View:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): August 2, 2007
Eastman Kodak Company
(Exact name of registrant as specified in charter)
New Jersey 1-87 16-0417150
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
343 State Street,
Rochester, New York 14650
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (585) 724-4000
--------------
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition
- --------------------------------------------------------
On August 2, 2007, Eastman Kodak Company issued a press release describing its
financial results for its second fiscal quarter ended June 30, 2007. Copies of
the press release and financial discussion document are attached as Exhibits
99.1 and 99.2, respectively, to this report.
Within the Company's second quarter 2007 press release and financial discussion
document, the Company makes reference to certain non-GAAP financial measures
including "Digital earnings improvement", "Traditional earnings improvement",
"Digital revenue", "Traditional revenue", "Net cash generation", "GCG digital
revenue improvement", "Net cash generation goal", "Digital earnings from
operations goal" and "Digital revenue growth forecast", which have directly
comparable GAAP financial measures. The Company believes that these measures
represent important internal measures of performance. Accordingly, where these
non-GAAP measures are provided, it is done so that investors have the same
financial data that management uses with the belief that it will assist the
investment community in properly assessing the underlying performance of the
Company on a year-over-year basis. Whenever such information is presented, the
Company has complied with the provisions of the rules under Regulation G and
Item 2.02 of Form 8-K. The specific reasons, in addition to the reasons
described above, why the Company's management believes that the presentation of
the non-GAAP financial measures provides useful information to investors
regarding Kodak's financial condition, results of operations and cash flows are
as follows:
Digital earnings improvement / Traditional earnings improvement / Digital
revenue / Traditional revenue / GCG digital revenue improvement / Digital
earnings from operations goal / Digital revenue growth forecast - Due to the
Company's ongoing digital transformation, management views the Company's
performance based on the following three key metrics: digital revenue growth,
digital earnings growth and net cash generation. These three key metrics are
emphasized in the Company's attached earnings release for the second quarter of
2007. These digital measures form the basis of internal management performance
expectations and certain incentive compensation. Accordingly, these digital
measures are presented so that investors have the same financial data that
management uses with the belief that it will assist the investment community in
properly assessing the underlying performance of the Company against its key
metrics on a year-over-year and quarter-sequential basis, as the Company
undergoes this digital transformation.
Net cash generation / Net cash generation goal - The Company believes that the
presentation of net cash generation is useful information to investors as it
facilitates the comparison of cash flows between reporting periods. In addition,
management utilizes these measures as tools to assess the Company's ability to
repay debt and repurchase its own common stock, after it has satisfied its
working capital needs (including restructuring-related payments), dividends,
capital expenditures, acquisitions and investments. The net cash generation
measure equals net cash provided by continuing operations from operating
activities, as determined under Generally Accepted Accounting Principles in the
U.S. (GAAP), minus capital expenditures, plus proceeds from the sale of assets,
investments in unconsolidated affiliates, and dividends. Net cash generation
forms the basis of internal management performance expectations (it is one of
the Company's three key metrics) and certain incentive compensation.
Accordingly, the Company believes that the presentation of this information is
useful to investors as it provides them with the same data as management uses to
facilitate their assessment of the Company's cash position.
Item 9.01. Financial Statements and Exhibits
- --------------------------------------------
(c) Exhibits
--------
Exhibit 99.1 Press release issued August 2, Furnished with
2007 regarding financial results this document
for the second quarter of 2007
Exhibit 99.2 Financial discussion document issued Furnished with
August 2, 2007 regarding financial this document
results for the second quarter of 2007
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 hereunto duly authorized.
EASTMAN KODAK COMPANY
By: /s/ Diane E. Wilfong
----------------------------
Name: Diane E. Wilfong
Title: Chief Accounting Officer
and Controller
Date: August 2, 2007
EXHIBIT INDEX
-------------
Exhibit No. Description
- ---------- ------------
99.1 Press release issued August 2, 2007 regarding financial results for the
second quarter of 2007
99.2 Financial discussion document issued August 2, 2007 regarding financial
results for the second quarter of 2007
Exhibit 99.1
Kodak Reports Significantly Improved 2nd Quarter Operating Results
on Sales of $2.510 Billion
Reaffirms Full-Year Cash, Digital Revenue, and Digital Earnings Goals
Reduces 2nd Quarter SG&A Expenses by $87 Million; Gross Profit
Margins Improve Across All Major Businesses, Driven by Reduced Cost
GAAP Pre-Tax Loss from Continuing Operations Reduced by 41% to
$173 Million; Company Ends Quarter with $1.925 Billion in Cash
New Consumer Inkjet Products and Imaging Sensor Technology Seeing
Positive Market Acceptance; Graphic Communications Group's Enterprise
Solutions Business Achieves a 40% Sales Increase
ROCHESTER, N.Y.--(BUSINESS WIRE)--Aug. 2, 2007--Eastman Kodak
Company (NYSE:EK) today reported a $121 million year-over-year
improvement in pre-tax results from continuing operations, reflecting
gross profit margin improvements across all of its major business
units. The company achieved a $97 million improvement in digital
earnings and a $31 million improvement in traditional earnings, as
expenses declined. In addition, the company reported a $135 million
after-tax loss from continuing operations, or $0.47 per share, an
improvement of $220 million, or $0.77 per share, as compared to the
prior year.
Kodak also reaffirmed its plan to achieve its full-year financial
goals for net cash generation, digital revenue growth and digital
earnings.
"Our second-quarter results reinforce our confidence in our
full-year performance," said Antonio M. Perez, Chairman and Chief
Executive Officer, Eastman Kodak Company. "Revenues during the second
quarter were in line with our expectations. Earnings improved across
all of our major business units, reflecting our strong focus on cost
reduction and operational efficiencies. We continue to expect a strong
second half, with double-digit sales growth in both of our major
digital businesses, driven by a stronger-than-ever portfolio of
digital products, including our revolutionary consumer inkjet printing
system, new image sensors, workflow software, and an expanded line of
NEXPRESS digital color printing presses. I'm pleased with our
first-half results, and I remain confident in our ability to achieve
our 2007 key strategic objectives."
On the basis of generally accepted accounting principles in the
U.S. (GAAP), the company reported a second-quarter loss from
continuing operations of $173 million pre-tax, $135 million after tax,
or $0.47 per share, compared with a loss of $294 million pre-tax, $355
million after tax, or $1.24 per share in the year-ago period. Items of
expense impacting comparability in the second quarter of 2007 totaled
$266 million after tax, or $0.92 per share. The most significant item
was restructuring costs of $316 million before tax and $248 million
after tax, or $0.86 per share. In the second quarter of 2006, items
that impacted comparability totaled $206 million after tax, or $0.72
per share, primarily reflecting restructuring costs.
For the second quarter of 2007:
-- Sales totaled $2.510 billion, a decrease of 7% from $2.688
billion in the second quarter of 2006. Digital revenue totaled
$1.460 billion, a 3% increase from $1.417 billion. Traditional
revenue totaled $1.044 billion, a 17% decline from $1.262
billion in the year-ago quarter.
-- The company's second-quarter loss from continuing operations,
before interest, other income (charges), net, and income taxes
was $163 million, compared with a loss of $257 million in the
year-ago quarter.
Other financial details:
-- Gross Profit margin was 26.2% for the quarter, up from 21.4%
in the prior year, primarily attributable to lower costs,
driven by manufacturing footprint reductions and the favorable
impact of foreign exchange, offset by adverse silver and
aluminum costs.
-- Selling, General and Administrative expenses decreased $87
million from the year-ago quarter, reflecting the company's
cost reduction activities. SG&A as a percentage of revenue was
17%, down from 19% in the year-ago quarter.
-- Net Cash Generation for the second quarter was negative $251
million, compared with negative $74 million in the year-ago
quarter. Net Cash Generation for the first half of 2007 was
negative $704 million, compared with negative $691 million in
the year-ago period. This corresponds to net cash used in
operating activities from continuing operations of $298
million for the second quarter, compared with $17 million in
the year-ago quarter, driven primarily by changes in working
capital. For the first half of 2007, net cash used in
operating activities from continuing operations was $695
million, compared with $554 million in the year-ago period.
-- On April 30, 2007, the company completed the sale of its
Health Group to an affiliate of Onex Corporation for $2.350
billion. As previously announced, the company used a portion
of the cash proceeds from that transaction to fully repay
$1.145 billion of outstanding secured term debt. As of June
30, 2007, the company's debt level was $1.624 billion, a
$1.154 billion reduction from the 2006 year-end debt level of
$2.778 billion.
-- Kodak held $1.925 billion in cash and cash equivalents as of
June 30, 2007.
Segment sales and results from continuing operations, before
interest, taxes, and other income and charges (earnings from
operations), are as follows:
-- Consumer Digital Imaging Group results improved by $78 million
to a loss of $55 million, compared with a year-ago loss of
$133 million. This improvement was driven by changes in
product portfolio management and lower SG&A expenses,
partially offset by scaling of the manufacturing and new
product introduction activities in the Inkjet Systems
business. Revenues for the second quarter totaled $1.000
billion, down from $1.105 billion in the year-ago quarter.
