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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): April 22, 2005
Eastman Kodak Company
(Exact name of registrant as specified in charter)
New Jersey 1-87 16-0417150
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(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
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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
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On April 22, 2005, Eastman Kodak Company issued a press release and a
supplemental financial discussion document describing its financial results for
its first fiscal quarter ended March 31, 2005. 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 first quarter 2005 press release and financial discussion
document, the Company makes reference to certain non-GAAP financial measures
including "Operational earnings," "Earnings excluding non-operational items,"
"Earnings from continuing operations, excluding non-operational items" (and the
line items comprising earnings from continuing operations on an operational
basis), "Earnings from continuing operations, excluding the impact of the
non-operational charge", "Free cash flow", "Operating cash flow", "Investable
cash flow" and "Operating cash flow excluding acquisitions", which have a
directly comparable GAAP financial measure, and to certain calculations that are
based on non-GAAP financial measures, including "Days sales outstanding" and
"Days supply in inventory." 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 and quarter-sequential 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:
Earnings from continuing operations, excluding non-operational items/focused
cost reductions - The Company's management believes that presenting earnings
from continuing operations, excluding non-operational items/focused cost
reductions, is an important additional measure of performance that can be used
for comparing results between reporting periods. These operating measures
represent the principle internal measures of performance, and form the basis of
internal management performance expectations and incentive compensation.
Free cash flow / Operating cash flow / Investable cash flow / Operating cash
flow excluding acquisitions - The Company believes that the presentation of
operating cash flow, investable cash flow and operating cash flow excluding
acquisitions is useful information to investors as they facilitate 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, dividends, and funded capital expenditures, acquisitions and investments.
The free cash flow measure equals net cash provided by continuing operations, as
determined under Generally Accepted Accounting Principles in the U.S. (U.S.
GAAP), plus proceeds from the sale of assets minus capital expenditures,
acquisitions, debt assumed in acquisitions and investments in unconsolidated
affiliates. The operating cash flow measure equals free cash flow less
dividends. The investable cash flow measure equals operating cash flow excluding
the impact of acquisitions and debt assumed in acquisitions. Operating cash flow
excluding acquisitions is the same as the investable cash flow measure.
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.
Days sales outstanding (DSO) - The Company believes that the presentation of a
DSO result that includes the impact of reclassifying rebates as an offset to
receivables is useful information to investors, as this calculation is more
reflective of the Company's receivables performance and cash collection efforts
due to the fact that most customers reduce their actual cash payment to the
Company by the amount of rebates owed to them.
Days supply in inventory (DSI) - The Company believes that the presentation of a
DSI result that is based on inventory before the LIFO reserve is useful
information to investors, as this calculation is more reflective of the
Company's actual inventory turns due to the fact that the inventory values in
the calculation are based on current cost. The Company also believes that the
presentation of a DSI result that is based on a cost of goods sold amount that
excludes certain manufacturing-related costs that are considered to be unusual,
or that occur infrequently, is useful information to investors, as it is more
reflective of the Company's actual inventory performance.
Item 9.01. Financial Statements and Exhibits
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(c) Exhibits
--------
Exhibit 99.1 Press release issued April 22, 2005 Furnished with
regarding financial results for the this document
first quarter of 2005
Exhibit 99.2 Financial discussion document issued Furnished with
April 22, 2005 regarding financial this document
results for the first quarter of 2005
SIGNATURES
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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/ Richard G. Brown, Jr.
-----------------------------
Name: Richard G. Brown, Jr.
Title: Controller
Date: April 22, 2005
EXHIBIT INDEX
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Exhibit No. Description
- ---------- ------------
99.1 Press release issued April 22, 2005 regarding financial results for the
first quarter 2005
99.2 Financial discussion document issued April 22, 2005 regarding financial
results for the first quarter 2005
Exhibit 99.1
Kodak Reports 1st-Quarter Net Loss of 50 Cents Per Share;
Earnings Excluding Non-Operational Items Total 3 Cents Per Share;
Company Reiterates Full-Year Operational Earnings Guidance
ROCHESTER, N.Y.--(BUSINESS WIRE)--April 22, 2005--Eastman Kodak
Company (NYSE:EK) reported a first-quarter net loss of 50 cents per
share, on a revenue decrease of 3%. The loss reflects charges for
focused cost reductions, while the company's sales reflect a decline
in traditional products and services of 18% and an increase in the
digital portfolio of 23%.
Kodak's reported net loss for the quarter included a
non-operational charge that reduced earnings, on a net basis, by 53
cents per share, reflecting focused cost reductions announced in
January 2004. By removing the cost-reduction charge from the
calculation of earnings, Kodak had operational earnings per share of 3
cents in the first quarter. The savings generated by the prior focused
cost reduction activities were offset by lower sales of traditional
products, rising raw material prices, and costs associated with
NexPress Solutions, which Kodak acquired in May 2004.
The company also reiterated its per-share operational earnings
guidance of $2.60 to $2.90 for all of 2005.
For the first quarter of 2005:
-- Sales totaled $2.832 billion, a decrease of 3% from $2.920
billion in the first quarter of 2004. Excluding foreign
exchange, sales decreased 5%.
-- The company reported a net loss of $142 million, or 50 cents
per share, compared with net income of $21 million, or 7 cents
per share, in the first quarter of 2004. The first-quarter
2004 earnings include income from discontinued operations of 4
cents per share, reflecting the operations of the company's
Remote Sensing Systems business, which was sold to ITT
Industries Inc. in August 2004.
-- Earnings from continuing operations, excluding the impact of
the non-operational charge, were $9 million, or 3 cents per
share. The earnings included higher-than-expected fixed costs
of 7 cents associated with year-end traditional manufacturing
slowdowns; a charge of 4 cents to terminate a consumer
photofinishing contract; and costs of 2 cents associated with
completing the recent accounting review. Additionally, in the
year-ago quarter, the company recorded a tax benefit of 10
cents per share, which was offset in part by a charge of 3
cents per share for an inventory adjustment related to the
acquisition of Scitex Digital Printing (Kodak Versamark). In
the first quarter of 2004, earnings from continuing
operations, excluding non-operational items, were $70 million,
or 24 cents per share.
"While the first quarter's performance was disappointing, such
short-term volatility is to be expected as we transform Kodak into a
digital company," said Kodak Chairman and Chief Executive Officer
Daniel A. Carp. "We remain committed to increasing the value of the
company over the long-term by delivering on our annual plans. We
expect to do that in 2005 and beyond."
Recent examples of Kodak's success in digital markets include
increased sales of Kodak Versamark's market-leading printing systems,
used by commercial printers, and broad consumer acceptance of KODAK
EASYSHARE Printer Docks, KODAK Picture Maker kiosks, and KODAK
EASYSHARE digital cameras, all of which rank first in market share in
the U.S. In the first quarter, the company's digital revenue rose 23%,
reflecting growth of 17% in January and February combined, followed by
a 31% increase in March.
"The first quarter is the smallest in terms of revenue, and small
changes in sales tend to have an exaggerated effect on our earnings in
that period," said Kodak President and Chief Operating Officer Antonio
M. Perez. "January and February were soft for reasons that we
understand, and we took actions mid-way through the quarter that
resulted in much stronger performance in March. This makes us more
confident of achieving our two key milestones for the year: digital
revenue exceeding traditional revenue, and digital earnings growth
exceeding the traditional earnings decline. We are successfully
implementing our digital growth strategy, and we continue to redesign
our cost structure to achieve our financial goals. As a result, we
remain confident of achieving our full-year guidance."
Other first-quarter 2005 details from continuing operations:
-- For the quarter, operating cash flow excluding acquisitions
was a negative $258 million, compared with a negative $140
million for the first quarter of 2004. The reduction in cash
flow reflects in part higher inventories and higher
restructuring payments. (Kodak defines operating cash flow
excluding acquisitions as net cash provided by continuing
operations, as determined under Generally Accepted Accounting
Principles in the U.S. (U.S. GAAP), plus proceeds from the
sale of assets, minus capital expenditures, investments in
unconsolidated affiliates and dividends.)
-- Debt increased $88 million from the year-end 2004 level to
$2.409 billion. The debt-to-capital ratio increased to 39.7%
from 37.9% at the end of 2004. The company's cash balance
remains strong at $1.031 billion at the end of the first
quarter, compared with $1.255 billion at the end of 2004.
-- Gross Profit on an operational basis was 28.1%, down from the
year-ago level of 28.5%.
