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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): January 30, 2006
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 January 30, 2006, Eastman Kodak Company issued a press release and a
supplemental financial discussion document describing its financial results for
its fourth fiscal quarter ended December 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 fourth quarter 2005 press release and financial discussion
document, the Company makes reference to certain non-GAAP financial measures
including "Digital revenue", "Digital revenue growth", "Digital earnings", "Free
cash flow", "Operating cash flow", "Investable cash flow" and "Earnings before
interest, taxes, depreciation and amortization (EBITDA)", which have directly
comparable GAAP financial measures, 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:
Digital revenue / Digital revenue growth / Digital earnings -- In the Company's
earnings release for the second quarter of 2005 that was issued on July 20,
2005, the Company indicated that, due to the ongoing digital transformation,
management would view the Company's performance based on the following three key
metrics: digital revenue growth, digital earnings growth and the generation of
cash. These three key metrics were reemphasized in the Company's investor
presentation on September 28, 2005 and in the attached earnings release for the
fourth quarter of 2005. 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.
Free cash flow / Operating cash flow / Investable cash flow -- The Company
believes that the presentation of free cash flow, operating cash flow and
investable cash flow 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, dividends, capital expenditures, acquisitions and investments. The free
cash flow measure equals net cash provided by operating activities from
continuing operations, as determined under Generally Accepted Accounting
Principles in the U.S. (U.S. GAAP) minus capital expenditures. The operating
cash flow measure equals free cash flow plus proceeds from the sale of assets,
minus acquisitions, debt assumed in acquisitions, investments in unconsolidated
affiliates, and dividends. The investable cash flow measure equals operating
cash flow excluding the impact of acquisitions and debt assumed in acquisitions,
and 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.
EBITDA / Interest Expense -- Under the Company's senior secured credit
facilities, there are two financial debt covenants that the Company must be in
compliance with on a quarterly basis: (1) debt to EBITDA and (2) EBITDA to
interest expense. Accordingly, the Company believes the presentation of the debt
to EBITDA and EBITDA to interest expense financial measures is useful
information to investors, as it provides information as to how the Company
actually performed against the financial covenant restrictions and requirements,
and how much headroom the Company has within the covenants.
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
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Exhibit 99.1 Press release issued January 30, Furnished with
2006 regarding financial results this document
for the fourth quarter of 2005
Exhibit 99.2 Financial discussion document issued Furnished with
January 30, 2006 regarding financial this document
results for the fourth 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: January 30, 2006
EXHIBIT INDEX
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Exhibit No. Description
- ---------- ------------
99.1 Press release issued January 30, 2006 regarding financial results for
the fourth quarter 2005
99.2 Financial discussion document issued January 30, 2006 regarding
financial results for the fourth quarter 2005
Exhibit 99.1
Kodak's 4th-Quarter Sales Rise 12% to $4.197 Billion;
Full-Year Digital Sales Exceed Traditional Sales for the First Time;
4th-Qtr Digital Sales Surge 45%, Led by Graphic
Communications and Consumer Digital
ROCHESTER, N.Y.--(BUSINESS WIRE)--Jan. 30, 2006--Eastman Kodak
Company
Company Exceeds Full-Year Cash Goals; Delivers $1.180 Billion in
Net Cash From Operating Activities in 2005; Cash Balance Totals
$1.665 Billion at Year-end
4th-Qtr GAAP Net Loss of $52 Million ($0.18 Per Share), Largely
Reflecting Restructuring Charges, Tax Benefits and Cumulative
Effect of an Accounting Change
Eastman Kodak Company today reported that revenue rose 12% in the
fourth quarter, led by a 45% increase in the sale of digital products
and services. The performance includes strong demand for the
market-leading offerings from the company's consumer digital portfolio
and the successful completion of the company's acquisition program to
support its Graphic Communications business. For all of 2005, digital
sales represented 54% of total revenue, marking the first time in the
company's history that digital revenue exceeded traditional.
On the basis of generally accepted accounting principles in the
U.S. (GAAP), the company reported a fourth-quarter loss of $52
million, or $0.18 per share. This largely stems from $283 million in
after-tax restructuring charges, partially offset by the previously
announced tax audit settlement between the company and the Internal
Revenue Service that resulted in the reversal of certain tax accruals
totaling $243 million.
For the fourth quarter of 2005:
-- Sales totaled $4.197 billion, an increase of 12% from $3.759
billion in the fourth quarter of 2004. Digital revenue totaled
$2.674 billion, a 45% increase from $1.850 billion.
Traditional revenue totaled $1.514 billion, a 21% decline from
$1.905 billion.
-- The GAAP net loss was $52 million, or $0.18 per share,
compared with a GAAP loss of $59 million, or $0.20 per share,
in the year-ago period.
-- The company's fourth-quarter loss from continuing operations,
before interest, other income, net, and income taxes was $162
million, compared with a loss of $236 million in the year-ago
quarter.
-- Digital earnings were $161 million, and were favorably
impacted by a number of items, including a year-over-year
increase in royalty income, which reflects the company's
continuing progress in the monetization of its intellectual
property, as well as the favorable impact resulting from the
company's Graphic Communications Group acquisition program.
"Kodak is now a thriving digital company," said Antonio M. Perez,
Chairman and Chief Executive Officer, Eastman Kodak Company. "The
fourth quarter marked the first time that we managed the company as it
will be run in 2006, and the digital earnings performance was
exceptional. And for all of 2005, we made tremendous progress on our
digital transformation. We completed an aggressive acquisition program
that established Kodak as a powerhouse in the graphic communications
market, we strengthened our market position in consumer digital with
several innovative new product introductions, and we made substantial
progress on our goal of reducing our traditional manufacturing
footprint, while benefiting from the strong cash flows available from
that business. We enjoy a solid cash position, and we are determined
to expand profit margins in the sizable digital businesses that we
have assembled."
Other fourth-quarter 2005 details:
-- Net cash provided by operating activities from continuing
operations totaled $1.240 billion in the fourth quarter,
compared with $702 million in the year-ago quarter.
-- Gross Profit was 22.8%, down from 25.9%, primarily due to
increased restructuring and the cost of accelerated
depreciation and asset useful life changes.
-- Selling, General and Administrative expenses were $748
million, up from $710 million, reflecting costs related to
acquisitions, partially offset by cost reduction activities.
-- Debt decreased $35 million from the third-quarter level, to
$3.528 billion as of Dec. 31. In 2005, debt increased $1.207
billion, reflecting more than $1.5 billion relating to
acquisitions, partially offset by $300 million in scheduled
debt repayments.
-- Kodak held $1.665 billion in cash as of Dec. 31, up from $610
million on Sept. 30, and up from $1.255 billion at the end of
2004.
Segment sales and results from continuing operations, before
interest, other income, net, and income taxes (earnings from
operations) for the fourth quarter of 2005, are as follows:
-- Digital & Film Imaging System sales totaled $2.513 billion,
down 3%. Earnings from operations for the segment were $76
million, compared with $135 million a year ago. Highlights for
the quarter included a 65% increase in sales of home printing
products and inkjet media, including a 95% increase in the
sales of KODAK EASYSHARE Printer Docks; a 41% increase in
consumer digital capture sales, which includes KODAK EASYSHARE
digital cameras; and a 23% increase in the sales of KODAK
PICTURE MAKER kiosks and related media.
-- Graphic Communications Group sales were $942 million, up 141%
largely reflecting the acquisition of KPG and Creo, as well as
a 38% increase in Kodak Versamark sales. Earnings from
operations in the fourth quarter were $40 million, compared
with a loss of $15 million in the year-ago quarter.
-- Health Group sales were $700 million, down 6%. Earnings from
operations for the segment were $83 million, compared with
$113 million a year ago. Highlights for the quarter included a
45% increase in Healthcare Information System sales.
-- All Other sales were $42 million, up 17% from the year-ago
quarter. The loss from operations totaled $43 million,
compared with a loss of $72 million a year ago. The All Other
category includes the Display & Components operation as well
as investments in new technologies.
2005 full-year results:
-- For the year, sales were $14.268 billion, up 6% from $13.517
billion in 2004.