This largely reflects anticipated decreases in traditional
photofinishing products and services at retail, partially
offset by growth in consumer imaging services and imaging
sensors. The new consumer inkjet printer line continues to
receive strong customer response and the company continues to
expand retail distribution as it increases manufacturing
capacity.
-- Graphic Communications Group earnings from operations were $44
million, compared with $16 million in the year-ago quarter.
This earnings increase was primarily driven by manufacturing
productivity improvements and lower SG&A expenses, partially
offset by higher aluminum costs. Sales for the second quarter
were $929 million, a 2% increase from the year-ago quarter.
Revenues from digital products improved by 6% for the quarter
versus the prior year, driven by favorable foreign exchange
and increased sales of digital plates. In addition, the
Enterprise Solutions business achieved a 40% revenue increase,
driven by strong sales of workflow software.
-- Film Products Group earnings from operations were $137
million, compared with $119 million in the year-ago quarter,
representing a strong improvement in the face of declining
revenue. During the second quarter of 2007, the group achieved
a 25% operating margin, as compared with 18% in the year-ago
quarter. The operating margin performance resulted from
changing product mix, lower depreciation expense, and actions
to reduce traditional infrastructure ahead of revenue
declines. Film Products Group sales were $559 million, down
from $660 million in the year-ago quarter, representing a
decrease of 15%.
"The performance of our business units this quarter is more
evidence of the progress that we are making in positioning Kodak for
sustainable success," said Perez. "I am proud of my team's performance
and I am encouraged by the enthusiastic market response to our new
products. We continue to make great strides in transforming Kodak into
a growing, profitable digital company."
2007 Outlook Reaffirmed
Kodak remains focused on three financial metrics as it continues
to transform its business: net cash generation, digital earnings from
operations and digital revenue growth.
As indicated during its first-quarter conference call with
investors, the company's goal for net cash generation this year is in
excess of $100 million after restructuring disbursements of
approximately $600 million. This outlook corresponds to expected net
cash provided by continuing operations from operating activities, on a
GAAP basis, in the range of $200 million to $450 million.
Additionally, the company's goal for 2007 full-year digital
earnings from operations is $150 million to $250 million, which
corresponds to a GAAP loss from continuing operations before interest,
other income (charges), net, and income taxes for the full year of
$550 million to $650 million.
Finally, the company continues to forecast 2007 digital revenue
growth of 3% to 5%, with total 2007 revenue expected to be down
between 4% and 7%.
Conference Call
Antonio Perez and Kodak Chief Financial Officer Frank Sklarsky
will host a conference call with investors at 11:00 a.m. Eastern Time
today. To access the call, please use the direct dial-in number:
913-312-1292, access code 4557735. There is no need to pre-register.
For those wishing to participate via an Internet Broadcast, please
access our Kodak Investor Center web page at:
http://www.kodak.com/go/invest.
The call will be recorded and available for playback by 2:00 p.m.
Eastern Time today by dialing 719-457-0820, access code 4557735. The
playback number will be active until Thursday, August 9th at 5:00 p.m.
Eastern Time.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this press release may be forward-looking in
nature, or "forward-looking statements" as defined in the United
States Private Securities Litigation Reform Act of 1995. For example,
references to the Company's expectations for digital earnings from
operations, digital revenue growth, net cash generation, sales growth,
revenue, and net cash from continuing operations are forward-looking
statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent the Company's estimates only as of the date they
are made, and should not be relied upon as representing the Company's
estimates as of any subsequent date. While the Company may elect to
update forward-looking statements at some point in the future, the
Company specifically disclaims any obligation to do so, even if its
estimates change. The forward-looking statements contained in this
press release are subject to a number of factors and uncertainties,
including the successful:
-- execution of the digital growth and profitability strategies,
business model and cash plan;
-- implementation of the cost reduction programs;
-- transition of certain financial processes and administrative
functions to a global shared services model and the
outsourcing of certain functions to third parties;
-- implementation of, and performance under, the debt management
program, including compliance with the Company's debt
covenants;
-- development and implementation of product go-to-market and
e-commerce strategies;
-- protection, enforcement and defense of the Company's
intellectual property, including defense of our products
against the intellectual property challenges of others;
-- implementation of intellectual property licensing and other
strategies;
-- integration of the Company's businesses to SAP, the Company's
enterprise system software;
-- completion of various portfolio actions;
-- reduction of inventories;
-- integration of acquired businesses and consolidation of the
Company's subsidiary structure;
-- improvement in manufacturing productivity and techniques;
-- improvements in working capital management and cash conversion
cycle;
-- improvement in supply chain efficiency; and
-- implementation of the strategies designed to address the
decline in the Company's traditional businesses.
The forward-looking statements contained in this press release are
subject to the following additional risk factors:
-- inherent unpredictability of currency fluctuations, commodity
prices and raw material costs;
-- competitive actions, including pricing;
-- changes in the Company's debt credit ratings and its ability
to access capital markets;
-- the nature and pace of technology evolution;
-- changes to accounting rules and tax laws, as well as other
factors which could impact the Company's reported financial
position or effective tax rate;
-- pension and other post retirement benefit cost factors, such
as actuarial assumptions, market performance, and employee
retirement decisions;
-- general economic, business, geo-political and regulatory
conditions or unanticipated environmental liabilities or
costs;
-- market growth predictions;
-- continued effectiveness of internal controls; and
-- other factors and uncertainties disclosed from time-to-time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this press release should be
evaluated in light of these important factors and uncertainties.
Eastman Kodak Company
Second Quarter 2007 Results
Non-GAAP Reconciliations
Within the Company's second quarter 2007 press release and
financial discussion document, reference is made to certain non-GAAP
financial measures, including "digital earnings improvement",
"traditional earnings improvement", "digital revenue", "traditional
revenue", "net cash generation", "GCG digital revenue improvement",
"net cash generation goal", "digital earnings from operations goal"
and "digital revenue growth forecast". Whenever such information is
presented, the Company has complied with the provisions of the rules
under Regulation G and Item 2.02 of Form 8-K. The Company's management
believes that the presentation of each of these non-GAAP financial
measures provides useful information to investors regarding Kodak's
financial condition, results of operations and cash flows as provided
in the Form 8-K filed in connection with this press release.
The following table reconciles digital and traditional earnings
improvements to the most directly comparable GAAP measure of
improvement in loss from continuing operations before income taxes
(dollar amounts in millions):
2007
Improvement
-----------
Digital earnings improvement, as presented $ 97
Traditional earnings improvement, as presented 31
New technologies earnings improvement 15
Restructuring costs and other items (49)
-----------
Loss from continuing operations before interest, other
income (charges), net and income taxes improvement (GAAP
basis) $ 94
Improvement in interest expense and other income
(charges), net 27
-----------
Loss from continuing operations before income taxes
improvement (GAAP basis), as presented $ 121
The following table reconciles digital revenue and traditional
revenue to the most directly comparable GAAP measure of consolidated
revenue (dollar amounts in millions):
Increase/
Q2 2007 Q2 2006 (Decrease)
------- ------- ----------
Digital revenue, as presented $ 1,460 $ 1,417 3%
Traditional revenue, as presented 1,044 1,262 -17%
New technologies revenue 6 9
------- -------
Consolidated revenue (GAAP basis), as
presented $ 2,510 $ 2,688 -7%
The following table reconciles net cash generation to the most
directly comparable GAAP measure of net cash used in continuing
operations from operating activities (dollar amounts in millions):
Q2 2007 Q2 2006 YTD 2007 YTD 2006
------- ------- -------- --------
Net cash used in continuing
operations from operating
activities (GAAP basis), as
presented $ (298) $ (17) $ (695) $ (554)
Additions to properties (59) (83) (125) (161)
Net proceeds from sales of
businesses/assets 106 26 116 33
Investments in unconsolidated
affiliates (9)
------- ------- -------- --------
Net cash generation (continuing
operations), as presented $ (251) $ (74) $ (704) $ (691)
The following table reconciles GCG digital revenue improvement to
the most directly comparable GAAP measure of GCG total segment revenue
improvement:
2007
Improvement
(Decline)
-----------
GCG digital revenue improvement, as presented 6%
GCG traditional revenue decline -17%
GCG total segment revenue improvement (GAAP basis), as
presented 2%
The following table reconciles the net cash generation goal to the
most directly comparable GAAP measure of net cash provided by
continuing operations from operating activities goal (dollar amounts
in millions):
2007
Goal
-----------------
Net cash generation goal, as presented in excess of $100
Additions to properties, net proceeds from sales of
businesses/assets, distributions from/(investments
in) unconsolidated affiliates and dividends goal 100-350
-----------------
Net cash provided by continuing operations from
operating activities goal (GAAP basis), as
presented $200-$450
=================
The following table reconciles the digital earnings from
operations goal to the most directly comparable GAAP measure of loss
from continuing operations before interest, other income (charges),
net and income taxes goal (dollar amounts in millions):
2007
Goal
-------------
Digital earnings from operations goal, as presented $150-$250
Traditional earnings, new technologies earnings,
restructuring costs and other discrete items goals (700)-(900)
-------------
Loss from continuing operations before interest, other
income (charges), net and income taxes goal (GAAP
basis), as presented $(550)-$(650)
=============
The digital revenue growth forecast for 2007, as presented, of 3%
to 5% corresponds to the most directly comparable GAAP measure of
expected total company revenue decline for 2007, as presented, of 4%
to 7%. Items to reconcile from the digital revenue growth forecast to
expected total company revenue decline are expected traditional and
new technologies revenue declines of 13% to 22%.
