<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, 2000
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, 2000
Common Stock, $2.50 par value 300,169,250
<PAGE> 2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Eastman Kodak Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share data)
<CAPTION>
Third Quarter Three Quarters
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Sales $3,590 $3,580 $10,434 $10,290
Cost of goods sold 1,987 2,087 5,786 5,842
------ ------ ------- -------
Gross profit 1,603 1,493 4,648 4,448
Selling, general and
administrative expenses 746 923 2,180 2,479
Research and development costs 197 193 606 598
------ ------ ------- -------
Earnings from operations 660 377 1,862 1,371
Interest expense 48 39 127 107
Other income 22 17 103 125
------ ------ ------- -------
Earnings before income taxes 634 355 1,838 1,389
Provision for income taxes 216 120 625 472
------ ------ ------- -------
NET EARNINGS $ 418 $ 235 $ 1,213 $ 917
====== ====== ======= =======
Basic earnings per share $ 1.37 $ .74 $ 3.93 $ 2.87
====== ====== ======= =======
Diluted earnings per share $ 1.36 $ .73 $ 3.91 $ 2.84
====== ====== ======= =======
Earnings used in basic and
diluted earnings per share $ 418 $ 235 $ 1,213 $ 917
Number of common shares used in
basic earnings per share 305.4 316.2 308.5 319.1
Incremental shares from
assumed conversion of options 2.3 4.1 2.1 3.7
------ ------ ------- -------
Number of common shares used in
diluted earnings per share 307.7 320.3 310.6 322.8
====== ====== ======= =======
CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
Retained earnings at beginning
of period $7,517 $6,563 $6,995 $6,163
Net earnings 418 235 1,213 917
Cash dividends declared (133) (139) (406) (421)
------ ------ ------ ------
Retained earnings
at end of period $7,802 $6,659 $7,802 $6,659
====== ====== ====== ======
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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
(in millions)
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 217 $ 373
Marketable securities 9 20
Receivables 2,718 2,537
Inventories 1,897 1,519
Deferred income tax charges 599 689
Other 306 306
------- -------
Total current assets 5,746 5,444
------- -------
PROPERTIES
Land, buildings and equipment at cost 12,892 13,289
Less: Accumulated depreciation 7,116 7,342
------- -------
Net properties 5,776 5,947
------- -------
OTHER ASSETS
Goodwill (net of accumulated amortization
of $751 and $671) 940 982
Other noncurrent assets 1,760 1,801
Deferred income tax charges 96 196
------- -------
TOTAL ASSETS $14,318 $14,370
======= =======
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payables $ 3,219 $ 3,832
Short-term borrowings 1,878 1,163
Taxes - income and other 593 612
Dividends payable 134 139
Deferred income tax credits 24 23
------- -------
Total current liabilities 5,848 5,769
OTHER LIABILITIES
Long-term borrowings 1,066 936
Postemployment liabilities 2,690 2,776
Other long-term liabilities 848 918
Deferred income tax credits 79 59
------- -------
Total liabilities 10,531 10,458
SHAREHOLDERS' EQUITY
Common stock at par* 978 978
Additional paid in capital 862 889
Retained earnings 7,802 6,995
Accumulated other comprehensive loss (458) (145)
------- -------
9,184 8,717
Less: Treasury stock at cost* 5,397 4,805
------- -------
Total shareholders' equity 3,787 3,912
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,318 $14,370
======= =======
<FN>
* Common stock: $2.50 par value, 950 million shares authorized,
391 million shares issued at September 30, 2000 and December 31,
1999. Treasury stock at cost consists of approximately 91 million
shares at September 30, 2000 and 81 million shares at December 31,
1999.
Total comprehensive income was $270 million and $294 million for
the quarters, and $899 million and $877 million for the year-to-
date periods, ended September 30, 2000 and September 30, 1999,
respectively.
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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
(in millions)
<CAPTION>
Three Quarters
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net earnings $1,213 $ 917
Adjustments to reconcile to
net cash (used in) provided by operating
activities:
Depreciation and amortization 653 670
Asset impairment and other charges 16 453
Benefit for deferred taxes 211 (50)
Gain on sales/retirements of assets (139) (52)
Increase in receivables (327) (326)
Increase in inventories (475) (240)
Decrease in liabilities excluding borrowings (626) (310)
Other items, net (103) (183)
------ ------
Total adjustments (790) (38)
------ ------
Net cash provided by operating activities 423 879
------ ------
Cash flows from investing activities:
Additions to properties (590) (749)
Proceeds from sales of assets 216 114
Cash flows related to sales of businesses 4 44
Acquisitions, net of cash acquired (66) (3)
Sales of marketable securities 82 93
Purchases of marketable securities (71) (73)
------ ------
Net cash used in investing activities (425) (574)
------ ------
Cash flows from financing activities:
Net increase in borrowings
with original maturity of
90 days or less 442 467
Proceeds from other borrowings 1,521 1,135
Repayment of other borrowings (1,091) (811)
Dividends to shareholders (411) (424)
Exercise of employee stock options 33 35
Stock repurchase programs (634) (583)
------ ------
Net cash used in financing activities (140) (181)
------ ------
Effect of exchange rate changes on cash (14) (1)
------ ------
Net (decrease) increase in cash and cash
equivalents (156) 123
Cash and cash equivalents, beginning of year 373 457
------ ------
Cash and cash equivalents, end of quarter $ 217 $ 580
====== ======
-----------------------------------------------------------------
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
1999 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. The financial statements
are based in part on estimates and have not been audited by
independent accountants. PricewaterhouseCoopers LLP will audit
the annual statements.
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NOTE 2: 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.
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NOTE 3: DERIVATIVES AND MARKET RISK
On January 1, 2000, the Company adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
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 may enter into derivative contracts.
The Company manages its foreign currency-related risk primarily
through the use of foreign currency forward contracts. The
majority of the contracts held by the Company are denominated in
euros, Australian dollars, and Canadian dollars.
<PAGE> 6
The Company has entered into foreign currency forward contracts
that are designated as cash flow hedges of exchange rate risk
related to forecasted foreign currency-denominated intercompany
sales. At September 30, the Company had cash flow hedges for the
euro, the Canadian dollar, and the Australian dollar, with
maturity dates ranging from October 2000 to December 2001. At
September 30, 2000, the fair value of open contracts was a pre-tax
loss of $2 million, recorded in other comprehensive income.