-- Reported net loss for the year totaled $1.371 billion, or
$4.76 per share, compared with net earnings of $556 million,
or $1.94 per share, in 2004, largely stemming from a $1.1
billion non-cash charge in 2005 to record a valuation
allowance against the net deferred tax assets in the U.S. The
establishment of the valuation allowance was required due to
the company's continuing losses in the U.S. resulting from the
accelerated and extensive restructuring activity required by
the decline in the traditional businesses. Also contributing
to the decrease in earnings relative to 2004 is the
year-over-year increase in restructuring charges of $245
million, a year-over-year decrease in earnings from
discontinued operations of $325 million, due primarily to the
gain in 2004 from the sale of the company's Remote Sensing
Systems unit, and a charge for a cumulative effect of an
accounting change of $57 million in 2005.
-- Net cash provided by operating activities from continuing
operations totaled $1.180 billion for the year, compared with
$1.146 billion in 2004.
Outlook for 2006:
Kodak expects 2006 digital revenue growth between 16% and 22%,
with total revenue growth between negative 2% and a positive 4%. The
company also expects to increase digital earnings to a range of $350
million to $450 million, with total earnings from operations, which is
the most directly comparable GAAP financial measure, of a negative
$900 million to a negative $1.1 billion. The loss from operations
range is largely being driven by the ongoing restructuring actions.
The company expects investable cash flow to be between $400 million
and $600 million, with net cash provided by operating activities from
continued operations of $800 million to $1.0 billion.
"We are now more than halfway through our transformation, and we
have proven our ability to drive sales in digital markets and to
generate the cash necessary to fund our growth," Perez said. "We enter
2006 with solid momentum and a stronger emphasis on profitable growth.
Our focus this year - beyond digital revenue growth and cash
generation - will be expanding the margins of our digital businesses,
now that we've amassed the scale necessary to be a market force. We
are confident that we have the management and the strategies in place
to achieve this goal and to generate value for our shareholders."
Antonio Perez and Robert Brust, Kodak's Chief Financial Officer,
will hold a meeting with investors today to discuss fourth quarter &
full year 2005 financial results and provide an outlook on expected
2006 performance. The meeting will be held at the Equitable Center,
787 Seventh Avenue (between 51st & 52nd Streets), beginning at 1:00 PM
ET. The event is expected to conclude by 3:00 PM ET.
Those who are unable to attend the meeting in person may
participate via conference call (listen mode only) by dialing
913-981-5542, reference number 6473137. The conference call will begin
promptly at 1:00 PM ET. Participants may also listen via webcast by
accessing the Kodak.com Investors web page at:
http://www.kodak.com/go/invest.
The call will be recorded and available for playback by 8:00 AM on
Tuesday, January 31, by dialing 719-457-0820, reference number
6473137. The playback number will be active until Tuesday, February 7,
at 5:00 PM ET. Also, the web cast will be archived and available for
replay on this site approximately 1 hour following the live broadcast.
Accounting for Employee Stock Option Awards:
On January 1, 2005, the Company adopted FASB Statement No. 123(R),
Share Based Payment, and began recognizing expense related to its
employee stock option awards. The FASB recently issued a proposed
staff position (FSP) which, if adopted as proposed, would require
companies to classify employee stock options with contingent cash
settlement features as equity awards provided the contingent event,
such as a change in control event, is not considered probable of
occurring. This classification would be consistent with the Company's
present classification of its outstanding stock option awards with
contingent cash settlement features. All financial information
reported in this press release is presented on a U.S. GAAP basis
assuming the proposed FSP is adopted as currently drafted. However, if
the FASB does not finalize, or changes the final provisions of the
proposed FSP, the Company would be required to reclassify certain of
its stock option awards to a liability as of January 1, 2005, and as
of the end of each quarter in 2005. A change in the Company's present
classification as equity of certain of the Company's stock option
awards would also require the Company to record a liability and report
the impact of recording the liability as the cumulative effect of a
change in accounting principle as of January 1, 2005, in the Company's
Statement of Operations for the first quarter of 2005. In addition to
the reclassification of existing liabilities and the recording of an
additional liability, the Company would record the change in fair
value of those awards in the Statement of Operations each quarter, and
accordingly, the net loss as originally reported in each quarter of
2005 may change. The Company has not yet computed what (1) the
cumulative effect of the change in accounting principle as of January
1, 2005, would be or (2) what the impact would be on the net loss for
each of the quarters in 2005 if the FASB does not issue the FSP as
drafted. The Company believes that the impact of recording the
additional liability would be material.
Safe Harbor Statement:
Digital and traditional revenues, digital revenue growth, digital
earnings, and investable cash flow 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 these measures 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, revenue,
revenue growth, and cash 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 digital growth and profitability
strategies, business model, and cash plan;
-- Implementation of a changed segment structure;
-- Implementation of our cost reduction program, including asset
rationalization and monetization, reduction in sales, general
and administrative costs and personnel reductions;
-- Implementation of, and performance under, our debt management
program;
-- Implementation of product strategies (including category
expansion, digitization, organic light emitting diode (OLED)
displays, and digital products);
-- Implementation of intellectual property licensing and other
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;
-- Integration of newly acquired businesses;
-- Improvement in manufacturing productivity and techniques;
-- Improvement in receivables performance;
-- Reduction in capital expenditures;
-- Improvement in supply chain efficiency and management of
sourcing relationships;
-- Implementation of our strategies designed to address the
decline in our traditional businesses; and
-- Performance 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;
-- Competitive actions, including pricing;
-- Changes in our debt credit ratings and our ability to access
capital markets;
-- The nature and pace of technology evolution, including the
traditional-to-digital transformation;
-- Continuing customer consolidation and buying power;
-- Current and future proposed changes to accounting rules and 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.
Exhibit 99.2
Eastman Kodak Company Financial Discussion Document
Fourth Quarter 2005 Results
As previously announced, the Company will only report its earnings
from continuing operations on a GAAP basis, which will be accompanied
by a description of the non-operational items affecting its GAAP
quarterly results by line item in the statement of operations. 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 fourth quarter 2005 and 2004,
respectively.
4th
Quarter
-----------------------------------
2005 2004
(in millions, except per share
data) $ EPS $ EPS
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(Loss) earnings from continuing
operations - GAAP $(143) $(0.50) $(58) $(0.20)
COGS
- - Charges for accelerated
depreciation in connection with
the focused cost reduction
actions 146 97
- - Charges for inventory writedowns
in connection with focused cost
reduction actions 6 14
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Subtotal 152 0.53 111 $0.39
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SG&A
- - Adjustment for Legal Settlement
charge 7 6
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Subtotal 7 0.03 6 $0.02
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Restructuring
- - Write off of fixed assets
relating to Kodak's historical
ownership interest in the
NexPress joint venture in
connection with the acquisition
of NexPress 7
- - Charges for focused cost
reduction actions 159 273
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Subtotal 159 0.55 280 $0.97
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Other Income/(Charges)
- - Favorable legal settlements (101)
- - Impairment of property related
to focused cost reduction actions 4 -
-------------- ----- -------
Subtotal 4 0.01 (101) $(0.35)
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Taxes
- - Tax impacts of the above-
mentioned items (28) (63)
-------------- ----- -------
Subtotal (28) (0.10) (63) $(0.22)
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Impact of Contingent Convertible
Debt on EPS (0.01) $(0.03)
Worldwide Revenues
Net worldwide sales were $4.197 billion for the fourth quarter of
2005 as compared with $3.759 billion for the fourth quarter of 2004,
representing an increase of $438 million or 12%. The increase in net
sales was primarily due to:
-- Volume: volumes increased fourth quarter sales by 6.4
percentage points driven primarily by increases in the
consumer digital capture and home printing solutions SPG's,
and entertainment print films.
-- Price/Mix: price/mix declines reduced fourth quarter sales by
6.5 percentage points, primarily driven by the film capture,
consumer digital capture, and home printing solutions SPG's.
-- Exchange: unfavorable exchange reduced fourth quarter sales by
$63 million, or 1.7 percentage points.
-- Acquisitions: Kodak Polychrome Graphics (KPG), and Creo
contributed $529 million, or approximately 13.5 percentage
points to fourth quarter sales.
Net sales in the U.S. were $1.976 billion for the fourth quarter
of 2005 as compared with $1.694 billion for the prior year quarter,
representing an increase of $282 million, or 17%.
