial position. The Company intends to adopt
this Statement effective January 1, 2000.
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in nature, or
"forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements in this Form 10-
Q relate to the Company's Year 2000 compliance efforts, including
expectations about compliance timetables and costs. Also, references to
the Company's restructuring and cost reduction initiatives and to expected
savings are forward-looking statements.
Actual results may differ from those expressed or implied in forward-
looking statements. The forward-looking statements contained in this
report are subject to a number of risk factors, including: the Company's
ability to implement its product strategies (including its category
expansion and digitization strategies and its plans for digital products
and Advantix products), to develop its business in emerging markets, like
China, and to assimilate acquisitions, including the Imation acquisition,
quickly; the successful completion of other planned portfolio actions; the
inherent unpredictability of currency fluctuations; competitive actions,
including pricing; the ability to realize cost reductions and operating
efficiencies, including the ability to implement headcount reduction
programs and facility closings timely and in a manner that does not unduly
disrupt business operations, and the ability to identify and to realize
other cost-reduction opportunities; the nature and pace of technology
substitution; general economic and business conditions; the ability of the
Company to identify and address successfully Year 2000 issues in a timely
manner, and at costs that are reasonably in line with projections; and the
ability of the Company's vendors to identify and address successfully their
own Year 2000 issues in a timely manner.
Any forward-looking statements in this report should be evaluated in light
of these important risk factors.
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<PAGE> 24
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company, as a result of its global operating and financing activities,
is exposed to changes in foreign currency exchange rates, commodity prices,
and interest rates, which may adversely affect its results of operations
and financial position. In seeking to minimize the risks and/or costs
associated with such activities, the Company manages exposures to changes
in commodity prices, interest rates and foreign currency exchange rates.
The majority of foreign currency forward contracts held by the Company are
denominated in the Euro or in British pounds sterling. If foreign currency
exchange rates at September 1999 and 1998 increased 10%, the Company would
incur losses of $59 million and $106 million on foreign currency forward
contracts outstanding at September 30, 1999 and 1998, respectively. Such
losses would be substantially offset by gains from the revaluation or
settlement of the underlying positions hedged.
The Company has used silver option and forward contracts to minimize almost
all of its exposure to increases in silver prices in 1998 and continues to
do so in 1999. As of September 30, 1999, the Company had open forward
contracts hedging the majority of its planned silver requirements for 1999.
Based on broker-quoted termination values, if the price of silver decreased
10% from $5.58 and $5.39 per troy ounce at September 30, 1999 and 1998,
respectively, the fair value of silver forward contracts would be reduced
by $8 million and $15 million, respectively. Such losses in fair value, if
realized, would be offset by lower costs of manufacturing silver-containing
products.
The Company is exposed to interest rate risk primarily through its
borrowing activities and less so through investments in marketable
securities. The Company utilizes U.S. dollar-denominated commercial paper
and borrowings as well as foreign currency-denominated borrowings to fund
its working capital and investment needs. The majority of short-term and
long-term borrowings and marketable securities are in fixed-rate
instruments. There is inherent roll-over risk for borrowings and
marketable securities as they mature and are renewed at current market
rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and business financing
requirements. Using a yield to maturity analysis, if September 30, 1999
interest rates increased 10% (about 61 basis points) with the September 30,
1999 level of short-term and long-term borrowings, there would be decreases
in fair value of short-term and long-term borrowings of $2 million and $16
million, respectively. If September 30, 1998 interest rates increased 10%
(about 51 basis points) with the September 30, 1998 level of debt and
marketable securities, there would be decreases in fair value of marketable
securities, short-term and long-term borrowings of $1 million, $1 million
and $10 million, respectively.
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<PAGE> 25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 7, 1998, the Company received a proposed administrative Consent
Order seeking unspecified penalties and a compliance schedule from the New
York State Department of Environmental Conservation (DEC), to address
alleged violations of the Environmental Conservation Law and regulations at
the Company's Kodak Park manufacturing complex in Rochester, New York. The
violations alleged were primarily comprised of air, water, and hazardous
substance releases and incidents, largely accidental, that had been
reported by the Company to the DEC over the previous five years.
On August 4, 1999, the DEC and the Company signed a Consent Order that
required the Company to pay a $775,000 penalty, which it has done, and to
take certain remedial actions at Kodak Park. These remedial actions
include upgrades to the King's Landing wastewater treatment plant and the
Kodak Park power plants.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and financial statement schedules required as part of this
report are listed in the index appearing on page 26 and 27.
(b) Reports on Form 8-K.