During the third quarter of 2000, a charge of $1 million (pre-tax)
was reclassified from other comprehensive income to cost of goods
sold. Hedge ineffectiveness was insignificant. Amounts deferred
to other comprehensive income will be reclassified into cost of
goods sold within the next twelve months.
The Company does not apply hedge accounting to the foreign
currency forward contracts used to offset currency-related changes
in the fair value of foreign currency-denominated assets and
liabilities. These contracts are marked to market through
earnings at the same time that the exposed assets and liabilities
are remeasured through earnings (both in other income).
A sensitivity analysis indicates that if foreign currency exchange
rates at September 30, 2000 and 1999 increased 10%, the Company
would incur losses of $67 million and $59 million on foreign
currency forward contracts outstanding at September 30, 2000 and
1999, respectively. Such losses would be substantially offset by
gains from the revaluation or settlement of the underlying
positions hedged.
The Company is exposed to commodity price risk related to
forecasted worldwide purchases of silver, a key ingredient in the
manufacture of traditional photographic film and paper. To
mitigate this risk, the Company designates silver forward
contracts as cash flow hedges of its forecasted silver purchases.
At September 30, 2000, the Company had open forward contracts
hedging virtually all of its planned silver requirements through
the third quarter of 2001. The fair value of these open contracts
was a pre-tax loss of $2 million. During the third quarter of
2000, a realized loss of $3 million (pre-tax) was recorded in cost
of goods sold, and a realized loss of $1 million (pre-tax) was
recorded in other comprehensive income. Hedge ineffectiveness was
insignificant. All open contracts mature by September 2001. All
of the realized gains and losses in other comprehensive income
will be reclassified into cost of goods sold within the next
twelve months.
A sensitivity analysis indicates that, based on broker-quoted
termination values, if the price of silver decreased 10% from spot
rates at September 30, 2000 and 1999, the fair value of silver
forward contracts would be reduced by $29 million and $8 million,
respectively. Such losses in fair value, if realized, would be
offset by lower costs of manufacturing silver-containing products.
<PAGE> 7
The Company is exposed to interest rate risk primarily through its
borrowing activities and, to a lesser extent, through investments
in marketable securities. The Company utilizes U.S. dollar-
denominated as well as foreign currency-denominated borrowings to
fund its working capital and investment needs. The majority of
short-term and long-term borrowings 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 predictable because of the
variability of future interest rates and business financing
requirements.
Using a yield-to-maturity analysis, if September 30, 2000 interest
rates increased 10% (about 62 basis points) with the current
period's level of debt, there would be decreases in fair value of
short-term and long-term borrowings of $2 million and $22 million,
respectively. If September 30, 1999 interest rates increased 10%
(about 61 basis points) with the September 30, 1999 level of debt,
there would be decreases in fair value of short-term and long-term
borrowings of $2 million and $16 million, respectively.
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NOTE 4: ACQUISITIONS
During the second quarter, the Company acquired the remaining
ownership interest in PictureVision, Inc. for cash and assumed
liabilities with a total transaction value of approximately $90
million. PictureVision, the leading provider of digital imaging
network services and solutions, now operates as a wholly-owned
subsidiary of the Company. In relation to this transaction, the
Company's second quarter results included approximately $25
million in charges for acquired in-process research and
development (R&D) and other acquisition-related charges. Goodwill
related to this acquisition is being amortized over 7 years.
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NOTE 5: RESTRUCTURING CHARGES
Please refer to the discussion under the heading "Restructuring
Programs" on pages 21-22.
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NOTE 6: NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the SEC issued Staff Accounting Bulleting No. 101
(SAB 101). This guidance summarizes the SEC staff's views on
various issues related to revenue recognition. SAB 101, as amended,
is effective for the fourth quarter 2000. The impact of this new
guidance is not expected to be material to the Company.
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NOTE 7: SUBSEQUENT EVENT
On October 30, 2000 the Company announced that it had entered an
agreement to purchase Bell & Howell Company's worldwide imaging
business. This agreement includes the purchase of Bell & Howell's
digital scanners, micrographics, media, supplies and equipment
services businesses. Under the terms of the agreement, Eastman
Kodak will pay Bell & Howell approximately $150 million in cash at
closing. The sale is subject to regulatory approvals and is
expected to close by year-end 2000.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
<TABLE>
SUMMARY
(in millions, except per share data)
<CAPTION>
Third Quarter Three Quarters
2000 1999 Change 2000 1999 Change
<S> <C> <C> <C> <C> <C> <C>
Sales $3,590 $3,580 0% $10,434 $10,290 + 1%
Earnings from operations 660 377 +75 1,862 1,371 +36
Net earnings 418 235 +78 1,213 917 +32
Basic earnings per share 1.37 .74 +85 3.93 2.87 +37
Diluted earnings per share 1.36 .73 +86 3.91 2.84 +38
</TABLE>
2000
Sales for the three and nine months ended September 30, 2000
reflect volume gains in consumer films, papers and digital
cameras, as well as strength in emerging markets. This growth was
partially mitigated by lower aggregate prices as well as foreign
exchange movements, which had a $130 million and $276 million
adverse impact on sales for the quarter and year-to-date periods,
respectively. Sales were also impacted by portfolio actions in
1999, primarily related to the sale of The Image Bank and the
Motion Analysis Systems Division in November 1999.
Net earnings in the first three quarters were reduced by after-tax
charges of approximately $27 million ($41 million pre-tax) for
expenses associated with the sale and exit of an equipment
manufacturing facility. Excluding these charges, three quarters
earnings per share would have been $4.00, or 6% higher than
adjusted three quarters 1999 earnings per share of $3.77.
Earnings for 1999 exclude after-tax charges of approximately $299
million ($453 million pre-tax). These charges are related to
portfolio adjustments to exit non-strategic or under-performing
businesses of $68 million ($103 million pre-tax) and restructuring
charges of $231 million ($350 million pre-tax).
The Company's second quarter results included certain charges and
credits which should be considered when reviewing the year-to-date
results presented later in this document. These charges and
credits are outlined below:
In connection with the Company's efforts to reposition Eastman
Software and the rationalization of certain manufacturing assets,
the Company recorded a pre-tax charge of $31 million in the second
quarter. Of this charge, $20 million is related to the write-down
of assets to net realizable value and severance costs.