Net sales outside the U.S. were $2.221 billion for the current
quarter as compared with $2.065 billion for the fourth quarter of
2004, representing an increase of $156 million, or 8%. The increase in
net sales for the period reflected the unfavorable impact of foreign
currency fluctuations of $63 million, or approximately 3%.
Digital Strategic Product Groups' Revenue
Kodak's digital product sales were $2.674 billion for the current
quarter as compared with $1.850 billion for the fourth quarter of
2004, representing an increase of $824 million, or 45%, primarily
driven by the Creo and KPG acquisitions and the consumer digital
capture and home printing SPG's.
Traditional Strategic Product Groups' Revenue
Net sales of the company's traditional products were $1.514
billion for the current quarter as compared with $1.905 billion for
the fourth quarter of 2004, representing a decrease of $391 million,
or 21%, primarily driven by declines in the film capture SPG and the
wholesale and retail photofinishing portions of the consumer output
SPG.
New Technologies Strategic Product Groups' Revenue
Net sales of new technologies products were $9 million in the
current quarter versus $4 million for the fourth quarter of 2004.
Refer to the attached "non-GAAP" reconciliation for a
reconciliation of digital, traditional, and new technologies revenue
to total consolidated net sales.
Foreign 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 $1.106 billion for the fourth
quarter of 2005 as compared with $1.020 billion for the prior year
quarter, representing an increase of $86 million, or 8%. The increase
in net sales for the period reflected the unfavorable impact of
foreign currency fluctuations of 6%.
Net sales in the Asia Pacific region were $701 million for the
current quarter as compared with $681 million for the prior year
quarter, representing an increase of $20 million, or 3%. The increase
in net sales for the period reflected the unfavorable impact of
foreign currency fluctuations of 2%.
Net sales in the Canada and Latin America region were $414 million
in the current quarter as compared with $364 million for the fourth
quarter of 2004, representing an increase of $50 million, or 14%. The
increase in net sales for the period reflected the favorable impact of
foreign currency fluctuations of 1%.
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 $751 million for the fourth quarter of 2005 as
compared with $751 million for the prior year quarter, remaining
unchanged.
The emerging market portfolio accounted for approximately 18% of
Kodak's worldwide sales and 34% of Kodak's non-U.S. sales in the
quarter. Sales growth was recorded for Mexico 25%, Brazil 12% and
Russia 2%. Sales declines were recorded for China 16%, Taiwan 13%,
Korea 5% and India 4%.
Gross Profit
Gross profit was $957 million for the fourth quarter of 2005 as
compared with $975 million for the fourth quarter of 2004,
representing a decrease of $18 million, or 2%. The gross profit margin
was 22.8% in the current quarter as compared with 25.9% in the prior
year quarter. The gross profit margin decreased 3.1 percentage points
primarily attributable to:
-- Price/Mix: reduced gross profit by 6.3 percentage points
primarily attributable to the consumer digital capture, film
capture, home printing solutions, and the Health Group digital
capture SPG's, partially offset by the year over year increase
in royalty income relating to digital capture.
-- Manufacturing/Other Cost: favorable manufacturing cost
increased gross profit by 2.1 percentage points primarily due
to productivity improvements and cost reduction actions which
more than offset the negative impacts of restructuring and
asset useful life changes.
-- Exchange: negatively impacted gross profit margins by 0.5
percentage point.
-- Acquisitions: positively impacted gross profit by 1.3
percentage points.
Gross profit in the quarter includes the following items:
-- Additional year over year restructuring costs of $40 million.
-- Additional accelerated depreciation and asset useful life
changes of $158 million.
Selling, General and Administrative Expenses
SG&A expenses were $748 million for the fourth quarter of 2005 as
compared with $710 million for the prior year quarter, representing an
increase of $38 million, or 5%. The increase in SG&A is primarily
attributable to:
-- Acquisition related SG&A of $99 million
-- A charge for a legal settlement of $7 million
These increases were partially offset by:
-- Cost reduction initiatives
-- Favorable foreign exchange of $12 million
As a percentage of sales, SG&A was 18% for the current quarter, as
compared with 19% in the prior year quarter.
Research and Development Costs
R&D expenses were $212 million for the fourth quarter of 2005 as
compared with $221 million for the fourth quarter of 2004,
representing a decrease of $9 million, or 4%. The total for the fourth
quarter of 2005 includes R&D expense of $33 million associated with
the acquisitions of Creo and KPG. R&D as a percentage of sales
decreased from 6% for the fourth quarter of 2004 to 5% for the current
quarter.
Restructuring Costs and Other
Cost Reduction Plans:
On July 20, 2005 Kodak announced that, as part of its effort to
accelerate its digital transformation, the Company would extend the
restructuring program originally announced in January 2004 to be
largely completed by the middle of 2007. The extension of the January
2004 program includes two major additional initiatives:
-- Reducing general and administrative costs, in part, by
consolidating functions and standardizing business processes.
This will result in an incremental employment reduction
totaling approximately 2,300 positions.
-- Accelerating the current restructuring of the traditional
manufacturing asset base. At the conclusion of this
restructuring, and including the impact of the change in
useful lives of manufacturing assets, the company expects that
its traditional asset base will be decreased to approximately
$1 billion, a reduction of 65 percent from the January 2004
level. The incremental employment reduction specific to
manufacturing will be approximately 7,000 positions.
Total cost reduction actions will bring the total worldwide
employment reduction under this extended program to a range of 22,500
to 25,000 by mid-year 2007. The charges associated with the additional
moves will increase the total to a range of $2.7 billion to $3
billion, up from $1.3 billion to $1.7 billion announced in January
2004. The annual savings from the new actions will increase the total
to a range of $1.6 billion to $1.8 billion, up from $800 million to $1
billion announced in January 2004.
In the fourth quarter, Kodak implemented cost reduction actions
resulting in pre-tax charges totaling $311 million. The components of
restructuring in the fourth quarter included (1) $137 million in
charges for employee severance relating to the elimination of
approximately 2,100 positions, (2) $38 million in charges associated
with exit costs and asset impairments, (3) $10 million gain for a
pension plan curtailment, and (4) $6 million in reversals of prior
reserves.
These components total $159 million and are recorded in
"Restructuring Costs and Other" in the Company's consolidated
statement of operations. In addition, the company recorded accelerated
depreciation and inventory write-offs of $152 million during the
quarter, which are recorded in "Cost of Goods Sold" (COGS) in the
Company's consolidated statement of operations.
Under the current cost reduction program on a program-to-date
basis Kodak has implemented cost reduction actions resulting in
pre-tax charges totaling approximately $2.0 billion, which includes
the elimination of approximately 17,600 positions worldwide.
Earnings (Loss) From Continuing Operations Before Interest, Other
Income (Charges), Net and Income Taxes (EFO):
EFO for the fourth quarter of 2005 was a loss of $162 million as
compared with a loss of $236 million for the fourth quarter of 2004,
representing an increase of $74 million. The increase in earnings from
operations is attributable to the reasons indicated above.
Digital Earnings:
Fourth quarter digital earnings on a GAAP basis were $161 million
driven primarily by acquisition related GCG earnings. Digital earnings
were also favorably impacted by a year over year increase in royalty
income, which reflects the Company's continuing progress in the
monetization of its intellectual property.
Refer to the attached "non-GAAP" reconciliations for a
reconciliation of digital earnings.
Interest Expense
Interest expense for the fourth quarter of 2005 was $67 million as
compared with $38 million for the prior year quarter, representing an
increase of $29 million. Higher interest expense is a result of
increased levels of debt associated with acquisitions.
Other Income, Net
The "Other Income, Net" component includes investment income,
income and losses from equity investments, gains and losses on the
sales of assets and investments, and foreign exchange gains and
losses.
Other Income for the current quarter was $55 million as compared
with Other Income of $131 million for the fourth quarter of 2004. The
largest contributor to the decrease in Other Income for the current
quarter is the inclusion of the Sun Microsystems legal settlement of
$92 million (pre-tax) in the prior year quarter.
Income Tax Provision (Benefit)
The Company's annual effective tax rate from continuing operations
decreased from a benefit rate of 59% for the prior year fourth quarter
to a benefit rate of 18% for the fourth quarter of 2005. This decrease
is primarily attributable to the inability to benefit losses in the
U.S. and changes related to valuation allowances against net U.S.
deferred tax assets.