On August 6, 1999, the Company filed a report on Form 8-K. Item 5, Other
Events, reported the filing of documents with respect to the issuance and
sale from time to time by the Company of up to $1,000,000,000 aggregate
principal amount of its Medium-Term Notes, Series A. Item 7, Exhibits,
referred to Exhibits 1, 4(a), 4(b), 4(c), and 4(d), all of which relate to
the Medium-Term Notes, Series A.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EASTMAN KODAK COMPANY
(Registrant)
Date November 3, 1999
E. Mark Rajkowski
Controller
<PAGE> 26
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit Page
(10) E. 1982 Eastman Kodak Company Executive Deferred Compensation
Plan, as amended effective October 7, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended December
31, 1996, Exhibit 10.) 28
G. Eastman Kodak Company 1990 Onmibus Long-term Compensation
Plan, as amended effective October 7, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997, and the
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998, Exhibit 10.) 30
H. Eastman Kodak Company Management Variable Compensation
Plan, as amended effective October 7, 1999.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997, the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998, and
the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998, Exhibit 10.) 31
I. Eastman Kodak Company 1995 Omnibus Long-Term Compensation
Plan, as amended effective October 7, 1999.
(Incorporated by reference to the Eastman Kodak Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, the Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1998,
the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998, and the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998,
Exhibit 10.) 32
O. Eastman Kodak Company 1997 Stock Option Plan, as amended
effective October 7, 1999.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997, and the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998, Exhibit 10.) 33
R. Eastman Kodak Company 2000 Omnibus Long-Term Compensation
Plan, as amended effective October 7, 1999.
(Incorporated by reference to the Eastman Kodak Company
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999, Exhibit 10.) 34
<PAGE> 27
(27) Financial Data Schedule - Submitted with the EDGAR filing as a
second document to this Form 10-Q.
<PAGE> 28
Exhibit (10) E.
1982 EASTMAN KODAK COMPANY EXECUTIVE DEFERRED COMPENSATION PLAN
Sections 1.10, 1.20, and 8.3 of the 1982 Eastman Kodak Company Executive
Deferred Compensation Plan are amended in their entirety, effective October
7, 1999, to read as follows:
1.10 Eligible Employee
"Eligible Employee" means the corporate officers of Kodak and any
other employee of the Company whose individual annual salary rate as
of August 1 is equal to or greater than the Eligibility Compensation
Level and who has a wage grade of 48 or above. Eligible Employee
shall also include an employee of Kodak or any Subsidiary of Kodak
selected annually by the Compensation Committee whose individual
annual salary rate as of August 1 is equal to or greater than the
Eligibility Compensation Level and who has a wage grade equivalent to
wage grade 48 or above. However, in no event shall a non-resident
alien be an Eligible Employee unless he or she is paid on United
States payroll. Any employee who becomes eligible to participate in
this Plan and in a future year does not qualify as an Eligible
Employee solely because his or her individual annual salary rate as of
August 1 is less than the Eligibility Compensation Level, shall
nevertheless be eligible to participate in such year.
1.20 Subsidiary
"Subsidiary" means any corporation or other entity in which Kodak has
a direct or indirect ownership interest of 50% or more of the total
combined voting power of the then outstanding securities or interests
of such corporation or other entity entitled to vote generally in the
election of directors or in which Kodak has the right to receive 50%
or more of the distribution of profits or 50% of the assets on
liquidation or dissolution.
8.3 Timing
Payments shall be made as soon as is administratively possible
following the fifth business day in March and shall commence in any
year designated by the Compensation Committee up through the tenth
year following the year in which the Participant retires, becomes
disabled, or for any other reason, ceases to be employed by the
"Consolidated Group," but in no event later than the year the
Participant reaches age 71. Notwithstanding the preceding sentence of
this Section 8.3, payment in the event of death shall be made in
accordance with Section 8.6. For purposes of this Section 8.3, the
term "Consolidated Group" means Kodak and all subsidiaries.
<PAGE> 29
Section 4.2 (B) of the 1982 Eastman Kodak Company Executive Deferred
Compensation Plan is amended in its entirety, effective February 11, 1999,
to read as follows:
4.2 (B) Newly Eligible Employees
An Eligible Employee who is hired by the Company during a calendar
year may make a deferral election to defer compensation earned during
the remainder of such year by filing an election in accordance with
the terms of this Section 4.2(B). Such election must be filed by the
Eligible Employee with the Compensation Committee within the earlier
of: (i) 10 days following the date of the Eligible Employee's receipt
of the Plan's enrollment package; or (ii) the 30th following the first
day of the Eligible Employee's employment with the Company.
Notwithstanding any provision of this Plan to the contrary, such
election shall only be effective with respect to the Eligible
Employee's: (i) base salary, beginning with the first pay period
following the pay period in which the election is filed with the
Compensation Committee; and (ii) any award to which he or she may be
entitled under the Management Variable Compensation Plan, or any
successor plan thereto, for services performed during the calendar
year of his or her hire. By way of an administrative rule, the
Compensation Committee may impose such additional requirements upon a
newly Eligible Employee's election, including, but not limited to, a
minimum level of deferral, as it determines in the exercise of its
sole and absolute discretion.
<PAGE> 30
Exhibit (10) G.
EASTMAN KODAK COMPANY 1990 OMNIBUS LONG-TERM COMPENSATION PLAN
Paragraph 20 of the Eastman Kodak Company 1990 Omnibus Long-Term
Compensation Plan is amended in its entirety, effective October 7, 1999, to
read as follows:
19. Withholding Taxes
The Company shall be entitled to deduct from any payment under the
Plan, regardless of the form of such payment, the amount of all
applicable income and employment taxes required by law to be withheld
with respect to such payment or may require the Participant to pay to
it such tax prior to and as a condition of the making of such payment.
