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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 31, 2007
Eastman Kodak Company
(Exact name of registrant as specified in charter)
New Jersey 1-87 16-0417150
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
343 State Street,
Rochester, New York 14650
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (585) 724-4000
-------------
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition
- ---------------------------------------------------------
On January 31, 2007, Eastman Kodak Company issued a press release describing its
financial results for its fourth fiscal quarter ended December 31, 2006. 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 2006 press release and financial discussion
document, the Company makes reference to certain non-GAAP financial measures
including "Digital revenue", "Traditional revenue", "New Technologies revenue",
"Digital earnings", "Digital EFO growth", "Digital earnings growth",
"Traditional earnings decline", "Free cash flow", "Operating cash flow", "Net
cash generation (formerly investable cash)", and "Earnings before interest,
taxes, depreciation and amortization (EBITDA)", which have directly comparable
GAAP financial measures. The Company believes that these measures represent
important internal measures of performance. Accordingly, where these non-GAAP
measures are provided, it is done so that investors have the same financial data
that management uses with the belief that it will assist the investment
community in properly assessing the underlying performance of the Company on a
year-over-year basis. Whenever such information is presented, the Company has
complied with the provisions of the rules under Regulation G and Item 2.02 of
Form 8-K. The specific reasons, in addition to the reasons described above, why
the Company's management believes that the presentation of the non-GAAP
financial measures provides useful information to investors regarding Kodak's
financial condition, results of operations and cash flows are as follows:
Digital revenue / Traditional revenue / New Technologies revenue / Digital
earnings / Digital EFO growth / Digital earnings growth / Traditional earnings
decline - Due to the Company's ongoing digital transformation, management views
the Company's performance based on the following three key metrics: digital
revenue growth, digital earnings growth and the generation of cash. These three
key metrics are emphasized in the Company's attached earnings release for the
fourth quarter of 2006. 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 / Net cash generation (formerly investable
cash) - The Company believes that the presentation of free cash flow, operating
cash flow and net cash generation is useful information to investors as it
facilitates the comparison of cash flows between reporting periods. In addition,
management utilizes these measures as tools to assess the Company's ability to
repay debt and repurchase its own common stock, after it has satisfied its
working capital needs (including restructuring-related payments), dividends,
capital expenditures, acquisitions and investments. The 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 net cash generation 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.
Item 9.01. Financial Statements and Exhibits
- ---------------------------------------------
(c) Exhibits
--------
Exhibit 99.1 Press release issued January 31, Furnished with
2007 regarding financial results this document
for the fourth quarter of 2006
Exhibit 99.2 Financial discussion document issued Furnished with
January 31, 2007 regarding financial this document
results for the fourth quarter of
2006
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EASTMAN KODAK COMPANY
By: /s/ Diane E. Wilfong
------------------------------
Name: Diane E. Wilfong
Title: Controller
Date: January 31, 2007
EXHIBIT INDEX
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Exhibit No. Description
- ---------- ------------
99.1 Press release issued January 31, 2007 regarding financial results for
the fourth quarter of 2006
99.2 Financial discussion document issued January 31, 2007 regarding
financial results for the fourth quarter of 2006
Exhibit 99.1
Kodak Delivers Positive 4th-Quarter Earnings on Sales of $3.821 Billion
4th-Qtr GAAP Profit From Continuing Operations of $17 Million
($0.06 Per Share), Including Restructuring Charges and Tax Valuation
Allowance
Full-Year Digital Earnings of $343 Million; Digital EFO Growth of
$271 Million Exceeds Traditional Earnings Decline for the Full Year
Company Meets Full-Year Cash Goals; Delivers $956 Million in Net
Cash From Operating Activities From Continuing Operations in 2006;
Cash Balance Totals $1.469 Billion at Year-End
ROCHESTER, N.Y.--(BUSINESS WIRE)--Jan. 31, 2007--Eastman Kodak
Company (NYSE:EK) today reported fourth-quarter net earnings from
continuing operations of $17 million, on lower year-over-year
revenues, reflecting cost reduction efforts that boosted earnings and
an emphasis on pursuing profitable sales. The company achieved $271
million in digital earnings for the fourth quarter, driven by wider
gross profit margins and the company's global cost-reduction
initiatives, resulting in strong earnings improvement in the company's
Consumer Digital and Graphic Communications businesses.
The company also delivered a $271 million increase in digital
earnings for the full year. Significantly, digital earnings growth for
the year exceeded the traditional earnings decline for the first time
in the company's history.
On the basis of generally accepted accounting principles (GAAP),
the company reported fourth-quarter earnings from continuing
operations of $17 million, or $0.06 per share. Items of net expense
that impacted comparability totaled $152 million, or $0.53 per share.
The most significant items included a restructuring charge of $69
million after tax, or $0.24 per share, and $89 million after tax, or
$0.31 per share, to record a valuation allowance against deferred tax
assets in various international entities.
For the fourth quarter of 2006:
-- Sales totaled $3.821 billion, a decrease of 9% from $4.197
billion in the fourth quarter of 2005. Digital revenue totaled
$2.449 billion, a 5% decrease from $2.587 billion in the
prior-year quarter, consistent with the company's focus on
improving digital profit margins. Traditional revenue totaled
$1.357 billion, a 15% decline from $1.592 billion in the
fourth quarter of 2005.
-- The GAAP earnings from continuing operations were $17 million,
or $0.06 per share, compared with a GAAP loss from continuing
operations of $137 million, or $0.48 per share, in the
year-ago period. The year-ago results included comparability
items of expense totaling $1.02 per share.
-- The company's fourth-quarter earnings from continuing
operations, before interest, other income (charges), net, and
income taxes were $222 million, compared with a loss of $171
million in the year-ago quarter.
-- Digital earnings for the fourth quarter were $271 million, an
increase of $130 million compared with the year-ago quarter,
and benefited from a number of items. The company generated
significant earnings growth in its Graphic Communications
business and achieved operational improvements in its Consumer
Digital Group, including a year-over-year increase in income
from licensing arrangements, which reflects the company's
continuing progress in generating returns from its
intellectual property.
"I am extremely pleased with our performance in 2006 and our
progress in implementing our digital business model," said Antonio M.
Perez, Chairman and Chief Executive Officer, Eastman Kodak Company.
"Our digital earnings greatly exceeded traditional earnings in the
fourth quarter. Profit margins expanded in the sizeable digital
businesses that we have assembled, debt declined by more than $800
million in 2006, and the year ended with a strong cash position. We
intend to conclude our restructuring this year, as part of the
creation of a digital company with sustainable revenue and profit
growth."
Other fourth-quarter 2006 details:
-- Net cash provided by operating activities from continuing
operations for the fourth quarter totaled $1.028 billion,
compared with $1.240 billion in the year-ago quarter. Net cash
generation (formerly investable cash) was $916 million,
bringing full-year net cash generation to $592 million, which
is at the upper end of the range provided by the company.
Full-year net cash provided by operating activities from
continuing operations totaled $956 million.
-- Kodak held $1.469 billion in cash as of December 31, 2006,
compared with $1.665 billion on December 31, 2005.
-- Debt decreased $561 million from the third-quarter level, to
$2.778 billion as of December 31, 2006. For the full-year
2006, debt decreased $805 million.
-- Selling, General and Administrative expenses decreased $172
million from the year-ago quarter, primarily reflecting the
company's cost reduction activities. SG&A as a percentage of
revenue was 15.6%, down from 18.3% in the year-ago quarter,
amplified by seasonally strong fourth-quarter revenue.
-- Gross profit margins were 26.4% in the current quarter, up
from 23.0% in the prior year quarter. This was driven by
operational improvements across the company's business units,
most notably KODAK PICTURE kiosks, the KODAK GALLERY, and the
favorable impact of the previously noted licensing
arrangements. The company also benefited from reduced
restructuring costs.
Fourth-quarter segment sales and results from continuing
operations, before interest, other income (charges), net, and income
taxes (earnings from operations), are as follows:
-- Consumer Digital Group earnings from operations were $150
million, compared with $40 million a year ago, on sales of
$1.154 billion, which were down 13% from the prior-year
quarter, consistent with the company's focus on improving
digital profit margins. On a full year-over-year basis,
earnings from operations improved by $132 million. Highlights
for the quarter included a 27% increase in sales of KODAK
PICTURE kiosks, of which 52% was a volume increase in related
thermal media sales, a significant earnings improvement in the
KODAK GALLERY, and an increase in income from licensing
arrangements. According to the NPD Group's consumer tracking
service, KODAK EASYSHARE digital cameras were number one in
unit market share in the U.S. for the fourth quarter and full
year of 2006.
-- Graphic Communications Group earnings from operations were $57
million, compared with $28 million in the year-ago quarter, on
sales of $974 million, which were up 3% from the prior-year
quarter. On a full year-over-year basis earnings from
operations improved by $182 million. The sales growth largely
reflects increased demand for NEXPRESS Color Presses and
digital plates, partially offset by a decline in NEXPRESS
Black & White Printers and the traditional product portfolio.
-- Film and Photofinishing Group earnings from operations were
$77 million, compared with $51 million a year ago, on sales of
$1.013 billion, which were down 16% from the prior-year
quarter. During the fourth quarter of 2006, the group achieved
an 8% operating margin, double the rate of the year-ago
quarter and in line with company expectations.
-- Health Group segment earnings from operations were $86
million, compared with $87 million a year ago, despite
substantial costs associated with the divestiture effort and
increased costs for silver. Sales for this segment were $660
million, down 6%. Highlights for the quarter included sales
increases in Healthcare Information System, digital dental
products, and digital capture, offset by declines in
traditional radiography and digital output. The company
announced on January 10th that it has reached an agreement to
sell the Health Group to Onex for as much as $2.55 billion.
The transaction is expected to close in the first half of
2007.
Other 2006 Highlights:
-- The company's net loss narrowed by $754 million, or $2.61 per
share, from a negative $1.354 billion, or $4.70 per share, in
2005 to a negative $600 million, or $2.09 per share in 2006.
The favorable year-over-year change reflects greatly improved
operational performance in the company's Consumer Digital,
Graphic Communications, and Film and Photofinishing
businesses. It also reflects a year-over-year decrease in
restructuring charges, reduced SG&A expenses and lower tax
valuation allowances versus the prior year.
-- On a full-year basis, the company posted $343 million in
digital earnings, a nearly five-fold improvement
year-over-year, and close to the company's aggressive target
for the year.
-- Net cash provided by operating activities from continuing
operations totaled $956 million for the year, compared with
$1.180 billion in 2005, at the upper end of the company's
forecasted range.
"I'm proud of my team and their accomplishments in 2006, and our
results reflect our progress in becoming a more profitable company,"
said Perez. "We delivered on every important goal that we set, with
the exception of digital revenue growth, where we made a specific
decision to focus on overall digital profit margins over revenue
growth.