-- Selling, General and Administrative expenses on an operational
basis were 20.6 % of sales, up from 18.8% in the year-ago
quarter.
Following are segment results from continuing operations for the
first quarter of 2005. The company does not allocate restructuring
charges to individual business segments.
-- Digital & Film Imaging Systems segment sales totaled $1.801
billion, down 9%. Earnings from operations for the segment
were $4 million, compared with $25 million a year ago.
Included in the 2005 earnings is a non-recurring charge of $16
million to terminate a consumer photofinishing contract.
Highlights for the quarter include a 68% increase in the sales
of KODAK Picture Maker kiosks and related media; a 42%
increase in KODAK Printer Docks and related media; and a 24%
increase in consumer digital capture sales, which includes the
KODAK EASYSHARE line of cameras. On the traditional side,
Kodak's sales of consumer film to dealers fell 29% worldwide
and 17% in the U.S., reflecting temporary inventory reductions
among retailers, especially in China. The company's view of
the industrywide consumer film decline in 2005, on a volume
basis, remains 20% worldwide and 30% in the U.S. Sales of
motion-picture origination and print film grew 6%.
-- Health sales were $626 million, down 1%. Earnings from
operations for the segment were $71 million, compared with $95
million a year ago. The performance reflects
lower-than-expected sales across the portfolio of digital
products and services, the result of operational issues that
the company is actively addressing. These issues relate to the
performance of a limited number of screens used in computed
radiography machines, which the company has already addressed,
as well as the delayed installation of certain health-care
information systems. The company is working actively to
improve installation performance. The x-ray and laser printer
businesses performed as expected.
-- Graphic Communications sales were $368 million, up 30%,
largely reflecting the acquisition in 2004 of the remainder of
the NexPress joint venture. The loss from operations was $20
million on a GAAP and operational basis, compared with
break-even results on a GAAP basis and earnings of $9 million
on an operational basis in the year-ago period, reflecting the
dilution of NexPress. The acquired companies continue to
perform as expected, and the newly acquired Kodak Polychrome
Graphics will provide immediate earnings contributions for the
remainder of the year.
-- All Other sales were $37 million, up 32% from the year-ago
quarter. The loss from operations totaled $42 million,
compared with a loss of $35 million a year ago. The loss
primarily reflects increased investments in new technology.
The All Other category includes the Display & Components
operation and other miscellaneous businesses.
Outlook
-- As noted above, the company reiterated its operational
earnings guidance of $2.60 to $2.90 per share for all of 2005.
(The company is unable to provide guidance on a GAAP basis
because costs associated with restructuring activities cannot
be reasonably predicted.)
-- The company continues to expect that operating cash flow this
year, excluding acquisitions, will range from $400 million to
$600 million.
Operational items are non-GAAP financial measures as defined by
the Securities and Exchange Commission's final rules under "Conditions
for Use of Non-GAAP Financial Measures." Reconciliations of
operational items included in this press release to the most directly
comparable GAAP financial measures can be found in the Financial
Discussion Document attached to this press release.
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 expectations for the Company's earnings, and cash
generation are forward-looking statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent our estimates only as of the date they are made,
and should not be relied upon as representing our estimates as of any
subsequent date. While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any
obligation to do so, even if our estimates change. The forward-looking
statements contained in this press release are subject to a number of
factors and uncertainties, including the successful:
-- Implementation of our digitally oriented growth strategy,
including the related implementation of our three-year cost
reduction program;
-- Implementation of our debt management program;
-- Implementation of product strategies (including digital
products, category expansion and digitization);
-- Implementation of intellectual property licensing strategies;
-- Development and implementation of e-commerce strategies;
-- Completion of information systems upgrades, including SAP, our
enterprise system software;
-- Completion of various portfolio actions;
-- Reduction of inventories;
-- Completion of focused capital expenditures;
-- Integration of newly acquired businesses;
-- Performance of accounts receivable;
-- Improvement in manufacturing productivity and techniques;
-- Improvement in supply chain efficiency;
-- Implementation of future focused cost reductions, including
personnel reductions; and
-- Development of our business in emerging markets like China,
India, Brazil, Mexico and Russia;
Forward-looking statements contained in this press release are
subject to the following additional risk factors:
-- Inherent unpredictability of currency fluctuations and raw
material costs;
-- Changes in our debt credit ratings and our ability to access
capital markets;
-- Competitive actions, including pricing;
-- The nature and pace of technology evolution, including the
analog-to-digital transition;
-- Continuing customer consolidation and buying power;
-- Current and future proposed changes to tax laws, as well as
other factors which could adversely impact our effective tax
rate in the future;
-- General economic, business, geopolitical, regulatory and
public health conditions;
-- Market growth predictions, and;
-- Other factors and uncertainties disclosed from time to time in
our 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.
Editor's Note: For additional information about Kodak, visit our
web site at www.kodak.com
2005
CONTACT: Eastman Kodak Company
Media Contacts:
Gerard Meuchner, 585-724-4513
gerard.meuchner@kodak.com
or
David Lanzillo, 585-781-5481
david.lanzillo@kodak.com
or
Investor Relations Contacts:
Don Flick, 585-724-4352
donald.flick@kodak.com
or
Patty Yahn-Urlaub, 585-724-4683
patty.yahn-urlaub@kodak.com
or
Carol Wilke, 585-724-6791
carol.wilke@kodak.com
Exhibit 99.2
Eastman Kodak Company Financial Discussion Document
First Quarter 2005 Results
Within this financial discussion document, the company makes
reference to certain non-GAAP financial measures including "Earnings
on an operational basis," "Operational earnings," and "Earnings from
continuing operations on an operational basis" (and the line items
comprising earnings from continuing operations on an operational
basis), "Free cash flow", "Operating cash flow", and "Investable cash
flow", which have a directly comparable GAAP financial measure, and to
certain calculations that are based on non-GAAP financial measures,
including "Days sales outstanding" and "Days supply in inventory." 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 and quarter-sequential 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 included within the Form 8-K under Item 2.02, "Results of
Operations and Financial Condition," as filed with the Securities and
Exchange Commission on April 22, 2005.
The following table presents Eastman Kodak Company's first quarter
2005 and restated first quarter 2004 results in accordance with
Generally Accepted Accounting Principles ("As Reported") and on a
continuing operations basis, excluding non-operational items
("Operational"). Earnings from continuing operations, excluding
non-operational items is a non-GAAP financial measure under Regulation
G. Accordingly, the following tables include a reconciliation of the
Operational results to the As Reported results, which represent the
most directly comparable financial measures in accordance with
Generally Accepted Accounting Principles in the U.S. ("U.S. GAAP").
First Quarter 2005 vs. Restated First Quarter 2004
Year-over-Year Comparison of Reported and Operational Earnings
(Amounts in millions of dollars, except per share data)
- ----------------------------------------------------------------------
1Q 05 as Excluded 1Q 05
Reported Items Operational
--------- -------- ------------
Sales $2,832 $2,832
COGS 2,127 (91) A 2,036
--------- -------- ------------
Gross Profit 705 91 796
SG&A 584 0 584
R&D 199 0 199
Restructuring
costs 118 (118) B 0
--------- -------- ------------
EFO -196 209 13
Interest Expense 38 38
Other Inc./(Charges) 35 35
--------- -------- ------------
Below EFO -3 -3
--------- -------- ------------
(Loss)/Earnings
before Taxes (199) 209 10
Tax (Benefit)
Provision (56) 57 C 1
--------- -------- ------------
Earnings (Loss):
Cont. Ops. -143 152 9
Earnings: Disc.
Ops. 1 (1) 0
--------- -------- ------------
Net Earnings (Loss) -$142 $151 $9
Diluted EPS: Cont.
Ops. -0.50 $0.53 0.03
Total Diluted EPS -0.50
1Q 04 as Excluded 1Q 04
Reported Items Operational
(Restated) (Restated)
---------- -------- ------------
Sales $2,920 $2,920
COGS 2,113 (24) D 2,089
---------- -------- ------------
Gross Profit 807 24 831
SG&A 549 0 549
R&D 197 (9) E 188
Restructuring
costs 54 (54) F 0
---------- -------- ------------
EFO 7 87 94
Interest Expense 44 44
Other Inc./(Charges) (2) (2)
---------- -------- ------------
Below EFO -46 -46
(Loss)/Earnings
before Taxes (39) 87 48
Tax (Benefit)
Provision (47) 25 G (22)
---------- -------- ------------
Earnings (Loss):
Cont. Ops. 8 62 70
Earnings: Disc.