During the fourth quarter of 2005, the Company recorded a tax
benefit from continuing operations of $31 million on a pre-tax loss of
$174 million. The tax benefit of $31 million for the quarter differs
from the tax benefit of $61 million that results from applying the
Company's statutory tax rate to the pre-tax loss of $174 million due
to (1) the $20 million true-up of the tax provision recorded related
to the prior quarter estimated write-down of the net deferred tax
assets in the U.S. resulting from the Company's plan to accelerate
restructuring of its traditional business combined with current and
anticipated losses in the U.S. with respect to such operations, (2)
the $39 million tax benefit resulting from the Company's audit
settlement with the Internal Revenue Service for tax years covering
1993 through 1998 and (3) a combination of net discrete period charges
that were not benefited for tax in the U.S. and charges taxed in
jurisdictions that, when aggregated, have tax rates lower than the
Company's statutory tax rate from continuing operations. The net
discrete period tax charges are primarily attributable to the creation
of the valuation allowance against U.S. deferred tax assets resulting
from discrete charges during 2005 including restructuring and other
actions related to the decline of the traditional business.
During the fourth quarter of 2004, the Company recorded a tax
benefit from continuing operations of $85 million on a pre-tax loss of
$143 million. The tax benefit of $85 million for the quarter differs
from the tax benefit of $50 million that results from applying the
Company's statutory tax rate to the pre-tax loss of $143 million due
to changes related to valuation allowances and discrete period charges
which are taxed in jurisdictions that, when aggregated, have tax rates
lower than the Company's statutory tax rate from continuing
operations.
Loss from Continuing Operations
The loss from continuing operations for the fourth quarter of 2005
was $143 million, or $.50 per diluted share, as compared with the loss
from continuing operations for the fourth quarter of 2004 of $58
million, or $.20 per diluted share, representing an increase in the
year over year loss of $85 million.
Earnings from Discontinued Operations
Earnings from discontinued operations for the fourth quarter of
2005 were $148 million, which includes (1) $203 million relating to
the settlement between the Company and the Internal Revenue Service on
the audit of the tax years 1993 through 1998, partially offset by (2)
a pension settlement charge of $55 million resulting from the fourth
quarter 2005 finalization of the transfer of pension assets to ITT in
connection with the sale of the Company's Remote Sensing Systems in
the third quarter of 2004. The $203 million relating to the tax audit
settlement resulted from the reversal of certain tax accruals, which
were established in 1994 in connection with the Company's sale of its
pharmaceutical, consumer health and household products businesses
during that year.
Cumulative Effect of an Accounting Change
The cumulative effect of an accounting change, net charge of $57
million is the result of the Company's adoption of Financial
Accounting Standards Board Interpretation No. (FIN) 47, "Accounting
for Conditional Asset Retirement Obligations" as of December 31, 2005.
Under FIN 47, the Company is required to record an obligation and an
asset for the present value of the estimated cost of fulfilling its
legal obligation with respect to the retirement of an asset when the
timing or method of settling that obligation is conditional upon a
future event (for example, the sale of, exiting from or disposal of an
asset - the "settlement date"). The primary application of FIN 47 to
the Company is with respect to asbestos remediation. The $57 million
charge represents the present value of the Company's asset retirement
obligations (net of the related unamortized asset) relating to
facilities with estimated settlement dates.
Segment Results:
DIGITAL & FILM IMAGING SYSTEMS
This segment provides consumers, professionals and
cinematographers with digital and traditional products and services.
Worldwide Revenues
Net worldwide sales for the Digital and Film Imaging Systems
segment were $2.513 billion for the fourth quarter of 2005 as compared
with $2.591 billion for the fourth quarter of 2004, representing a
decrease of $78 million, or 3%. The decrease in net sales was composed
of:
-- Volume: volumes increased fourth quarter sales by 8.1
percentage points driven primarily by increases in the
consumer digital capture and home printing solutions SPG's.
-- Price/Mix: price/mix declines reduced fourth quarter sales by
9.6 percentage points, primarily driven by the consumer
digital capture, home printing solutions and film capture
SPG's.
-- Exchange: unfavorable exchange reduced fourth quarter sales by
1.5 percentage points.
Net sales in the U.S. were $1.341 billion for the current quarter
as compared with $1.205 billion for the fourth quarter of 2004,
representing an increase of $136 million, or 11%.
Net sales outside the U.S. were $1.172 billion for the fourth
quarter of 2005 as compared with $1.386 billion for the prior year
quarter, representing a decrease of $214 million, or 15%.
DFIS segment digital product sales were $1.377 billion for the
current quarter as compared with $1.006 billion for the fourth quarter
of 2004, representing an increase of $371 million, or 37%, primarily
driven by the consumer digital capture SPG, the kiosks/media portion
of the consumer output SPG, and the home printing SPG.
Segment traditional product sales were $1.136 billion for the
current quarter as compared with $1.585 billion for the fourth quarter
of 2004, representing a decrease of $449 million or 28%, primarily
driven by declines in the consumer output and film capture SPG's.
Digital Strategic Product Groups' Revenue
Net worldwide sales of consumer digital capture products, which
include consumer digital cameras, accessories, memory products and
royalties, increased 41% in the fourth quarter of 2005 as compared
with the prior year quarter, primarily reflecting strong volume
increases, partially offset by negative price/mix and unfavorable
exchange. Kodak gained U.S. and worldwide unit market share on a year
to date basis through November. Kodak strengthened its number one
market share position in the U.S. and remains in the number three
market position on a worldwide basis through November.
Net worldwide sales of Picture Maker kiosks/media increased 23% in
the fourth quarter of 2005 as compared with the fourth quarter of
2004, as a result of strong volume increases partially offset by
unfavorable exchange. Sales continue to be driven by strong consumable
sales at retail locations, with media volumes increasing 87% versus
last year.
Net worldwide sales from the home printing solutions SPG, which
includes inkjet photo paper and printer docks/media, increased 65% in
the current quarter as compared with the fourth quarter of 2004 driven
by a 95% increase in sales of printer docks and associated thermal
media. Through November, Kodak's Printer Dock product continues to
maintain a leading market share position on a weighted average basis
in six key countries where market share is measured. During the
quarter, inkjet paper sales declined year over year.
Traditional Strategic Product Groups' Revenue
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 36% in the fourth quarter of 2005 as
compared with the fourth quarter of 2004, primarily reflecting volume
declines, negative price/mix and unfavorable exchange.
U.S. consumer film industry sell-through volumes decreased
approximately 28% in the fourth quarter and 25% for full year 2005 as
compared with the prior year. These results are in-line with
previously communicated expectations.
Net worldwide sales for the retail photofinishing SPG, which
includes color negative paper, minilab equipment and services,
chemistry, and photofinishing services at retail, decreased 35% in the
fourth quarter of 2005 as compared with the fourth quarter of 2004,
primarily reflecting volume declines, negative price/mix and
unfavorable exchange.
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 49% in the fourth
quarter of 2005 as compared with the fourth quarter of 2004,
reflecting continuing volume declines, negative price/mix and
unfavorable exchange.
Net worldwide sales for the entertainment film SPG's, including
origination and print films for the entertainment industry, decreased
2%, primarily reflecting volume increases offset by negative price/mix
and unfavorable exchange. For full year 2005 entertainment film sales
increased 1%.
Gross Profit
Gross profit for the Digital and Film Imaging Systems segment was
$578 million for the fourth quarter of 2005 as compared with $679
million for the prior year quarter, representing a decrease of $101
million or 15%. The gross profit margin was 23.0% in the current year
quarter as compared with 26.2% in the prior year quarter. The 3.2
percentage point decrease was primarily attributable to:
-- Price/Mix: reduced gross profit by 8.1 percentage points
primarily attributable to the home printing solutions, film
capture and consumer digital capture SPG's, partially offset
by the year over year increase in royalty income relating to
digital capture.
-- Manufacturing/Other Cost: favorable manufacturing/other cost
increased gross profit margins by 4.9 percentage points
primarily driven by productivity improvements and cost
reduction actions, which more than offset the negative impacts
of asset useful life changes.
Selling, General and Administrative Expenses
In the fourth quarter, SG&A expenses for the Digital and Film
Imaging Systems segment decreased $22 million or 5%, from $460 million
in the fourth quarter of 2004 to $438 million in the current quarter,
and decreased as a percentage of sales from 18% to 17% in the current
quarter.