"Kodak is now a company with a strong market position in a
significant number of digital categories. We enter 2007 with solid
momentum, a strong emphasis on sustaining profitable growth, and the
talent and resources necessary to generate value for our
shareholders."
Conference Call
Antonio Perez and Kodak Chief Financial Officer Frank Sklarsky
will host a conference call with investors at 11:00 a.m. Eastern Time
today. To access the call, please use the direct dial-in number:
913-981-5591, access code 1644226. There is no need to pre-register.
The call will be recorded and available for playback by 2:00 p.m.
Eastern Time today by dialing 719-457-0820, access code 1644226. The
playback number will be active until Wednesday, February 7th at 5:00
p.m. Eastern Time.
Investor Meeting
Eastman Kodak Company will hold its annual strategy meeting with
the institutional investment community on Thursday, February 8th in
New York City.
The meeting will be held at Thomson Financial, located at 195
Broadway (between Fulton & Dey). Presentations by Antonio Perez, Frank
Sklarsky, and other senior Kodak managers will begin promptly at 9:00
a.m. The program, including a question and answer period, is expected
to conclude by 12:30 p.m.
If you wish to attend, please RSVP by contacting Jo Ann Bruno at
(585) 724-1130 by Friday, February 2nd or by e-mail to
joann.bruno@kodak.com.
For those unable to attend in person, the meeting will be
available via a live webcast.
To access the webcast please go to: http://www.kodak.com/go/invest
The meeting will also be teleconferenced in listen-only mode. To
listen please call 913-981-5542 access code 1685146 or ask for the
Kodak Investor Meeting.
An audio replay of the meeting will be available beginning Friday,
February 9th at 9:00 a.m. and will run until 5:00 p.m. Eastern Time on
Friday, February 16th. The replay phone number is 719-457-0820 and the
reference number is 1685146.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in
nature, or "forward-looking statements" as defined in the United
States Private Securities Litigation Reform Act of 1995. For example,
references to expectations for the Company's revenue and profit growth
and restructuring are forward-looking statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent the Company's estimates only as of the date they
are made, and should not be relied upon as representing the Company's
estimates as of any subsequent date. While the Company may elect to
update forward-looking statements at some point in the future, the
Company specifically disclaims any obligation to do so, even if its
estimates change. The forward-looking statements contained in this
report are subject to a number of factors and uncertainties, including
the successful:
-- execution of the digital growth and profitability strategies,
business model and cash plan;
-- implementation of the cost reduction programs;
-- transition of certain financial processes and administrative
functions to a global shared services model and the
outsourcing of certain functions to third parties;
-- implementation of, and performance under, the debt management
program, including compliance with the Company's debt
covenants;
-- development and implementation of product go-to-market and
e-commerce strategies;
-- protection, enforcement and defense of the Company's
intellectual property, including defense of our products
against the intellectual property challenges of others;
-- implementation of intellectual property licensing and other
strategies;
-- completion of information systems upgrades, including SAP, the
Company's enterprise system software;
-- completion of various portfolio actions;
-- reduction of inventories;
-- integration of acquired businesses;
-- improvement in manufacturing productivity and techniques;
-- improvement in receivables performance;
-- improvement in supply chain efficiency; and
-- implementation of the strategies designed to address the
decline in the Company's traditional businesses.
The forward-looking statements contained in this report are
subject to the following additional risk factors:
-- inherent unpredictability of currency fluctuations, commodity
prices and raw material costs;
-- competitive actions, including pricing;
-- changes in the Company's debt credit ratings and its ability
to access capital markets;
-- the nature and pace of technology evolution;
-- changes to accounting rules and tax laws, as well as other
factors which could impact the Company's reported financial
position or effective tax rate;
-- general economic, business, geo-political and regulatory
conditions;
-- market growth predictions;
-- continued effectiveness of internal controls; and
-- other factors and uncertainties disclosed from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this report should be evaluated
in light of these important factors and uncertainties.
Eastman Kodak Company
Fourth Quarter 2006 Results
Non-GAAP Reconciliations
Within the Company's fourth quarter 2006 press release and
financial discussion document, the Company makes reference to certain
non-GAAP financial measures including "digital earnings", "digital EFO
growth", "digital earnings growth", "traditional earnings decline",
"digital revenue", "traditional revenue", and "net cash generation
(formerly investable cash)". 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 each of these
non-GAAP financial measures provides useful information to investors
regarding Kodak's financial condition, results of operations and cash
flows has been provided in the Form 8-K filed in connection with this
press release.
The following table reconciles digital earnings to the most
directly comparable GAAP measure of net loss from continuing
operations (dollar amounts in millions):
Increase/
FY 2006 FY 2005 (Decrease)
------- -------- ----------
Digital earnings, as presented $ 343 $ 72 $ 271
Traditional earnings, as presented 432 650 (218)
New Technologies loss (211) (215) 4
Legal settlements 2 (21) 23
Restructuring costs and other items (768) (1,118) 350
------- -------- ----------
Loss from continuing operations before
interest, other income (charges), net and
income taxes (GAAP basis) (202) (632) 430
Interest expense (262) (211) (51)
Other income (charges), net 118 44 74
Provision for income taxes (254) (555) 301
------- -------- ----------
Net loss from continuing operations (GAAP
basis), as presented $ (600) $(1,354) $ 754
======= ======== ==========
The following table reconciles digital earnings to the most
directly comparable GAAP measure of net earnings (loss) from
continuing operations (dollar amounts in millions):
Increase/
Q4 2006 Q4 2005 (Decrease)
------- ------- ----------
Digital earnings, as presented $ 271 $ 141 $ 130
Traditional earnings, as presented 98 57 41
New Technologies loss (71) (53) (18)
Legal settlements 6 (21) 27
Restructuring costs and other items (82) (295) 213
------- ------- ----------
Earnings (loss) from continuing operations
before interest, other income (charges),
net and income taxes (GAAP basis), as
presented 222 (171) 393
Interest expense (60) (67) 7
Other income (charges), net 36 55 (19)
(Provision) benefit for income taxes (181) 46 (227)
------- ------- ----------
Net earnings (loss) from continuing
operations (GAAP basis), as presented $ 17 $ (137) $ 154
======= ======= ==========
The following table reconciles digital revenue, traditional
revenue, and new technologies revenue amounts to the most directly
comparable GAAP measure of consolidated revenue (dollar amounts in
millions):
Q4 2006 Q4 2005 Change from prior year
------- ------- ----------------------
Digital revenue, as presented $2,449 $2,587 - 5%
Traditional revenue, as
presented 1,357 1,592 -15%
New technologies revenue 15 18 -17%
------- ------- ----------------------
Consolidated revenue (GAAP
basis), as presented $3,821 $4,197 - 9%
======= ======= ======================
The following table reconciles the net cash provided by continuing
operations relating to operating activities under US GAAP, to Kodak's
definition of (1) free cash flow, (2) operating cash flow, and (3) net
cash generation* :
4th Quarter
($ amounts in millions) 2006
--------------
Net cash provided by continuing operations relating to
operating activities, as presented $1,028
Additions to properties (97)
--------------
Free Cash Flow (continuing operations) 931
Net proceeds from sales of businesses/assets 66
Investments in unconsolidated affiliates (9)
Acquisitions, net of cash acquired -
Dividends (72)
--------------
Operating Cash Flow (continuing operations) 916
Acquisitions, net of cash acquired -
--------------
Net Cash Generation * (continuing operations), as
presented $916
- ----------------------------------------------------------------------
Full Year
($ amounts in millions) 2006
--------------
Net cash provided by continuing operations relating to
operating activities, as presented $956
Additions to properties (379)
--------------
Free Cash Flow (continuing operations) 577
Net proceeds from sales of businesses/assets 178
(Investments in) / distributions from unconsolidated
affiliates (19)
Acquisitions, net of cash acquired (3)
Debt assumed through acquisitions -
Dividends (144)
--------------
Operating Cash Flow (continuing operations) 589
Acquisitions, net of cash acquired 3
Debt assumed through acquisitions -
--------------
Net Cash Generation * (continuing operations), as
presented $592
- ----------------------------------------------------------------------
* formerly Investable Cash Flow
As previously announced, the Company will only report its results
on a GAAP basis, which will be accompanied by a description of
non-operational items affecting its GAAP quarterly results by line
item in the statement of operations. The Company defines
non-operational items as restructuring and related charges, legal
settlements, in-process research and development charges related to
acquisitions, significant gains and losses on sales of assets, asset
impairments, the related tax effects of those items and certain other
significant items not related to the Company's core operations.
Non-operational items, as defined, are specific to the Company and
other companies may define the term differently. The following table
presents a description of the non-operational items affecting the
Company's quarterly results by line item in the statement of
operations for the fourth quarter of 2006 and 2005, respectively.
4th Quarter
------------------------------------
2006 2005
(in millions, except per share
data)
$ EPS $ EPS
-------------- --------------
(Loss) earnings from continuing
operations - GAAP $17 $0.06 $(137) $(0.48)
COGS
- - Charges for accelerated
depreciation in connection with
the focused cost reduction
actions 58 130
- - Charges for inventory
writedowns in connection with
focused cost reduction actions 4 6
------- ------ ------ -------
Subtotal 62 0.22 136 0.48
------- ------ ------ -------
SG&A
- - Adjustment for Legal Settlement
(reversals)/charges (6) 21
------- ------ ------ -------
Subtotal (6) (0.02) 21 0.07
------- ------ ------ -------
Restructuring
- - Charges for focused cost
reduction actions 20 159
------- ------ ------ -------
Subtotal 20 0.07 159 0.56
------- ------ ------ -------
Other Income/(Charges)
- - Gain on the sale of properties
related to focused cost
reduction actions, net (3)
- - Impairment of property related
to focused cost reduction
actions 4
------- ------ ------ -------
Subtotal (3) (0.01) 4 0.01
------- ------ ------ -------
Taxes
- - Impact of establishment of
valuation allowances 89
- - Tax impacts of the above-
mentioned items (10) (28)
------- ------ ------ -------
Subtotal 79 0.27 (28) (0.10)
------- ------ ------ -------
CONTACT: Eastman Kodak Company
Media:
David Lanzillo, 585-781-5481
david.lanzillo@kodak.com
or
Barbara Pierce, 585-724-5036
barbara.pierce@kodak.com
or
Investor Relations:
Don Flick, 585-724-4352
donald.flick@kodak.com
or
Patty Yahn-Urlaub, 585-724-4683
patty.yahn-urlaub@kodak.com
or
Angela Nash, 585-724-0982
angela.nash@kodak.com
Exhibit 99.2
FINANCIAL DISCUSSION DOCUMENT
FOURTH QUARTER 2006 COMPARED WITH FOURTH QUARTER 2005
CONSOLIDATED
Worldwide Revenues
Net worldwide sales were $3,821 million for the fourth quarter of
2006 as compared with $4,197 million for the fourth quarter of 2005,
representing a decrease of $376 million or 9%. The decrease in net
sales was primarily due to declines in volumes and unfavorable
price/mix, which decreased fourth quarter sales by approximately 9.3
and 1.8 percentage points, respectively. The decrease in volumes was
primarily driven by declines in the consumer film capture Strategic
Product Group (SPG), photofinishing services SPG, and consumer output
SPG within the FPG segment; the consumer digital capture SPG within
the CDG segment; the traditional prepress consumables SPG within the
GCG segment; and the radiography film and digital output SPGs within
the KHG segment. The unfavorable price/mix was primarily driven by the
consumer film capture SPG and the consumer output SPG within the FPG
segment; the radiology film and digital output SPG within the KHG
segment; the kiosk SPG and consumer digital capture SPG within the CDG
segment; and the digital prepress consumables SPG and workflow and
prepress SPG within the GCG segment. These declines were partially
offset by the favorable impact of foreign exchange of approximately
2.2 percentage points.