Ops. 13 (13) 0
---------- -------- ------------
Net Earnings (Loss) $21 $49 $70
Diluted EPS: Cont.
Ops. 0.03 $0.21 0.24
Total Diluted EPS 0.07
Items excluded from Earnings on an operational basis:
A - Charges for accelerated depreciation and inventory writedowns of
$81 million and $10 million, respectively, in connection with the
focused cost reduction actions.
B - Charges for focused cost reduction actions of $118 million.
C - Tax impacts of the above-mentioned excluded items.
D - Charges for accelerated depreciation and inventory writedowns of
$22 million and $2 million, respectively, in connection with the
focused cost reduction actions.
E - Charge for in-process research and development of $9 million in
connection with the acquisition of Scitex Digital Printing
(renamed Kodak Versamark).
F - Charges for focused cost reduction actions of $54 million.
G - Tax impacts of the above-mentioned excluded items.
1Q 05 as 1Q 05 1Q 04 as 1Q 04
As Percent Reported Operational Reported Operational
of Sales: (Restated) (Restated)
--------- ------------ ---------- -------------
Gross Profit 24.9% 28.1% 27.6% 28.5%
SG&A 20.6% 20.6% 18.8% 18.8%
SG&A w/o
Advertising 17.8% 17.8% 16.1% 16.1%
R&D 7.0% 7.0% 6.7% 6.4%
EFO -6.9% 0.5% 0.2% 3.2%
Earnings (Loss):
Cont. Ops. -5.0% 0.3% 0.3% 2.4%
- ---------------------------------------------------------
Consolidated Revenues:
Net worldwide sales were $2.832 billion for the first quarter of
2005 as compared with $2.920 billion for the first quarter of 2004,
representing a decrease of $88 million or 3% as reported, or a
decrease of 5% excluding the favorable impact of exchange. The
decrease in net sales was composed of:
-- Volume: volumes declines reduced first quarter sales by
approximately 3.6 percentage points driven primarily by
declines in the film capture Strategic Product Group (SPG),
the wholesale and retail photofinishing portions of the
consumer output SPG, and the Health Group digital output and
film capture and output SPGs.
-- Price/Mix: declines reduced first quarter sales by
approximately 4.1 percentage points, primarily driven by the
film capture SPG, consumer digital capture SPG and Health
Group digital capture SPG.
-- Exchange: favorable exchange of approximately 1.9 percentage
points partially offset the negative impacts of volume and
price/mix.
-- Acquisitions: NexPress Solutions contributed $78 million or
approximately 2.7 percentage points to first quarter sales.
Net sales in the U.S. were $1.115 billion for the first quarter of
2005 as compared with $1.126 billion for the prior year quarter,
representing a decrease of $11 million, or 1%.
Net sales outside the U.S. were $1.717 billion for the current
quarter as compared with $1.794 billion for the first quarter of 2004,
representing a decrease of $77 million, or 4%. Excluding the favorable
impact of exchange, net sales outside the U.S. decreased 7%.
Kodak's digital product sales (excluding new technologies) were
$1.318 billion for the current quarter as compared with $1.073 billion
for the first quarter of 2004, representing an increase of $245
million, or 23%, primarily driven by the consumer digital capture SPG,
the kiosks/media portion of the consumer output SPG, and the home
printing SPG.
Net sales of the company's traditional products were $1.511
billion for the current quarter as compared with $1.841 billion for
the first quarter of 2004, representing a decrease of $330 million, or
18%, primarily driven by declines in the film capture SPG, the
wholesale and retail photofinishing portions of the consumer output
SPG, and the Health Group film capture and output SPG.
Non-U.S. Revenues:
The company's operations outside the U.S. are reported in three
regions: (1) the Europe, Africa and Middle East Region ("EAMER"), (2)
the Asia Pacific region and (3) the Canada and Latin America region.
Net sales in the EAMER region were $851 million for the first
quarter of 2005 as compared with $910 million for the prior year
quarter, representing a decrease of $59 million, or 6% as reported, or
a decrease of 10% excluding the favorable impact of exchange.
Net sales in the Asia Pacific region were $578 million for the
current quarter as compared with $601 million for the prior year
quarter, representing a decrease of $23 million, or 4% as reported, or
a decrease of 6% excluding the favorable impact of exchange.
Net sales in the Canada and Latin America region were $288 million
in the current quarter as compared with $283 million for the first
quarter of 2004, representing an increase of $5 million, or 2% as
reported, or flat excluding the favorable impact of exchange.
Emerging Markets:
The company's major emerging markets include China, Brazil,
Mexico, Russia, India, Korea, Hong Kong and Taiwan. Net sales in
emerging markets were $638 million for the first quarter of 2005 as
compared with $658 million for the prior year quarter, representing a
decrease of $20 million, or 3% as reported, or a decrease of 5%
excluding the favorable impact of exchange.
The emerging market portfolio accounted for approximately 23% of
Kodak's worldwide sales and 37% of Kodak's non-U.S. sales in the
quarter. Sales growth was recorded for India 8%, Mexico 6%, and Russia
1%. Sales declines were recorded for China 21% and Brazil 1%.
Sales decreases in China primarily reflect inventory reductions in
retail channels for consumer film products.
Gross Profit:
GAAP: refer to the "Year-over-Year Comparison of Reported and
Operational Earnings" table with footnotes
Operational:
Excluding charges relating to accelerated depreciation and
inventory writedowns in connection with the company's three-year cost
reduction program, gross profit on an operational basis was $796
million for the first quarter of 2005 as compared with $831 million
for the first quarter of 2004, representing a decrease of $35 million,
or 4%. During the first quarter of 2005, the company's gross profit
was favorably impacted by a LIFO liquidation of $16 million versus $5
million in the first quarter of 2004.
The gross profit margin was 28.1% in the current quarter as
compared with 28.5% in the prior year quarter. The 0.4 percentage
point decrease was primarily attributable to:
-- Price/Mix: reduced gross profit by approximately 3.1
percentage points primarily attributable to the consumer
digital capture SPG, entertainment print films, and the Health
Group digital capture SPG.
-- Manufacturing Cost: favorable manufacturing cost increased
gross profit by approximately 2.2 percentage points as
unfavorable manufacturing variances and increased raw material
prices were offset by cost reduction initiatives.
-- Exchange: favorably impacted gross margin by approximately 0.8
percentage points.
Selling, General and Administrative Expenses:
GAAP and Operational:
SG&A expenses on an operational basis were $584 million for the
first quarter of 2005 as compared with $549 million for the prior year
quarter, representing an increase of $35 million, or 6%. The increase
in SG&A is primarily attributable to:
-- A $16 million pre-tax SG&A charge to exit a consumer
photofinishing customer contract
-- Acquisition related SG&A of $24 million
-- Unfavorable foreign exchange of $9 million
-- Incremental 10-K and restatement costs of $6 million
Partially offset by:
-- Cost reduction initiatives
As a percentage of sales, SG&A increased from 19% for the first
quarter of 2004 to 21% for the current quarter.
Research and Development Costs:
GAAP: refer to the "Year-over-Year Comparison of Reported and
Operational Earnings" table with footnotes
Operational
R&D expenses on an operational basis were $199 million for the
first quarter of 2005 as compared with $188 million for the first
quarter of 2004, representing an increase of $11 million, or 6%. The
increase in R&D is attributable to acquisition related R&D of $21
million partially offset by cost reduction activities. R&D as a
percentage of sales increased from 6% for the first quarter of 2004 to
7% for the current quarter.
Restructuring Costs and Other
Cost Reduction Plans:
As announced in January 2004, the company is executing a
three-year cost reduction program throughout the 2004 to 2006
timeframe, consistent with the implementation of Kodak's new business
model. The program is expected to result in total charges of $1.3
billion to $1.7 billion over the three-year period, with cost savings
in the range of $800 million to $1 billion for full year 2007.
Overall, Kodak's worldwide facility square footage is being reduced by
approximately one third. Approximately 12,000 to 15,000 positions
worldwide are being eliminated through these actions primarily in
global manufacturing, selected traditional businesses and corporate
administration.