As previously announced, the Company will only report its results
on a GAAP basis, which will be accompanied by a description of
non-operational items affecting its GAAP quarterly results by line
item in the statement of operations. The Company defines
non-operational items as restructuring and related charges, gains and
losses on sales of assets, certain asset impairments, the related tax
effects of those items and certain other significant pre-tax and tax
items not related to the Company's core operations. Non-operational
items, as defined, are specific to the Company and other companies may
define the term differently. The following table presents a
description of the non-operational items affecting the Company's
quarterly results by line item in the statement of operations for the
second quarter of 2007 and 2006, respectively.
2nd Quarter
---------------------------------
2007 2006
(in millions, except per share data)
$ EPS $ EPS
---------------- ----------------
Loss from continuing operations -
GAAP $ (135) $ (0.47) $ (355) $ (1.24)
COGS
- - Charges for accelerated
depreciation in connection with the
focused cost reduction actions 15 63
- - Charges for inventory writedowns
in connection with focused cost
reduction actions 6 5
------- -------- ------- --------
Subtotal 21 0.07 68 0.24
------- -------- ------- --------
SG&A
- - Charge for legal settlement - 4
------- -------- ------- --------
- - 4 0.01
------- -------- ------- --------
Restructuring
- - Charges for focused cost reduction
actions 295 156
------- -------- ------- --------
Subtotal 295 1.03 156 0.55
------- -------- ------- --------
Other Operating Income/(Charges),
Net
- - Gains on sale of property related
to focused cost reduction actions,
net (39) (3)
- - Impairment of property related to
focused cost reduction actions 6 9
------- -------- ------- --------
Subtotal (33) (0.12) 6 0.02
------- -------- ------- --------
Taxes
- - Audit settlement, establishment of
foreign valuation allowances and
adjustments of uncertain tax
positions 36
- - Tax impacts of the above-mentioned
pre-tax items (53) (28)
------- -------- ------- --------
Subtotal (17) (0.06) (28) (0.10)
- ----------------------------------------------------------------------
CONTACT: Eastman Kodak Company
Media:
David Lanzillo, 585-781-5481
david.lanzillo@kodak.com
or
Investor Relations:
Ann McCorvey, 585-724-5096
antoinette.mccorvey@kodak.com
or
Angela Nash, 585-724-0982
angela.nash@kodak.com
Exhibit 99.2
EASTMAN KODAK COMPANY
FINANCIAL DISCUSSION DOCUMENT
SECOND QUARTER 2007 COMPARED WITH SECOND QUARTER 2006
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
Worldwide Revenues
Net worldwide sales were $2,510 million for the second quarter of
2007 as compared with $2,688 million for the second quarter of 2006,
representing a decrease of $178 million or 7%. The decrease in net
sales was primarily due to declines in volumes and unfavorable
price/mix, which decreased second quarter sales by approximately 6.6
and 2.7 percentage points, respectively. The decrease in volumes was
primarily driven by Consumer Film Capture within FPG, snapshot
printing within Digital Capture and Devices and the traditional
portion of Retail Printing, both within CDG, and the traditional
consumables portion of Prepress Solutions within GCG. The negative
price/mix was primarily driven by Digital Capture and Devices and
Retail Printing, both within CDG, as well as Consumer Film Capture and
Entertainment Imaging within FPG. Second quarter sales were positively
impacted by foreign exchange, which increased sales by $71 million or
approximately 2.6 percentage points.
Digital Strategic Product Groups' Revenues
The Company's digital product sales were $1,460 million for the
second quarter of 2007 as compared with $1,417 million for the prior
year quarter, representing an increase of $43 million, or 3%,
primarily driven by increased revenues from Enterprise Solutions and
growth in the digital prepress consumables portion of Prepress
Solutions, both within GCG. CDG digital revenues were essentially flat
year-over-year primarily driven by the decline in snapshot printing,
partially offset by sales of the recently introduced digital picture
frames.
Traditional Strategic Product Groups' Revenues
Net sales of the Company's traditional products were $1,044
million for the second quarter of 2007 as compared with $1,262 million
for the prior year quarter, representing a decrease of $218 million,
or 17%, primarily driven by declines in Consumer Film Capture within
FPG, Retail Printing within CDG, and traditional prepress consumables
sales within GCG.
Product sales from new technologies were $6 million for the second
quarter of 2007 and $9 million for the second quarter of 2006.
Gross Profit
Gross profit was $658 million for the second quarter of 2007 as
compared with $575 million for the second quarter of 2006,
representing an increase of $83 million, or 14%. The gross profit
margin was 26.2% in the current quarter as compared with 21.4% in the
prior year quarter. The 4.8 percentage point increase was primarily
attributable to reduced manufacturing and other costs, which increased
gross profit margins by approximately 6.5 percentage points, and were
driven by a combination of lower restructuring-related charges, lower
depreciation expense, and the impact of the Company's cost reduction
initiatives, partially offset by increased silver and aluminum costs.
Gross profit margins were also favorably impacted by foreign exchange,
which increased gross profit margins by approximately 0.8 percentage
points. These increases were partially offset by unfavorable price/mix
and volume declines, which reduced gross profit margins by
approximately 2.0 percentage points and 0.5 percentage points,
respectively. The negative price/mix was primarily driven by Digital
Capture and Devices within CDG, Prepress Solutions within GCG and
price/mix declines within FPG, while the volume declines were largely
driven by Consumer Film Capture within FPG, snapshot printing within
CDG, and the traditional portion of Retail Printing within CDG.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $431
million for the second quarter of 2007 as compared with $518 million
for the prior year quarter, representing a decrease of $87 million, or
17%. SG&A as a percentage of sales decreased from 19% in the second
quarter of 2006 to 17% in the second quarter of 2007. The
year-over-year decrease in SG&A is primarily attributable to
significant Company-wide cost reduction actions.
Research and Development Costs
Research and development costs (R&D) were $128 million for the
second quarter of 2007 as compared with $152 million for the second
quarter of 2006, representing a decrease of $24 million, or 16%. R&D
as a percentage of sales was 5% for the second quarter of 2007 as
compared with the prior year quarter of 6%. This decrease was
primarily driven by the continuing realignment of resources, as well
as the timing of development of new products.
Restructuring Costs and Other
Restructuring costs and other were $295 million for the second
quarter of 2007 as compared with $156 million for the prior year
quarter, representing an increase of $139 million or 89%. The most
significant portion of the second quarter costs was a $238 million
impairment charge taken in the current quarter related to the sale of
the Company's Xiamen, China facility. These costs, as well as the
restructuring-related costs reported in cost of goods sold, are
discussed in further detail under "RESTRUCTURING COSTS AND OTHER"
below.
Other Operating (Income) Expenses, Net
The other operating (income) expenses, net category includes gains
and losses on sales of capital assets and certain asset impairment
charges. Other operating income was $33 million for the second quarter
of 2007 as compared with other operating expenses of $6 million for
the second quarter of 2006, representing an improvement of $39
million. This improvement was largely driven by the gain on the sale
of the Light Management Films business, as well as increased gains on
sales of capital assets in the current quarter.
Loss From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
The loss from continuing operations before interest, other income
(charges), net and income taxes for the second quarter of 2007 was
$163 million as compared with a loss of $257 million for the second
quarter of 2006, representing an improvement in earnings of $94
million. This change is attributable to the reasons described above.
Interest Expense
Interest expense for the second quarter of 2007 was $31 million as
compared with $43 million for the prior year quarter, representing a
decrease of $12 million, or 28%. Lower interest expense is primarily
due to lower debt levels as a result of the full payoff of the
Company's Secured Term Debt in the current quarter.
Other Income (Charges), Net
The other income (charges), net category includes interest income,
income and losses from equity investments, and foreign exchange gains
and losses. Other income for the current quarter was $21 million as
compared with other income of $6 million for the second quarter of
2006. The increase of $15 million is primarily attributable to higher
interest income, and was also impacted by lower losses on foreign
exchange transactions than in the prior year.
Income Tax (Benefit) Provision
For the second quarter of 2007, the Company recorded a benefit of
$38 million on a pre-tax loss of $173 million, representing an
effective rate of 22.0%. The difference of $23 million between the
recorded benefit of $38 million and the benefit of $61 million that
would result from applying the U.S. statutory rate of 35.0% is
primarily attributable to: (1) losses generated in certain
jurisdictions outside the U.S., which were not benefited and (2) the
mix of earnings from operations in certain lower-taxed jurisdictions
outside the U.S. Other significant items that caused the difference
from the statutory tax rate include non-U.S. tax benefits of $27
million associated with total worldwide restructuring costs and asset
impairments; a net benefit of $15 million associated with adjustments
uncertain tax benefits; and a provision of $42 million associated with
the establishment of valuation allowances in foreign jurisdictions.