Research and Development Costs
Fourth quarter R&D costs for the Digital and Film Imaging Systems
segment decreased $19 million, or 23%, from $83 million in the fourth
quarter of 2004 to $64 million in the current quarter and remained
flat as a percentage of sales at 3%. The decrease in R&D year over
year was primarily attributable to spending reductions related to
traditional products and services.
Earnings from Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
Earnings from operations for the Digital and Film Imaging Systems
segment decreased $59 million, or 44%, from $135 million in the fourth
quarter of 2004 to $76 million in the fourth quarter of 2005,
primarily as a result of the factors described above. The operating
earnings margin rate decreased from 5% for the prior year quarter to
3% in the current quarter.
HEALTH GROUP
The Health Group segment supplies the healthcare industry with
traditional and digital image capture and output products and
services.
Worldwide Revenues
Net worldwide sales for the Health Group were $700 million for the
fourth quarter of 2005 as compared with $741 million for the prior
year quarter, representing a decrease of $41 million, or 6%. The
decrease in net sales was composed of:
-- Volume: Volumes decreased fourth quarter sales by .5
percentage point, primarily driven by the digital output and
film capture & output SPG's.
-- Price/Mix: Decreases in price/mix reduced fourth quarter sales
by 2.5 percentage points, primarily driven by the digital
capture, digital output, and film capture and output SPG's.
-- Exchange: Unfavorable exchange impacted sales by 2.7
percentage points.
Net sales in the U.S. were $274 million for the current quarter as
compared with $303 million for the fourth quarter of 2004,
representing a decrease of $29 million, or 10%.
Net sales outside the U.S. were $426 million for the fourth
quarter of 2005 as compared with $438 million for the prior year
quarter, representing a decrease of $12 million, or 3%.
Digital Strategic Product Groups' 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 and RIS - Radiology Information Systems), were
$477 million for the current quarter as compared with $490 million for
the fourth quarter of 2004, representing a decrease of $13 million, or
3% primarily driven by volume and price declines in the digital output
SPG.
Traditional Strategic Product Groups' Revenues
Net worldwide sales of traditional products, including analog
film, equipment and chemistry were $223 million for the current
quarter as compared with $251 million for the prior year quarter,
representing a decrease of $28 million, or 11%, primarily driven by
volume and price declines in the film capture and output SPG.
Gross Profit
Gross profit for the Health Group was $256 million for the fourth
quarter of 2005 as compared with $307 million in the prior year
quarter, representing a decrease of $51 million, or 17%. The gross
profit margin was 36.6% in the current quarter as compared with 41.4%
in the fourth quarter of 2004. The decrease in the gross profit margin
of 4.8 percentage points was principally attributable to:
-- Manufacturing/Other Cost: manufacturing/other cost decreased
gross profit margins by 2.0 percentage points, primarily
reflecting accelerated depreciation of manufacturing assets
and higher silver costs.
-- Price/Mix: price/mix negatively impacted gross profit margins
by 2.9 percentage points primarily driven by the digital
capture and film capture and output SPG's.
-- Exchange: unfavorable exchange impacted gross profit margin by
0.3 percentage point.
Selling, General and Administrative Expenses
In the fourth quarter, SG&A expenses for the Health Group
decreased $4 million, or 3%, from $135 million in the fourth quarter
of 2004 to $131 million for the current quarter, but increased as a
percent of sales from 18% to 19%.
Research and Development Costs
Fourth quarter R&D costs decreased $17 million from $59 million in
the fourth quarter of 2004 to $42 million in the current quarter, a
decrease of 29%, and decreased as a percentage of sales from 8% to 6%.
Earnings From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
Earnings from operations for the Health Group decreased $30
million, or 27%, from $113 million for the prior year quarter to $83
million for the fourth quarter of 2005, while EFO as a percentage of
sales decreased 3 percentage points to 12% from 15% for the prior year
quarter. This decline primarily reflects the impact of lower gross
profit margins.
GRAPHIC COMMUNICATIONS
The Graphic Communications segment serves a variety of customers
in the creative, in-plant, data center, commercial printing,
packaging, newspaper and digital service bureau market segments with a
range of software, media and hardware products that provide customers
with a variety of solutions for prepress equipment, workflow software,
traditional and digital printing, and document scanning and
multi-vendor IT services.
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 agreed to consummate certain transactions that resulted 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 had 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 Company completed its acquisition
of Creo on June 15, 2005.
Worldwide Revenues
Net worldwide sales for the Graphic Communications segment were
$942 million for the fourth quarter of 2005 as compared with $391
million for the prior year quarter, representing an increase of $551
million, or 141%. The increase in net sales was primarily due to the
completion of the KPG and Creo acquisitions.
Net sales in the U.S. were $341 million for the current year
quarter as compared with $172 million for the prior year quarter,
representing an increase of $169 million, or 98%.
Net sales outside the U.S. were $601 million in the fourth quarter
of 2005 as compared with $219 million for the prior year quarter,
representing an increase of $382 million or 174%.
Digital Strategic Product Groups' Revenues
The Graphic Communications segment digital product sales for the
current quarter were $792 million versus $324 million for the prior
year quarter, an increase of 144%, primarily related to the
acquisitions of KPG and Creo.
Segment digital sales are comprised of KPG digital revenues,
NexPress Solutions, a producer of digital color and black and white
printing solutions; Creo, a supplier of prepress systems; Kodak
Versamark, a provider of continuous inkjet technology, document
scanners, Encad; a maker of wide format inkjet printers, and service
and support.
Net worldwide sales for NexPress products increased 22% for the
second half of 2005 compared with the second half of 2004, primarily
driven by unit volume increases partially offset by negative price/mix
and unfavorable exchange. NexPress color is finishing 2005 with strong
order backlog. For full year 2005, color monthly page volumes
continued to increase, which resulted in higher NexPress consumables
revenue for the year.
Kodak Versamark sales increased 38% in the current quarter as
compared with the fourth quarter of 2004, driven primarily by their
success in continuing to penetrate the transactional printing market.
Traditional Strategic Product Groups' Revenues:
Segment traditional product sales for the current quarter are $150
million versus $67 million for the fourth quarter of 2004, an increase
of 124%, primarily due to the KPG acquisition. These traditional sales
are comprised of the sales of Kodak traditional graphics products,
KPG's analog plates and films, and microfilm products.
Gross Profit:
Gross profit for the Graphic Communications segment was $273
million for the fourth quarter of 2005 as compared with $96 million in
the prior year quarter, representing an increase of $177 million, or
184%. The gross profit margin was 29.0% in the current quarter as
compared with 24.6% in the prior year quarter. The increase in the
gross profit margin of 4.4 percentage points was primarily
attributable to:
-- Acquisitions: Creo and KPG increased gross profit margins by
approximately 2.5 percentage points.
-- Price/Mix: price/mix favorably impacted gross profit by 1.6
percentage points.
-- Manufacturing/Other Cost: Manufacturing/other costs positively
impacted gross profit margins by approximately .4 percentage
point.
-- Exchange: unfavorable exchange subtracted .4 percentage points
from gross profit margin.
Selling, General and Administrative Expenses
SG&A expenses for the Graphic Communications segment increased $89
million, or 117%, from $76 million in the fourth quarter of 2004 to
$165 million for the current quarter, and decreased as a percentage of
sales from 19% to 18%. The decrease in SG&A percentage is primarily
attributable to the acquisitions of KPG and Creo, which have lower
SG&A as a percent of sales.
Research and Development Costs
R&D costs increased $32 million, from $36 million in the fourth
quarter of 2004 to $68 million in the current quarter and decreased as
a percentage of sales from 9% for the fourth quarter of 2004 to 7% for
the current quarter. The absolute dollar increase in R&D spending is
primarily driven by increased R&D costs associated with acquired
businesses.
Earnings (Loss) from Continuing Operations Before Interest, Other
Income (Charges), Net and Income Taxes
Earnings from operations for the Graphic Communications segment
were $40 million in the current quarter versus losses of $15 million
for the prior year quarter primarily as a result of the factors
outlined above.
ALL OTHER
All Other 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.