Under this program, Kodak implemented cost reduction actions in
the first quarter resulting in pre-tax charges totaling $210 million
or $0.53 per share. The components of restructuring in the first
quarter include $80 million for employee severance relating to the
elimination of approximately 1,650 positions and $47 million
associated with exit costs and asset impairments, partially offset by
reserve reversals and curtailments of $8 million. In addition, the
company recorded accelerated depreciation and inventory write-offs of
$91 million during the quarter. The following changes in manufacturing
plant operations and other actions were announced during the quarter:
-- Closure of additional consumer photofinishing labs in the
United States and Europe
-- Closure of the Kodak Park paper mill in Rochester, New York by
the end of the second quarter 2005
-- Transfer of health x-ray manufacturing operations from Sao
Jose dos Campos to other sites by early fourth quarter 2005
-- Ceasing of photochemical manufacturing operations in Sao Jose
dos Campos by end of second quarter 2005
Under the current cost reduction program on a program-to-date
basis (Full Year 2004 and Quarter 1 2005) Kodak has implemented cost
reduction actions resulting in pre-tax charges totaling $1.036
billion, which includes the elimination of approximately 11,275
positions worldwide.
Earnings From Operations:
GAAP: refer to the "Year-over-Year Comparison of Reported and
Operational Earnings" table with footnotes
Operational:
EFO on an operational basis for the first quarter of 2005 was $13
million as compared with $94 million for the first quarter of 2004,
representing a decrease of $81 million, or 86%. EFO as a percentage of
sales decreased from 3% in the first quarter of 2004 to 1% in the
current quarter. The decrease in earnings from operations is
attributable to the reasons indicated above.
Below EFO:
GAAP and Operational:
Interest expense for the first quarter of 2005 was $38 million as
compared with $44 million for the prior year quarter, representing a
decrease of $6 million, or 14%. Lower interest expense is a result of
the company's significantly lower debt levels partially offset by
higher interest rates.
The "Other Income/(Charges)" component includes investment income,
income and losses from equity investments, foreign exchange and gains
and losses on the sales of assets and investments. Other Income for
the current quarter was $35 million as compared with Other Charges of
$2 million for the first quarter of 2004. The improvement is partially
attributable to the fact that in the prior period the NexPress
investment was accounted for under the equity method and included in
Other Income/(Charges). As a result of the company's purchase of
Heidelberg's 50% interest in the NexPress joint venture, which closed
on May 1, 2004, NexPress is consolidated in the company's Statement of
Earnings and included in the Graphic Communications segment.
Additional improvement is contributed from the year-over-year increase
in equity earnings from Kodak Polychrome Graphics.
Corporate Tax Rate:
GAAP:
The Company's estimated annual effective tax rate from continuing
operations decreased from 21% for the prior year first quarter to 13%
for the first quarter of 2005.
This decrease is primarily attributable to expected increased
earnings from operations in certain lower-taxed jurisdictions outside
the U.S. relative to total consolidated earnings, the expected
full-year earnings impact of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, which is not taxable, and
other miscellaneous items including interest.
During the first quarter of 2005, the Company recorded a tax
benefit from continuing operations of $56 million on a pre-tax loss of
$199 million. The tax benefit of $56 million for the quarter differs
from the tax benefit of $26 million that results from applying the
estimated annual effective tax rate to the pre-tax loss of $199
million due to discrete period tax benefits relating to discrete
period charges which are taxed in jurisdictions that, when aggregated,
have tax rates greater than the estimated annual effective tax rate
from continuing operations. The discrete period tax benefits resulted
from the following discrete period charges:
-- Tax benefits of $57 million associated with the net focused
cost reduction charges of $209 million.
During the first quarter of 2004, the Company recorded a tax
benefit from continuing operations of $47 million on a pre-tax loss of
$39 million. The tax benefit of $47 million for the quarter differs
from the tax benefit of $8 million that results from applying the
estimated annual effective tax rate to the pre-tax loss of $39 million
due to (1) discrete period tax benefits relating to discrete period
charges which are taxed in jurisdictions that, when aggregated, have
tax rates greater than the estimated annual effective tax rate from
continuing operations and (2) the recording of a $32 million tax
benefit relating to the IRS's concession concerning the taxation of
Intercompany royalties. The discrete period tax benefits resulted from
the following discrete period charges:
-- Tax benefits of $22 million associated with the net focused
cost reduction charges of $78 million; and
-- Tax benefits of $3 million associated with the charge for
purchased in-process R&D of $9 million.
Operational:
The Company's estimated annual effective tax rate from continuing
operations for 2005 is 13%. The actual tax provision from continuing
operations on an operational basis was $1 million on $10 million of
pre-tax income in the first quarter of 2005.
The Company's estimated annual effective tax rate from continuing
operations for the first quarter of 2004 was 21%. The actual tax
benefit from continuing operations on an operational basis was $22
million on pre-tax income of $48 million. The tax benefit of $22
million for the quarter differs from the tax provision of $10 million
that results from applying the estimated annual effective tax rate to
the pre-tax income of $48 million due to the recording of a $32
million tax benefit relating to the IRS's concession concerning the
taxation of Intercompany royalties.
The decrease in the estimated annual effective tax rate from
continuing operations from 21% for the prior year first quarter to 13%
for the first quarter of 2005 is primarily attributable to expected
increased earnings from operations in certain lower-taxed
jurisdictions outside the U.S. relative to total consolidated
earnings, the expected full-year earnings impact of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, which is
not taxable, and other miscellaneous items including interest.
Earnings from Continuing Operations:
GAAP: refer to the "Year-over-Year Comparison of Reported and
Operational Earnings" table with footnotes.
Operational:
Earnings from continuing operations on an operational basis for
the first quarter of 2005 were $9 million, or $.03 per diluted share,
as compared with earnings from continuing operations on an operational
basis for the first quarter of 2004 of $70 million, or $.24 per
diluted share, representing a decrease of $61 million, or 87%.
First quarter operational earnings from continuing operations for
2005 exclude the following after-tax items:
-- A charge of $151 million ($209 million pre-tax), or $.53 per
share, resulting from all previously announced cost reduction
initiatives. $118 million is recorded in "Restructuring Costs
and Other" and $91 million of accelerated depreciation and
inventory writedowns is recorded in "Cost of Goods Sold"
(COGS).
Earnings from Discontinued Operations:
Net income from discontinued operations of $13 million in the
first quarter of 2004 primarily reflects earnings from the company's
Remote Sensing Systems business, which was sold to ITT Industries Inc.
in August 2004.
Segment Results:
In September of 2004, the Company announced the realignment of its
operations to accelerate growth in the commercial, consumer and health
markets. In connection with the realignment, the Company's new
reporting structure that was implemented in first quarter 2005 is
outlined in the sections below.
Unless otherwise indicated, the segment results on a GAAP and
operational basis are the same.
Digital and Film Imaging Systems
The D&FIS segment comprises the same products and services as in
fourth quarter 2004, with the addition of aerial and industrial films.
This segment provides consumers, professionals and cinematographers
with digital and traditional products and services.
Revenues:
Net worldwide sales for the Digital and Film Imaging Systems
segment were $1.801 billion for the first quarter of 2005 as compared
with $1.978 billion for the first quarter of 2004, representing a
decrease of $177 million, or 9% as reported, or a decrease of 11%
excluding the favorable impact of exchange. The decrease in net sales
was composed of:
-- Volume: decreases in volume reduced first quarter sales by
approximately 6.0 percentage points driven primarily by
declines in the film capture SPG and the wholesale and retail
photofinishing portions of the consumer output SPG.
-- Price/Mix: declines attributable to price/mix reduced first
quarter sales by approximately 5.1 percentage points driven
primarily by the digital capture SPG, the traditional film
capture SPG, and the color negative paper SPG.
-- Exchange: favorable exchange of approximately 2.0 percentage
points partially offsets the negative impacts of volume and
price/mix.
Net sales in the U.S. were $701 million for the current quarter as
compared with $741 million for the first quarter of 2004, representing
a decrease of $40 million, or 5%.
Net sales outside the U.S. were $1.100 billion for the first
quarter of 2005 as compared with $1.237 billion for the prior year
quarter, representing a decrease of $137 million, or 11% as reported,
or a decrease of 14% excluding the favorable impact of exchange.
Digital product sales were $604 million for the current quarter as
compared with $473 million for the first quarter of 2004, representing
an increase of $131 million, or 28%, primarily driven by the consumer
digital capture SPG, the kiosks/media portion of the consumer output
SPG, and the home printing SPG.