During the second quarter the Company identified a deferred tax
asset in a foreign jurisdiction, which should have been appropriately
reserved with a valuation allowance in a prior period. Therefore, the
Company recorded a valuation allowance of $20 million in the current
quarter to appropriately reflect the net deferred tax asset balance.
This amount is included in the $42 million provision discussed above.
In accordance with SFAS No. 109, "Accounting for Income Taxes,"
the Company recorded a tax benefit in continuing operations associated
with the realization of current year losses in certain jurisdictions
where it has historically had a valuation allowance due to the
recognition of the pre-tax gain in discontinued operations.
For the second quarter of 2006, the Company recorded a provision
of $61 million on a pre-tax loss of $294 million, representing an
effective rate of (20.7)%. The difference of $164 million between the
recorded provision of $61 million and the benefit of $103 million that
would result from applying the U.S. statutory rate of 35.0% is
primarily attributable to: (1) losses generated within the U.S. and in
certain jurisdictions outside the U.S., which were not benefited and
(2) the mix of earnings from operations in certain lower-taxed
jurisdictions outside the U.S. Other significant items that caused the
difference from the statutory tax rate include non-U.S. tax benefits
of $27 million associated with total worldwide restructuring costs and
asset impairments; and discrete tax charges relating primarily to
purchase accounting for the Creo acquisition, tax rate changes, and
impacts from ongoing tax audits with respect to open tax years of $40
million.
Loss From Continuing Operations
The loss from continuing operations for the second quarter of 2007
was $135 million, or $.47 per basic and diluted share, as compared
with a loss from continuing operations for the second quarter of 2006
of $355 million, or $1.24 per basic and diluted share, representing an
improvement in earnings of $220 million. This improvement in earnings
from continuing operations is attributable to the reasons described
above.
CONSUMER DIGITAL IMAGING GROUP
Worldwide Revenues
Net worldwide sales for CDG were $1,000 million for the second
quarter of 2007 as compared with $1,105 million for the second quarter
of 2006, representing a decrease of $105 million, or 10%. The decrease
in net sales was comprised of volume declines, which reduced net sales
by approximately 7.3 percentage points, and unfavorable price/mix,
which reduced net sales by approximately 3.8 percentage points. The
decrease in volumes was primarily driven by snapshot printing and the
traditional portion of Retail Printing, partially offset by sales of
the recently introduced digital picture frames, while the negative
price/mix was largely attributable to Digital Capture and Devices and
lower kiosk equipment sales offset by higher media sales within Retail
Printing. These declines were partially offset by favorable foreign
exchange, which increased net sales by approximately 1.6 percentage
points.
Net worldwide sales of Digital Capture and Devices, which includes
consumer digital cameras, accessories, memory products, snapshot
printers and related media, and intellectual property royalties,
decreased 3% in the second quarter of 2007 as compared with the prior
year quarter, primarily reflecting negative price/mix on digital
cameras and lower snapshot printing volumes, partially offset by sales
of new digital picture frames, intellectual property royalties and
favorable exchange. For digital still cameras, Kodak remains in the
top three market position on a worldwide basis through May.
Net worldwide sales of Retail Printing decreased 17% in the second
quarter of 2007 as compared with the prior year quarter, reflecting
volume declines and negative price/mix, partially offset by favorable
foreign exchange. Sales of photofinishing services declined 43% from
the second quarter of 2006, reflecting continuing industry film
processing volume declines. This decline in photofinishing services
was partially offset by increased sales of kiosks and related media,
which increased 2% from the prior year quarter. The change in kiosks
and related media sales reflects strong consumables sales at retail
locations, with 4x6 media volumes increasing 36% versus last year,
substantially offset by lower kiosk equipment sales.
Digital Strategic Product Groups' Revenues
CDG digital product sales are comprised of digital capture and
devices, kiosks/media, online printing, consumer inkjet systems, and
imaging sensors.
Digital product sales for CDG were $645 million for the second
quarter of 2007 as compared with $647 million for the prior year
quarter, representing a decrease of $2 million. The decrease was
primarily driven by declines in sales of digital cameras and snapshot
printing, partially offset by growth in intellectual property
royalties and sales of digital picture frames.
Traditional Strategic Product Groups' Revenues
CDG traditional product sales are comprised of consumer and
professional photographic paper, photochemicals and photofinishing
services.
Traditional product sales for CDG were $355 million for the second
quarter of 2007 as compared with $458 million for the second quarter
of 2006, representing a decrease of $103 million, or 22%. This
decrease was primarily driven by declines in photofinishing services
and photographic paper.
Gross Profit
Gross profit for CDG was $179 million for the second quarter of
2007 as compared with $146 million for the prior year quarter,
representing an increase of $33 million or 23%. The gross profit
margin was 17.9% in the current quarter as compared with 13.2% in the
prior year quarter. The 4.7 percentage point increase was primarily
attributable to reductions in cost, which improved gross profit
margins by approximately 6.3 percentage points, and favorable foreign
exchange, which improved gross profit margins by approximately 1.0
percentage point. The reductions in cost were primarily driven by
lower depreciation expense, the impact of the Company's cost reduction
initiatives and more effective product portfolio management, partially
offset by costs associated with the scaling of manufacturing and new
product introduction activities in the Consumer Inkjet Systems
business and by adverse silver costs. These improvements in gross
profit margins were partially offset by unfavorable price/mix and
volume declines. Price/mix negatively impacted gross profit margins by
approximately 2.3 percentage points, primarily driven by Digital
Capture and Devices and kiosks/media, partially offset by the
year-over-year increase in intellectual property royalties. Volume
declines reduced gross profit margins by approximately 0.4 percentage
points, primarily driven by snapshot printing, and the traditional
portion of Retail Printing.
Selling, General and Administrative Expenses
SG&A expenses for CDG decreased $31 million, or 15%, from $207
million in the second quarter of 2006 to $176 million in the current
quarter, and decreased as a percentage of sales from 19% for the
second quarter of 2006 to 18% for the current quarter. This decrease
was primarily driven by focused cost reduction initiatives and
improved go-to-market structure, partially offset by increased
advertising expenses associated with Consumer Inkjet Systems.
Research and Development Costs
R&D costs for CDG decreased $13 million, or 18%, from $72 million
in the second quarter of 2006 to $59 million in the current quarter
and decreased as a percentage of sales from 7% for the second quarter
of 2006 to 6% for the current quarter. This dollar decrease is
attributable to spending incurred in 2006 related to the development
of Consumer Inkjet Systems, which were introduced in the first quarter
of 2007, and related to cost reduction actions within CDG's other
businesses.
Loss From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
The loss from continuing operations before interest, other income
(charges), net and income taxes for CDG was $55 million in the second
quarter of 2007 as compared with a loss of $133 million in the second
quarter of 2006, representing an improvement in earnings of $78
million or 59%, as a result of the factors described above.
FILM PRODUCTS GROUP
Worldwide Revenues
Net worldwide sales for FPG were $559 million for the second
quarter of 2007 as compared with $660 million for the second quarter
of 2006, representing a decrease of $101 million, or 15%. The decrease
in net sales was comprised of: (1) lower volumes, which decreased
second quarter sales by approximately 15.3 percentage points and were
primarily attributable to Consumer Film Capture and (2) declines
related to negative price/mix, which reduced net sales by
approximately 2.5 percentage points and were primarily attributable to
Consumer Film Capture and Entertainment Imaging. These decreases were
partially offset by favorable foreign exchange, which increased net
sales by approximately 2.4 percentage points.
Net worldwide sales of Consumer Film Capture, including consumer
roll film (35mm and APS film), one-time-use cameras (OTUC),
professional films, and reloadable traditional film cameras, decreased
30% in the second quarter of 2007 as compared with the second quarter
of 2006, primarily reflecting continuing industry volume declines and
negative price/mix, partially offset by favorable exchange.
Net worldwide sales for Entertainment Imaging films, which
includes origination, intermediate, and print films for the
entertainment industry, were flat compared with the prior year,
primarily reflecting volume increases in color print films and
favorable exchange across all product lines, partially offset by
volume declines in origination films and unfavorable price/mix across
all product lines.
Gross Profit
Gross profit for FPG was $229 million for the second quarter of
2007 as compared with $243 million for the prior year quarter,
representing a decrease of $14 million or 6%. The gross profit margin
was 41.0% in the current quarter as compared with 36.8% in the prior
year quarter. The 4.2 percentage point increase was primarily
attributable to decreased manufacturing and other costs, which
positively impacted gross profit margins by approximately 7.6
percentage points, which were driven by lower depreciation expense and
the impact of the Company's cost reduction initiatives, partially
offset by increased silver costs. Favorable foreign exchange increased
gross profit margins by approximately 1.7 percentage points. These
increases were partially offset by unfavorable price/mix and volume
declines, which reduced gross profit margins by approximately 4.7
percentage points and 0.6 percentage points, respectively. Negative
price/mix impacted essentially all businesses in FPG, while the volume
declines were primarily driven by Consumer Film Capture.