In accordance with any applicable administrative guidelines it
establishes, the Committee may allow a Participant to pay the amount
of taxes required by law to be withheld from an Award by withholding
from any payment of Common Stock due as a result of such Award, or by
permitting the Participant to deliver to the Company, shares of Common
Stock having a fair market value, as determined by the Committee,
equal to an amount that is not in excess of the amount required to be
withheld to satisfy the minimum statutory withholding rates for
federal, state and payroll purposes.
<PAGE> 31
Exhibit (10) H.
EASTMAN KODAK COMPANY MANAGEMENT VARIABLE COMPENSATION PLAN
Section 13.2 of the Eastman Kodak Company Management Variable Compensation
Plan is amended in its entirety, effective October 7, 1999, to read as
follows:
13.2 Withholding Taxes
The Company shall be entitled to deduct from any payment under the
Plan, regardless of the form of such payment, the amount of all
applicable income and employment taxes required by law to be withheld
with respect to such payment or may require the Participant to pay to
it such tax prior to and as a condition of the making of such payment.
In accordance with any applicable administrative guidelines it
establishes, the Committee may allow a Participant to pay the amount
of taxes required by law to be withheld from an Award by withholding
from any payment of Common Stock due as a result of such Award, or by
permitting the Participant to deliver to the Company, shares of Common
Stock having a fair market value, as determined by the Committee,
equal to an amount that is not in excess of the amount required to be
withheld to satisfy the minimum statutory withholding rates for
federal, state and payroll purposes.
<PAGE> 32
Exhibit (10) I.
EASTMAN KODAK COMPANY 1995 OMNIBUS LONG-TERM COMPENSATION PLAN
Section 19.2 of the Eastman Kodak Company 1995 Omnibus Long-Term
Compensation Plan is amended in its entirety, effective October 7, 1999, to
read as follows:
19.2 Withholding Taxes
The Company shall be entitled to deduct from any payment under the
Plan, regardless of the form of such payment, the amount of all
applicable income and employment taxes required by law to be withheld
with respect to such payment or may require the Participant to pay to
it such tax prior to and as a condition of the making of such payment.
In accordance with any applicable administrative guidelines it
establishes, the Committee may allow a Participant to pay the amount
of taxes required by law to be withheld from an Award by withholding
from any payment of Common Stock due as a result of such Award, or by
permitting the Participant to deliver to the Company, shares of Common
Stock having a fair market value, as determined by the Committee,
equal to an amount that is not in excess of the amount required to be
withheld to satisfy the minimum statutory withholding rates for
federal, state and payroll purposes.
<PAGE> 33
Exhibit (10) O.
EASTMAN KODAK COMPANY 1997 STOCK OPTION PLAN
Section 8.2 of the Eastman Kodak Company 1997 Stock Option Plan is amended
in its entirety, effective October 7, 1999, to read as follows:
8.2 Withholding Taxes
The Company shall be entitled to deduct from any payment under the
Plan, regardless of the form of such payment, the amount of all
applicable income and employment taxes required by law to be withheld
with respect to such payment or may require the Participant to pay to
it such tax prior to and as a condition of the making of such payment.
In accordance with any applicable administrative guidelines it
establishes, the Committee may allow a Participant to pay the amount
of taxes required by law to be withheld from an Award by withholding
from any payment of Common Stock due as a result of such Award, or by
permitting the Participant to deliver to the Company, shares of Common
Stock having a fair market value, as determined by the Committee,
equal to an amount that is not in excess of the amount required to be
withheld to satisfy the minimum statutory withholding rates for
federal, state and payroll purposes.
<PAGE> 34
Exhibit (10) R.
EASTMAN KODAK COMPANY 2000 OMNIBUS LONG-TERM COMPENSATION PLAN
Section 19.2 of the Eastman Kodak Company 2000 Omnibus Long-Term
Compensation Plan is amended in its entirety, effective October 7, 1999, to
read as follows:
19.2 Withholding Taxes
The Company shall be entitled to deduct from any payment under the
Plan, regardless of the form of such payment, the amount of all
applicable income and employment taxes required by law to be withheld
with respect to such payment or may require the Participant to pay to
it such tax prior to and as a condition of the making of such payment.
In accordance with any applicable administrative guidelines it
establishes, the Committee may allow a Participant to pay the amount
of taxes required by law to be withheld from an Award by withholding
from any payment of Common Stock due as a result of such Award, or by
permitting the Participant to deliver to the Company, shares of Common
Stock having a fair market value, as determined by the Committee,
equal to an amount that is not in excess of the amount required to be
withheld to satisfy the minimum statutory withholding rates for
federal, state and payroll purposes.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the third
quarter 1999 Form 10-Q of Eastman Kodak Company, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000031235
<NAME> EASTMAN KODAK COMPANY
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0
0
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