Traditional product sales were $1.197 billion for the current
quarter as compared with $1.505 billion for the first quarter of 2004,
representing a decrease of $308 million or 20%, primarily driven by
declines in the consumer output and film capture SPGs.
Digital Strategic Product Group Revenues
Net worldwide sales of consumer digital capture products, which
include consumer digital cameras, accessories, memory products and
royalties, increased 24% in the first quarter of 2005 as compared with
the prior year quarter, primarily reflecting strong volume increases
and favorable exchange, partially offset by negative price/mix. Slower
than anticipated sales early in the quarter were partially offset by
strengthening sales in March.
While complete data for the consumer digital camera market in the
first quarter is not yet available, all indications are that Kodak
held the number one unit market share position for the entire U.S.
market during the quarter. On a worldwide basis, Kodak gained unit
market share year-to-date through February.
Net worldwide sales of Picture Maker kiosks/media increased 68% in
the first quarter of 2005 as compared with the first quarter of 2004,
as a result of strong volume increases and favorable exchange. Sales
continue to be driven by strong market acceptance of Kodak's new
generation of kiosks and an increase in consumer demand for digital
printing at retail. During the quarter, Kodak was able to improve on
the previous limitations on media supply, and additional capacity came
on line in early April.
Net worldwide sales from the home printing solutions SPG, which
includes inkjet photo paper and printer docks/media, increased 42% in
the current quarter as compared with the first quarter of 2004 driven
by sales of printer docks and associated thermal media. Kodak's
Printer Dock product continues to maintain a leading U.S. market share
position on a unit basis in the 4x6 photo printer category through
February. During the quarter, inkjet paper sales declined year over
year as volume growth was more than offset by lower pricing. Industry
growth continues to slow as a result of improving retail printing
solutions, and alternative home printing solutions.
Traditional Strategic Product Group Revenues
Net worldwide sales of the film capture SPG, including consumer
roll film (35mm and APS film), one-time-use cameras (OTUC),
professional films, reloadable traditional film cameras and
batteries/videotape decreased 28% in the first quarter of 2005 as
compared with the first quarter of 2004, primarily reflecting volume
declines and negative price/mix partially offset by favorable
exchange.
U.S. consumer film industry sell-through volumes decreased
approximately 20% in the first quarter of 2005 as compared with the
prior year quarter. Kodak's sell-in consumer film volumes declined
approximately 30% as compared with the prior year quarter, reflecting
a continuing reduction in U.S. retailer inventories. Kodak continues
to project full year 2005 consumer film volumes to decline as much as
30% in the US, and 20% on a worldwide basis.
Net worldwide sales for the retail photofinishing SPG, which
includes color negative paper, minilab equipment and services,
chemistry, and photofinishing services at retail, decreased 19% in the
first quarter of 2005 as compared with the first quarter of 2004,
primarily reflecting volume declines and negative price/mix partially
offset by favorable exchange. Kodak has changed its participation
model for minilab equipment in the U.S., eliminating direct sales
involvement in favor of a referral model.
Net worldwide sales for the wholesale photofinishing SPG, which
includes color negative paper, equipment, chemistry, and
photofinishing services at Qualex in the U.S. and CIS (Consumer
Imaging Services) outside the U.S., decreased 41% in the first quarter
of 2005 as compared with the first quarter of 2004, reflecting
continuing volume declines partially offset by favorable exchange.
Net worldwide sales for the entertainment film SPGs, including
origination and print films for the entertainment industry increased
6%, primarily reflecting volume increases and favorable exchange
partially offset by negative price/mix. Entertainment films continued
to benefit from a robust market and higher volume driven by
simultaneous worldwide releases of major feature films.
Gross Profit:
Gross profit for the Digital and Film Imaging Systems segment was
$461 million for the first quarter of 2005 as compared with $502
million for the prior year quarter, representing a decrease of $41
million or 8%. The gross profit margin was 25.6% in the current year
quarter as compared with 25.4% in the prior year quarter. The 0.2
percentage point increase was primarily attributable to:
-- Price/Mix: declines attributable to price/mix reduced gross
profit margins by approximately 4.1 percentage points
primarily driven by the film capture SPG, the color negative
paper SPG, and entertainment print films.
-- Manufacturing Cost: favorable manufacturing cost improved
gross profit margins by approximately 3.7 percentage points.
-- Exchange: favorably impacted gross profit margins by
approximately 0.7 percentage points.
SG&A:
In the first quarter, SG&A expenses for the Digital and Film
Imaging Systems segment increased $6 million or 2%, from $377 million
in the first quarter of 2004 to $383 million in the current quarter,
and increased as a percentage of sales from 19% to 21%. Cost reduction
actions were more than offset by a $16 million pre-tax SG&A charge to
exit a consumer photofinishing customer contract.
R&D:
First quarter R&D costs for the Digital and Film Imaging Systems
segment decreased $26 million, or 26%, from $100 million in the first
quarter of 2004 to $74 million in the current quarter and decreased as
a percentage of sales from 5% to 4%. The decrease in R&D year over
year was primarily attributable to spending reductions related to
traditional products and services.
EFO:
Earnings from operations for the Digital and Film Imaging Systems
segment decreased $21 million, or 84%, from $25 million in the first
quarter of 2004 to $4 million in the first quarter of 2005, primarily
as a result of the factors described above. The operating earnings
margin rate decreased 1 percentage point to approximately 0% from 1%
for the prior year quarter.
Health Group
The Health Group segment comprises the same products and services
as in fourth quarter 2004, with the addition of Orex. This segment
supplies the healthcare industry with traditional and digital image
capture and output products and services. On January 18, 2005, Kodak
announced the acquisition of Orex Computed Radiography Ltd., a leading
provider of compact, digital computed radiography systems. Kodak
anticipates that Orex will add approximately $32 million to Kodak's
Health Group revenues in 2005 and will be earnings neutral in 2005 and
accretive thereafter on an operating basis. On March 3, 2005, Kodak
completed its acquisition of Orex, paying $51.3 million in cash at
closing.
Revenues:
Net worldwide sales for the Health Group were $626 million for the
first quarter of 2005 as compared with $631 million for the prior year
quarter, representing a decrease of $5 million, or 1% as reported, or
a decrease of 3% excluding the favorable impact of exchange. The
decrease in net sales was composed of:
-- Volume: Volume remained unchanged year-over-year. Decreases in
the digital output and film capture & output SPGs were offset
by growth in the digital capture SPG, services SPG and dental
systems SPG.
-- Price/Mix: Decreases in price/mix reduced first quarter sales
by approximately 2.4 percentage points, primarily driven by
the digital capture SPG, digital output SPG, and the
traditional medical film portion of the film capture and
output SPG.
-- Exchange: Favorable exchange impacted sales by approximately
2.1 percentage points.
Net sales in the U.S. were $245 million for the current quarter as
compared with $258 million for the first quarter of 2004, representing
a decrease of $13 million, or 5%.
Net sales outside the U.S. were $381 million for the first quarter
of 2005 as compared with $373 million for the prior year quarter,
representing an increase of $8 million, or 2% as reported, or a 1%
decrease excluding the favorable impact of exchange.
Digital Products and Services Revenues:
Net worldwide sales of digital products, which include digital
output (DryView laser imagers/media and wet laser printers/media),
digital capture equipment (computed radiography (CR) and digital
radiography (DR) systems), services, dental systems (practice
management software and digital radiography capture equipment) and
healthcare information systems (PACS - Picture Archiving and
Communications Systems), were $405 million for the current quarter as
compared with $398 million for the first quarter of 2004, representing
an increase of $7 million or 2%. Sales reflect volume increases and
favorable exchange partially offset by negative price/mix.
Traditional Products and Services Revenues:
Net worldwide sales of traditional products, including analog
film, equipment, chemistry and services were $220 million for the
current quarter as compared with $232 million for the prior year
quarter, representing a decrease of $12 million, or 5% primarily
reflecting lower volumes and unfavorable price/mix for the film
capture and output SPG, partially offset by favorable exchange.
Gross Profit:
Gross profit for the Health Group was $241 million for the first
quarter of 2005 as compared with $259 million in the prior year
quarter, representing a decrease of $18 million, or 7%. The gross
profit margin was 38.5% in the current quarter as compared with 41.0%
in the first quarter of 2004. The decrease in the gross profit margin
of 2.5 percentage points was principally attributable to:
-- Manufacturing Cost: manufacturing cost decreased gross profit
margins by approximately 1.1 percentage points, primarily
reflecting higher silver and raw material costs and the impact
of unfavorable manufacturing variances.