Also during the second quarter, a plan approved by Kodak
Polychrome Graphics (KPG) management to improve the cost structure
of the joint venture resulted in Kodak recording a $15 million pre-
tax charge as its share of the cost of that program. Steps to be
taken at KPG include capacity rationalization to better align
sources of supply and demand and severance charges associated with
achieving a more competitive cost structure. It is possible that
additional charges may be recorded by the Company in future
quarters as KPG completes this improvement program.
<PAGE> 9
Additionally, the Company incurred approximately $25 million of
charges for in-process R&D and other acquisition-related costs in
the second quarter in connection with its purchase of the
remaining interest in its PictureVision subsidiary, as further
described in Note 4, "Acquisitions".
During the second quarter, the Company also reversed approximately
$44 million of severance related costs originally recorded as part
of its third quarter 1999 restructuring charge, which is fully
described in the section titled "Restructuring Programs".
The Company also benefited during the second quarter from gains
associated with the de-mutualizaton of an insurance company,
resulting in a one-time cash payment of approximately $25 million.
The impact on the Company's results from the above items was a
reduction in year-to-date pre-tax earnings of approximately $2
million and $1 million in after-tax earnings. As a result of
these charges and credits, cost of goods sold (COGS) was reduced
by approximately $19 million, R&D was increased by approximately
$6 million, and selling, general and administrative expenses
(SG&A) was increased by less than $1 million. In addition, "Other
Income" was adversely impacted by approximately $15 million as the
result of the KPG cost reduction plan. Except as specifically
described in the year to date business segment discussions which
follow, the impact of these items on operating segment results is
immaterial.
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<PAGE> 10
<TABLE>
Sales by Operating Segment
(in millions)
<CAPTION>
Third Quarter Three Quarters
2000 1999 Change 2000 1999 Change
<S> <C> <C> <C> <C> <C> <C>
Consumer Imaging
Inside the U.S. $ 970 $ 917 + 6% $ 2,782 $ 2,596 + 7%
Outside the U.S. 971 1,054 - 8 2,781 2,840 - 2
------ ------ --- ------- ------- ---
Total Consumer Imaging 1,941 1,971 - 2 5,563 5,436 + 2
------ ------ --- ------- ------- ---
Kodak Professional
Inside the U.S. 189 191 - 1 524 539 - 3
Outside the U.S. 238 275 -13 751 861 -13
------ ------ --- ------- ------- ---
Total Kodak Professional 427 466 - 8 1,275 1,400 - 9
------ ------ --- ------- ------- ---
Health Imaging
Inside the U.S. 262 222 +18 759 691 +10
Outside the U.S. 272 281 - 3 845 858 - 2
------ ------ --- ------- ------- ---
Total Health Imaging 534 503 + 6 1,604 1,549 + 4
------ ------ --- ------- ------- ---
Other Imaging
Inside the U.S. 344 324 + 6 983 941 + 4
Outside the U.S. 344 316 + 9 1,009 964 + 5
------ ------ --- ------- ------- ---
Total Other Imaging 688 640 + 8 1,992 1,905 + 5
------ ------ --- ------- ------- ---
Total Sales $3,590 $3,580 + 0% $10,434 $10,290 + 1%
====== ====== === ======= ======= ===
</TABLE>
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<TABLE>
Earnings from Operations by Operating Segment
(in millions)
<CAPTION>
Third Quarter Three Quarters
2000 1999 Change 2000 1999 Change
<S> <C> <C> <C> <C> <C> <C>
Consumer Imaging $373 $425 -12% $1,014 $ 983 + 3%
Percent of Sales 19.2% 21.6% 18.2% 18.1%
Kodak Professional $ 81 $107 -24% $ 212 $ 268 -21%
Percent of Sales 19.0% 23.0% 16.6% 19.1%
Health Imaging $138 $117 +18% $ 380 $ 344 +10%
Percent of Sales 25.8% 23.3% 23.7% 22.2%
Other Imaging $ 68 $ 78 -13% $ 212 $ 126 +68%
Percent of Sales 9.9% 12.2% 10.6% 6.6%
---- ---- --- ------ ------ ---
Total of segments $660 $727 - 9% $1,818 $1,721 + 6%
Percent of Sales 18.4% 20.3% 17.4% 16.7%
Restructuring
(charges) credits - (350) 44 (350)
---- ---- --- ------ ------ ---
Total Earnings from
Operations $660 $377 +75% $1,862 $1,371 +36%
==== ==== === ====== ====== ===
Percent of Sales 18.4% 10.5% 17.8% 13.3%
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</TABLE>
<PAGE> 11
<TABLE>
Net Earnings by Operating Segment
(in millions)
<CAPTION>
Third Quarter Three Quarters
2000 1999 Change 2000 1999 Change
<S> <C> <C> <C> <C> <C> <C>
Consumer Imaging $267 $296 -10% $ 739 $ 690 + 7%
Percent of Sales 13.8% 15.0% 13.3% 12.7%
Kodak Professional $ 34 $ 66 -48% $ 96 $ 204 -53%
Percent of Sales 8.0% 14.2% 7.5% 14.6%
Health Imaging $ 96 $ 73 +32% $ 265 $ 230 +15%
Percent of Sales 18.0% 14.5% 16.5% 14.8%
Other Imaging $ 51 $ 53 - 4% $ 154 $ 86 +79%
Percent of Sales 7.4% 8.3% 7.7% 4.5%
---- ---- --- ------ ------ ---
Total of segments $448 $488 - 8% $1,254 $1,210 + 4%
Percent of Sales 12.5% 13.6% 12.0% 11.8%
Restructuring
(charges) credits - (350) 44 (350)
Interest expense (48) (39) (127) (107)
Other corporate items 4 5 22 15
Income tax effects on
above items and taxes
not allocated to
segments 14 131 20 149
---- ---- --- ------ ------ ---
Total Net Earnings $418 $235 +78% $1,213 $ 917 +32%
==== ==== === ====== ====== ===
Percent of Sales 11.6% 6.6% 11.6% 8.9%
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</TABLE>
<TABLE>
COSTS AND EXPENSES
(in millions)
<CAPTION>
Third Quarter Three Quarters
2000 1999 Change 2000 1999 Change
<S> <C> <C> <C> <C> <C> <C>
Gross profit $1,603 $1,493 + 7% $4,648 $ 4,448 + 4%
Percent of Sales 44.7% 41.7% 44.5% 43.2%
Selling, general and
administrative expenses $ 746 $ 923 -19% $2,180 $ 2,479 -12%
Percent of Sales 20.8% 25.8% 20.9% 24.1%
Research and development
costs $ 197 $ 193 + 2% $ 606 $ 598 + 1%
Percent of Sales 5.5% 5.4% 5.8% 5.8%
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</TABLE>
2000 COMPARED WITH 1999
Third Quarter
Consolidated
Third quarter 2000 sales were $3.590 billion, level with the
previous year. Adjusting for portfolio changes, revenues
increased 1%. Exchange had a $130 million negative impact in the
quarter, principally due to the continuing weakness of the Euro.