Net sales in the U.S. were $1,695 million for the fourth quarter
of 2006 as compared with $1,976 million for the prior year quarter,
representing a decrease of $281 million, or 14%. Net sales outside the
U.S. were $2,126 million for the current quarter as compared with
$2,221 million for the fourth quarter of 2005, representing a decrease
of $95 million, or 4%, which includes the positive impact of foreign
currency fluctuations of $91 million, or 4%.
Digital Strategic Product Groups' Revenues
The Company's digital product sales, including new technologies
product sales, were $2,464 million for the fourth quarter of 2006 as
compared with $2,605 million for the prior year quarter, representing
a decrease of $141 million, or 5%, primarily driven by the consumer
digital capture SPG within the CDG segment and the digital output SPG
within the Health Group segment, partially offset by increases in the
kiosk SPG within the CDG segment; and the digital prepress consumables
SPG and NexPress color SPG within the GCG segment. Product sales from
new technologies, which are included in digital product sales, were
$15 million for the fourth quarter of 2006 and $18 million for the
fourth quarter of 2005.
Traditional Strategic Product Groups' Revenues
Net sales of the Company's traditional products were $1,357
million for the fourth quarter of 2006 as compared with $1,592 million
for the prior year quarter, representing a decrease of $235 million,
or 15%, primarily driven by declines in the consumer film capture SPG,
the photofinishing services SPG and the consumer and professional
output SPGs in the FPG segment.
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 $1,107 million for the fourth
quarter of 2006 as compared with $1,106 million for the prior year
quarter, representing an increase of $1 million, or less than 1%. This
increase in net sales for the period included the favorable impact of
foreign currency fluctuations of 7%. Net sales in the Asia Pacific
region were $618 million for the current quarter as compared with $701
million for the prior year quarter, representing a decrease of $83
million, or 12%. This decrease in net sales for the period included
the favorable impact of foreign currency fluctuations of 2%. Net sales
in the Canada and Latin America region were $401 million in the
current quarter as compared with $414 million for the fourth quarter
of 2005, representing a decrease of $13 million, or 3%. The decrease
in net sales for the period included the favorable impact of foreign
currency fluctuations of 1%.
Gross Profit
Gross profit was $1,007 million for the fourth quarter of 2006 as
compared with $967 million for the fourth quarter of 2005,
representing an increase of $40 million, or 4%. The gross profit
margin was 26.4% in the current quarter as compared with 23.0% in the
prior year quarter. The 3.4 percentage point increase was primarily
attributable to: (1) reductions in manufacturing costs, which
increased gross profit margins by approximately 1.6 percentage points,
(2) price/mix, which positively impacted gross profit margins by
approximately 1.4 percentage points, and (3) foreign exchange, which
positively impacted gross profit margins by approximately 1.0
percentage points. These increases were partially offset by volume
declines, which negatively impacted gross profit margins by
approximately 0.7 percentage points.
The positive price/mix impact referred to above was primarily
driven by an extension and amendment of an existing license
arrangement and a new licensing arrangement within the consumer
digital capture SPG. The non-recurring portions of these licensing
arrangements contributed approximately 3.2% of revenue to consolidated
gross profit dollars in the current quarter, as compared with 1.4% of
revenue to consolidated gross profit dollars for similar arrangements
in the year ago quarter. The positive impact of these arrangements was
partially offset by negative price/mix within the photofinishing
services SPG and consumer output SPG within the FPG segment; the
digital capture solutions SPG within the KHG segment; and the kiosk
SPG and consumer digital capture SPG within the CDG segment. The
volume declines were primarily driven by the consumer film capture SPG
and consumer output SPG within the FPG segment; and the traditional
prepress consumables SPG within the GCG segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $595
million for the fourth quarter of 2006 as compared with $767 million
for the prior year quarter, representing a decrease of $172 million,
or 22%. SG&A as a percentage of sales decreased from 18% for the
fourth quarter of 2005 to 16% for the current year quarter. The
decrease in SG&A is primarily attributable to ongoing Company-wide
cost reduction initiatives. The year-over-year decrease in SG&A was
also impacted by $21 million of legal settlement costs in the fourth
quarter of 2005 and a $6 million reduction to legal reserves in the
fourth quarter of 2006.
Research and Development Costs
Research and development costs (R&D) were $170 million for the
fourth quarter of 2006 as compared with $212 million for the fourth
quarter of 2005, representing a decrease of $42 million, or 20%. R&D
as a percentage of sales was 4% for the fourth quarter of 2006 as
compared with the prior year quarter of 5%. This decrease was
primarily driven by spending reductions in the current quarter related
to traditional products and services, and was also impacted by
integration activities related to GCG subsidiaries.
Restructuring Costs and Other
Restructuring costs and other were $20 million for the fourth
quarter of 2006 as compared with $159 million for the fourth quarter
of 2005, representing a decrease of $139 million or 87%. These costs,
as well as the restructuring costs reported in cost of goods sold, are
discussed in further detail under "RESTRUCTURING COSTS AND OTHER"
below.
Earnings (Loss) From Continuing Operations Before Interest, Other
Income (Charges), Net and Income Taxes
Earnings from continuing operations before interest, other income
(charges), net and income taxes for the fourth quarter of 2006 were
$222 million as compared with a loss of $171 million for the fourth
quarter of 2005, representing an increase in earnings of $393 million.
This change is attributable to the reasons described above.
Interest Expense
Interest expense for the fourth quarter of 2006 was $60 million as
compared with $67 million for the prior year quarter, representing a
decrease of $7 million, or 10%. Lower interest expense is primarily
driven by lower average debt balances resulting from approximately
$540 million of payments made in the fourth quarter of 2006 on the
Company's October 2005 $2.7 billion Senior Secured Credit Facilities.
Other Income (Charges), Net
The other income (charges), 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 $36 million as
compared with other income of $55 million for the fourth quarter of
2005. The decrease of $19 million is primarily attributable to lower
gains on property and asset sales related to focused cost reduction
actions, partially offset by a year-over-year increase in interest
income.
Earnings (Loss) From Continuing Operations Before Income Taxes
Earnings from continuing operations before income taxes for the
fourth quarter of 2006 was $198 million as compared with a loss of
$183 million for the fourth quarter of 2005, representing an increase
in earnings of $381 million. This change is attributable to the
reasons described above.
Income Tax Provision
For the three months ended December 31, 2006, the Company recorded
a provision of $181 million on pre-tax earnings of $198 million,
representing an effective rate of 91.4%. The difference of $112
million between the recorded provision of $181 million and the
provision of $69 million that would result from applying the U.S.
statutory rate of 35.0% is outlined below.
For the three months ended December 31, 2005, the Company recorded
a benefit of $46 million on a pre-tax loss of $183 million,
representing an effective rate of 25.1%. The difference of $18 million
between the recorded benefit of $46 million and the benefit of $64
million that would result from applying the U.S. statutory rate of
35.0% is outlined below.
3 Months Ended 3 Months Ended
December 31, December 31,
(dollars in millions) 2006 2005
- -- The ongoing impact of not providing
any tax benefit on the losses incurred
in the U.S. and in certain foreign
jurisdictions, partially offset by the
impact of the pre-tax earnings outside
the U.S. being generated in
jurisdictions with a net effective tax
rate that is lower than the U.S.
statutory rate. $ 34 $ 47
- -- The Company recorded discrete pre-
tax charges for restructuring, asset
sale gains/losses, and a legal
settlement totaling $73 million in the
three months ended December 31, 2006,
relating to which the Company recorded
a tax provision of $25 million. This
provision differs from the benefit
that would have resulted using the
U.S. statutory rate of $26 million
primarily due to the fact that the
restructuring charges recorded in the
U.S. and in certain jurisdictions
outside the U.S. have not been
benefited as a result of the Company's
assessment of the realizability of the
net deferred tax assets in those
jurisdictions. 51 --
- -- The Company recorded discrete pre-
tax charges for restructuring, asset
impairments and a legal settlement
charge totaling $320 million in the
three months ended December 31, 2005,
relating to which the Company recorded
a tax benefit of $27 million. This
benefit differs from the benefit that
would have resulted using the U.S.
statutory rate of $112 million due to
the fact that the restructuring
charges recorded in the U.S. have not
been benefited, combined with the fact
that the charges recorded outside the
U.S. have been incurred in
jurisdictions that have a net tax rate
that is lower than the U.S. statutory
rate. -- 85
- -- The Company recorded discrete tax
charges in the three months ended
December 31, 2006 relating primarily
to the establishment of valuation
allowances in certain foreign
jurisdictions, purchase accounting and
impacts from the ongoing tax audits
and return filings with respect to
open tax years totaling $27 million. 27 --
- -- The Company recorded discrete tax
benefits in the three months ended
December 31, 2005 relating primarily
to the release of valuation allowance
against net deferred tax assets and
audit settlements in the U.S., offset
by the planned remittance of earnings
from subsidiary companies outside the
U.S. and other tax adjustments. -- (114)
--------------- ---------------
Total tax provision difference
resulting from the Company's effective
tax rate vs. the U.S. statutory rate $112 $18
=============== ===============
The Company has performed the required assessment of positive and
negative evidence regarding the realization of the net deferred tax
assets in accordance with SFAS No. 109, "Accounting for Income Taxes"
(SFAS 109). This assessment included the evaluation of scheduled
reversals of deferred tax assets and liabilities, estimates of
projected future taxable income, carryback potential and tax planning
strategies.