-- Price/Mix: Price/mix negatively impacted gross profit margins
by approximately 2.1 percentage points primarily driven by the
digital capture SPG, digital output SPG and the traditional
medical film portion of the film capture and output SPG.
-- Exchange: favorable exchange added approximately 0.6
percentage points to the gross profit rate.
SG&A:
In the third quarter, SG&A expenses for the Health Group increased
$3 million, or 3%, from $118 million in the first quarter of 2004 to
$121 million for the current quarter, and remains constant as a
percentage of sales at 19%. The increase in SG&A expenses is primarily
attributable to the unfavorable impact of foreign exchange of
approximately $2 million.
R&D:
First quarter R&D costs increased $3 million from $46 million in
the first quarter of 2004 to $49 million in the current quarter and
increased as a percentage of sales from 7% for the first quarter of
2004 to 8% for the current quarter, primarily due to increased
spending to drive digital growth in selected areas of the product
portfolio.
EFO:
Earnings from operations for the Health Group decreased $24
million, or 25%, from $95 million for the prior year quarter to $71
million for the first quarter of 2005, while the operating earnings
margin rate decreased 4 percentage points to 11% from 15% for the
prior year quarter. The decrease in operating earnings reflects the
impact of lower gross profit margins and increased SG&A and R&D
attributable to investments for growth. For the remainder of the year,
the operating earnings margin rate is expected to return to the mid
teen range enabled by:
-- Elimination of variances associated with year-end
manufacturing shutdowns.
-- Improved volume leverage throughout the year associated with
the seasonality of the digital businesses.
-- Improved digital growth associated with momentum on new
products and resolution of a short-term CR product performance
issue.
Graphic Communications
As of January 1, 2005, the Graphic Communications segment consists
of Encad, Inc., a maker of wide-format inkjet printers, inks and
media; Kodak Versamark, a world leader in high-speed, 100% variable
data printing; NexPress Solutions, Inc., a leader in on-demand digital
color and monochrome image printing systems; Kodak's Document Products
and Services organization, which includes market-leading production
and desktop document scanners, microfilm, worldwide service and
support and business process services operations; Kodak's traditional
graphics products which are sold to Kodak Polychrome Graphics LLC; and
Kodak's 50 percent interest in Kodak Polychrome Graphics LLC (KPG), a
joint venture with Sun Chemical.
The Graphic Communications segment serves a variety of customers
in the in-plant, data center, commercial printing and digital service
bureau markets with a range of equipment that spans large-format
inkjet printing and digital monochrome printing to on-demand digital
image-rich color printing and transactional communications.
On January 12, 2005, the Company announced that it had entered
into a Redemption Agreement with Sun Chemical Corporation and Sun
Chemical Group B.V. (collectively, "Sun"), pursuant to which the
parties have agreed to consummate certain transactions that will
result in Kodak owning 100% of the equity interests in Kodak
Polychrome Graphics LLC and Kodak Polychrome Graphics Company Ltd
(KPG). The Company completed its acquisition of KPG on April 1, 2005.
On January 31, 2005, the Company announced that it has entered
into a definitive agreement to acquire all of the outstanding common
shares of Creo Inc., a premier supplier of prepress systems used by
commercial printers worldwide. The closing of the transactions
contemplated by the Agreement is scheduled to take place three
business days following the satisfaction or waiver of the closing
conditions. Either party may terminate the Agreement if the closing
does not occur on or before September 30, 2005.
Revenues:
Net worldwide sales for the Graphic Communications segment were
$368 million for the first quarter of 2005 as compared with $283
million for the prior year quarter, representing an increase of $85
million, or 30% as reported, or 28% excluding the favorable impact of
exchange. The increase in net sales was primarily due to the NexPress
acquisition.
Net sales in the U.S. were $156 million for the current year
quarter as compared with $112 million for the prior year quarter,
representing an increase of $44 million, or 39%.
Net sales outside the U.S. were $212 million in the first quarter
of 2005 as compared with $171 million for the prior year quarter,
representing an increase of $41 million or 24% as reported, or an
increase of 22% excluding the favorable impact of exchange.
The Graphic Communications segment digital product sales are
composed of NexPress Solutions, a producer of digital color and black
and white printing solutions, Kodak Versamark, a leader in continuous
inkjet technology, document scanners, Encad, a maker of wide format
inkjet printers, and service and support.
Segment traditional product sales are comprised of the sales of
Kodak traditional graphics products to KPG, and microfilm products.
The NexPress installed base of digital production color presses
continues to experience good customer acceptance and increases in
customer average monthly page volumes are leading to increased
consumables business. Overall activity levels for production volumes
and product related sales and service are steadily increasing and
acquisition integration remains on schedule.
Kodak Versamark high speed inkjet sales increased 14% year over
year in the first quarter, led by increased placements of color
printing solutions in the transactional printing market coupled with a
growing consumables business.
Net worldwide sales of graphic arts products to KPG decreased 9%
in the current quarter as compared with the first quarter of 2004.
Although the traditional graphic arts products continue in secular
decline, KPG registered improved market share performance in the
quarter.
KPG's earnings and cash performance continued to benefit from the
strength of its leading position in digital printing plates and
digital proofing, coupled with favorable operating expense management
and foreign exchange. KPG contributed positively to Kodak's "Other
income and charges" during the first quarter of 2005 both in absolute
terms and in quarterly year over year comparisons.
Gross Profit:
Gross profit for the Graphic Communications segment was $88
million for the first quarter of 2005 as compared with $64 million in
the prior year quarter, representing an increase of $24 million, or
38%. The gross profit margin was 23.9% in the current quarter as
compared with 22.6% in the prior year quarter. The increase in the
gross profit margin of 1.3 percentage points was primarily
attributable to:
-- Price/Mix: negative price/mix decreased gross profit margins
by approximately 1.1 percentage point.
-- Manufacturing Cost: manufacturing cost positively impacted
gross profit margins by approximately 1.6 percentage points.
-- Exchange: exchange positively impacted gross profit margins by
approximately 0.6 percentage point.
SG&A:
SG&A expenses for the Graphic Communications segment increased $28
million, or 64%, from $44 million in the first quarter of 2004 to $72
million for the current quarter, and increased as a percentage of
sales from 16% to 20%. The increase in SG&A is primarily attributable
to the NexPress Solutions acquisition.
R&D:
GAAP:
First quarter R&D costs increased $16 million, from $20 million in
the first quarter of 2004 to $36 million in the current quarter and
increased as a percentage of sales from 7% for the first quarter of
2004 to 10% for the current quarter. The R&D expense increase is
primarily due to the acquisition of NexPress Solutions.
Operational:
Excluding the $9 million charge for purchased in-process R&D
recorded in the first quarter of 2004 in connection with the
acquisition of Scitex Digital Printing (Kodak Versamark), first
quarter R&D costs increased $25 million, from $11 million in the first
quarter of 2004 to $36 million in the current quarter and increased as
a percentage of sales from 4% to 10%. The R&D expense increase is
primarily due to the acquisition of NexPress Solutions.
EFO:
GAAP:
Losses from operations for the Graphic Communications segment were
$20 million in the current quarter versus breakeven earnings for the
prior year quarter. The loss in the current year quarter was driven
primarily by the dilution from the NexPress acquisition.
Operational:
Excluding the $9 million first quarter 2004 charge for purchased
in-process R&D, losses from operations for the Graphic Communications
segment were $20 million in the current quarter versus profit of $9
million for the prior year quarter. The loss in the current year was
driven primarily by the dilution from the NexPress acquisition.
All Other
All Other comprises the same products and services as in fourth
quarter 2004, with the addition of optics. It is composed of Kodak's
display and components business for image sensors, optics, display
materials, and other small, miscellaneous businesses. All Other also
includes development initiatives in inkjet technologies. These
businesses offer imaging sensors to original equipment manufacturers
(OEMs) and other specialty materials including organic light emitting
diode (OLED) technology to commercial customers.
Revenues:
Net worldwide sales for All Other were $37 million for the first
quarter of 2005, as compared with $28 million for the prior year
quarter, representing an increase of $9 million, or 32% as reported.
Net sales in the U.S. were $13 million for the current year
quarter as compared with $15 million for the prior year quarter,
representing a decrease of $2 million, or 13%.