Worldwide Revenues
Net worldwide sales for All Other were $42 million for the fourth
quarter of 2005, as compared with $36 million for the prior year
quarter, representing an increase of $6 million, or 17%
Net sales in the U.S. were $20 million for the current year
quarter as compared with $14 million for the prior year quarter,
representing an increase of $6 million, or 43%.
Net sales outside the U.S. were $22 million in the fourth quarter
of 2005 as compared with $22 million for the prior year quarter,
remaining unchanged.
Earnings (Loss) from Continuing Operations Before Interest, Other
Income (Charges), Net and Income Taxes
The loss from operations for All Other was $43 million in the
current quarter, an increase in earnings of $29 million or 40% as
compared with the loss from operations of $72 million in the fourth
quarter of 2004, primarily driven by portfolio rationalization and an
increase in earnings from the sensor business.
Balance Sheet:
Cash Flow:
Net cash provided by (used in) continuing operations relating to
operating activities, investing activities and financing activities,
as determined under U.S. GAAP in the fourth quarter of 2005 was $1.24
billion, ($101) million and ($106) million, respectively.
Kodak's definition of free cash flow equals net cash provided by
continuing operations relating to operating activities less additions
to properties. Kodak's definition of operating cash flow equals free
cash flow plus proceeds from sales of assets plus distributions from
unconsolidated affiliates minus investments in unconsolidated
affiliates minus acquisitions minus debt assumed through acquisitions
minus dividends. Investable cash flow is operating cash flow excluding
acquisitions and debt assumed in acquisitions.
During the fourth quarter, operating cash flow was $1.070 billion,
a $623 million increase versus $447 million in the year ago quarter
primarily driven by inventory reductions, and the favorable impacts of
the company's continuing progress in the monetization of its
intellectual property.
Investable cash flow for the current quarter was $1.067 billion,
$609 million higher than the $458 million in the fourth quarter of
2004. Investable cash flow for the year was targeted at the lower end
of the $400 million to $600 million range, as outlined on September
28th at the Company's New York investor meeting, and the Company
exceeded this target with full year investable cash flow of $728
million for 2005.
The table below reconciles the net cash provided by continuing
operations relating to operating activities as determined under U.S.
GAAP, to Kodak's definition of (1) free cash flow, (2) operating cash
flow and (3) investable cash flow for the fourth quarter of 2005 and
2004 and full year 2005 and 2004.
4th Quarter
- ----------------------------------------------------------------------
($ millions) 2005 2004
--------- ---------
Net cash (used in) provided by continuing
operations relating to operating activities: $1,240 $702
Additions to properties (140) (177)
--------- ---------
Free Cash Flow (continuing operations) 1100 525
Net proceeds from sales of businesses/assets 68 4
Distributions from/(investments in) unconsolidated
affiliates (29) 0
Acquisitions, net of cash acquired 3 (11)
Debt assumed through acquisitions 0 0
Dividends (72) (71)
--------- ---------
Operating Cash Flow (continuing operations) 1070 447
Acquisitions, net of cash acquired (3) 11
Debt assumed through acquisitions 0 0
--------- ---------
Investable Cash Flow (continuing operations) $1,067 $458
- -------------------------------------------------- --------- ---------
Full Year
- ----------------------------------------------------------------------
($ millions) 2005 2004
--------- ---------
Net cash provided by continuing operations
relating to operating activities: $1,180 $1,146
Additions to properties ($472) ($460)
--------- ---------
Free Cash Flow (continuing operations) 708 686
Net proceeds from sales of businesses/assets 130 24
Distributions from/(investments in) unconsolidated
affiliates 34 (31)
Acquisitions, net of cash acquired (984) (369)
Debt assumed through acquisitions (541) 0
Dividends (144) (143)
--------- ---------
Operating Cash Flow (continuing operations) (797) 167
Acquisitions, net of cash acquired 984 369
Debt assumed through acquisitions 541 0
--------- ---------
Investable Cash Flow (continuing operations) $728 $536
- -------------------------------------------------- --------- ---------
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. The
Company paid a semi-annual dividend payment on December 14, 2005.
Capital Spending:
Capital additions were $140 million in the fourth quarter of 2005,
which was $37 million lower than the year ago quarter and $18 million
higher 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 $2.760 billion, which were composed of
trade ($2.447 billion) and miscellaneous ($313 million) receivables at
the end of the fourth quarter of 2005, increased $216 million from the
fourth quarter of 2004 and decreased $107 million quarter
sequentially. The quarter sequential decrease is primarily driven by a
shift in sales timing away from the end of the quarter, as well as
management collection efforts. The year over year increase is
primarily 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 $374 million to
$2.073 billion at the end of the fourth quarter of 2005, and would
reduce the net trade receivable balance by $500 million to $1.637
billion at the end of the fourth 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 fourth quarter was 52 days,
higher than the prior year quarter by 7 days and higher quarter
sequentially by 2 days. 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 4 days to 61 days and flat quarter
sequentially.
Inventory:
Kodak's inventories of $1.140 billion (after LIFO) decreased $18
million year over year and decreased $517 million quarter
sequentially. The quarter sequential decrease is primarily due to
planned inventory reductions in-line with corporate initiatives,
combined with the continued decline in demand for traditional film
products.
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 $1.431 billion, $57 million
lower than a year ago and $520 million lower than the third quarter of
2005. DSI from continuing operations of 62 days was lower by 1 day
from the fourth quarter 2004 and lower by 3 days quarter sequentially.
Kodak defines inventory turns as 12 months COGS divided by
four-quarter average inventory before the LIFO reserve. Inventory
turns from continuing operations were 5.9, which is 0.1 higher than a
year ago and 0.3 higher 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 fourth quarter of 2004 and decreased by
2 days quarter sequentially. Inventory turns from continuing
operations of 7.5 were 0.1 lower than a year ago and increased 0.3
quarter sequentially.
Debt:
Debt increased $1.207 billion from the year-end level to $3.528
billion, reflecting acquisitions, and the company held $1.665 billion
in cash on its balance sheet at the end of the quarter, up from $1.255
billion at the end of 2004. Quarter sequentially, debt decreased by
$35 million to $3.528 billion and cash increased by $1.055 billion to
$1.665 billion.
Equity was $1.964 billion and the debt to total capital ratio was
64.2%, reflecting an increase of 3.8 percentage points quarter
sequentially and an increase of 26.4 percentage points year over year.
The increase is driven primarily by the debt associated with the
acquisitions of KPG and Creo, and also by the decrease in equity
resulting from year-to-date losses of $1.371 billion, inclusive of
$1.1 billion in year to date tax charges to establish a valuation
allowance against the net deferred tax assets in the U.S.
Debt Covenant
During the quarter, the Company successfully completed $2.7
billion of senior secured credit facilities. As part of this credit
facility, financial covenants were established for debt to EBITDA and
EBITDA to interest expense. As of year end 2005, the debt to EBITDA
was 2.8 versus a covenant restriction of <4.75. EBITDA to interest at
year end 2005 was 6.4 versus a requirement of >3.0.
Foreign Exchange:
The impact of foreign exchange on operating activities during the
fourth quarter of 2005 was ($0.07) per share, down $0.19 per share
year over year, and foreign exchange activities recorded in "Other
Income/(Charges)" had a positive $0.02 per share impact, up $0.04 per
share from fourth quarter 2004. Therefore, the sum of the operational
and reportable exchange impacts decreased earnings in the fourth
quarter of 2005 by ($0.05) per share, down $0.15 from prior year
quarter.
Accounting for Employee Stock Option Awards:
On January 1, 2005, the Company adopted FASB Statement No. 123(R),
Share Based Payment, and began recognizing expense related to its
employee stock option awards. The FASB recently issued a proposed
staff position (FSP) which, if adopted as proposed, would require
companies to classify employee stock options with contingent cash
settlement features as equity awards provided the contingent event,
such as a change in control event, is not considered probable of
occurring. This classification would be consistent with the Company's
present classification of its outstanding stock option awards with
contingent cash settlement features. All financial information
reported in this press release is presented on a U.S. GAAP basis
assuming the proposed FSP is adopted as currently drafted. However, if
the FASB does not finalize, or changes the final provisions of the
proposed FSP, the Company would be required to reclassify certain of
its stock option awards to a liability as of January 1, 2005 and as of
the end of each quarter in 2005. A change in the Company's present
classification as equity of certain of the Company's stock option
awards would also require the Company to record a liability and report
the impact of recording the liability as the cumulative effect of a
change in accounting principle as of January 1, 2005 in the Company's
Statement of Operations for the first quarter of 2005. In addition to
the reclassification of existing liabilities and the recording of an
additional liability, the Company would record the change in fair
value of those awards in the Statement of Operations each quarter, and
accordingly, the net loss as originally reported in each quarter of
2005 may change.