Selling, General and Administrative Expenses
SG&A expenses for FPG decreased $35 million, or 29%, from $119
million in the second quarter of 2006 to $84 million in the current
quarter, and decreased as a percentage of sales from 18% in the prior
year quarter to 15% in the current quarter. The decline in SG&A was
attributable to the concentrated efforts of the business to reduce
costs.
Research and Development Costs
R&D costs for FPG were $5 million in the second quarter of 2006 as
compared with $8 million in the current quarter, and remained constant
as a percentage of sales at 1%.
Earnings From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
Earnings from continuing operations before interest, other income
(charges), net and income taxes for FPG were $137 million in the
second quarter of 2007 as compared with earnings of $119 million in
the second quarter of 2006, representing an increase of $18 million or
15%, as a result of the factors described above.
GRAPHIC COMMUNICATIONS GROUP
Worldwide Revenues
Net worldwide sales for GCG were $929 million for the second
quarter of 2007 as compared with $908 million for the prior year
quarter, representing an increase of $21 million, or 2%. The increase
in net sales was primarily attributable to favorable exchange, which
increased net sales by approximately 4.2 percentage points, primarily
within Prepress Solutions and Document Imaging. This increase was
partially offset by unfavorable price/mix, which decreased sales by
approximately 1.5 percentage points, and volume declines, which
decreased sales by approximately 0.4 percentage points. The
unfavorable price/mix was primarily driven by Prepress Solutions and
Document Imaging, partially offset by favorable price/mix within
Enterprise Solutions. The volume declines were driven by Document
Imaging, Digital Printing Solutions, and traditional prepress
consumables within Prepress Solutions, partially offset by volume
increases in Enterprise Solutions and digital prepress consumables
within Prepress Solutions.
Net worldwide sales of Prepress Solutions increased 1%, primarily
driven by increased sales of digital plates, partially offset by
declines in sales of analog plates.
Net worldwide sales of Document Imaging were flat compared with
prior year, driven by increased service revenue, offset by declines in
sales of scanners and traditional document imaging media.
Net worldwide sales of Digital Printing Solutions decreased 2%,
primarily driven by declines in electrophotographic printing equipment
and commercial inkjet printing equipment, partially offset by growth
in consumables and service.
Net worldwide sales of Enterprise Solutions increased 40%,
primarily attributable to revenue growth from workflow software and
digital front-end controllers.
Digital Strategic Product Groups' Revenues
GCG digital product sales are comprised of Enterprise Solutions,
Digital Printing Solutions, portions of Prepress Solutions and
portions of Document Imaging.
Sales of digital products and services for GCG were $815 million
for the second quarter of 2007 as compared with $770 million for the
prior year quarter, representing an increase of $45 million, or 6%.
The increase in digital products and services revenue was primarily
attributable to increased sales from Enterprise Solutions and the
digital portions of Prepress Solutions, as well as the favorable
impact of exchange.
Traditional Strategic Product Groups' Revenues
GCG traditional product sales are comprised of sales of
traditional prepress consumables, including analog plates and graphics
film, and traditional document imaging equipment and media. These
sales were $114 million for the current quarter as compared with $138
million for the prior year quarter, representing a decrease of $24
million, or 17%. The decrease in sales was primarily attributable to
lower volumes of analog plates and graphics film.
Gross Profit
Gross profit for GCG was $265 million for the second quarter of
2007 as compared with $253 million in the prior year quarter,
representing an increase of $12 million, or 5%. The gross profit
margin was 28.5% in the current quarter as compared with 27.9% in the
prior year quarter. The increase in the gross profit margin of 0.6
percentage points was primarily attributable to favorable price/mix,
which increased gross profit margins by approximately 0.7 percentage
points and was primarily driven by Enterprise Solutions and Prepress
Solutions. Reductions in manufacturing and other costs increased gross
profit margins by approximately 0.2 percentage points, primarily
reflecting cost reduction actions and lower depreciation expense,
offset by higher aluminum costs, while unfavorable foreign exchange
reduced gross profit margins by approximately 0.4 percentage points.
Selling, General and Administrative Expenses
SG&A expenses for GCG were $170 million for the second quarter of
2007 as compared with $185 million in the prior year quarter,
representing a decrease of $15 million, or 8%, and decreased as a
percentage of sales from 20% to 18%. The decrease in SG&A is largely
attributable to continuing integration synergies and targeted cost
reductions.
Research and Development Costs
R&D costs for GCG decreased $2 million, or 4%, from $52 million
for the second quarter of 2006 to $50 million for the current quarter,
and decreased as a percentage of sales from 6% in the second quarter
of 2006 to 5% in the current year quarter.
Earnings From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
Earnings from continuing operations before interest, other income
(charges), net and income taxes for GCG were $44 million in the second
quarter of 2007 as compared with earnings of $16 million in the second
quarter of 2006, representing an increase of $28 million, or 175%.
This increase in earnings is attributable to the reasons outlined
above.
ALL OTHER
Worldwide Revenues
Net worldwide sales for All Other were $22 million for the second
quarter of 2007 as compared with $15 million for the second quarter of
2006, representing an increase of $7 million, or 47%.
Loss From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
The loss from continuing operations before interest, other income
(charges), net and income taxes for All Other was $6 million in the
current quarter as compared with a loss of $25 million in the second
quarter of 2006. This $19 million improvement in earnings was largely
driven by lower R&D spending related to the display business.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
On April 30, 2007, the Company sold all of the assets and business
operations of its Health Group segment to Onex Healthcare Holdings,
Inc. ("Onex") (now known as Carestream Health, Inc.), a subsidiary of
Onex Corporation, for up to $2.55 billion. The price was composed of
$2.35 billion in cash at closing and $200 million in additional future
payments if Onex achieves certain returns with respect to its
investment. If Onex investors realize an internal rate of return in
excess of 25% on their investment, the Company will receive payment
equal to 25% of the excess return, up to $200 million.
The Company recognized a pre-tax gain of $980 million on the sale
in the second quarter of 2007. The pre-tax gain excludes the
following: up to $200 million of potential future payments related to
Onex's return on its investment as noted above; potential charges
related to settling pension obligations with Onex in future periods;
and any adjustments that may be made in the future that are currently
under review.
The Company used a portion of the initial $2.35 billion cash
proceeds to fully repay its approximately $1.15 billion of Secured
Term Debt. About 8,100 employees of the Company associated with the
Health Group transitioned to Carestream Health, Inc. as part of the
transaction. Also included in the sale were manufacturing operations
focused on the production of health imaging products, as well as an
office building in Rochester, NY.
Upon authorization of the Company's Board of Directors on January
8, 2007, the Company met all the requirements of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," for
accounting for the Health Group segment as a discontinued operation.
As such, the Health Group business ceased depreciation and
amortization of long-lived assets. In accordance with EITF No. 87-24,
"Allocation of Interest to Discontinued Operations," the Company
allocated certain interest expense on debt that was required to be
repaid as a result of the sale. Interest expense allocated to
discontinued operations totaled $7 million and $22 million for the
three months ended June 30, 2007 and 2006, respectively.
Total Company earnings from discontinued operations for the three
months ended June 30, 2007 and 2006 of $727 million (including a
pre-tax gain on sale of $980 million) and $73 million, respectively,
were net of a provision for income taxes of $257 million, and a
benefit for income taxes of $11 million, respectively.
NET EARNINGS (LOSS)
Net earnings for the second quarter of 2007 were $592 million, or
$2.06 per basic and diluted share, as compared with a net loss for the
second quarter of 2006 of $282 million, or $.98 per basic and diluted
share, representing an improvement in earnings of $874 million or 310
%. This improvement in earnings is attributable to the reasons
outlined above.
RESTRUCTURING COSTS AND OTHER
The Company has undertaken a cost reduction program that was
initially announced in January 2004. This program is referred to as
the "2004-2007 Restructuring Program." This program was expected to
result in total charges of $1.3 billion to $1.7 billion over a
three-year period, of which $700 million to $900 million related to
severance, with the remainder relating to the disposal of buildings
and equipment. Overall, Kodak's worldwide facility square footage was
expected to be reduced by approximately one-third. Approximately
12,000 to 15,000 positions worldwide were expected to be eliminated
through these actions primarily in global manufacturing, selected
traditional businesses and corporate administration.
The Company subsequently expanded the program to extend into 2007,
and increased the expected employment reductions and total charges. On
February 8, 2007, the Company again updated the ranges for anticipated
restructuring activity. The Company now expects that the total
employment reductions will be in the range of 28,000 to 30,000
positions and total charges will be in the range of $3.6 billion to
$3.8 billion.
The increase in expected cost is due to the realization that
further reductions are required to achieve the Company's target cost
model.
