1995 Worldwide Results Compared with 1994



	Annual Report 1996

1995 Worldwide Results Compared with 1994

Worldwide sales of Polaroid Corporation and its subsidiaries decreased 3% to $2.24 billion in 1995 compared with $2.31 billion in 1994. In 1995, the Company sold 5.4 million cameras compared with 6.4 million cameras in 1994, a decline of 16%, in part due to lower sales of Captiva. In 1995, the Company decided to limit its production of Captiva cameras to the completion of work-in-progress. The Company will continue to market Captiva cameras and film for the foreseeable future, as well as provide service. Instant film shipments decreased slightly for the full year 1995 compared to 1994. Over the past few years, growth in instant camera and film shipments has shifted from mature markets in the United States, Western Europe and Japan to new markets such as China and Russia.

Sales in the United States were $1.02 billion in 1995, a decrease of 12% compared with $1.16 billion in 1994. In 1995, U.S. shipments of instant cameras and film decreased significantly compared to 1994, primarily reflecting the impact of the dealer inventory adjustment program. In addition, instant cameras and film were transshipped by U.S. dealers to Russia in 1994. U.S. sales in 1995 were also impacted by consumer promotional pricing on instant film and lower sales of videotapes and conventional film.

International sales increased 6% from $1.15 billion in 1994 to $1.22 billion in 1995. In 1995, as a result of increased sales in Russia, sales in the European region increased 5% to $739 million compared with $705 million in 1994. The Company's sales in Russia were $196 million in 1995, a 27% increase compared with $154 million in 1994. Sales in 1995 in Western Europe were flat compared to 1994, in part reflecting the dealer inventory adjustment program. In 1995, sales in the Asia Pacific, Canada, Latin and South America regions increased 7% to $479 million compared with $448 million in 1994. The increase is primarily a result of higher sales in China and other developing markets. While the Company believes that developing markets present particularly attractive opportunities, such markets tend to be considerably less stable than more established markets. There can be no assurance that developing markets will continue to produce favorable results.

Gross margins as a percent of sales were 42% for 1995 and 43% for 1994. The decline in gross margin in 1995 is primarily attributable to lower instant film sales, more instant film price promotions for consumers and unfavorable production costs associated with lower production levels.

Marketing, research, engineering and administrative expenses in 1995 were $849 million compared with $788 million in 1994. Included in these expenses were research and engineering expenses of $166 million in both 1995and 1994. The 8% increase in marketing, research, engineering and administrative expenses in 1995 reflects an increase in international marketing expenses for developing markets, an increase in worldwide consumer promotional expenses and infrastructure costs associated with the Company's switch in 1995 from third-party distribution to direct distribution to dealers in Japan. In 1995, pre-tax charges for restructuring and other expenses totaled $247 million of which $77 million was recorded in the first quarter and $170 million was recorded in the fourth quarter, as more fully described below.

In the first quarter of 1995, the Company implemented a restructuring plan which resulted in a pre-tax charge of $77 million. The Company offered an early retirement program to certain qualified employees and a voluntary severance program to all employees, both of which were open from February 13, 1995 to March 31, 1995. As a result of these programs, approximately 930 employees (approximately 560 from manufacturing and 370 from marketing, research, engineering and administrative functions) terminated their employment in 1995. The pre-tax costs related to the voluntary severance program were $56 million, of which $47 million of cash severance payments were made in 1995. The remaining cash severance payments of approximately $9 million were paid in the first quarter of 1996. Additionally, $18 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 on the Company's statement of cash flows. The remainder of the charge consisted of a pre-tax charge of approximately $3 million for exit costs related to the shutdown of certain facilities.

In December 1995, the Company announced a plan to make fundamental changes in its operating structure. The restructuring plan features three principal components - program reductions in certain product, research and manufacturing areas; strategic refocusing of the Company's digital imaging businesses for the medical dia gnostic and graphic arts markets; and a reduction in corporate overhead expenses. The charge for this program was $280 million. Of that amount, $170 million was recorded in the fourth quarter of 1995 and $110 million was recorded in the first quarter of 1996.

The 1995 fourth quarter pre-tax charge of $170 million included $85 million to write off certain assembly equipment and fixed assets and $30 million to write-off inventory and accrue other costs, all of which were primarily related to the Captiva product line. The remaining $55 million of the charge was related to the estimated cost of involuntary severance benefits for the Company's domestic employees who were expected to terminate in 1996. This amount does not include any incremental voluntary severance benefits and pension enhancement benefits. The cost of these benefits, along with severance costs for the Company's international employees ($100 million) was recognized in the first quarter of 1996. No cash severance payments were made in 1995 under this program. In the first quarter of 1996, the Company also recorded a $10 million charge to write off additional inventory.

The loss from operations for the full year 1995 was $158 million, compared to an operating profit of $200 million in 1994. Excluding the charge for restructuring and other expenses of $247 million, operating profit for 1995 would have been $89 million, a reduction of $111 million compared to 1994. This reduction is attributable to a combination of factors, primarily to a decline in domestic instant film sales, an increase in worldwide promotional expenses, an increase in international marketing expenses for developing markets and higher losses for the Company's digital imaging businesses.

The Company's new digital imaging businesses which are in the early stages of revenue generation incurred total losses of approximately $190 million in 1995 compared to approximately $180 million in 1994. The 1995 losses were principally attributable to medical imaging and to graphics imaging with a lesser proportion attributable to electronic imaging. The 1994 losses were principally attributable to medical imaging with a smaller proportion attributable to each of graphics imaging and electronic imaging. Included in the losses attributable to medical imaging and graphics imaging in both 1995 and 1994, are significant costs associated with the Company's new coating facility which was brought on line in 1994 and is operating at low levels of production capacity. Shipments of the new graphics imaging product, Dry Tech Imagesetting Film, began in October 1995. Shipments of Helios medical imaging systems doubled in 1995 compared to the low base amount in 1994.

Other income was $9 million in 1995 compared with $7 million in 1994. Included in other income were foreign currency losses resulting from balance sheet translation amounting to $3 million in 1995 and $8 million in 1994. Interest expense increased to $52 million in 1995 from $47 million in 1994 primarily as a result of lower amounts of interest capitalized on qualifying assets and increased short-term borrowings.

For the full year 1995, the effective tax rate was 30%, compared with 27% for 1994. For purposes of determining the after-tax charges, the Company assumed a statutory tax rate of 35% to calculate the tax benefit. The net after-tax foreign currency exchange loss from balance sheet translation for the full year 1995 amounted to $.03 per common share, compared with a $.02 loss for 1994.

The net loss for the full year 1995 was $140 million, or $3.09 primary loss per common share, compared with earnings of $117 million for the full year 1994, or $2.49 primary earnings per common share. The full year 1995 results include pre-tax charges totaling $247 million for the two early retirement and the related tax effect, the full year 1995 primary earnings per common share would have been approximately $.45 per share.