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| Annual Report 1996 | ||
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| Annual Report 1996 | ||
1996 Worldwide Results Compared with 1995
Worldwide sales of Polaroid Corporation and its subsidiaries increased 2% to $2.28 billion in 1996 compared with $2.24 billion in 1995. Worldwide shipments of instant film in 1996 increased slightly compared to 1995. Excluding instant film shipments in Russia, 1996 shipments increased in the mid-single digits compared to 1995 shipments. In 1996, the Company sold 5.1 million cameras compared with 5.4 million cameras in 1995. Excluding camera shipments in Russia, 1996 camera shipments increased moderately compared to 1995. Conventional film shipments increased significantly and videotape shipments increased slightly in 1996 compared to 1995.
In 1996, sales in the United States were $1.06 billion, an increase of 4% compared to $1.02 billion in 1995. In 1996, U.S. shipments of instant cameras decreased moderately and shipments of instant film increased slightly compared to 1995. Sales in the U.S. in 1996 also included approximately $10 million to $20 million of licensing income on patents.
International sales in 1996 of $1.21 billion were comparable to international sales of $1.22 billion in 1995, despite the decline in sales in Russia and the negative impact of foreign currency translation. Sales in 1996 in the European region, excluding Russia, increased compared to 1995. Including Russia, sales in the European region decreased 10% to $664 million in 1996 compared with $739 million in 1995. The Company's sales in Russia in 1996 decreased over 40% compared to a year ago. In 1996, sales in the Asia Pacific, Canada, Latin and South America regions increased 15% to $551 million compared to $479 million in 1995 despite the negative impact of foreign currency translation, in particular, the yen.
Gross margins as a percent of sales increased to 44% for 1996 from 42% for 1995. The increase in gross margin in 1996 reflects the impact of savings from restructuring, favorable pricing on instant film, licensing income on patents and more cost-effective promotions. In 1996, the gross margin was also negatively affected by foreign currency translation.
Marketing, research, engineering and administrative expenses decreased to $797 million (35% of sales) in 1996 from $849 million in 1995 (38% of sales), primarily as a result of lower spending in research and engineering expenses. Research and engineering expenses were $116 million in 1996 compared to $166 million in 1995, a 30% decrease.
One-time costs relate to special charges in 1996 and charges for restructuring and other in 1996 and 1995. In 1996, one-time costs totaled $150 million pre-tax of which $110 million was recorded in the first quarter of 1996 and $40 million was recorded in the fourth quarter of 1996. In 1995, one-time costs totaled $247 million.
The $110 million restructuring and other expenses represents the balance of severance and pension enhancement costs and inventory write-downs related to the December 1995 program (as more fully described in the section "1995 Worldwide Results Compared with 1994".) The $110 million charge includes approximately $55 million pre-tax costs related to the severance program. Additionally, approximately $45 million represents enhanced retirement benefits provided under the early retirement program that will be funded from the Company's pension plans, and therefore has been reflected as a non-cash item in the Company's consolidated statement of cash flows.
The 1996 fourth quarter $40 million pre-tax cost includes $25 million related to the previously announced costs associated with the sale of the Company's Helios medical diagnostic imaging equipment line and $15 million to write down parts and capital equipment under development for a printer project and other costs. Inventory write-offs of $7 million related to these matters were recorded in cost of sales, in accordance with new accounting guidelines and $33 million was reported as special charges. The $33 million special charge reflects the write-offs of fixed assets, severance and other costs.
Excluding one-time costs, operating profit for 1996 was $202 million compared to $89 million in 1995. The increase in operating profit primarily reflects the impact of savings from restructuring and lower losses in the Company's digital imaging businesses. Including one-time costs, operating profit was $52 million in 1996 compared to a loss from operations of $158 million in 1995.
Total losses in the Company's digital imaging businesses in 1996 declined approximately $60 million compared to total losses of approximately $190 million in 1995. Reduction of these losses was achieved through restructuring and the growth of new product revenue, particularly in digital products which included LCD panels and projectors, the Company's PDC-2000 digital camera and color film recorders.
Other income was $27 million in 1996 compared with $9 million in 1995. This increase primarily reflects a $23 million gain on the sale of real estate partially offset by lower interest income. Included in other income was a foreign currency loss of $2 million from balance sheet translation in 1996 compared to a foreign currency loss of $3 million a year ago. Interest expense decreased to $47 million in 1996 from $52 million in 1995 primarily as a result of lower average borrowings and lower average interest rates.
For the full year 1996, the effective tax rate was 52%, compared with 30% for 1995. The increase in the effective tax rate was primarily a result of the adverse effect of the strengthening U.S. dollar on the international tax rate. For purposes of determining the after-tax one-time costs, the Company assumed a tax rate of 40% in 1996 and 35% in 1995 to calculate the tax benefit. The net after-tax foreign currency exchange loss from balance sheet translation for the full year 1996 amounted to $.11 per common share, compared with a $.03 loss for 1995.
In 1996, the Company recorded an extraordinary loss of $56.1 million (net of the tax benefit of $1.5 million) related to two transactions associated with the Company's $140.0 million 8% Subordinated Convertible Debentures (the "Debentures".) In June 1996, the Company purchased the conversion rights for $53.8 million and redeemed $.5 million of principal of the Debentures. This transaction has been determined to be a substantive modification of the terms of the Debentures and has been accounted for as an extinguishment of debt and the issuance of new debt. The cost of the conversion rights and the amount of the fair value of the new debt over the carrying value of the extinguished debt was recorded as an extraordinary loss of $54.5 million (net of the tax benefit of $.4 million) in the second quarter of 1996. As the holder of the conversion rights, the Company could have redeemed the Debentures at any time on or before September 30, 1998. If the Debentures had not been redeemed by the Company by September 30, 1998, the conversion rights would have reverted to the holders of the Debentures. In December 1996, the Company gave irrevocable notice that it was repurchasing the remaining $139.5 million of principal of the Debentures. The repurchase cost over the carrying value of the Debentures was rec orded as an extraordinary loss of $1.6 million (net of the tax benefit of $1.1 million) in the fourth quarter of 1996. This transaction closed on January 22, 1997.
Excluding one-time costs and the related tax effect in both 1996 and 1995, earnings before extraordinary items in 1996 were $105 million, or $2.27 primary earnings per common share, compared with $20 million, or $.45 primary earnings per common share for 1995. In 1996, the extraordinary loss was $56 million or $1.21 per common share. Including one-time costs and the extraordinary loss, the net loss in 1996 was $41 million, or $.89 primary loss per common share, compared with a loss of $140 million, or $3.09 primary loss per common share in 1995. Fully diluted earnings per common share were not reported in 1996 and 1995 because they were greater than primary earnings per common share.