When adjusted for both portfolio changes and currency movements,
sales increased 5% over the third quarter of 1999. U.S. sales
were approximately $1.765 billion, 7% higher than 1999. Sales
outside the U.S. were approximately $1.825 billion representing a
5% decline year over year. Excluding the unfavorable impact of
foreign exchange, sales outside the U.S. increased approximately
2%.
<PAGE> 12
Emerging markets continued positive sales growth in the third
quarter, posting a 5% year-on-year improvement. Growth rates in
the emerging markets declined on a quarter sequential basis due
primarily to the inherent volatility of this market. The emerging
market portfolio accounted for approximately 17% of Kodak's
worldwide sales in the quarter. The portfolio showed growth in
Greater Russia (+35%), Greater China (+13%), Asia Area (+11%), and
Latin America (+1%), and a decline in Eastern Europe, Africa and
the Middle East (-9%). The year-over-year slowing of sales in
emerging markets reflected business slowdowns in certain areas as
well as a combination of adjustments to distributor networks,
realignment of channel inventory imbalances and the adverse effect
of foreign exchange.
Sales of digital products and services in the third quarter were
$746 million, a year-over-year increase of 12%, comparing
favorably to the second quarter growth rate of 2%. Digital
products and services represented 21% of the company's sales in
the third quarter. In the quarter, sales of consumer digital
products and services increased 40% and sales of commercial
digital products and services increased 3%. The low sales growth
in commercial principally reflects reduced digital product sales
to KPG. Continued growth in Health Imaging's laser imaging
business as well as strong sales of consumer digital cameras and
ink jet paper positively impacted sales growth. Earnings from
operations associated with the above sales resulted in a loss of
$6 million.
Third quarter gross profit increased by 3.0 percentage points year
over year, from 41.7% of sales to 44.7% primarily due to
restructuring charges in the year-ago quarter. Excluding the 1999
restructuring charges and relocation cost in 2000, gross profit
declined 3.1 percentage points, from 48.3% of sales to 45.2%. The
decline in margin was driven principally by lower prices,
increased sales of lower margin products like one-time-use and
consumer digital cameras, and the negative impact of exchange,
partially offset by volume driven manufacturing productivity.
Pricing declines on traditional products did not accelerate in the
quarter. However, the strong growth in consumer digital products
accounted for a significant portion of the price impact on gross
margin in the quarter. In addition, slowing year-over-year
manufacturing productivity accounted for a substantial portion of
the balance of the decline. Kodak's level load manufacturing
program led the Company to higher build rates and higher
productivity levels earlier in the year. Included in the 2000
third quarter gross profit are relocation expenses of
approximately $18 million (pre-tax) associated with the sale and
exit of the Company's Elmgrove equipment manufacturing facility in
Rochester, New York.
SG&A expenses declined both in dollars and as a percentage of
sales from 25.8% to 20.8%. SG&A excluding advertising expenses
also declined, from 20.4% to 15.7%. This decrease is principally
due to the impact of 1999 restructuring charges as well as the
Company's ongoing cost reduction activities and portfolio actions.
R&D was up slightly in dollar terms at $197 million in 2000 and
$193 million in the third quarter of 1999, essentially unchanged
as a percent of sales, at 5.5%. Expenditures continue to track
within the Company's expected ranges.
<PAGE> 13
Earnings from operations were $660 million, an increase of 75%
over 1999. This earnings increase primarily reflects the impact
of restructuring charges taken in 1999 totalling $350 million.
Interest expense increased $9 million or 23% over last year,
primarily as a result of higher average debt balances and interest
rates. Other income increased $5 million, which is primarily the
result of higher sales of investments partially offset by lower
equity earnings for the KPG joint venture.
Consumer Imaging
Worldwide Consumer Imaging sales in the third quarter declined 2%.
Adjusted for the impact of unfavorable exchange, year-over-year
sales increased 2%. U.S. sales were up 6%, while sales outside
the U.S. were down 8% as reported, and down 1% with exchange
excluded.
In the quarter, Consumer Imaging sales growth was led by one-time-
use and Advantix cameras, photofinishing, consumer digital
services and picture maker kiosks and related media.
From a geographic perspective, the segment experienced slowing
revenue growth in the U.S. (+6%) and Emerging Markets (+2%), while
Western Europe revenues declined 15%, primarily as a result of the
significant impact of the euro.
Worldwide film sales to dealers (35mm film, Advantix film, one-
time-use cameras) in the third quarter declined 2%, reflecting a
4% volume increase which was more than offset by a 3% price/mix
decline and a negative 3% exchange impact. U.S. film sales to
dealers were up 4%, resulting from a 3% volume increase, and
positive price/mix of 1%. Outside the U.S., film sales to dealers
declined 7%, as a result of volume growth of 4%, more than offset
by 5% price/mix decline and negative 6% exchange impact.
During the third quarter, Kodak continued to successfully shift
consumers to the differentiated, higher value MAX and Advantix
product lines. In the U.S., MAX and Advantix films combined grew
to more than 60% of Kodak's total consumer roll film revenues.
This movement in the value mix is up 7 percentage points year over
year and compares favorably to the 59% recorded in the second
quarter of 2000.
Worldwide paper sales in the third quarter declined 6%, reflecting
1% volume growth more than offset by a 3% price/mix decline and 4%
unfavorable exchange. U.S. paper sales declined 2%, as a result of
3% volume declines partially offset by a 1% price/mix increase.