Based upon management's December 31, 2006 assessment of
realizability, management concluded that it is no longer more likely
than not that certain net deferred tax assets would be realized and,
as such, recorded a valuation allowance of approximately $89 million
during the fourth quarter 2006. The net deferred tax assets relate to
entities outside of the U.S. Prior to the Company's fourth quarter
2006 assessment of realizability, it was believed, based on available
evidence, that the Company would more likely than not realize the net
deferred tax assets.
In addition, the Company continues to record a valuation allowance
on all U.S. tax benefits until an appropriate level of profitability
in the U.S. is sustained or until the Company is able to generate
enough taxable income through other tax planning strategies and
transactions.
On October 3, 2006, the Company filed a claim for a federal tax
refund of approximately $650 million related to a 1994 loss recognized
on the sale of a subsidiary stock that was disallowed at that time
under Internal Revenue Service (IRS) regulations. Since that time, the
IRS has issued new regulations that serve as the basis for this refund
claim. Due to the uncertainty of the claim, the Company, in accordance
with its accounting policies, has not recorded a tax benefit related
to this refund claim.
Earnings (Loss) From Continuing Operations
Earnings from continuing operations for the fourth quarter of 2006
were $17 million, or $.06 per basic and diluted share, as compared
with a loss from continuing operations for the fourth quarter of 2005
of $137 million, or $.48 per basic and diluted share, representing an
increase in earnings of $154 million. This decrease in loss from
continuing operations is attributable to the reasons described above.
CONSUMER DIGITAL IMAGING GROUP
Worldwide Revenues
Net worldwide sales for the Consumer Digital Imaging Group (CDG)
segment were $1,154 million for the fourth quarter of 2006 as compared
with $1,332 million for the fourth quarter of 2005, representing a
decrease of $178 million, or 13%. The decrease in net sales was
comprised of: (1) lower volumes, which in total decreased fourth
quarter sales by approximately 11.3 percentage points, driven
primarily by declines in the consumer digital capture SPG, and (2)
declines related to unfavorable price/mix, which reduced net sales by
approximately 3.1 percentage points, driven primarily by the kiosk SPG
and the consumer digital capture SPG. The negative price/mix impact
includes the positive effects of an extension and amendment of an
existing license arrangement and a new licensing arrangement, portions
of which were non-recurring. These arrangements provide the Company
with a return on portions of historical R&D investments and similar
opportunities are expected to have a continuing impact on the results
of operations. The decreases in volumes and price/mix were partially
offset by favorable exchange, which increased net sales by
approximately 1.0 percentage points.
CDG segment net sales in the U.S. were $818 million for the
current quarter as compared with $939 million for the fourth quarter
of 2005, representing a decrease of $121 million, or 13%. CDG segment
net sales outside the U.S. were $336 million for the fourth quarter of
2006 as compared with $393 million for the prior year quarter,
representing a decrease of $57 million, or 15%.
Net worldwide sales of consumer digital capture products, which
include consumer digital cameras, accessories, memory products,
imaging sensors, and intellectual property royalties, decreased 25% in
the fourth quarter of 2006 as compared with the prior year quarter,
primarily reflecting volume decreases and negative price/mix,
partially offset by favorable exchange. The negative price/mix impact
includes the positive impacts of an extension and amendment of an
existing license arrangement and a new licensing arrangement, as
mentioned above. These arrangements provide the Company with a return
on portions of historical R&D investments and similar opportunities
are expected to have a continuing impact on the results of operations.
According to the NPD Group's consumer tracking service, Kodak
EasyShare digital cameras were number one in unit market share in the
U.S. for the fourth quarter and full year 2006. On a year to date
basis through November, the Company remains in the top three unit
market share position on a worldwide basis for consumer digital
cameras.
Net worldwide sales of picture maker kiosks/media (the kiosk SPG)
increased 27% in the fourth quarter of 2006 as compared with the
fourth quarter of 2005, as a result of volume increases and favorable
exchange, partially offset by negative price/mix. Sales continue to be
driven by strong consumable sales at retail locations with 4x6 media
volumes increasing 52% versus last year.
Net worldwide sales of the home printing solutions SPG, which
includes inkjet photo paper and printer docks/media, increased 2% in
the current quarter as compared with the fourth quarter of 2005 driven
by volume increases and favorable exchange, partially offset by
negative price/mix. On a year to date basis through November, the
Company's printer dock held a leading market share position in the
U.S., U.K., and Australia.
Gross Profit
Gross profit for the CDG segment was $323 million for the fourth
quarter of 2006 as compared with $247 million for the prior year
quarter, representing an increase of $76 million or 31%. The gross
profit margin was 28.0% in the current quarter as compared with 18.5%
in the prior year quarter. The 9.5 percentage point increase was
primarily attributable to improvements in price/mix, a reduction in
manufacturing costs, and the favorable impact of foreign exchange.
Improvements in price/mix positively impacted gross profit margins by
approximately 6.4 percentage points, due to an extension and amendment
of an existing license arrangement and a new license arrangement, as
mentioned above. The impact of the non-recurring portions of these
licensing arrangements contributed approximately 10.7% of revenue to
segment gross profit dollars in the current quarter, as compared with
4.3% of revenue to segment gross profit dollars for similar
arrangements in the year ago quarter. The positive impact of these
arrangements was partially offset by negative price/mix in the kiosk
and consumer digital capture SPGs. Additionally, manufacturing cost
reductions and operational improvements increased gross profit margins
by approximately 2.6 percentage points, primarily within the kiosk SPG
and consumer digital capture SPG. Foreign exchange further increased
gross profit margins by approximately 0.8 percentage points. These
increases were partially offset by volume declines, which reduced
gross profit margins by approximately 0.4 percentage points.
Selling, General and Administrative Expenses
SG&A expenses for the CDG segment decreased $33 million, or 20%,
from $165 million in the fourth quarter of 2005 to $132 million in the
current quarter, and decreased as a percentage of sales from 12% for
the fourth quarter of 2005 to 11% for the current quarter. This
decrease was primarily driven by a decline in advertising spending as
a result of focused cost reduction activities.
Research and Development Costs
R&D costs for the CDG segment decreased $2 million, or 5%, from
$43 million in the fourth quarter of 2005 to $41 million in the
current quarter but increased as a percentage of sales from 3% in the
prior year quarter to 4% in the current year quarter.
Earnings From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
Earnings from continuing operations before interest, other income
(charges), net and income taxes for the CDG segment were $150 million
in the fourth quarter of 2006 compared with $40 million in the fourth
quarter of 2005, representing an increase in earnings of $110 million
or 275%, as a result of the factors described above.
FILM AND PHOTOFINISHING SYSTEMS GROUP
Worldwide Revenues
Net worldwide sales for the Film and Photofinishing Systems Group
(FPG) segment were $1,013 million for the fourth quarter of 2006 as
compared with $1,201 million for the fourth quarter of 2005,
representing a decrease of $188 million, or 16%. The decrease in net
sales was primarily comprised of lower volumes, which decreased net
sales by approximately 16.3 percentage points, driven primarily by
declines in the consumer film capture SPG, the consumer output SPG,
and the photofinishing services SPG. Declines related to negative
price/mix, which reduced fourth quarter sales by approximately 1.4
percentage points, were driven primarily by the consumer film capture
SPG and consumer output SPG. These declines were partially offset by
favorable foreign exchange, which increased net sales by approximately
2.0 percentage points.
FPG segment net sales in the U.S. were $334 million for the
current quarter as compared with $408 million for the fourth quarter
of 2005, representing a decrease of $74 million, or 18%. FPG segment
net sales outside the U.S. were $679 million for the fourth quarter of
2006 as compared with $793 million for the prior year quarter,
representing a decrease of $114 million, or 14%.
Net worldwide sales of the consumer 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 26% in the fourth quarter of 2006 as
compared with the fourth quarter of 2005, primarily reflecting
industry volume declines.
Net worldwide sales for the consumer and professional output SPGs,
which include color negative paper and photochemicals, decreased 10%
in the fourth quarter of 2006 as compared with the fourth quarter of
2005, primarily reflecting industry volume declines and unfavorable
price/mix, partially offset by favorable exchange.
Net worldwide sales for the photofinishing services SPG, which
includes equipment and photofinishing services at retail on-site and
Qualex in the U.S. and CIS (Consumer Imaging Services) outside the
U.S., decreased 41% in the fourth quarter of 2006 as compared with the
fourth quarter of 2005, reflecting continuing industry volume declines
in the development and processing of consumer films.
Net worldwide sales for the entertainment imaging SPGs, including
origination, intermediate, and print films for the entertainment
industry were flat year-over-year.
Gross Profit
Gross profit for the FPG segment was $243 million for the fourth
quarter of 2006 as compared with $333 million for the prior year
quarter, representing a decrease of $90 million or 27%. The gross
profit margin was 24.0% in the current quarter as compared with 27.7%
in the prior year quarter. The 3.7 percentage point decrease was
primarily attributable to increased manufacturing costs, which reduced
gross profit margins by approximately 3.5 percentage points and were
largely driven by increased silver costs. Volume declines reduced
gross profit margins by approximately 0.8 percentage points, while
negative price/mix unfavorably impacted gross profit margins by
approximately 0.4 percentage points. These declines were partially
offset by favorable exchange, which increased gross profit margins by
approximately 1.1 percentage points.
Selling, General and Administrative Expenses
SG&A expenses for the FPG segment decreased $107 million, or 41%,
from $262 million in the fourth quarter of 2005 to $155 million in the
current quarter, and decreased as a percentage of sales from 22% in
the prior year quarter to 15% in the current year quarter. The decline
in SG&A was primarily attributable to cost reduction initiatives.
Research and Development Costs
R&D costs for the FPG segment decreased $9 million, or 45%, from
$20 million in the fourth quarter of 2005 to $11 million in the
current quarter and decreased as a percentage of sales from 2% in the
prior year quarter to 1% in the current year quarter. The decrease in
R&D was primarily attributable to reductions in spending related to
traditional products and services.
Earnings From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
Earnings from continuing operations before interest, other income
(charges), net and income taxes for the FPG segment were $77 million
in the fourth quarter of 2006 compared with earnings of $51 million in
the fourth quarter of 2005, representing an increase of $26 million or
51%, primarily as a result of cost reductions and the other factors
described above.