The aforementioned 2004-2007 Restructuring Program underpins a
dramatic transformation of the Company focused on two primary elements
of cost restructuring: manufacturing infrastructure and operating
expense rationalization. As this four-year effort has progressed, the
underlying business model necessarily has evolved, requiring broader
and more costly manufacturing infrastructure reductions (primarily
non-cash charges) than originally anticipated, as well as similarly
broader rationalization of selling, administrative and other business
resources (primarily severance charges). In addition, the recent
divestiture of the Health Group has further increased the amount of
reductions necessary to appropriately scale the Corporate
infrastructure.
The actual charges for initiatives under this program are recorded
in the period in which the Company commits to formalized restructuring
plans or executes the specific actions contemplated by the program and
all criteria for restructuring charge recognition under the applicable
accounting guidance have been met.
Restructuring Programs Summary
The activity in the accrued restructuring balances and the
non-cash charges incurred in relation to all of the Company's
restructuring programs were as follows for the second quarter of 2007:
Balance
March 31, Costs Cash
(in millions) 2007 Incurred (1) Reversals Payments (2)
---------- ------------ --------- ------------
2004-2007 Restructuring
Program:
Severance reserve $ 196 $ 19 $ - $ (83)
Exit costs reserve 26 30 - (32)
---------- ------------ --------- ------------
Total reserve $ 222 $ 49 $ - $ (115)
Long-lived asset
impairments and
inventory write-downs $ - $ 257 $ - $ -
Accelerated
depreciation $ - $ 15 $ - $ -
Pre-2004 Restructuring
Programs:
Severance reserve $ - $ - $ - $ -
Exit costs reserve 6 - - -
---------- ------------ --------- ------------
Total reserve $ 6 $ - $ - $ -
---------- ------------ --------- ------------
Total of all
restructuring programs $ 228 $ 321 $ - $ (115)
========== ============ ========= ============
Other
Adjustments Balance
Non-cash and June 30,
(in millions) Settlements Reclasses (3) 2007
----------- ------------- --------
2004-2007 Restructuring Program:
Severance reserve $ - $ 41 $ 173
Exit costs reserve - - 24
----------- ------------- --------
Total reserve $ - $ 41 $ 197
Long-lived asset impairments and
inventory write-downs $ (257) $ - $ -
Accelerated depreciation $ (15) $ - $ -
Pre-2004 Restructuring Programs:
Severance reserve $ - $ - $ -
Exit costs reserve - - 6
----------- ------------- --------
Total reserve $ - $ - $ 6
----------- ------------- --------
Total of all restructuring programs $ (272) $ 41 $ 203
=========== ============= ========
(1) The costs incurred include both continuing operations of $316
million and discontinued operations of $5 million.
(2) During the three months ended June 30, 2007, the Company paid
approximately $120 million related to restructuring. Of this total
amount, $115 million was recorded against restructuring reserves,
while $5 million was recorded against pension and other postretirement
liabilities.
(3) The total restructuring charges of $321 million include
pension and other postretirement charges and credits for curtailments,
settlements and special termination benefits. However, because the
impact of these charges and credits relate to the accounting for
pensions and other postretirement benefits, the related impacts on the
Consolidated Statement of Financial Position are reflected in their
respective components as opposed to within the accrued restructuring
balances at June 30, 2007. Accordingly, the Other Adjustments and
Reclasses column of the table above includes reclassifications to
Other long-term assets and Pension and other postretirement
liabilities for the position elimination-related impacts on the
Company's pension and other postretirement employee benefit plan
arrangements, including net curtailment and settlement gains and
special termination benefits of $37 million and reclassifications to
Other long-term liabilities for other severance-related costs of $2
million. Additionally, the Other Adjustments and Reclasses column of
the table above includes foreign currency translation of $2 million.
The costs incurred, net of reversals, which total $321 million for
the three months ended June 30, 2007, include $15 million and $6
million of charges related to accelerated depreciation and inventory
write-downs that were reported in cost of goods sold in the
accompanying Consolidated Statement of Operations for the three months
ended June 30, 2007. Of the remaining costs incurred, net of
reversals, $5 million was included in discontinued operations and $295
million was reported as restructuring costs and other in the
accompanying Consolidated Statement of Operations for the three months
ended June 30, 2007. The severance costs and exit costs require the
outlay of cash, while long-lived asset impairments, accelerated
depreciation and inventory write-downs represent non-cash items.
2004-2007 Restructuring Program Activity
The Company implemented certain actions under the program during
the second quarter of 2007. As a result of these actions, the Company
recorded charges of $321 million in the second quarter of 2007, which
were composed of severance, long-lived asset impairments, exit costs,
inventory write-downs, and accelerated depreciation of $19 million,
$251 million, $30 million, $6 million, and $15 million, respectively.
Included in these amounts, $3 million of severance and $2 million of
exit costs are presented as discontinued operations. The severance
costs related to the elimination of approximately 1,100 positions,
including approximately 175 photofinishing, 425 manufacturing, 25
research and development and 475 administrative positions. The
geographic composition of the positions to be eliminated includes
approximately 325 in the United States and Canada and 775 throughout
the rest of the world. The reduction of the 1,100 positions and the
$49 million charges for severance and exit costs are reflected in the
2004-2007 Restructuring Program table below. The $251 million charge
in the second quarter for long-lived asset impairments was included in
restructuring costs and other in the accompanying Consolidated
Statement of Operations for the three months ended June 30, 2007,
respectively. The charges taken for inventory write-downs of $6
million were reported in cost of goods sold in the accompanying
Consolidated Statement of Operations for the three monthsended June
30, 2007.
As a result of initiatives implemented under the 2004-2007
Restructuring Program, the Company also recorded $15 million of
accelerated depreciation on long-lived assets in cost of goods sold in
the accompanying Consolidated Statement of Operations for the three
months ended June 30, 2007. The accelerated depreciation relates to
long-lived assets accounted for under the held and used model of SFAS
No. 144. The total amount of $15 million relates to $14 million of
manufacturing facilities and equipment, and $1 million of
administrative facilities that will be used until their abandonment.
The Company will incur approximately $4 million of accelerated
depreciation in the third quarter of 2007 as a result of the
initiatives already implemented under the 2004-2007 Restructuring
Program.
In April 2007, the Company entered into an agreement to sell its
manufacturing site in Xiamen, China. This sale closed in the second
quarter of 2007 and resulted in a non-cash charge of approximately
$238 million. This action is part of the 2004-2007 Restructuring
Program.
Under this program, on a life-to-date basis as of June 30, 2007,
the Company has recorded charges of $3,220 million, which was composed
of severance, long-lived asset impairments, exit costs, inventory
write-downs and accelerated depreciation of $1,322 million, $611
million, $304 million, $75 million and $908 million, respectively. The
severance costs related to the elimination of approximately 25,600
positions, including approximately 6,425 photofinishing, 11,950
manufacturing, 1,450 research and development and 5,775 administrative
positions.
The following table summarizes the activity with respect to the
charges recorded in connection with the focused cost reduction actions
that the Company has committed to under the 2004-2007 Restructuring
Program and the remaining balances in the related reserves at June 30,
2007:
Exit
Number of Severance Costs
(dollars in millions) Employees Reserve Reserve
--------- --------- -------
2004 charges - continuing operations 8,975 $ 405 $ 95
2004 charges - discontinued operations 650 13 4
2004 reversals - continuing operations - (6) (1)
2004 utilization (5,175) (169) (47)
2004 other adj. & reclasses - 24 (15)
--------- --------- -------
Balance at 12/31/04 4,450 267 36
2005 charges - continuing operations 7,850 472 82
2005 charges - discontinued operations 275 25 2
2005 reversals - continuing operations - (3) (6)
2005 utilization (10,225) (377) (95)
2005 other adj. & reclasses - (113) 4
--------- --------- -------
Balance at 12/31/05 2,350 271 23
2006 charges - continuing operations 5,150 266 66
2006 charges - discontinued operations 475 52 3
2006 reversals - continuing operations - (3) (1)
2006 utilization (5,700) (416) (67)
2006 other adj. & reclasses - 58 -
--------- --------- -------
Balance at 12/31/06 2,275 228 24
Q1 2007 charges - continuing operations 1,075 53 22
Q1 2007 charges - discontinued operations 50 17 -
Q1 2007 utilization (1,000) (84) (20)
Q1 2007 other adj. & reclasses - (18) -
--------- --------- -------
Balance at 3/31/07 2,400 196 26
Q2 2007 charges - continuing operations 1,100 16 28
Q2 2007 charges - discontinued operations - 3 2
Q2 2007 utilization (1,250) (83) (32)
Q2 2007 other adj. & reclasses - 41 -
--------- --------- -------
Balance at 6/30/07 2,250 $ 173 $ 24
========= ========= =======
Long-lived Asset
Impairments
and Inventory Accelerated
(dollars in millions) Total Write-downs Depreciation
------ ---------------- ------------
2004 charges - continuing
operations $ 500 $ 156 $ 152
2004 charges - discontinued
operations 17 1 -
2004 reversals - continuing
operations (7) - -
2004 utilization (216) (157) (152)
2004 other adj. & reclasses 9 - -
------ ---------------- ------------
Balance at 12/31/04 303 - -
2005 charges - continuing
operations 554 160 391
2005 charges - discontinued
operations 27 1 -
2005 reversals - continuing
operations (9) - -
2005 utilization (472) (161) (391)
2005 other adj. & reclasses (109) - -
------ ---------------- ------------
Balance at 12/31/05 294 - -
2006 charges - continuing
operations 332 97 273
2006 charges - discontinued
operations 55 3 12
2006 reversals - continuing
operations (4) - -
2006 utilization (483) (100) (285)
2006 other adj. & reclasses 58 - -
------ ---------------- ------------
Balance at 12/31/06 252 - -
Q1 2007 charges - continuing
operations 75 11 65
Q1 2007 charges - discontinued
operations 17 - -
Q1 2007 utilization (104) (11) (65)
Q1 2007 other adj. & reclasses (18) - -
------ ---------------- ------------
Balance at 3/31/07 222 - -
Q2 2007 charges - continuing
operations 44 257 15
Q2 2007 charges - discontinued
operations 5 - -
Q2 2007 utilization (115) (257) (15)
Q2 2007 other adj. & reclasses 41 - -
------ ---------------- ------------
Balance at 6/30/07 $ 197 $ - $ -
====== ================ ============
As a result of the initiatives already implemented under the
2004-2007 Restructuring Program, severance payments will be paid
during periods through 2008 since, in many instances, the employees
whose positions were eliminated can elect or are required to receive
their payments over an extended period of time. Most exit costs have
been paid or will be paid during 2007. However, certain costs, such as
long-term lease payments, will be paid over periods after 2007.