Outside the U.S., paper sales were down 7% with 3% volume gains
offset by a combination of negative 4% price/mix and 6%
unfavorable exchange.
<PAGE> 14
SG&A expenses for the segment decreased 8%, from 24.9% of sales to
23.2%. Excluding advertising expenses, SG&A expenses decreased
9%, from 16.8% of sales to 15.6%. Research and development
expenses decreased 5%, from 4.3% of sales to 4.1%.
In the third quarter, Consumer Imaging segment earnings from
operations decreased 12% or $52 million year over year. The
earnings decrease in the third quarter was driven by the combined
effects of sales declines and lower gross profit margins on the
mix of products and services sold year over year. Partially
offsetting gross profit declines was continued expense control in
the quarter, with SG&A as a percent of sales declining 1.7
percentage points. The reduction in gross margins reflected
strong sales growth in lower margin products such as one-time-use
cameras and photofinishing services as well as ongoing downward
pressure on price. Net earnings for the segment of $267 million
decreased $29 million or 10% from the third quarter of 1999.
Kodak Professional
Kodak Professional worldwide third quarter revenues were down 8%
from the previous year, due to ongoing declines in the Graphics
and Commercial businesses. Adjusting for unfavorable exchange,
revenues were down 6% year over year. Overall emerging markets
performance for the segment was strong, posting gains of 14% year
over year. The Portrait/Social sensitized business was the
largest contributor to year-over-year growth in emerging markets.
Total commercial products revenue was down 6% in the quarter.
Commercial sensitized film and paper product sales were down 13%
year over year. However, the Commercial Digital Capture business
returned to growth in the quarter and the Commercial Digital
Output business experienced double-digit growth.
Total Portrait/Social revenues increased 1% in the quarter.
Portrait/Social sensitized products were down slightly primarily
from declining paper revenues. Worldwide, positive paper volumes
were not enough to offset slight price/mix declines and
unfavorable exchange. However, strong acceptance of the Portra
family of products in developed markets and ProImage products in
emerging markets continued throughout the quarter. Portrait/Social
digital products revenue growth was driven by new digitization
products and strong sales of digital printers and scanners.
The Graphics business, both traditional and digital, experienced
year-over-year revenue declines from reduced product sales to the
KPG joint venture. However, the recently announced joint venture
cost improvement program is proceeding successfully with capacity
consolidation, planned workforce reductions, infrastructure re-
alignment, and implementation of process improvements.
<PAGE> 15
SG&A expenses for the segment decreased 4%, but increased as a
percentage of sales from 18.2% of sales to 19.2%. Excluding
advertising expenses, SG&A expenses decreased 16%, from 15.9% of
sales to 14.5%. R&D expenses increased 19%, from 5.8% of sales to
7.5%, principally reflecting unusually low spending in 1999.
Kodak Professional earnings from operations decreased 24% from the
year-ago quarter. This decline in earnings resulted from lower
sales volumes, adverse pricing, unfavorable mix and foreign
exchange. Net earnings for the segment decreased 48% from $66
million in 1999 to $34 million in 2000 for the reasons discussed
above as well as decreased equity earnings from KPG.
Health Imaging
In the third quarter, worldwide sales in the Health Imaging
segment increased 6% year over year or 10% when adjusted for the
impact of exchange. U.S. sales increased 18% while sales outside
the U.S. were down 3% as reported, but up 3% with exchange
excluded. Sales in emerging markets were essentially flat, but up
modestly when adjusted for exchange. Sales in emerging markets
are volatile from quarter to quarter depending on the timing of
large government tender orders.
Sales of digital products (including laser printers, digital
media, digital capture equipment and Picture Archiving and
Communications Systems (PACS)) increased 14% year over year.
Placements of DryView laser imagers increased 60% over a very
strong third quarter last year. DryView media sales increased
more than 50%, while sales of digital capture products and PACS
increased more than 60%. Wet laser imaging sales continued their
expected declines from last year.
The electronic component parts shortage, which caused constraints
on manufacturing and shipment of the new Computed Radiography (CR-
800) digital capture product in the second quarter, has recently
eased.
Sales of traditional medical products, including analog film,
equipment, chemistry and services, were flat year over year, but
increased 4% when adjusted for the impact of exchange. For
traditional analog films (excluding specialty films), year-over-
year sales declined 8% reflecting slightly lower volumes, expected
negative price effect and unfavorable exchange. Mammography and
Oncology specialty products continued to show strong growth of
15%. Dental product sales increased 20%, reflecting the impact of
changes to dealer incentive plans intended to align sell in with
sell through.
SG&A expenses for the segment decreased 8%, from 20.5% of sales to
17.8%, reflecting continued cost control and on-going benefits
from the successful integration of the Imation business acquired
in December 1998. Excluding advertising expenses, SG&A expenses
decreased 9%, from 19.5% of sales to 16.7%. R&D expenses
increased 21%, from 5.6% of sales to 6.4%, consistent with the
long-term spending target for the business.
<PAGE> 16
Earnings from operations increased 18%, from $117 million to $138
million, as the benefits of increased sales, improvements in
manufacturing productivity, and continued SG&A spending reductions
more than offset the negative effects of foreign exchange and
changes in product price/mix. Net earnings increased 32% over
the third quarter of 1999.
Other Imaging
Other Imaging segment sales were up 8% on a year-over-year basis.
When adjusted for the divestiture of The Image Bank and the Motion
Analysis Systems Division, sales were up 18%, excluding exchange.
Segment sales growth in the quarter was led by strong consumer
digital camera volume increases of more than 120% and strong sales
performance in the Commercial & Government Systems unit.
SG&A expenses for the segment decreased 11%, from 20.5% of sales
to 17.0%. Excluding advertising expenses, SG&A expenses decreased
13%, from 17.5% of sales to 14.1%. The reduction in costs
reflects the Company's goal of growing its business without adding
significantly to its administrative cost base. R&D expenses
decreased 2%, from 8.1% of sales to 7.4%.
Earnings from operations for the Other Imaging Segment were down
$10 million, or 13% primarily as a result of increased losses from
consumer digital cameras and writeable CD media. Net earnings for
the segment decreased 4%.
<PAGE> 17
Year to date
Consolidated
Sales for the nine months ended September 30, 2000 were $10.434
billion representing a 1% increase over the comparable 1999
period. Adjusting for portfolio changes, revenues increased 3%.