GRAPHIC COMMUNICATIONS GROUP
During the second quarter of 2006, the Company indicated that, as
a result of ongoing integration of acquisitions within the Graphic
Communications Group, it had become increasingly difficult to report
results by the discrete businesses that were acquired. Therefore,
results for the GCG segment are reported using the following SPG
structure:
-- Digital Prepress Consumables - digital plates, chemistry,
media and services
-- NexPress Color - equipment, consumables and services for
NexPress color products, and direct image press equipment
-- Commercial Inkjet Printing Solutions - Versamark equipment,
consumables and service
-- Workflow and Prepress - workflow software, output devices,
proofing equipment, and services
-- Other Digital - electrophotographic black and white equipment
and consumables, document scanners and services, wide format
inkjet, imaging services
-- Traditional - analog plates, graphics and other films, paper,
media equipment, archival products
As the GCG segment completes its integration process and further
aligns the discrete businesses, starting in the first quarter of 2007,
the GCG segment results will be reported using the following
organizational structure:
-- Enterprise Solutions - workflow software and digital
controller development
-- Digital Printing Solutions - all inkjet and
electrophotographic products, including both equipment and
consumables
-- Prepress Solutions - prepress consumables, output devices, and
proofing hardware and software
-- Document Imaging Business - document scanners and services,
and imaging services
Worldwide Revenues
Net worldwide sales for the Graphic Communications Group segment
were $974 million for the fourth quarter of 2006 as compared with $942
million for the prior year quarter, representing an increase of $32
million, or 3%. The increase in net sales was primarily due to: (1)
favorable exchange, which increased net sales by approximately 3.5
percentage points, and (2) volume increases, which increased net sales
by approximately 1.3 percentage points. These increases were partially
offset by negative price/mix, which reduced net sales by approximately
1.3 percentage points.
The volume increases were primarily attributable to the digital
prepress consumables SPG, the NexPress Color SPG, and the workflow and
prepress SPG. The negative price/mix impact was primarily driven by
the digital prepress consumables SPG and workflow and prepress SPG,
partially offset by price/mix improvements in the traditional prepress
consumables SPG.
Net sales in the U.S. were $307 million for the current quarter as
compared with $341 million for the prior year quarter, representing a
decrease of $34 million, or 10%. Net sales outside the U.S. were $667
million in the fourth quarter of 2006 as compared with $601 million
for the prior year quarter, representing an increase of $66 million,
or 11%.
Digital Strategic Product Groups' Revenues
The Graphic Communications Group segment digital product sales are
comprised of the digital prepress consumables SPG; NexPress color SPG;
commercial inkjet printing solutions SPG; workflow and prepress
systems SPG; and other digital SPG.
Digital product sales for the Graphic Communications Group segment
were $835 million for the fourth quarter of 2006 as compared with $785
million for the prior year quarter, representing an increase of $50
million, or 6%. The increase in digital product sales was primarily
attributable to increases in the digital prepress consumables SPG, the
NexPress color SPG, and the workflow and prepress SPG, partially
offset by declines in other digital products and services.
Net worldwide sales of digital prepress consumables increased 14%
in the current quarter as compared with the prior year quarter,
primarily driven by strong volume increases and favorable exchange.
Net worldwide sales for the NexPress color SPG increased 40%
primarily driven by a revenue increase in NexPress color equipment and
consumables. The installed base of digital production color presses
continues to grow, with average monthly page volumes increasing 63% in
the current quarter versus the prior year quarter.
Net worldwide sales for the workflow and prepress SPG increased 5%
in the current quarter as compared with the prior year quarter, mainly
driven by volume increases in workflow software and favorable
exchange.
Net worldwide sales of commercial inkjet printing solutions
decreased 3% in the current quarter as compared with the fourth
quarter of 2005. Overall sales decreases were largely due to timing of
equipment sales. Year-over-year print volume grew 11%.
Net worldwide sales of other digital products and services
decreased 5% in the current quarter as compared with the prior year
quarter, driven primarily by volume declines for electrophotographic
black and white equipment and consumables, and wide format inkjet.
These decreases were partially offset by sales increases in the
document imaging business.
Traditional Strategic Product Groups' Revenues
Segment traditional product sales are primarily comprised of sales
of traditional graphics products including films, paper, media,
equipment, archival products, and analog plates. These sales were $139
million for the current quarter compared with $157 million for the
prior year quarter, representing a decrease of $18 million, or 11%.
The decrease in sales was primarily attributable to declines in analog
plates and graphic films as the industry continues to transition to
digital.
Gross Profit
Gross profit for the Graphic Communications Group segment was $280
million for the fourth quarter of 2006 as compared with $272 million
in the prior year quarter, representing an increase of $8 million, or
3%. The gross profit margin was 28.7% in the current quarter as
compared with 28.9% in the prior year quarter. The decrease in the
gross profit margin of 0.2 percentage points was primarily
attributable to manufacturing and other costs, which negatively
impacted gross profit margins by approximately 1.0 percentage points,
largely driven by increased silver and aluminum commodity costs. This
decline was partially offset by favorable price/mix, which increased
gross profit margins by approximately 0.5 percentage points, and
favorable exchange, which positively impacted gross profit margins by
approximately 0.4 percentage points.
Selling, General and Administrative Expenses
SG&A expenses for the Graphic Communications Group segment
remained constant at $174 million for both the fourth quarter of 2006
and 2005 and remained constant as a percentage of sales at 18%.
Realized cost integration savings were offset by redistribution of
corporate costs associated with bringing acquired businesses into the
Kodak portfolio.
Research and Development Costs
Fourth quarter R&D costs for the Graphic Communications Group
segment decreased $20 million, or 29%, from $70 million for the fourth
quarter of 2005 to $50 million for the current quarter, and decreased
as a percentage of sales from 7% for the fourth quarter of 2005 to 5%
for the current quarter. The year-over-year decrease was primarily
driven by savings realized from integration activities.
Earnings From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
Earnings from continuing operations before interest, other income
(charges), net and income taxes for the Graphic Communications Group
segment were $57 million in the fourth quarter of 2006 compared with
earnings of $28 million in the fourth quarter of 2005, representing an
increase of $29 million, or 104%. This increase in earnings is
attributable to the reasons outlined above.
HEALTH GROUP
Worldwide Revenues
Net worldwide sales for the Health Group segment were $660 million
for the fourth quarter of 2006 as compared with $700 million for the
prior year quarter, representing a decrease of $40 million, or 6%. The
decrease in sales was attributable to volume declines of approximately
7.6 percentage points, primarily driven by the radiology film SPG,
digital output SPG, and the dental SPG, partially offset by the growth
in the digital capture SPG, and healthcare information solutions SPG.
Unfavorable price/mix reduced fourth quarter sales by approximately
1.0 percentage points, primarily driven by the digital output SPG and
digital capture SPG. These declines were partially offset by favorable
exchange, which increased net sales by approximately 2.8 percentage
points.
Net sales in the U.S. were $222 million for the current quarter as
compared with $274 million for the fourth quarter of 2005,
representing a decrease of $52 million, or 19%. Net sales outside the
U.S. were $438 million for the fourth quarter of 2006 as compared with
$426 million for the prior year quarter, representing an increase of
$12 million, or 3%.
Digital Strategic Product Groups' Revenues
Health Group segment digital sales, which include digital output
(DryView laser imagers/media and wet laser printers/media), digital
capture systems (computed radiography and digital radiography
equipment), digital dental systems (practice management software and
digital and computed radiography capture equipment), healthcare
information solutions (Picture Archiving and Communications Systems
(PACS), Radiology Information Systems (RIS) and Information Management
Solutions (IMS)), and associated services were $460 million for the
current quarter as compared with $470 million for the fourth quarter
of 2005, representing a decrease of $10 million, or 2%. This sales
decline was driven by declines in the digital output SPG, partially
offset by growth in the digital capture SPG, the digital dental SPG,
and the healthcare information solutions SPG.
Traditional Strategic Product Groups' Revenues
Segment traditional product sales, including analog and dental
film, equipment, service, and chemistry, were $200 million for the
current quarter as compared with $230 million for the fourth quarter
of 2005, representing a decrease of $30 million, or 13%. Sales
declines were primarily driven by volume decreases in traditional
radiology film products and traditional dental film.
Gross Profit
Gross profit for the Health Group segment was $249 million for the
fourth quarter of 2006 as compared with $256 million in the prior year
quarter, representing a decrease of $7 million, or 3%. The gross
profit margin was 37.7% in the current quarter as compared with 36.6%
in the fourth quarter of 2005. The increase in the gross profit margin
of 1.1 percentage points was principally attributable to decreases in
manufacturing costs, which increased gross profit margins by
approximately 2.5 percentage points, and favorable exchange, which
increased gross profit margins by approximately 1.2 percentage points.
Partially offsetting these increases were unfavorable price/mix, which
negatively impacted gross profit margins by approximately 2.1
percentage points, primarily driven by the digital output SPG, digital
capture SPG, and the healthcare information solutions SPG, and volume
declines, which decreased gross profit margins by approximately 0.3
percentage points.
Selling, General and Administrative Expenses
SG&A expenses for the Health Group segment were $132 million,
unchanged as compared with the fourth quarter of 2005, but increased
as a percentage of sales from 19% in the prior year quarter to 20% in
the current year quarter. The SG&A expenses in the current quarter
include $17 million of spending related to the Company's exploration
of strategic alternatives for the Health Group, offset by cost
reduction activities. The Company announced on January 10, 2007 that
it has reached an agreement to sell the Health Group to Onex
Corporation for as much as $2.55 billion. The transaction is expected
to close in the first half of 2007.
Research and Development Costs
Fourth quarter R&D costs decreased $7 million, or 18%, from $38
million in the fourth quarter of 2005 to $31 million, but remained
constant as a percentage of sales at 5%. This decline is primarily
attributable to planned reductions in R&D spending for the Health
Group, specifically in the digital output SPG and the digital capture
SPG.
Earnings From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
Earnings from continuing operations before interest, other income
(charges), net and income taxes for the Health segment decreased $1
million, or 1%, from $87 million for the prior year quarter to $86
million for the fourth quarter of 2006 due to the reasons described
above.
ALL OTHER
Worldwide Revenues
Net worldwide sales for All Other were $20 million for the fourth
quarter of 2006 as compared with $22 million for the fourth quarter of
2005, representing a decrease of $2 million, or 9%. Net sales in the
U.S. were $14 million for the fourth quarter of 2006 as compared with
$14 million for the prior year quarter. Net sales outside the U.S.
were $6 million in the fourth quarter of 2006 as compared with $8
million in the prior year quarter, representing a decrease of $2
million, or 25%.
Loss From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
The loss from continuing operations before interest, other income
(charges), net and income taxes for All Other was $72 million in the
current quarter as compared with a loss of $61 million in the fourth
quarter of 2005.
(Loss) Earnings From Discontinued Operations, Net of Income Taxes
There was a loss from discontinued operations in the current
quarter of $1 million, or $.00 per basic and diluted share, as
compared with earnings from discontinued operations in the fourth
quarter of 2005 of $148 million, or $.52 per basic and diluted share.