The Company has not yet computed what (1) the cumulative effect of
the change in accounting principle as of January 1, 2005 would be or
(2) what the impact would be on the net loss for each of the quarters
in 2005 if the FASB does not issue the FSP as drafted. The Company
believes that the impact of recording the additional liability would
be material.
Safe Harbor Statement:
Digital and traditional revenues, digital revenue growth, digital
earnings, and investable cash flow 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 these measures 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, revenue,
revenue growth, and cash 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 digital growth and profitability
strategies, business model, and cash plan;
-- Implementation of a changed segment structure;
-- Implementation of our cost reduction program, including asset
rationalization and monetization, reduction in sales, general
and administrative costs and personnel reductions;
-- Implementation of, and performance under, our debt management
program;
-- Implementation of product strategies (including category
expansion, digitization, organic light emitting diode (OLED)
displays, and digital products);
-- Implementation of intellectual property licensing and other
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;
-- Integration of newly acquired businesses;
-- Improvement in manufacturing productivity and techniques;
-- Improvement in receivables performance;
-- Reduction in capital expenditures;
-- Improvement in supply chain efficiency and management of
sourcing relationships;
-- Implementation of our strategies designed to address the
decline in our traditional businesses; and
-- Performance 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;
-- Competitive actions, including pricing;
-- Changes in our debt credit ratings and our ability to access
capital markets;
-- The nature and pace of technology evolution, including the
traditional-to-digital transformation;
-- Continuing customer consolidation and buying power;
-- Current and future proposed changes to accounting rules and 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.
THIS PAGE INTENTIONALLY LEFT BLANK
Eastman Kodak Company
CONSOLIDATED STATEMENT OF EARNINGS - UNAUDITED
(in millions, except per share data)
Three Months Ended Twelve Months Ended
December 31 December 31
------------------ -------------------
2005 2004 2005 2004
Net sales $4,197 $3,759 $14,268 $13,517
Cost of goods sold 3,240 2,784 10,631 9,582
------ ------ ------- -------
Gross profit 957 975 3,637 3,935
Selling, general and
administrative expenses 748 710 2,649 2,491
Research and development costs 212 221 892 836
Restructuring costs and other 159 280 690 695
------ ------ ------- -------
Loss from continuing
operations before interest,
other income (charges), net and
income taxes (162) (236) (594) (87)
Interest expense 67 38 211 168
Other income (charges), net 55 131 44 161
------ ------ ------- -------
Loss from continuing
operations before income taxes (174) (143) (761) (94)
(Benefit) provision for income taxes (31) (85) 703 (175)
------ ------ ------- -------
(Loss) earnings from continuing
operations (143) (58) (1,464) 81
Earnings (loss) from discontinued
operations, net of income taxes 148 (1) 150 475
Cumulative effect of accounting
change (57) - (57) -
------ ------ ------- -------
NET (LOSS) EARNINGS $ (52) $ (59) $(1,371) $ 556
====== ====== ======= =======
Basic and diluted net (loss)
earnings per share:
Continuing operations $ (.50) $ (.20) $(5.08) $ .28
Discontinued operations .52 - .52 1.66
Cumulative effect of accounting
change (.20) - (.20) -
------ ------ ------- -------
Total $ (.18) $ (.20) $(4.76) $1.94
====== ====== ======= =======
Number of common shares used in
net (loss) earnings per share:
Basic 287.2 286.7 287.9 286.6
Diluted 287.2 286.7 287.9 286.8
Net Sales from Continuing Operations by Reportable Segment and All
Other - Unaudited
(in millions)
Three Months Ended Twelve Months Ended
December 31 December 31
---------------------- --------------------------
2005 2004 Change 2005 2004 Change
D&FIS
Inside the U.S. $1,341 $1,205 + 11% $ 3,777 $ 3,900 - 3%
Outside the U.S. 1,172 1,386 - 15 4,683 5,466 - 14
------ ------ ----- ------- ------- -----
Total D&FIS 2,513 2,591 - 3 8,460 9,366 - 10
------ ------ ----- ------- ------- -----
Health
Inside the U.S. 274 303 - 10 1,052 1,114 - 6
Outside the U.S. 426 438 - 3 1,603 1,572 + 2
------ ------ ----- ------- ------- -----
Total Health 700 741 - 6 2,655 2,686 - 1
------ ------ ----- ------- ------- -----
Graphic
Communications
Inside the U.S. 341 172 + 98 1,079 587 + 84
Outside the U.S. 601 219 +174 1,911 756 +153
------ ------ ----- ------- ------- -----
Total Graphic
Communications 942 391 +141 2,990 1,343 +123
------ ------ ----- ------- ------- -----
All Other
Inside the U.S. 20 14 + 43 71 57 + 25
Outside the U.S. 22 22 0 92 65 + 42
------ ------ ----- ------- ------- -----
Total All Other 42 36 + 17 163 122 + 34
------ ------ ----- ------- ------- -----
Consolidated
total $4,197 $3,759 + 12% $14,268 $13,517 + 6
====== ====== ===== ======= ======= =====
(Loss) Earnings from Continuing Operations Before Interest, Other
Income (Charges), Net and Income Taxes by Reportable Segment and All
Other - Unaudited
(in millions)
Three Months Ended Twelve Months Ended
December 31 December 31
--------------------- ----------------------
2005 2004 Change 2005 2004 Change
D&FIS $ 76 $ 135 - 44% $ 368 $598 - 38%
Percent of Sales 3% 5% 4% 6%
Health $ 83 $ 113 - 27% $ 355 $452 - 21%
Percent of Sales 12% 15% 13% 17%
Graphic Communications $ 40 $ (15) +367% $ 2 $(39) +105%
Percent of Sales 4% (4)% - % (3)%
All Other $ (43) $ (72) + 40% $(178) $(191) + 7%
Percent of Sales (102)% (200)% (109)% (157)%
----- ----- ----- ------ ----- -----
Total of segments $ 156 $ 161 - 3% $ 547 $ 820 - 33%
Percent of Sales 4% 4% 4% 6%
Restructuring costs
and other (311) (391) (1,134) (901)
Legal settlement (7) (6) (7) (6)
----- ----- ----- ------ ----- -----
Consolidated total $(162) $(236) + 31% $(594) $ (87) - 583%
===== ===== ===== ===== ===== =====
(Loss) Earnings from Continuing Operations by Reportable Segment and
All Other - Unaudited
(in millions)
Three Months Ended Twelve Months Ended
December 31 December 31
---------------------- -----------------------
2005 2004 Change 2005 2004 Change
D&FIS $ 37 $ 122 - 70% $ 218 $ 520 - 58%
Percent of Sales 1% 5% 3% 6%
Health $ 22 $ 84 - 74% $ 199 $ 366 - 46%
Percent of Sales 3% 11% 7% 14%
Graphic Communications $ 20 $ - $ (9) $ (8) - 13%
Percent of Sales 2% - (1)%
All Other $ (8) $ (64) + 88% $ (99) $(163) + 39%
Percent of Sales (19)% (178)% (61)% (134)%
----- ------ ----- ------- ----- ------
Total of segments $ 71 $ 142 - 50% $ 309 $ 715 - 57%
Percent of Sales 2% 4% 2% 5%
Lucky film impairment - - (19) -
Restructuring costs
and other (311) (391) (1,134) (901)
Japan Moriya warehouse
impairment (4) - (25) -
Property sales - - 41 -
Sun Microsystems
settlement - 92 - 92
GE settlement - 9 - 9
Legal settlement (7) (6) (7) (6)
Interest expense (67) (38) (211) (168)
Other corporate items 4 5 18 12
Tax on Infotonics
contribution - - (6) -
Income tax effects on
above items and taxes
not allocated to above 171 129 (430) 328
----- ------ ----- ------- ----- ------
Consolidated total $(143) $ (58) - 147% $(1,464) $ 81 -1,907%
===== ====== ===== ======= ===== ======
Eastman Kodak Company
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - UNAUDITED
(in millions, except share and per
share data) At December 31,
2005 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,665 $ 1,255
Receivables, net 2,760 2,544
Inventories, net 1,140 1,158
Deferred income taxes 100 556
Other current assets 116 105
Assets of discontinued operations 0 30
------- --------
Total current assets 5,781 5,648
------- --------
Property, plant and equipment, net 3,761 4,512
Goodwill 2,141 1,446
Other long-term assets 3,140 3,131
------- --------
TOTAL ASSETS $14,823 $14,737
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 4,171 $ 3,896
Short-term borrowings 819 469