Net sales outside the U.S. were $24 million in the first quarter
of 2005 as compared with $13 million for the prior year quarter,
representing an increase of $11 million or 85% as reported.
EFO:
The loss from operations for All Other was $42 million in the
current quarter, a decrease of $7 million or 20% as compared with the
loss from operations of $35 million in the first quarter of 2004. The
loss from operations was primarily driven by digital investments,
which include the inkjet and display programs.
Balance Sheet:
Cash Flow:
Kodak defines free cash flow as net cash provided by continuing
operations, (as determined under generally accepted accounting
principles in the U.S.- U.S. GAAP), plus proceeds from the sale of
assets minus capital expenditures, acquisitions, debt assumed in
acquisitions and investments in unconsolidated affiliates. Kodak's
definition of operating cash flow equals free cash flow less
dividends. Investable cash flow is operating cash flow excluding
acquisitions and debt assumed in acquisitions.
During the first quarter, operating cash flow from continuing
operations was a negative $305 million, a $140 million improvement
versus the negative $445 million in the year ago quarter driven
primarily by lower acquisition spend partially offset by higher
inventory balances and an increase in cash payments associated with
restructuring.
Investable cash flow was a negative $258 million, $118 million
worse than the negative $140 million in the first quarter of 2004.
Kodak remains on track to achieve targeted investable cash flow for
the year of $400 million to $600 million.
Net cash (used in) provided by continuing operations relating to
operating activities, investing activities and financing activities,
as determined under U.S. GAAP in the first quarter of 2005 was ($223)
million, ($90) million and $99 million, respectively.
The table below reconciles the net cash provided by continuing
operations relating to operating activities as determined under U.S.
GAAP, to Kodak's definition of operating and investable cash flow for
the first quarter of 2005 and 2004:
1st Quarter
- ---------------------------------------------------------------------
($ millions) 2005 2004
------------
Net cash (used in) provided by continuing operations
relating to operating activities: ($223) ($27)
Additions to properties (99) (91)
Net proceeds from sales of businesses/assets 1 0
Distributions from/(investments in) unconsolidated
affiliates 63 (22)
Acquisitions, net of cash acquired (47) (305)
Debt assumed through acquisitions 0 0
------------
Free Cash Flow (continuing operations) (305) (445)
Dividends 0 0
------------
Operating Cash Flow (continuing operations) (305) (445)
Acquisitions, net of cash acquired 47 305
Debt assumed through acquisitions 0 0
------------
Investable Cash Flow (continuing operations) ($258)($140)
- ---------------------------------------------------------------------
Dividend:
The company makes semi-annual dividend payments, which, when
declared by the Board of Directors, will be paid on the company's 10th
business day each July and December to shareholders of record as of
the close of the first business day of the preceding month. Kodak made
no dividend payments during the first quarters of 2005 and 2004.
Capital Spending:
Capital additions were $99 million in the first quarter of 2005,
which was $8 million higher than the year ago quarter and $78 million
lower quarter sequentially. The majority of the spending supported new
products, manufacturing productivity and quality improvements,
infrastructure improvements and ongoing environmental and safety
initiatives.
Receivables:
Total net receivables of $2.281 billion, which were composed of
trade ($1.931 billion) and miscellaneous ($350 million) receivables at
the end of the first quarter, 2005, increased $22 million from the
first quarter of 2004 and decreased $263 million quarter sequentially.
The quarter sequential decrease is a result of first quarter sales
being lower than fourth quarter peak season sales. The year over year
increase is driven by receivables from acquisitions.
Accrued customer rebates are classified as miscellaneous payables;
however, the majority of these are cleared through customer
deductions. The effect of offsetting these accrued customer rebates
would reduce the net trade receivable balance by $388 million to
$1.543 billion at the end of the first quarter of 2005, and would
reduce the net trade receivable balance by $415 million to $1.480
billion at the end of the first quarter of 2004.
Kodak defines days sales outstanding (DSO) as the four-quarter
moving average net trade receivables after customer rebate
reclassification, divided by 12 months of trade sales, multiplied by
365 days. Due to the fact that reported sales are net of customer
rebates and a majority of these rebates are cleared through customer
deductions, the company's DSO calculation includes the impact of
reclassifying rebates as an offset to receivables. By reclassifying
the rebates as an offset to receivables, the company's DSO is more
reflective of the true number of days the net trade receivables are
outstanding.
DSO from continuing operations for the first quarter was 46 days,
higher than the prior year quarter by three days and higher quarter
sequentially by one day. This is primarily due to the newly acquired
businesses that tend to have higher DSO.
If rebate accrual balances were not offset against receivables for
purposes of calculating the DSO, DSO from continuing operations would
have increased year over year by two days to 58 days and one-day
quarter sequentially.
Inventory:
Kodak's inventories of $1.330 billion (after LIFO) increased $117
million year over year and increased $172 million quarter
sequentially. The year over year increase is primarily due to the
acquisition of NexPress.
Kodak defines days supply of inventory (DSI) from continuing
operations as four-quarter average inventory before the LIFO reserve
divided by 12 months COGS, multiplied by 365 days. For purposes of
Kodak's definition, COGS excludes certain manufacturing-related costs
that are considered to be unusual or that occur infrequently.
Inventory before the LIFO reserve was $1.647 billion, which was
$73 million higher than a year ago and $159 million higher than fourth
quarter 2004. DSI from continuing operations of 64 days was higher by
one day from the first quarter 2004 and higher quarter sequentially by
one day.
Kodak defines inventory turns as 12 months COGS divided by
four-quarter average inventory before the LIFO reserve. Inventory
turns from continuing operations were 5.7, which is 0.1 lower than a
year ago and 0.1 lower quarter sequentially.
Including the impact of the LIFO reserve and using COGS as
reported on a GAAP basis, DSI from continuing operations of 49 days
increased by one day from the first quarter of 2004 and quarter
sequentially. Inventory turns from continuing operations decreased by
0.3 turns relative to the first quarter of 2004 and decreased by 0.2
turns quarter sequentially.
Debt:
Debt increased by $88 million to $2.409 billion and cash decreased
by $224 million to $1.031 billion quarter sequentially.
Equity was $3.658 billion and the debt to total capital ratio was
39.7%, reflecting an increase of 1.8 percentage points quarter
sequentially and a decrease of 8.4 percentage points year over year.
Foreign Exchange:
Year over year, the impact of foreign exchange on operating
activities during the first quarter was a positive $0.07 per share and
foreign exchange activities recorded in "Other Income/(Charges)" had
zero per share impact. Therefore, the sum of the operational and
reportable exchange impacts increased earnings in the quarter by $0.07
per share.
Silver:
During the first quarter, the impact of high silver prices was
more than offset by the effect of favorable foreign exchange.
Earnings Per Share:
Guidance:
Kodak remains committed to the full year 2005 operational earnings
guidance of $2.60 to $2.90 per share.
The Company is unable to provide guidance for earnings per share
from continuing operations on an as reported basis, because costs
associated with restructuring activities cannot be reasonably
predicted.
Upcoming Meetings:
Kodak will host an investor event for those members of the
investment community who will be attending the upcoming AIM/On Demand
trade show at the Philadelphia Convention Center in Philadelphia,
Pennsylvania. This function will be held on Wednesday, May 18, 2005,
beginning at 7:45 AM EST with a booth tour. Investors are encouraged
to attend the trade show morning keynote address at 9:00 AM EST given
by Eastman Kodak Company's Chairman of the Board and CEO, Daniel Carp.
Safe Harbor Statement:
Operational items are non-GAAP financial measures as defined by
the Securities and Exchange Commission's final rules under "Conditions
for Use of Non-GAAP Financial Measures." Reconciliations of
operational items included in this press release to the most directly
comparable GAAP financial measures can be found in the Financial
Discussion Document attached to this press release.