The prior year quarter earnings from discontinued operations were
primarily related to a $203 million reversal of certain tax accruals
as a result of a settlement between the Company and the Internal
Revenue Service on the audit of the tax years 1993 through 1998. These
accruals had been established in 1994 in connection with the Company's
sale of its pharmaceutical, consumer health and household products
businesses during that year. The tax accrual reversals were partially
offset by a pension settlement charge of $54 million resulting from
the finalization of the transfer of pension assets to ITT Industries,
Inc. (ITT) in connection with the sale of the Company's Remote Sensing
Systems business (RSS) in August 2004.
Loss From Cumulative Effect of Accounting Change, Net of Income
Taxes
There was no loss from cumulative effect of accounting change, net
of income taxes for the fourth quarter of 2006. The loss from
cumulative effect of an accounting change, net of income taxes, of $57
million or $.20 per basic and diluted share for the fourth quarter of
2005 was 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.
The $57 million charge recorded in the prior year represents the
present value of the Company's asset retirement obligations (net of
the related unamortized asset) relating to facilities with estimated
settlement dates, and is primarily related to asbestos remediation
costs.
NET EARNINGS (LOSS)
The consolidated net earnings for the fourth quarter of 2006 were
$16 million, or $.06 per basic and diluted share, as compared with a
net loss for the fourth quarter of 2005 of $46 million, or a loss of
$.16 per basic and diluted share, representing an increase in earnings
of $62 million or 135%. This increase is attributable to the reasons
outlined above.
RESTRUCTURING COSTS AND OTHER
The Company is currently undergoing the transformation from a
traditional products and services company to a digital products and
services company. In connection with this transformation, the Company
announced a cost reduction program in January 2004 that would extend
through 2006 to achieve the appropriate business model and to
significantly reduce its worldwide facilities footprint. In July 2005,
the Company announced an extension to this program into 2007 to
accelerate its digital transformation, which included further cost
reductions that will result in a business model consistent with what
is necessary to compete profitably in digital markets.
In connection with its announcement relating to the extended
"2004-2007 Restructuring Program," the Company has provided estimates
with respect to (1) the number of positions to be eliminated, (2) the
facility square footage reduction, (3) the reduction in its
traditional manufacturing infrastructure, (4) the total restructuring
charges to be incurred, (5) incremental annual savings, and (6)
incremental cash charges associated with these actions.
The actual charges for initiatives under this program are recorded
in the period in which the Company commits to formalized restructuring
plans or executes the specific actions contemplated by the program and
all criteria for restructuring charge recognition under the applicable
accounting guidance have been met.
Restructuring Programs Summary
The activity in the accrued restructuring balances and the
non-cash charges incurred in relation to all of the restructuring
programs described below were as follows for the fourth quarter of
2006:
Other
Ad-
Balance Non- justments Balance
Sept. Costs Cash cash and Dec.
30, Incurred Rever- Pay- Settle- Reclasses 31,
(in millions) 2006 (1) sals ments ments (2) 2006
2004-2007 Restructuring Program:
Severance
reserve $ 300 $ (10) $ (2) $(111) $ - $ 51 $ 228
Exit costs
reserve 24 16 - (17) - 1 24
------- -------- ------ ------ ------- --------- -------
Total reserve $ 324 $ 6 $ (2) $(128) $ - $ 52 $ 252
======= ======== ====== ====== ======= ========= =======
Long-lived
asset
impairments
and
inventory
write-downs $ - $ 20 $ - $ - $ (20) $ - $ -
======= ======== ====== ====== ======= ========= =======
Accelerated
depre-
ciation $ - $ 58 $ - $ - $ (58) $ - $ -
======= ======== ====== ====== ======= ========= =======
Pre-2004 Restructuring Programs:
Severance
reserve $ - $ - $ - $ - $ - $ - $ -
Exit costs
reserve 11 - - - - - 11
------- -------- ------ ------ ------- --------- -------
Total reserve $ 11 $ - $ - $ - $ - $ - $ 11
======= ======== ====== ====== ======= ========= =======
Total of all
re-
structuring
programs $ 335 $ 84 $ (2) $(128) $ (78) $ 52 $ 263
======= ======== ====== ====== ======= ========= =======
(1) The net severance costs of $(10) million incurred in the
current quarter include $58 million of gross severance charges, which
were more than offset by gains on settlements and curtailments of
pension obligations of $(68) million.
(2) The total restructuring charges of $84 million include: (1)
pension and other postretirement charges and credits for curtailments,
settlements and special termination benefits, and (2) environmental
remediation charges that resulted from the Company's ongoing
restructuring actions. However, because these charges and credits
relate to the accounting for pensions, other postretirement benefits,
and environmental remediation costs, the related impacts on the
Consolidated Statement of Financial Position are reflected in their
respective components as opposed to within the accrued restructuring
balances at December 31, 2006. Accordingly, the Other Adjustments and
Reclasses column of the table above includes: (1) reclassifications to
Other long-term assets and Pension and other postretirement
liabilities for the position elimination-related impacts on the
Company's pension and other postretirement employee benefit plan
arrangements, including net curtailment and settlement gains, and
special termination benefits of $49 million, and (2) reclassifications
to Other long-term liabilities for the restructuring-related impacts
on the Company's environmental remediation liabilities of $1 million.
Additionally, the Other Adjustments and Reclasses column of the table
above includes foreign currency translation adjustments of $2 million.
The costs incurred, net of reversals, which total $82 million for
the three months ended December 31, 2006, include $58 million and $4
million of charges related to accelerated depreciation and inventory
write-downs, respectively, that were reported in cost of goods sold in
the accompanying Consolidated Statement of Operations for the three
months ended December 31, 2006. The remaining costs incurred of $20
million were reported as restructuring costs and other in the
accompanying Consolidated Statement of Operations for the three months
ended December 31, 2006. The severance reserve and exit costs reserve
generally require the outlay of cash, while long-lived asset
impairments, accelerated depreciation and inventory write-downs
represent non-cash items.
2004-2007 Restructuring Program
The Company announced on January 22, 2004 that it planned to
develop and execute a comprehensive cost reduction program throughout
the 2004 to 2006 timeframe. The objective of these actions is to
achieve a business model appropriate for the Company's traditional
businesses, and to sharpen the Company's competitiveness in digital
markets.
The Program was expected to result in total charges of $1.3
billion to $1.7 billion over the three-year period, of which $700
million to $900 million are related to severance, with the remainder
relating to the disposal of buildings and equipment. Overall, the
Company's worldwide facility square footage was expected to be reduced
by approximately one-third. Approximately 12,000 to 15,000 positions
worldwide were expected to be eliminated through these actions
primarily in global manufacturing, selected traditional businesses and
corporate administration.
On July 20, 2005, the Company announced that it would extend the
restructuring activity, originally announced in January 2004, as part
of its efforts to accelerate its digital transformation and to respond
to a faster-than-expected decline in consumer film sales. As a result
of this announcement, the overall restructuring program was renamed
the "2004-2007 Restructuring Program." Under the 2004-2007
Restructuring Program, the Company expected to increase the total
employment reduction to a range of 22,500 to 25,000 positions, and to
reduce its traditional manufacturing infrastructure to approximately
$1 billion, compared with $2.9 billion as of December 31, 2004. These
changes were expected to increase the total charges under the Program
to a range of $2.7 billion to $3.0 billion. Based on the actual
actions taken through the end of the fourth quarter of 2006 under this
Program and an understanding of the estimated remaining actions to be
taken, the Company expects that the employment reductions and total
charges under this Program will be within the ranges of 25,000 to
27,000 positions and $3.0 billion to $3.4 billion, respectively, as
initially indicated in the second quarter 2006 Form 10-Q.
The Company implemented certain actions under the Program during
the fourth quarter of 2006. As a result of these actions, the Company
recorded charges of $26 million in the fourth quarter of 2006, which
were composed of severance, long-lived asset impairments, exit costs
and inventory write-downs of $(10) million, $16 million, $16 million
and $4 million, respectively. The net severance costs of $(10) million
incurred in the current quarter include $58 million of gross severance
charges, which were more than offset by gains on pension curtailments
and settlements of $(68) million. The severance costs related to the
elimination of approximately 1,175 positions, including approximately
600 manufacturing, 350 administrative, 175 photofinishing and 50
research and development positions. The geographic composition of the
positions to be eliminated includes approximately 425 in the United
States and Canada and 750 throughout the rest of the world. The
reduction of the 1,175 positions and the $6 million charges for
severance and exit costs are reflected in the 2004-2007 Restructuring
Program table below. The $16 million charge in the fourth quarter and
the $88 million year-to-date charge for long-lived asset impairments
were included in restructuring costs and other in the accompanying
Consolidated Statement of Operations for the three and twelve months
ended December 31, 2006, respectively. The charges taken for inventory
write-downs of $4 million and $12 million were reported in cost of
goods sold in the accompanying Consolidated Statement of Operations
for the three and twelve months ended December 31, 2006, respectively.
As a result of initiatives implemented under the 2004-2007
Restructuring Program, the Company recorded $58 million and $285
million of accelerated depreciation on long-lived assets in cost of
goods sold in the accompanying Consolidated Statement of Operations
for the three and twelve months ended December 31, 2006, respectively.
The accelerated depreciation relates to long-lived assets accounted
for under the held and used model of SFAS No. 144. The fourth quarter
amount of $58 million relates to $52 million of manufacturing
facilities and equipment, $5 million of photofinishing facilities and
equipment, and $1 million of administrative facilities and equipment
that will be used until their abandonment. The year-to-date amount of
$285 million relates to $11 million of photofinishing facilities and
equipment, $271 million of manufacturing facilities and equipment, and
$3 million of administrative facilities and equipment that will be
used until their abandonment.
Under this Program, on a life-to-date basis as of December 31,
2006, the Company has recorded charges of $2,731 million, which was
composed of severance, long-lived asset impairments, exit costs,
inventory write-downs, and accelerated depreciation of $1,233 million,
$350 million, $252 million, $68 million, and $828 million,
respectively. The severance costs related to the elimination of
approximately 23,375 positions, including approximately 6,200
photofinishing, 10,900 manufacturing, 1,375 research and development
and 4,900 administrative positions.
The following table summarizes the activity with respect to the
charges recorded in connection with the focused cost reduction actions
that the Company has committed to under the 2004-2007 Restructuring
Program and the remaining balances in the related reserves at December
31, 2006:
(dollars in
millions)
Long-lived
Asset
Impair
ments and Accel-
Exit Inventory erated
Number of Severance Costs Write- Deprec
Employees Reserve Reserve Total downs iation
--------- --------- -------- ------ ---------- -------
2004 charges 9,625 $ 418 $ 99 $ 517 $ 157 $ 152
2004 reversals - (6) (1) (7) - -
2004 utili-
zation (5,175) (169) (47) (216) (157) (152)
2004 other adj.