Exchange had a $276 million negative impact on the year-to-date
period. When adjusted for both portfolio changes and currency
movements, sales increased 6% over the comparable 1999 period.
Reported U.S. sales were approximately $5.048 billion, 6% higher
than 1999. Sales outside the U.S. were approximately $5.386
billion representing a 2% decline year over year, as reported.
Excluding the unfavorable impact of foreign exchange, sales
outside the U.S. increased approximately 3%.
Sales in emerging markets, which accounted for 18% of the
Company's nine-month sales, increased 11% over the comparable 1999
period. Growth over the 1999 year-to-date period was seen across
all regions including Greater China (+16%), Latin America (+6%),
Asia Area (+16%), Eastern Europe, Africa, Middle East (+3%), and
Greater Russia (+45%).
Sales of digital products and services were $2,177 million for the
first nine months of 2000, and represent a 7% increase over the
$2,029 million recorded in 1999. Sales from digital/digitization
products and services accounted for 21% of the Company's total
year-to-date sales. Excluding the impact of charges taken for
PictureVision and Eastman Software, discussed previously, earnings
from the Company's digital businesses totaled $2 million versus
break-even in 1999.
Gross profit increased 4% in the year-to-date period from 43.2% of
sales to 44.5%. These margins reflect higher manufacturing
volumes and improved productivity offset by the negative impact of
price, mix, and exchange. 2000 gross profit includes accelerated
depreciation and relocation costs of approximately $41 million and
other charges and credits, discussed previously, which reduced
COGS by approximately $19 million. 1999 gross profit includes pre-
tax charges of approximately $327 million related to portfolio
adjustments and restructuring charges, discussed previously.
Excluding the effects of these items, 2000 gross profit declined
1%.
SG&A expenses decreased 12% from 24.1% of sales to 20.9%. SG&A
excluding advertising expenses declined 14%, from 19.1% of sales
to 16.1%. This reflects the Company's cost reduction and
portfolio actions. 1999 SG&A includes charges of approximately
$114 million related to restructuring activities and $12 million
related to portfolio adjustments, both discussed previously.
Excluding the effects of these items, SG&A declined 7% from 22.9%
of sales to 20.9%.
<PAGE> 18
R&D expenditures were flat as a percentage of sales and increased
slightly in dollar terms, from $598 million to $606 million.
Included in R&D expense for 2000 are other charges, primarily for
in-process R&D as discussed previously, of approximately $6
million.
Earnings from operations increased 36%. Included in 1999 earnings
from operations were charges of approximately $350 million related
to restucturing activities and $103 million related to portfolio
actions discussed previously. 2000 earnings from operations
includes charges of approximately $41 million for accelerated
depreciation and relocation expenses partially offset by other
charges and credits, discussed previously, which increased
earnings from operations by approximately $13 million. Year-over-
year currency movements had a $108 million negative impact on
earnings from operations. In addition to the items discussed
above, earnings from operations benefited from the continued
downward trend in SG&A costs, both in dollars and as a percentage
of sales.
Interest expense increased 19% from the prior period, primarily as
a result of higher interest rates and increased average
borrowings. Other income decreased $22 million, primarily due to
lower equity earnings for the KPG joint venture, which includes a
$15 million charge, discussed previously, and the reclassification
of Nexpress R&D costs into the joint venture, partially offset by
the sales of investments.
Net earnings increased 32% from $917 million to $1,213 million for
the nine-month periods ended September 30, 1999 and 2000,
respectively. Earnings per share increased 38% over the first
three quarters of 1999, and 6% when adjusted for 1999
restructuring charges and portfolio actions and 2000 accelerated
depreciation and relocation expenses, discussed above. The
effective tax rate was 34% in both periods.
Consumer Imaging
Year-to-date sales in the Consumer Imaging segment increased 2%
year over year and increased 5% excluding unfavorable foreign
exchange movements. U.S. sales increased 7% while sales outside
the U.S. declined by 2%, but increased 4% excluding the effect of
exchange movements. Sales declines outside the U.S. were
partially mitigated by 9% growth in emerging markets, which saw
double-digit sales growth in film, both in volume and dollar
terms.
Worldwide film sales (including 35 mm film, Advantix film, and one-
time-use cameras) increased 2% over the first nine months of 1999,
reflecting an 8% volume increase which more than offset negative
price and foreign exchange movements of 3% each. U.S. film sales
increased 5% on increased volume and stable prices. Outside the
U.S., increased volumes were offset by lower prices and negative
currency movements.
Worldwide paper sales were level with 1999 as volume gains of 5%
offset lower prices and negative exchange. U.S. paper sales
increased by 4% on higher volumes and flat pricing. Outside the
U.S., paper sales decreased 3% as a 6% increase in volumes could
not offset price declines of 4% and a negative exchange movement
of 5%.
<PAGE> 19
SG&A expenses for the segment decreased 7%, from 25.6% of sales to
23.3%, reflecting the benefits of the Company's cost reduction
efforts. Excluding advertising expenses, SG&A expenses decreased
7%, from 17.9% of sales to 16.2%. R&D expenses decreased 4%, from
4.7% of sales to 4.4%.
Earnings from operations increased 3%, as the benefits of higher
unit sales volumes, manufacturing productivity, and cost
reductions more than offset unfavorable exchange, lower effective
selling prices and a negative impact from product mix. Net
earnings were $739 million, which reflects a 7% increase over the
prior-year period.
Kodak Professional
Sales in the Kodak Professional segment decreased 9% over the
first three quarters of 1999 and 7% excluding the adverse effects
of currency movements. Adjusting the year-over-year comparison
for the impact of the formation of the KPG joint venture in Japan,
sales declined 7%. Increased revenues in the Company's
Portrait/Social business did not offset declines in digital camera
prices and volumes, reduced sales in the segment's commercial
business and lower sales of graphic products to KPG. U.S.
revenues decreased 3% and revenues outside the U.S. decreased 13%,
or 10% excluding the unfavorable impact of foreign exchange.
SG&A expenses for the segment were in line with 1999 in dollar
terms but increased as a percentage of sales, from 18.5% of sales
to 20.3%. Excluding advertising expenses, SG&A expenses increased
1%, from 16.1% of sales to 17.9%, reflecting increased e-Commerce
related spending. R&D expenses decreased 4% but increased on a
percentage of sales basis from 7.4% of sales to 7.8%.