The charges of $321 million recorded in the second quarter of 2007
included $10 million applicable to FPG, $24 million applicable to CDG,
$10 million applicable to GCG, and $272 million that was applicable to
manufacturing, research and development, and administrative functions,
which are shared across all segments. The remaining $5 million is
applicable to discontinued operations.
The restructuring actions implemented during the second quarter of
2007 under the 2004-2007 Restructuring Program are expected to
generate future annual cost savings of approximately $89 million and
future annual cash savings of approximately $71 million. These cost
savings began to be realized by the Company beginning in the second
quarter of 2007, and are expected to be fully realized by the end of
2007 as most of the actions and severance payouts are completed. These
total cost savings are expected to reduce future cost of goods sold,
SG&A, and R&D expenses by approximately $52 million, $36 million, and
$1 million, respectively.
Based on all of the actions taken to date under the 2004-2007
Restructuring Program, the program is expected to generate annual cost
savings of approximately $1,535 million, including annual cash savings
of $1,461 million, as compared with pre-program levels. The Company
began realizing these savings in the second quarter of 2004, and
expects the savings to be fully realized by the end of 2007 as most of
the actions and severance payouts are completed. These total cost
savings are expected to reduce cost of goods sold, SG&A, and R&D
expenses by approximately $973 million, $419 million, and $143
million, respectively.
The above savings estimates are based primarily on objective data
related to the Company's severance actions. Savings resulting from
facility closures and other non-severance actions that are more
difficult to quantify are not included. The Company reaffirms its
estimate of total annual cost savings including both employee-related
costs and facility-related costs under the extended 2004-2007
Restructuring Program of $1.6 billion to $1.8 billion, as announced in
July 2005, and does not expect the final annual cost savings to differ
materially from this estimate.
Pre-2004 Restructuring Programs Activity
At June 30, 2007, the Company had remaining exit costs reserves of
$6 million, relating to restructuring plans committed to or executed
prior to 2004. Most of these remaining exit costs reserves represent
long-term lease payments, which will continue to be paid over periods
throughout and after 2007.
CASH FLOW ACTIVITY
The Company's cash and cash equivalents increased $456 million for
the six months ending June 30, 2007 to $1,925 million. The increase
resulted primarily from $2,316 million of net cash provided by
investing activities, offset by $1,145 million of net cash used in
financing activities and $725 million of net cash used in operating
activities for the six months ending June 30, 2007.
The net cash used in continuing operations from operating
activities of $695 million for the six months ending June 30, 2007 was
primarily attributable to increases in inventories of $149 million and
a decrease in liabilities excluding borrowings of $765 million. The
increase in inventories is primarily due to inventory balances needed
to meet seasonal revenue patterns. The decrease in liabilities
excluding borrowings is primarily due to restructuring-related
severance benefits and exit costs, lower trade payables and payment of
incentive compensation accruals. These uses of cash were partially
offset by decreases in receivables of $90 million. The decrease in
receivables is a result of seasonally lower sales levels in the six
month period ended June 30, 2007 compared with fourth quarter 2006
sales. In addition, the Company's net earnings of $441 million, which,
when adjusted for earnings from discontinued operations, net of income
taxes; depreciation and amortization; the gain on sales of
businesses/assets; restructuring costs, asset impairments and other
non-cash charges; and benefit for deferred taxes, provided $245
million of operating cash. Net cash used in discontinued operations
from operating activities was $30 million.
The net cash used in continuing operations from investing
activities of $19 million was utilized primarily for capital
expenditures of $125 million, partially offset by proceeds from sales
of businesses and assets of $116 million. Net cash provided by
discontinued operations from investing activities was $2,335 million
due to the proceeds received in connection with the sale of the Health
Group business. The net cash used in financing activities of $1,145
million was primarily the result of a net decrease in borrowings
primarily related to the full repayment of the Secured Term Debt.
The Company's primary uses of cash included restructuring
payments, debt payments, capital additions, employee benefit plan
payments/contributions, and working capital needs.
Capital additions were $125 million in the six months ended June
30, 2007, with the majority of the spending supporting new products,
manufacturing productivity and quality improvements, infrastructure
improvements, equipment placements with customers, and ongoing
environmental and safety initiatives.
During the six months ended June 30, 2007, the Company expended
$235 million against restructuring reserves and pension and other
postretirement liabilities, primarily for the payment of severance
benefits. Employees whose positions were eliminated could elect to
receive severance payments for up to two years following their date of
termination.
The Company has a dividend policy whereby it makes semi-annual
payments which, when declared, will be paid on the Company's 10th
business day each July and December to shareholders of record on the
close of the first business day of the preceding month. On May 9,
2007, the Board of Directors declared a semi-annual cash dividend of
$.25 per share payable to shareholders of record at the close of
business on June 1, 2007. This dividend was paid on July 16, 2007.
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 United
States Private Securities Litigation Reform Act of 1995. For example,
references to the Company's expectations for restructuring plans and
charges, receivables, guarantees, amortization expense, cost savings,
cash savings, and employment reductions are forward-looking
statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent the Company's estimates only as of the date they
are made, and should not be relied upon as representing the Company's
estimates as of any subsequent date. While the Company may elect to
update forward-looking statements at some point in the future, the
Company specifically disclaims any obligation to do so, even if its
estimates change. The forward-looking statements contained in this
report are subject to a number of factors and uncertainties, including
the successful:
-- execution of the digital growth and profitability strategies,
business model and cash plan;
-- implementation of the cost reduction programs;
-- transition of certain financial processes and administrative
functions to a global shared services model and the
outsourcing of certain functions to third parties;
-- implementation of, and performance under, the debt management
program, including compliance with the Company's debt
covenants;
-- development and implementation of product go-to-market and
e-commerce strategies;
-- protection, enforcement and defense of the Company's
intellectual property, including defense of its products
against the intellectual property challenges of others;
-- implementation of intellectual property licensing and other
strategies;
-- integration of the Company's businesses to SAP, the Company's
enterprise system software;
-- completion of various portfolio actions;
-- reduction of inventories;
-- integration of acquired businesses and consolidation of the
Company's subsidiary structure;
-- improvement in manufacturing productivity and techniques;
-- improvement in working capital management and cash conversion
cycle;
-- improvement in supply chain efficiency; and
-- implementation of the strategies designed to address the
decline in the Company's traditional businesses.
The forward-looking statements contained in this report are
subject to the following additional risk factors:
-- inherent unpredictability of currency fluctuations, commodity
prices and raw material costs;
-- competitive actions, including pricing;
-- changes in the Company's debt credit ratings and its ability
to access capital markets;
-- the nature and pace of technology evolution;
-- changes to accounting rules and tax laws, as well as other
factors which could impact the Company's reported financial
position or effective tax rate;
-- pension and other postretirement benefit cost factors such as
actuarial assumptions, market performance, and employee
retirement decisions;
-- general economic, business, geo-political and regulatory
conditions or unanticipated environmental liabilities or
costs;
-- market growth predictions;
-- continued effectiveness of internal controls; and
-- other factors and uncertainties disclosed from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this report should be evaluated
in light of these important factors and uncertainties.