&
reclasses - 24 (15) 9 - -
---------- --------- -------- ------ ---------- -------
Balance at
12/31/04 4,450 267 36 303 - -
2005 charges 8,125 497 84 581 161 391
2005 reversals - (3) (6) (9) - -
2005
utilization (10,225) (377) (95) (472) (161) (391)
2005 other adj.
& reclasses - (113) 4 (109) - -
---------- --------- -------- ------ ---------- -------
Balance at
12/31/05 2,350 271 23 294 - -
Q1, 2006
charges 1,175 90 19 109 38 82
Q1, 2006
reversals - (1) - (1) - -
Q1, 2006
utilization (1,425) (97) (14) (111) (38) (82)
Q1, 2006 other
adj. &
reclasses - 6 1 7 - -
--------- --------- -------- ------ ---------- -------
Balance at
03/31/06 2,100 269 29 298 - -
Q2, 2006
charges 1,625 141 20 161 14 72
Q2, 2006
reversals - - (1) (1) - -
Q2, 2006
utilization (1,300) (118) (15) (133) (14) (72)
Q2, 2006 other
adj. &
reclasses - (12) (4) (16) - -
--------- --------- -------- ------ ---------- -------
Balance at
06/30/06 2,425 280 29 309 - -
Q3, 2006
charges 1,650 97 14 111 28 73
Q3, 2006
utilization (1,075) (90) (21) (111) (28) (73)
Q3, 2006 other
adj. &
reclasses - 13 2 15 - -
--------- --------- -------- ------ ---------- -------
Balance at
09/30/06 3,000 300 24 324 - -
Q4, 2006
charges 1,175 (10) 16 6 20 58
Q4, 2006
reversals - (2) - (2) - -
Q4, 2006
utilization (1,900) (111) (17) (128) (20) (58)
Q4, 2006 other
adj. &
reclasses - 51 1 52 - -
--------- --------- -------- ------ ---------- -------
Balance at
12/31/06 2,275 $ 228 $ 24 $ 252 $ - $ -
========= ========= ======== ====== ========== =======
As a result of the initiatives already implemented under the
2004-2007 Restructuring Program, severance payments will be paid
during periods through 2008 since, in many instances, the employees
whose positions were eliminated can elect or are required to receive
their payments over an extended period of time. Most exit costs have
been paid during 2006. However, certain costs, such as long-term lease
payments, will be paid over periods after 2006.
The charges of $84 million recorded in the fourth quarter of 2006
included $26 million applicable to the Film and Photofinishing Systems
Group segment, $9 million applicable to the Consumer Digital Imaging
Group segment, $15 million applicable to the Graphic Communications
Group segment, and $11 million applicable to the Health Group segment.
The balance of $23 million was applicable to manufacturing, research
and development, and administrative functions, which are shared across
all segments.
The restructuring actions implemented during the fourth quarter of
2006 under the 2004-2007 Restructuring Program are expected to
generate future annual cost savings of approximately $73 million, of
which approximately $71 million represents future annual cash savings.
These cost savings began to be realized by the Company beginning in
the fourth quarter of 2006, and are expected to be fully realized by
the end of 2007 as most of the actions and severance payouts are
completed. These total cost savings are expected to reduce future cost
of goods sold, SG&A, and R&D expenses by approximately $42 million,
$25 million, and $6 million, respectively.
Based on all of the actions taken to date under the 2004-2007
Restructuring Program, the program is expected to generate annual cost
savings of approximately $1,385 million, including annual cash savings
of $1,331 million, as compared with pre-program levels. The Company
began realizing these savings in the second quarter of 2004, and
expects the savings to be fully realized by the end of 2007 as most of
the actions and severance payouts are completed. These total cost
savings are expected to reduce cost of goods sold, SG&A, and R&D
expenses by approximately $897 million, $351 million, and $137
million, respectively.
The above savings estimates are based primarily on objective data
related to the Company's severance actions. Savings resulting from
facility closures and other non-severance actions that are more
difficult to quantify are not included. The Company has updated its
estimate of total annual cost savings under the extended 2004-2007
Restructuring Program to $1.6 billion to $1.8 billion, as announced in
July 2005, based on the additional charges expected to be incurred, as
discussed above.
Pre-2004 Restructuring Programs
At December 31, 2006, the Company had remaining exit costs
reserves of $11 million relating to restructuring plans committed to
or executed prior to 2004. Most of these remaining exit costs reserves
represent long-term lease payments, which will continue to be paid
over periods throughout and after 2006.
CASH FLOW ACTIVITY
The Company's cash and cash equivalents decreased $196 million
from $1,665 million at December 31, 2005 to $1,469 million at December
31, 2006. The decrease resulted primarily from $947 million of net
cash used in financing activities, $225 million of net cash used in
investing activities, partially offset by $956 million of net cash
provided by operating activities.
The net cash provided by operating activities of $956 million was
primarily attributable to the Company's net loss of $601 million
which, when adjusted for equity in earnings from unconsolidated
affiliates, depreciation and amortization, the gain on sales of
businesses/assets, restructuring costs, asset impairments and other
non-cash charges, and provision for deferred taxes, provided $872
million of operating cash. Additionally, decreases in inventories of
$271 million and decreases in receivables of $157 million, offset by
decreases in liabilities excluding borrowings of $116 million,
contributed to operating cash. The decrease in inventories is
primarily due to planned inventory reductions driven by corporate
initiatives, seasonality and a decline in demand for traditional
products. The decrease in receivables was primarily caused by the
continued industry decline in sales of traditional products and
services. The decrease in liabilities excluding borrowings was
primarily a result of a decrease in accounts payable related to the
decrease in inventories. Included in the items above was approximately
$315 million of net cash provided by non-recurring licensing
arrangements and $548 million of cash used in restructuring activities
during the period.
The net cash used in investing activities of $225 million was
utilized primarily for capital expenditures of $379 million, partially
offset by net proceeds from the sale of assets of $178 million. The
net cash used in financing activities of $947 million was the result
of net payments of borrowings of $803 million and dividend payments of
$144 million.
The Company's primary uses of cash include restructuring payments,
debt payments, capital additions, dividend payments, employee benefit
plan payments/contributions, and working capital needs.
Capital additions were $379 million in the twelve months ended
December 31, 2006, with the majority of the spending supporting new
products, manufacturing productivity and quality improvements,
infrastructure improvements, equipment placements with customers, and
ongoing environmental and safety initiatives.
During the twelve months ended December 31, 2006, the Company
expended $548 million against restructuring reserves and pension and
other postretirement liabilities, primarily for the payment of
severance benefits. Certain employees whose positions were eliminated
could elect to receive severance payments for up to two years
following their date of termination.
The Company has a dividend policy whereby it makes semi-annual
payments which, when declared, will be paid on the Company's 10th
business day each July and December to shareholders of record on the
close of the first business day of the preceding month. On May 10,
2006, the Board of Directors declared a semi-annual cash dividend of
$.25 per share payable to shareholders of record at the close of
business on June 1, 2006. This dividend was paid on July 18, 2006. On
October 17, 2006 the Board of Directors declared a semi-annual cash
dividend of $.25 per share payable to shareholders of record at the
close of business on November 1, 2006. This dividend was paid on
December 14, 2006.
The Secured Credit Agreement contains various affirmative and
negative covenants customary in a facility of this type, including two
quarterly financial covenants: (1) a consolidated debt for borrowed
money to consolidated earnings before interest, taxes, depreciation
and amortization (EBITDA) (subject to adjustments to exclude any
extraordinary income or losses, as defined by the Secured Credit
Agreement, interest income and certain non-cash items of income and
expense) ratio of not greater than: 3.50 to 1 as of December 31, 2006
and thereafter, and (2) a consolidated EBITDA to consolidated interest
expense (subject to adjustments to exclude interest expense not
related to borrowed money) ratio, on a rolling four-quarter basis, of
no less than 3 to 1.
As of December 31, 2006, the Company's consolidated debt to EBITDA
ratio was 1.92 and the consolidated EBITDA to consolidated interest
ratio was 6.07. Consolidated EBITDA and consolidated interest expense,
as adjusted, are non-GAAP financial measures. The Company believes
that the presentation of the consolidated debt to EBITDA and EBITDA to
consolidated interest expense financial measures is useful information
to investors, as it provides information as to how the Company
actually performed against the financial requirements under the
Secured Credit Facilities, and how much headroom the Company has
within these covenants.
The following table reconciles EBITDA, as included in the
computation of the consolidated debt to EBITDA ratio under the Secured
Credit Agreement covenants, to the most directly comparable GAAP
measure of loss from continuing operations before interest, other
income (charges), net and income taxes:
Rolling
Four Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
(in millions) Total 2006 2006 2006 2006
-------- -------- -------- -------- --------
Net (loss) earnings $ (601) $ 16 $ (37) $ (282) $ (298)
Plus:
Interest expense 262 60 74 66 62
Provision for income
taxes 254 181 19 51 3
Depreciation and
amortization 1,331 315 300 345 371
Non-cash restructuring
charges and asset write-
downs/impairments 247 76 38 77 56
Non-cash stock
compensation expense 17 - 3 8 6
Non-cash equity in
(earnings) loss from
unconsolidated
affiliates (1) 7 (1) (7) -
-------- -------- -------- -------- --------
Total additions to
calculate EBITDA 2,110 639 433 540 498
Less:
Investment income (60) (16) (14) (13) (17)
-------- -------- -------- -------- --------
Total subtractions to
calculate EBITDA (60) (16) (14) (13) (17)
-------- -------- -------- -------- --------
EBITDA, as included in
the debt to EBITDA ratio
as presented $ 1,449 $639 $ 382 $ 245 $ 183
======== ======== ======== ======== ========
Fourth Third Second First
(in millions) Rolling Four Quarter Quarter Quarter Quarter
Quarter Total 2006 2006 2006 2006
(Following is a
reconciliation to the
most directly
comparable GAAP
measure)
EBITDA, as included in
the debt to EBITDA
ratio as presented $ 1,449 $ 639 $ 382 $ 245 $ 183
Depreciation and
amortization (1,331) (315) (300) (345) (371)
Non-cash restructuring
charges and asset
write-downs/impairments (247) (76) (38) (77) (56)
Other adjustments, net (73) (26) (42) 10 (15)
------------- ------- ------- ------- -------
(Loss) earnings from
continuing operations
before interest, other
income (charges), net
and income taxes $ (202) $ 222 $ 2 $ (167) $ (259)
============= ======= ======= ======= =======
The following table reconciles interest expense, as adjusted, as
included in the computation of the EBITDA to interest expense ratio
under the Secured Credit Agreement covenants, to the most directly
comparable GAAP measure of interest expense:
Fourth Third Second First
(in millions) Rolling Four Quarter Quarter Quarter Quarter
Quarter Total 2006 2006 2006 2006
Interest expense, as
included in the EBITDA
to interest expense
ratio $ 239 $ 55 $ 62 $ 62 $ 60
Adjustments to interest
expense for purposes of
the covenant
calculation 23 5 12 4 2
------------- ------- ------- ------- -------
Interest expense $ 262 $ 60 $ 74 $ 66 $ 62
============= ======= ======= ======= =======
Adjustments to interest expense relate to items that are not debt
for borrowed money, including interest relating to capital leases and
interest relating to tax matters.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report may be forward-looking in
nature, or "forward-looking statements" as defined in the United
States Private Securities Litigation Reform Act of 1995. For example,
references to expectations for the Company's successful monetization
of intellectual property, the closing of the sale of the Health Group,
employment reductions, costs of and savings from the restructuring
programs, and achievement of the Company's digital business model are
forward-looking statements.