Earnings from operations decreased 21%, while net earnings (which
includes the $15 million pre-tax charge related to the KPG
business discussed previously) declined 53%. Included in 1999
earnings from operations is a $20 million pre-tax charge related
to the Company's investment in CalComp Corporation. The decline
in net earnings reflects lower revenues along with a reduction of
joint venture income from KPG.
Health Imaging
Sales in the Health Imaging segment increased 4% from the prior
year-to-date period, and 6% excluding the adverse effect of
currency movements. Increased sales of DryView media and digital
products more than offset an expected decrease in wet laser
imaging sales. Sales inside the U.S. increased 10%, while sales
outside the U.S. decreased 2%, despite an increase of 6% in
emerging market sales. Excluding the adverse effect of foreign
currency movement, sales outside the U.S. increased 3%.
SG&A expenses for the segment decreased 6%, from 20.2% to 18.3% of
sales. Excluding advertising expenses, SG&A expenses decreased
8%, from 19.4% of sales to 17.2%, reflecting the benefits of cost
control initiatives and the continued successful integration of
the Imation business acquired in December 1998. R&D expenses
increased 9%, from 5.9% of sales to 6.2%.
<PAGE> 20
Earnings from operations increased 10%, as higher sales with
stable margins and lower SG&A costs more than offset increased R&D
spending. Segment net earnings increased 15%, from $230 million
to $265 million for the nine months ended September 30, 1999 and
2000, respectively.
Other Imaging
Sales in the Other Imaging segment increased 5% from the prior
year-to-date period, as higher unit volumes more than offset
portfolio changes, lower prices and adverse currency movements.
Adjusting for the impact of portfolio changes, segment sales
increased 13%. Sales growth in the first three quarters was led
by strong digital camera sales with unit volume increases of 93%,
strong sales performance in the Commercial & Government Systems
unit, and growth in Entertainment Imaging.
SG&A expenses for the segment decreased 18%, from 21.3% of sales
to 16.7%. Excluding advertising expenses, SG&A expenses decreased
21%, from 18.5% of sales to 13.9%. Year-to-date 2000 SG&A
expenses include other charges and credits of approximately $23
million, primarily related to Eastman Software and PictureVision,
as discussed previously. 1999 SG&A expenses include charges of
approximately $12 million related to portfolio adjustments,
discussed previously.
R&D expenses increased 11%, from 7.7% of sales to 8.1%, primarily
due to the write-off of in-process R&D related to the
PictureVision acquisition and increased investments in digital
products and services.
Earnings from operations were $212 million, $86 million higher
than the prior year period. Included in 1999 earnings from
operations were charges of approximately $83 million related to
portfolio actions, discussed previously. 2000 earnings from
operations include charges of approximately $8 million for
accelerated depreciation and relocation expenses and other
charges, discussed previously, of approximately $40 million.
Aside from these charges, earnings from operations increased 5%
reflecting lower SG&A costs, which more than offset portfolio
changes and the unfavorable effects of foreign currency rate
changes. Net earnings for the segment were $154 million, an
increase of $68 million over the prior year.
<PAGE> 21
RESTRUCTURING PROGRAMS
1999 Program
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. The
Company recorded $236 million of the $350 million provision as
cost of goods sold, primarily for employee severance, asset write-
downs, and shutdown costs related to these actions. The remaining
$114 million was recorded as SG&A for employee severance payments.
In connection with this program, approximately 3,400 positions
were to be eliminated worldwide, with approximately $250 million
of the restructuring charge for severance payments. The 3,400
personnel included in the restructuring were associated with the
realignment of manufacturing (1,500) and service and
photofinishing operations (870); and the consolidation of sales
and marketing (460), R&D (70) and administrative (500) functions
in various locations of the Company's worldwide operations.
Approximately $90 million of the $350 million charge was 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 Rochester, New York. In
addition, approximately $10 million of the charge was for shutdown
costs related to the exit of the Elmgrove facility. The net cash
cost of the restructuring program, which is being funded through
operations, is approximately $107 million after tax. This
expected cash outflow includes the effect of the revisions to the
program discussed below. As of the third quarter of 2000,
approximately 2,300 employees have left the Company under this
program.
During the second quarter of 2000, the Company reversed
approximately $44 million of severance related costs originally
recorded as part of its third quarter 1999 restructuring charge.
The reversal is the result of two factors. First, certain
manufacturing operations originally planned to be outsourced will
now be retained, as cost beneficial arrangements for the Company
could not be reached. Second, severance actions in Japan and
Europe have now been completed at a cost less than originally
estimated. Consequently, approximately 500 (450 manufacturing and
50 administrative) fewer employees will be separated, resulting in
total planned terminations under the third quarter 1999 program of
2,900. The remaining headcount reductions are expected to be
completed by December 31, 2000. Of the $44 million reversal,
approximately $25 million was recorded in cost of goods sold and
approximately $19 million was recorded as part of SG&A, consistent
with where the original charges were recorded.
The Company originally anticipated approximate pre-tax savings
associated with this program of $100 million in 2000, and an
additional $70 million in 2001, resulting in total run rate
savings of $170 million. As a result of the 500 fewer
terminations noted above, the Company now expects pre-tax savings
of $90 million in 2000 and an additional $50 million in 2001,
resulting in a revised annual run-rate savings of $140 million.
The Company anticipates recovering the net cash cost of this
revised program in less than two years.
<PAGE> 22
The following table summarizes the restructuring costs and
activity of the 1999 program:
(in millions)
Severance Shutdown
Costs Costs Total
Initial reserve $250 $10 $260
Amounts utilized 163 4 167
Amounts reversed 44 - 44
---- --- ----
Balance 9/30/00 $ 43 $ 6 $ 49
In addition to the charges related to the sale and exit of the
Company's Elmgrove site, discussed above, the Company incurred pre-
tax charges of approximately $18 million and $41 million during
the current quarter and year-to-date periods. These charges
reflect the accelerated depreciation of certain assets which
remained in use until the site was sold and related relocation
costs. It is estimated that related relocation costs of
approximately $15-$20 million pre-tax, per quarter, will be
recorded through the first half of 2001 in connection with these
actions.