Accrued income taxes 467 625
------- --------
Total current liabilities 5,457 4,990
Long-term debt, net of current portion 2,709 1,852
Pension and other postretirement liabilities 3,463 3,338
Other long-term liabilities 1,230 737
------- --------
Total liabilities 12,859 10,917
------- --------
Commitments and Contingencies (Note 11)
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value;
391,292,760 shares issued in 2005
and 2004; 287,223,323 and
286,696,938 shares outstanding
in 2005 and 2004 978 978
Additional paid in capital 873 859
Retained earnings 6,393 7,922
Accumulated other comprehensive loss (460) (90)
Unearned restricted stock (6) (5)
------- --------
7,778 9,664
Treasury stock, at cost
104,069,437 shares in 2005 and
104,595,822 shares in 2004 5,814 5,844
------- --------
Total shareholders' equity 1,964 3,820
------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,823 $14,737
======= =======
Eastman Kodak Company
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
For the Year Ended December 31,
(in millions) 2005 2004 2003
Cash flows from operating activities:
Net (loss) earnings $ (1,371) $ 556 $ 253
Adjustments to reconcile to net cash
provided by operating activities:
Earnings from discontinued operations, net
of income taxes (150) (475) (64)
Cumulative effect of change in accounting
principle 57 - -
Equity in (earnings) losses from
unconsolidated affiliates (12) (20) 52
Depreciation and amortization 1,418 1,030 864
Gain on sales of businesses/assets (78) (13) (11)
Purchased research and development 54 16 32
Restructuring costs, asset impairments
and other charges 195 130 156
Provision (benefit) for deferred income taxes 509 (37) (49)
Decrease (increase) in receivables 228 (43) 15
Decrease in inventories 274 83 118
(Decrease) increase in liabilities
excluding borrowings (162) (283) 103
Other items, net 218 202 98
------ ------ ------
Total adjustments 2,551 590 1,314
------ ------ ------
Net cash provided by continuing operations 1,180 1,146 1,567
------ ------ ------
Net cash provided by discontinued
operations 28 22 78
------ ------ ------
Net cash provided by operating activities 1,208 1,168 1,645
------ ------ ------
Cash flows from investing activities:
Additions to properties (472) (460) (497)
Net proceeds from sales of
businesses/assets 130 24 24
Acquisitions, net of cash acquired (984) (369) (697)
Distributions from (investments in)
unconsolidated affiliates 34 (31) (89)
Marketable securities - sales 182 124 86
Marketable securities - purchases (194) (116) (87)
------ ------ ------
Net cash used in continuing operations (1,304) (828) (1,260)
------ ------ ------
Net cash provided by (used in)
discontinued operations - 708 (7)
------ ------ ------
Net cash used in investing activities (1,304) (120) (1,267)
------ ------ ------
Cash flows from financing activities:
Net decrease in borrowings with
maturities of 90 days or less (126) (308) (574)
Proceeds from other borrowings 2,520 147 1,693
Repayment of other borrowings (1,729) (767) (531)
Dividends to shareholders (144) (143) (330)
Exercise of employee stock options 12 5 12
------ ------ ------
Net cash provided by (used in)
financing activities 533 (1,066) 270
------ ------ ------
Effect of exchange rate changes on cash (27) 23 33
------ ------ ------
Net increase in cash and cash equivalents 410 5 681
Cash and cash equivalents, beginning of year 1,255 1,250 569
------ ------ ------
Cash and cash equivalents, end of year $1,665 $1,255 $1,250
====== ====== ======
Eastman Kodak Company
Fourth Quarter 2005 Results
Non-GAAP Reconciliations
Within the Company's fourth quarter 2005 press release and
financial discussion document, the Company makes reference to certain
non-GAAP financial measures: "Digital revenue", "Traditional revenue",
"Digital earnings", "Digital revenue growth", "Investable cash flow",
and "EBITDA". 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 why the Company's management
believes that the presentation of the non-GAAP financial measure
provides useful information to investors regarding Kodak's financial
condition, results of operations and cash flows have been provided in
the Form 8-K filed in connection with this press release and financial
discussion document.
Digital Revenue and Traditional Revenue
The following table reconciles digital revenue amounts and growth
rate from prior year, as presented, to the most directly comparable
GAAP measure of total consolidated net sales (dollar amounts in
billions):
Q4 2005 Q4 2004 Percentage
Change
------- ------- ----------
Digital revenue, as presented $2.674 $1.850 +45%
Traditional revenue, as presented 1.514 1.905 -21%
New Technologies revenue 0.009 0.004 +125%
------ ------ -----
Total consolidated net sales $4.197 $3.759 +12%
====== ====== =====
Digital Earnings
The following table reconciles digital earnings, as presented, to
the most directly comparable GAAP measure of consolidated loss from
continuing operations before interest, other income (charges), net and
income taxes (loss from operations) (dollar amounts in millions):
Q4 2005 Q4 2004
------- -------
Digital earnings, as presented $ 161 $ 63
Traditional earnings 41 140
New Technologies earnings (46) (42)
------- -------
Total segment earnings from operations 156 161
Less: Charges not allocated to segments
Restructuring costs (311) (391)
Legal settlements (7) (6)
------- -------
Total consolidated loss from operations $ (162) $ (236)
======= =======
Digital Revenue Growth
The following table reconciles digital revenue growth projections
for 2006, as presented, to the most directly comparable GAAP measure
of total consolidated net sales growth:
Digital revenue growth, as presented 16% - 22%
Traditional revenue and New Technologies
revenue (net) decline (22%) - (16%)
-------------
Total consolidated net sales growth (decline) (2%) - 4%
=========
2006 Digital Earnings Outlook
The following table reconciles the 2006 digital earnings outlook,
as presented, to the most directly comparable GAAP measure of total
consolidated earnings (loss) from continuing operations before
interest, other income (charges), net and income taxes (loss from
operations) (dollar amounts in millions):
Digital earnings, as presented $350 - $450
Traditional earnings, New Technologies earnings
and Restructuring costs ($1,450) - ($1,350)
-------------------
Total consolidated loss from operations ($1,100) - ($900)
=================
Investable Cash Flow
The following table reconciles the 2006 investable cash flow
outlook, as presented, to the most directly comparable GAAP measure of
net cash provided by operating activities from continuing operations
(dollars in millions):
Investable cash flow, as presented $400 - $600
Addback:
Dividends, Additions to Properties,
and Asset Sales $400
-------------
Net cash provided by continuing operations
from operating activities $800 - $1,000
=============
Debt Covenants - EBITDA
The following table reconciles EBITDA, as included in the
computation of the debt to EBITDA ratio under the Company's covenants
relative to the $2.7 billion senior secured credit facilities, to the
most directly comparable GAAP measure of earnings (loss) from earnings
(loss) from continuing operations before interest, other income
(charges), net and income taxes (loss from operations) (dollar amounts
in millions):
2005
----
EBITDA, as included in Debt to EBITDA ratio $1,260
Depreciation and Amortization (1,418)
Restructuring Charges (Non-Cash) and Asset
Write-offs/Impairments (379)
Other Adjustments, Net (57)
Loss from operations $ (594)
=========
Debt Covenants - Interest Expense
The following table reconciles interest expense, as included in
the computation of the debt to EBITDA ratio under the Company's
covenants relative to the $2.7 billion senior secured credit
facilities, to the most directly comparable GAAP measure of interest
expense on a GAAP basis (dollar amounts in millions):
2005
----
Interest expense, as included in Interest Coverage ratio $ 198
Adjustments to Interest Expense for Purpose of the Covenant
Calculation 13
------
Interest expense (on a GAAP basis) $ 211
======