Actual results may differ from those expressed or implied in
forward-looking statements. In addition, any forward-looking
statements represent the Company's estimates only as of the date they
are made, and should not be relied upon as representing the Company's
estimates as of any subsequent date. While the Company may elect to
update forward-looking statements at some point in the future, the
Company specifically disclaims any obligation to do so, even if its
estimates change. The forward-looking statements contained in this
report are subject to a number of factors and uncertainties, including
the successful:
-- execution of the digital growth and profitability strategies,
business model and cash plan;
-- implementation of the cost reduction programs;
-- transition of certain financial processes and administrative
functions to a global shared services model and the
outsourcing of certain functions to third parties;
-- implementation of, and performance under, the debt management
program, including compliance with the Company's debt
covenants;
-- development and implementation of product, go-to-market and
e-commerce strategies;
-- protection, enforcement and defense of the Company's
intellectual property, including defense of our products
against the intellectual property challenges of others;
-- implementation of intellectual property licensing and other
strategies;
-- completion of information systems upgrades, including SAP, the
Company's enterprise system software;
-- completion of various portfolio actions;
-- reduction of inventories;
-- integration of acquired businesses;
-- improvement in manufacturing productivity and techniques;
-- improvement in receivables performance;
-- improvement in supply chain efficiency; and
-- implementation of the strategies designed to address the
decline in the Company's traditional businesses.
The forward-looking statements contained in this report are
subject to the following additional risk factors:
-- inherent unpredictability of currency fluctuations, commodity
prices and raw material costs;
-- competitive actions, including pricing;
-- changes in the Company's debt credit ratings and its ability
to access capital markets;
-- the nature and pace of technology evolution;
-- changes to accounting rules and tax laws, as well as other
factors which could impact the Company's reported financial
position or effective tax rate;
-- general economic, business, geo-political and regulatory
conditions;
-- market growth predictions;
-- continued effectiveness of internal controls; and
-- other factors and uncertainties disclosed from time to time in
the Company's filings with the Securities and Exchange
Commission.
Any forward-looking statements in this report should be evaluated
in light of these important factors and uncertainties.
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(in millions, except per share data)
Three Months Ended Twelve Months Ended
December 31 December 31
------------------ -------------------
2006 2005 2006 2005
Net sales $ 3,821 $ 4,197 $ 13,274 $ 14,268
Cost of goods sold 2,814 3,230 9,906 10,650
--------- -------- --------- ---------
Gross profit 1,007 967 3,368 3,618
Selling, general and
administrative expenses 595 767 2,389 2,668
Research and development costs 170 212 710 892
Restructuring costs and other 20 159 471 690
--------- -------- --------- ---------
Earnings (loss) from continuing
operations before interest,
other income (charges), net
and income taxes 222 (171) (202) (632)
Interest expense 60 67 262 211
Other income (charges), net 36 55 118 44
--------- -------- --------- ---------
Earnings (loss) from continuing
operations before income taxes 198 (183) (346) (799)
Provision (benefit) for income
taxes 181 (46) 254 555
--------- -------- --------- ---------
Earnings (loss) from continuing
operations $ 17 $ (137) $ (600) $ (1,354)
========= ======== ========= =========
(Loss) earnings from
discontinued operations, net
of income taxes $ (1) $ 148 $ (1) $ 150
========= ======== ========= =========
Cumulative effect of accounting
change $ - $ (57) $ - $ (57)
========= ======== ========= =========
NET EARNINGS (LOSS) $ 16 $ (46) $ (601) $ (1,261)
========= ======== ========= =========
Basic and diluted net earnings
(loss) per share:
Continuing operations $ .06 $ (.48) $ (2.09) $ (4.70)
Discontinued operations - .52 - .52
Effect of accounting change - (.20) - (.20)
--------- -------- --------- ---------
Total $ .06 $ (.16) $ (2.09) $ (4.38)
========= ======== ========= =========
Number of common shares used in
basic net loss per share 287.3 287.2 287.3 287.9
Incremental shares from assumed
conversion of options 0.2 - - -
--------- -------- --------- ---------
Number of common shares used
in diluted net loss per share 287.5 287.2 287.3 287.9
========= ======== ========= =========
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - UNAUDITED
(in millions)
December 31, December 31,
2006 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,469 $ 1,665
Receivables, net 2,669 2,760
Inventories, net 1,202 1,455
Deferred income taxes 108 100
Other current assets 109 116
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Total current assets 5,557 6,096
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Property, plant and equipment, net 2,842 3,778
Goodwill 2,196 2,141
Other long-term assets 3,556 3,221
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TOTAL ASSETS $ 14,151 $ 15,236
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 4,144 $ 4,187
Short-term borrowings 64 819
Accrued income taxes 588 483
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Total current liabilities 4,796 5,489
OTHER LIABILITIES
Long-term debt, net of current portion 2,714 2,764
Pension and other postretirement liabilities 4,008 3,476
Other long-term liabilities 1,281 1,225
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Total liabilities 12,799 12,954
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 881 867
Retained earnings 5,967 6,717
Accumulated other comprehensive loss (671) (467)
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7,155 8,095
Less: Treasury stock at cost 5,803 5,813
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Total shareholders' equity 1,352 2,282
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,151 $ 15,236
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EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(in millions)
Twelve Months Ended
December 31
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2006 2005
Cash flows relating to operating activities:
Net loss $ (601) $ (1,261)
Adjustments to reconcile to net cash provided by
operating activities:
Loss (earnings) from discontinued operations 1 (150)
Loss from cumulative effect of accounting change - 57
Equity in earnings from unconsolidated
affiliates (1) (12)
Depreciation and amortization 1,331 1,402
Purchased research and development - 54
Gain on sales of businesses/assets (65) (78)
Restructuring costs, asset impairments and other
non-cash charges 141 195
Provision for deferred taxes 67 343
Decrease in receivables 157 228
Decrease in inventories 271 306
Decrease in liabilities excluding borrowings (116) (118)
Other items, net (229) 214
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Total adjustments 1,557 2,441
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Net cash provided by continuing operations 956 1,180
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Net cash provided by discontinued operations - 28
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Net cash provided by operating activities 956 1,208
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Cash flows relating to investing activities:
Additions to properties (379) (472)
Net proceeds from sales of assets 178 130
Acquisitions, net of cash acquired (3) (984)
(Investments in) distributions from
unconsolidated affiliates (19) 34
Marketable securities - purchases (135) (194)
Marketable securities - sales 133 182
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Net cash used in investing activities (225) (1,304)
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Cash flows relating to financing activities:
Net decrease in borrowings with original
maturity of 90 days or less (11) (126)
Proceeds from other borrowings 765 2,520
Debt issuance costs - (57)
Repayment of other borrowings (1,557) (1,672)
Dividend payments (144) (144)
Exercise of employee stock options - 12
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Net cash (used in) provided by financing
activities (947) 533
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Effect of exchange rate changes on cash 20 (27)
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Net (decrease) increase in cash and cash
equivalents (196) 410
Cash and cash equivalents, beginning of year 1,665 1,255
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Cash and cash equivalents, end of quarter $ 1,469 $ 1,665
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Net Sales from Continuing Operations by Reportable Segment and All
Other - Unaudited
(in millions)
Three Months Ended Twelve Months Ended
December 31 December 31
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2006 2005 Change 2006 2005 Change
Consumer Digital
Imaging Group
Inside the U.S. $ 818 $ 939 - 13% $ 1,872 $ 2,034 - 8%
Outside the U.S. 336 393 - 15 1,048 1,181 - 11
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Total Consumer Digital
Imaging Group 1,154 1,332 - 13 2,920 3,215 - 9
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Film and
Photofinishing
Systems Group
Inside the U.S. 334 408 -18 1,359 1,767 - 23
Outside the U.S. 679 793 -14 2,797 3,558 - 21
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Total Film and
Photofinishing
Systems Group 1,013 1,201 -16 4,156 5,325 - 22
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Graphic Communications
Group
Inside the U.S. 307 341 - 10 1,248 1,079 + 16
Outside the U.S. 667 601 + 11 2,384 1,911 + 25
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Total Graphic
Communications Group 974 942 + 3 3,632 2,990 + 21
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Health Group
Inside the U.S. 222 274 - 19 914 1,052 - 13
Outside the U.S. 438 426 + 3 1,583 1,603 - 1
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Total Health Group 660 700 - 6 2,497 2,655 - 6
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All Other
Inside the U.S. 14 14 0 52 47 +11
Outside the U.S. 6 8 - 25 17 36 -53
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Total All Other 20 22 - 9 69 83 - 17
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Consolidated total $3,821 $4,197 - 9% $13,274 $14,268 - 7%
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Earnings (Loss) 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
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2006 2005 Change 2006 2005 Change
Consumer Digital
Imaging Group $ 150 $ 40 +275% $ 1 $ (131) +100%
Percent of Sales 13% 3% 0% (4)%
Film and Photofinishing
Systems Group $ 77 $ 51 + 51% $ 358 $ 540 -34%
Percent of Sales 8% 4% 9% 10%
Graphic Communications
Group $ 57 $ 28 +104% $ 141 $ (41) +444%
Percent of Sales 6% 3% 4% (1)%
Health Group $ 86 $ 87 - 1% $ 278 $ 370 - 25%
Percent of Sales 13% 12% 11% 14%
All Other $ (72) $ (61) - 18% $ (214) $ (231) + 7%
Percent of Sales (360)% (277)% (310)% (278)%
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Total of segments $ 298 $ 145 +106% $ 564 $ 507 + 11%
Percent of Sales 8% 3% 4% 4%
Restructuring costs and
other (82) (295) (768) (1,118)
Legal settlement 6 (21) 2 (21)
Interest expense (60) (67) (262) (211)
Other income (charges),
net 36 55 118 44
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Consolidated earnings
(loss) from
continuing
operations before
income taxes $ 198 $ (183) + 208% $ (346) $ (799) + 57%
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