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 expectations for the Company's growth in sales and
earnings, the effects of legislation, cash generation, tax rate, and
debt management are forward-looking statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent our estimates only as of the date they are made,
and should not be relied upon as representing our estimates as of any
subsequent date. While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any
obligation to do so, even if our estimates change. The forward-looking
statements contained in this press release are subject to a number of
factors and uncertainties, including the successful:
-- Implementation of our digitally oriented growth strategy,
including the related implementation of our three-year cost
reduction program;
-- Implementation of our debt management program;
-- Implementation of product strategies (including digital
products, category expansion and digitization);
-- Implementation of intellectual property licensing strategies;
-- Development and implementation of e-commerce strategies;
-- Completion of information systems upgrades, including SAP, our
enterprise system software;
-- Completion of various portfolio actions;
-- Reduction of inventories;
-- Completion of focused capital expenditures;
-- Integration of newly acquired businesses;
-- Performance of accounts receivable;
-- Improvement in manufacturing productivity and techniques;
-- Improvement in supply chain efficiency;
-- Implementation of future focused cost reductions, including
personnel reductions; and
-- Development of our business in emerging markets like China,
India, Brazil, Mexico and Russia;
Forward-looking statements contained in this press release are
subject to the following additional risk factors:
-- Inherent unpredictability of currency fluctuations and raw
material costs;
-- Changes in our debt credit ratings and our ability to access
capital markets;
-- Competitive actions, including pricing;
-- The nature and pace of technology evolution, including the
analog-to-digital transition;
-- Continuing customer consolidation and buying power;
-- Current and future proposed changes to tax laws, as well as
other factors which could adversely impact our effective tax
rate in the future;
-- General economic, business, geopolitical, regulatory and
public health conditions;
-- Market growth predictions, and;
Other factors and uncertainties disclosed from time to time in our
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
CONSOLIDATED STATEMENT OF EARNINGS - UNAUDITED
(in millions, except per share data)
Three Months Ended
March 31
------------------
2005 2004
Net sales $2,832 $2,920
Cost of goods sold 2,127 2,113
-------- --------
Gross profit 705 807
Selling, general and administrative
expenses 584 549
Research and development costs 199 197
Restructuring costs and other 118 54
-------- --------
(Loss) earnings from continuing operations
before interest, other charges, net, and
income taxes (196) 7
Interest expense 38 44
Other income (charges), net 35 (2)
-------- --------
Loss from continuing operations before
income taxes (199) (39)
Benefit for income taxes (56) (47)
-------- --------
(Loss) earnings from continuing operations (143) 8
Earnings from discontinued operations, net
of income tax 1 13
-------- --------
NET (LOSS) EARNINGS $(142) $ 21
===== =====
Basic and diluted net (loss) earnings per share:
Continuing operations $ (.50) $ .03
Discontinued operations .00 .04
------ -------
Total $(.50) $ .07
====== ======
Number of common shares used in
basic net (loss) earnings per share 286.9 286.6
Incremental shares from
assumed conversion of options - 0.1
------- -------
Number of common shares used in
diluted net (loss) earnings per share 286.9 286.7
===== ======
Net Sales from Continuing Operations by Reportable Segment and All
Other - Unaudited
(in millions)
Three Months Ended
March 31
-----------------------------
2005 2004 Change
D&FIS
Inside the U.S. $ 701 $ 741 - 5%
Outside the U.S. 1,100 1,237 - 11
-------- ------- -----
Total Digital & Film Imaging Systems 1,801 1,978 - 9
-------- -------- -----
Health
Inside the U.S. 245 258 - 5
Outside the U.S. 381 373 + 2
-------- -------- -----
Total Health 626 631 - 1
-------- -------- -----
Graphic Communications
Inside the U.S. 156 112 + 39
Outside the U.S. 212 171 + 24
-------- ------- -----
Total Graphic Communications 368 283 + 30
-------- ------- -----
All Other
Inside the U.S. 13 15 - 13
Outside the U.S. 24 13 + 85
-------- ------- ----
Total All Other 37 28 + 32
-------- ------- ----
Consolidated total $2,832 $2,920 - 3%
======== ====== =====
Earnings (Loss) from Continuing Operations Before Interest, Other
Charges, Net, and Income Taxes by Reportable Segment and All
Other - Unaudited
(in millions)
Three Months Ended
March 31
--------------------------------
2005 2004 Change
D&FIS $ 4 $ 25 - 84%
Percent of Sales 0% 1%
Health $ 71 $ 95 - 25%
Percent of Sales 11% 15%
Graphic Communications $ (20) $ -
Percent of Sales (5)%
All Other $ (42) $ (35) - 20%
Percent of Sales (114)% (125)%
--------- --------- ------
Total of segments $ 13 $ 85 - 85%
0% 3%
Restructuring costs and other (209) (78)
--------- --------- ------
Consolidated total $ (196) $ 7 -2900%
======== ========= ======
Earnings (Loss) from Continuing Operations by Reportable Segment
and All Other - Unaudited
(in millions)
Three Months Ended
March 31
--------------------------------
2005 2004 Change
D&FIS $ 12 $ 21 - 43%
Percent of Sales 1% 1%
Health $ 63 $ 75 - 16%
Percent of Sales 10% 12%
Graphic Communications $ (1) $ (2) + 50%
Percent of Sales 0% (1)%
All Other $ (37) $ (29) - 28%
Percent of Sales (100)% (104)%
-------- --------- -------
Total of segments $ 37 $ 65 - 43%
1% 2%
Restructuring costs and other (209) (78)
Interest expense (38) (44)
Other corporate items 5 2
Income tax effects on above items
and taxes not allocated to above 62 63
-------- -------- -------
Consolidated total $ (143) $ 8 -1888%
======= ======= =======
Eastman Kodak Company
CONSOLIDATED STATEMENT OF FINANCIAL POSITION -UNAUDITED
(in millions)
March 31, Dec. 31,
2005 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,031 $ 1,255
Receivables, net 2,281 2,544
Inventories, net 1,330 1,158
Deferred income taxes 582 556
Other current assets 149 105
Assets of discontinued operations 30 30
--------- ---------
Total current assets 5,403 5,648
--------- ---------
Property, plant and equipment, net 4,276 4,512
Goodwill 1,457 1,446
Other long-term assets 2,999 3,131
--------- ---------
TOTAL ASSETS $14,135 $14,737
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $3,584 $ 3,896
Short-term borrowings 553 469
Accrued income taxes 573 625
-------- ----------
Total current liabilities 4,710 4,990
OTHER LIABILITIES
Long-term debt, net of current portion 1,856 1,852
Postretirement liabilities 3,181 3,338
Other long-term liabilities 730 746
-------- ----------
Total liabilities 10,477 10,926
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 853 850
Retained earnings 7,768 7,922
Accumulated other comprehensive loss (115) (90)
Unearned restricted stock (5) (5)
--------- ----------
9,479 9,655
Less: Treasury stock at cost 5,821 5,844
--------- ---------
Total shareholders' equity 3,658 3,811
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,135 $14,737
========= =========
Eastman Kodak Company
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(in millions)
Three Months Ended
March 31
---------------------
2005 2004
Cash flows relating to operating activities:
Net (loss) earnings $(142) $ 21
Adjustments to reconcile to net cash (used in)
provided by operating activities:
Earnings from discontinued operations (1) (13)
Equity in (earnings) losses from
unconsolidated affiliates (23) 6
Depreciation and amortization 267 207
Purchased research and development 2 9
Gain on sales of businesses/assets (1) -
Restructuring costs, asset impairments and
other non-cash charges 32 5
Benefit for deferred taxes (8) (35)
Decrease in receivables 239 111
Increase in inventories (200) (98)
Decrease in liabilities excluding borrowings (365) (271)
Other items, net (23) 31
------- -------
Total adjustments (81) (48)
------- -------
Net cash used in continuing operations (223) (27)
------- -------
Net cash used in discontinued operations - (4)
------- -------
Net cash used in operating activities (223) (31)
------- -------
Cash flows relating to investing activities:
Additions to properties (99) (91)
Net proceeds from sales of businesses/assets 1 -
Acquisitions, net of cash acquired (47) (305)
Distributions from (investments in)
unconsolidated affiliates 63 (22)
Marketable securities - purchases (29) (34)
Marketable securities - sales 21 26
------- -------
Net cash used in continuing operations (90) (426)
------- -------
Net cash used in discontinued operations - -
------- -------
Net cash used in investing activities (90) (426)
------- -------
Cash flows relating to financing activities:
Net increase (decrease) in borrowings
with original maturity of 90 days or less 107 (177)
Proceeds from other borrowings 50 60
Repayment of other borrowings (69) (165)
Exercise of employee stock options 11 -
------- -------
Net cash provided by (used in) financing
activities 99 (282)
------- -------
Effect of exchange rate changes on cash (10) (1)
------- -------
Net decrease in cash and cash equivalents (224) (740)
Cash and cash equivalents, beginning of year 1,255 1,250
------- -------
Cash and cash equivalents, end of quarter $1,031 $ 510
======= =======