1997 Program
The Company recorded a pre-tax provision of $1,455 million in the
fourth quarter of 1997 for severance and other termination
benefits and exit costs related to the strategic realignment of
the Company's worldwide manufacturing, sales and marketing, R&D,
administrative, and photofinishing operations. The Company
recorded $165 million of the $1,455 million provision as cost of
goods sold, primarily for inventory write-downs and other costs.
The remaining $1,290 million included $735 million of severance,
$127 million of other exit costs and $428 million of asset
impairments.
The principal purpose of this program was to eliminate
infrastructure and operational inefficiencies and redundancies
throughout the Company by taking actions to separate personnel,
close facilities and exit non-strategic businesses. Primary
actions involved the reorganization of sensitized goods
manufacturing and research lab operations as well as decisions to
exit numerous businesses across all operating segments, with a
significant portion relating to Consumer Imaging and Other Imaging
segment businesses. Approximately 13,500 employees had been
terminated through the end of the third quarter 2000 under this
plan. Through the end of the third quarter 2000, approximately
$703 million and $100 million was spent for severance costs and
other business exit costs, respectively. At September 30, 2000,
the Company had a liability of approximately $59 million for this
program. The remaining actions under the program are expected to
be completed by the end of 2000.
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<PAGE> 23
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 euros.
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. Greece will be adopting the
euro at a later date with other countries expected to follow. The
Company has operations in all of these countries.
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. Under the 'no compulsion no
prohibition' rules, billing systems have been modified so that the
Company is now 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 2001, when they
will change to the euro. Systems changes for countries not on SAP
(Finland and Greece) are also being implemented in 2001.
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<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first three
quarters of 2000 was $423 million. Net earnings, adjusted for
depreciation and amortization and asset impairment and other
charges, provided $1,882 million of operating cash. This was
partially offset by increases in receivables of $327 million,
reflecting normal seasonality; decreases in liabilities (excluding
borrowings) of $626 million, related primarily to severance
payments for restructuring programs and the payment of accrued
wage dividend and incentive compensation; and increased
inventories of $475 million reflecting the Company's earlier
decision to move to a level loading inventory strategy combined
with lower than planned sales performance. Net cash used in
investing activities of $425 million for the first three quarters
of 2000 was primarily to support capital expenditures. Total
capital expenditures are expected to be approximately $1.0 billion
for the year, with fourth quarter spending to support
manufacturing productivity, quality improvements, environmental
compliance and new products including e-Commerce initiatives,
digital photofinishing and digital cameras. Net cash used in
financing activities of $140 million for the first three quarters
of 2000 was primarily due to net increases in total borrowings of
$872 million, reduced by $411 million of dividend payments and
$634 million for stock repurchases.
Cash dividends per share of $.44, payable quarterly, were declared
in the third quarter of 2000 and 1999. Total cash dividends of
$406 million and $421 million were declared in the first three
quarters of 2000 and 1999, respectively.
Net working capital (excluding short-term borrowings) at the end
of the quarter was $1,776 million, compared with $838 million at
year-end 1999. This increase reflects higher inventory and
receivables balances and lower overall payables, as discussed
above.
On April 15, 1999, the Company's Board of Directors authorized a
new stock repurchase program for up to $2 billion of the Company's
outstanding stock. This program is the third since 1995, and
brings the total repurchases authorized under the three programs
to $5 billion. During the third quarter of 2000, the Company
repurchased $461 million of outstanding shares under the $2
billion program initiated in 1999, bringing the total repurchased
under that program to approximately $1.309 billion. On October 18,
2000, the Company announced an acceleration of its share
repurchase rate to an average of approximately $20 million per day
until the $1.0 billion to $1.2 billion share repurchase committed
to in June is reached.
<PAGE> 25
Item 3. Quantitative And Qualitative Disclosures About Market
Risk
See NOTE 3, DERIVATIVES AND MARKET RISK.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the New York State Department of Environmental
Conservation have reached agreement on the terms of a settlement
resolving alleged violations of air regulations in 6 NYCRR Part
227, regarding emissions of nitrogen oxides ("NOx") from the
boilers at the Company's Kodak Park manufacturing facility in
Rochester, New York.
The Company received a Notice of Violation in May 2000 alleging
multiple violations of Part 227-2 emission limits, as well as Part
227-3 record keeping/reporting requirements. The Company had
identified and self-reported multiple de minimis exceedances of
the NOx emission limits during the third quarter of 1999.
However, DEC additionally alleged that the Company had violated
the Part 227-3 NOx Budget Program by using inappropriate default
values in calculating emissions under the budget program for 1999.
The Company disputed these allegations, taking the position that
its use of the default values had originally been approved by DEC,
a position the Agency later reversed.
To resolve these allegations and related issues regarding budget
program requirements for current and future years, the Company has
agreed to enter into a Consent Order wherein it neither admits nor
denies any of the allegations in the Order, agrees to pay a fine
of $115,000, and agrees not to challenge DEC's administrative
action reducing Kodak Park's NOx budget allocation for the year
2000. DEC has approved Kodak's NOx budget plan.
The U.S. Environmental Protection Agency, Region 2, has initiated
an administrative enforcement action against the Company, alleging
violations of air monitoring requirements under the Resource
Conservation and Recovery Act ("RCRA"), the law that regulates the
management of hazardous waste. These issues arose as the result
of an inspection conducted by EPA at Kodak Park in May 1999. The
complaint, alleging six counts of failing to test and monitor
certain valves, containers, and pumps at Kodak Park, seeks a
penalty of $303,064 and an Order requiring that the Company come
into compliance within sixty days.
Although the Company does not dispute the allegations with respect
to some equipment, many of the Agency's allegations are based on
its more expansive interpretation of the applicability of the
hazardous waste program to equipment that the Company believes to
be process equipment (and therefore exempt).
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<PAGE> 26
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 27.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed for the
quarter ended September 30, 2000.
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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
by the undersigned.
EASTMAN KODAK COMPANY
(Registrant)
Date November 13, 2000
E. Mark Rajkowski
Controller
<PAGE> 27
Eastman Kodak Company and Subsidiary Companies
Index to Exhibits and Financial Statement Schedules
Exhibit
(27) Financial Data Schedule - Submitted with the EDGAR filing as a
second document to this Form 10-Q.