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(in millions, except per share data)
Three Months Six Months
Ended Ended
June 30 June 30
--------------- ---------------
2007 2006 2007 2006
-------------------------------
Net sales $ 2,510 $ 2,688 $ 4,629 $ 4,980
Cost of goods sold 1,852 2,113 3,542 3,936
------- ------- ------- -------
Gross profit 658 575 1,087 1,044
Selling, general and administrative
expenses 431 518 826 1,025
Research and development costs 128 152 265 300
Restructuring costs and other 295 156 380 294
Other operating (income) expenses, net (33) 6 (39) 11
------- ------- ------- -------
Loss from continuing operations before
interest, other income (charges), net
and income taxes (163) (257) (345) (586)
Interest expense 31 43 56 84
Other income (charges), net 21 6 38 38
------- ------- ------- -------
Loss from continuing operations before
income taxes (173) (294) (363) (632)
(Benefit) provision for income taxes (38) 61 (54) 69
------- ------- ------- -------
Loss from continuing operations (135) (355) (309) (701)
Earnings from discontinued operations,
net of income taxes 727 73 750 121
------- ------- ------- -------
NET EARNINGS (LOSS) $ 592 $ (282) $ 441 $ (580)
======= ======= ======= =======
Basic and diluted net earnings (loss)
per share:
Continuing operations $(0.47) $(1.24) $(1.08) $(2.44)
Discontinued operations 2.53 0.26 2.61 0.42
------- ------- ------- -------
Total $ 2.06 $(0.98) $ 1.53 $(2.02)
======= ======= ======= =======
Number of common shares used in basic
net earnings (loss) per share 287.6 287.3 287.5 287.2
Incremental shares from assumed
conversion of options - - - -
------- ------- ------- -------
Number of common shares used in
diluted net earnings (loss) per share 287.6 287.3 287.5 287.2
======= ======= ======= =======
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
(in millions)
June 30, December 31,
2007 2006
----------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,925 $ 1,469
Receivables, net 2,021 2,072
Inventories, net 1,188 1,001
Deferred income taxes 109 108
Other current assets 122 96
Assets of discontinued operations - 811
--------- ------------
Total current assets 5,365 5,557
Property, plant and equipment, net 1,993 2,602
Goodwill 1,621 1,584
Other long-term assets 4,095 3,509
Assets of discontinued operations - 1,068
--------- ------------
TOTAL ASSETS $13,074 $ 14,320
========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities $ 3,333 $ 3,712
Short-term borrowings 292 64
Accrued income and other taxes 399 347
Liabilities of discontinued operations - 431
--------- ------------
Total current liabilities 4,024 4,554
Long-term debt, net of current portion 1,332 2,714
Pension and other postretirement liabilities 3,595 3,934
Other long-term liabilities 1,631 1,690
Liabilities of discontinued operations - 40
--------- ------------
Total liabilities 10,582 12,932
--------- ------------
Commitments and Contingencies (Note 7)
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value 978 978
Additional paid in capital 880 881
Retained earnings 6,322 5,967
Accumulated other comprehensive income (loss) 88 (635)
--------- ------------
8,268 7,191
Less: Treasury stock, at cost 5,776 5,803
--------- ------------
Total shareholders' equity 2,492 1,388
--------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $13,074 $ 14,320
========= ============
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
(in millions) 2007 2006
-------------------------
Cash flows from operating activities:
Net earnings (loss) $ 441 $ (580)
Adjustments to reconcile to net cash used in
operating activities:
Earnings from discontinued operations,
net of income taxes (750) (121)
Equity in earnings from unconsolidated
affiliates - (7)
Depreciation and amortization 446 637
(Gain) loss on sales of businesses/assets (48) 1
Non-cash restructuring costs, asset
impairments and other charges 274 78
Benefit for deferred income taxes (118) (221)
Decrease in receivables 90 189
(Increase) decrease in inventories (149) 72
Decrease in liabilities excluding
borrowings (765) (453)
Other items, net (116) (149)
------------- -----------
Total adjustments (1,136) 26
------------- -----------
Net cash used in continuing operations (695) (554)
------------- -----------
Net cash (used in) provided by
discontinued operations (30) 153
------------- -----------
Net cash used in operating activities (725) (401)
------------- -----------
Cash flows from investing activities:
Additions to properties (125) (161)
Net proceeds from sales of
businesses/assets 116 33
Acquisitions, net of cash acquired (2) -
Investments in unconsolidated affiliates - (9)
Marketable securities - sales 77 57
Marketable securities - purchases (85) (60)
------------- -----------
Net cash used in continuing operations (19) (140)
------------- -----------
Net cash provided by (used in)
discontinued operations 2,335 (23)
------------- -----------
Net cash provided by (used in)
investing activities 2,316 (163)
------------- -----------
Cash flows from financing activities:
Net decrease in borrowings with
maturities of 90 days or less (6) (21)
Proceeds from other borrowings 16 568
Repayment of other borrowings (1,160) (599)
Exercise of employee stock options 5 -
------------- -----------
Net cash used in financing activities (1,145) (52)
------------- -----------
Effect of exchange rate changes on cash 10 6
------------- -----------
Net increase (decrease) in cash and cash
equivalents 456 (610)
Cash and cash equivalents, beginning of
period 1,469 1,665
------------- -----------
Cash and cash equivalents, end of period $ 1,925 $ 1,055
============= ===========
Net Sales from Continuing Operations by Reportable Segment and All
Other
(in millions)
Three Months Ended June 30,
-----------------------------------
Foreign
Currency
2007 2006 Change Impact*
---------- -------- ------ --------
Consumer Digital Imaging Group
Inside the U.S. $ 512 $ 565 -9% 0%
Outside the U.S. 488 540 -10 +3
---------- --------
Total Consumer Digital Imaging
Group 1,000 1,105 -10 +2
---------- --------
Film Products Group
Inside the U.S. 133 201 -34 0
Outside the U.S. 426 459 -7 +3
---------- --------
Total Film Products Group 559 660 -15 +2
---------- --------
Graphic Communications Group
Inside the U.S. 304 314 -3 0
Outside the U.S. 625 594 +5 +6
---------- --------
Total Graphic Communications Group 929 908 +2 +4
---------- --------
All Other
Inside the U.S. 19 13 +46 0
Outside the U.S. 3 2 +50 0
---------- --------
Total All Other 22 15 +47 0
---------- --------
Consolidated
Inside the U.S. 968 1,093 -11 0
Outside the U.S. 1,542 1,595 -3 +5
---------- --------
Consolidated Total $ 2,510 $ 2,688 -7% +3%
========== ========
Six Months Ended June 30,
--------------------------------
Foreign
Currency
2007 2006 Change Impact*
-------- ------- ------ --------
Consumer Digital Imaging Group
Inside the U.S. $ 901 $ 990 -9% 0%
Outside the U.S. 877 1,017 -14 +3
-------- -------
Total Consumer Digital Imaging Group 1,778 2,007 -11 +1
-------- -------
Film Products Group
Inside the U.S. 250 332 -25 0
Outside the U.S. 767 828 -7 +4
-------- -------
Total Film Products Group 1,017 1,160 -12 +3
-------- -------
Graphic Communications Group
Inside the U.S. 586 627 -7 0
Outside the U.S. 1,207 1,151 +5 +7
-------- -------
Total Graphic Communications Group 1,793 1,778 +1 +4
-------- -------
All Other
Inside the U.S. 29 30 -3 0
Outside the U.S. 12 5 +140 0
-------- -------
Total All Other 41 35 +17 0
-------- -------
Consolidated
Inside the U.S. 1,766 1,979 -11 0
Outside the U.S. 2,863 3,001 -5 +4
-------- -------
Consolidated Total $ 4,629 $4,980 -7% +3%
======== =======
* Represents the percentage point change in segment net sales for the
period that is attributable to foreign currency fluctuations
(Loss) Earnings from Continuing Operations Before Interest, Other
Income (Charges), Net and Income Taxes by Reportable Segment and All
Other
(in millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2007 2006 Change 2007 2006 Change
------ ------- ------ ------ ------- ------
Consumer Digital Imaging
Group $ (55) $ (133) +59% $(169) $ (300) +44%
Percent of Sales (6)% (12)% (10)% (15)%
Film Products Group $ 137 $ 119 +15% $ 211 $ 170 +24%
Percent of Sales 25% 18% 21% 15%
Graphic Communications
Group $ 44 $ 16 +175% $ 60 $ 40 +50%
Percent of Sales 5% 2% 3% 2%
All Other $ (6) $ (25) +76% $ (19) $ (41) +54%
Percent of Sales (27)% (167)% (46)% (117)%
------ ------- ------ -------
Total of segments $ 120 $ (23) +622% $ 83 $ (131) +163%
Percent of Sales 5% (1)% 2% (3)%
Restructuring costs and
other (316) (224) (467) (440)
Other operating (expenses)
income, net 33 (6) 39 (11)
Legal settlement - (4) - (4)
Interest expense (31) (43) (56) (84)
Other income (charges),
net 21 6 38 38
------ ------- ------ -------
Consolidated loss from
continuing operations
before income taxes $(173) $ (294) +41% $(363) $ (632) +43%
====== ======= ====== =======