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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): August 1, 2006
Eastman Kodak Company
(Exact name of registrant as specified in charter)
New Jersey 1-87 16-0417150
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
343 State Street,
Rochester, New York 14650
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (585) 724-4000
--------------
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition
- ---------------------------------------------------------
On August 1, 2006, Eastman Kodak Company issued a press release describing its
financial results for its second fiscal quarter ended June 30, 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 second 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 revenue growth", "Digital earnings", "Digital earnings from
operations", "Digital earnings by segment", "Free cash flow", "Operating cash
flow", "Investable cash flow", and "Earnings before interest, taxes,
depreciation and amortization (EBITDA)", which have directly comparable GAAP
financial measures. 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
revenue growth / Digital earnings from operations / Digital earnings / Digital
earnings by segment - 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 second 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 / Investable cash flow - The Company
believes that the presentation of free cash flow, operating cash flow and
investable cash flow is useful information to investors as it facilitates the
comparison of cash flows between reporting periods. In addition, management
utilizes these measures as tools to assess the Company's ability to repay debt
and repurchase its own common stock, after it has satisfied its working capital
needs (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 investable cash flow measure equals operating cash flow excluding
the impact of acquisitions and debt assumed in acquisitions, and forms the basis
of internal management performance expectations (it is one of the Company's
three key metrics) and certain incentive compensation. Accordingly, the Company
believes that the presentation of this information is useful to investors as it
provides them with the same data as management uses to facilitate their
assessment of the Company's cash position.
EBITDA / Interest Expense - Under the Company's senior secured credit
facilities, there are two financial debt covenants that the Company must be in
compliance with on a quarterly basis: (1) debt to EBITDA and (2) EBITDA to
interest expense. Accordingly, the Company believes the presentation of the debt
to EBITDA and EBITDA to interest expense financial measures is useful
information to investors, as it provides information as to how the Company
actually performed against the financial covenant restrictions and requirements,
and how much headroom the Company has within the covenants.
Item 9.01. Financial Statements and Exhibits
- ---------------------------------------------
(c) Exhibits
--------
Exhibit 99.1 Press release issued August 1, Furnished with
2006 regarding financial results this document
for the second quarter of 2006
Exhibit 99.2 Financial discussion document issued Furnished with
August 1, 2006 regarding financial this document
results for the second 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/ Richard G. Brown, Jr.
-----------------------------
Name: Richard G. Brown, Jr.
Title: Controller
Date: August 1, 2006
EXHIBIT INDEX
-------------
Exhibit No. Description
- ---------- ------------
99.1 Press release issued August 1, 2006 regarding financial results
for the second quarter of 2006
99.2 Financial discussion document issued August 1, 2006 regarding
financial results for the second quarter of 2006
Exhibit 99.1
Kodak Reports 2nd-Quarter Sales of $3.360 Billion
ROCHESTER, N.Y.--(BUSINESS WIRE)--Aug. 1, 2006--Eastman Kodak
Company
-- Company Achieves Digital Profitability Two Quarters Ahead of
2005 Pace; Ends Quarter with $1.055 Billion in Cash; 2nd-Qtr
GAAP Net Loss Totals $282 Million ($0.98 Per Share)
-- Agreement Announced with Flextronics to Improve Digital Camera
Manufacturing and Distribution Efficiency
-- Company Reaffirms 2006 Cash and Digital Earnings Forecasts;
Revises Digital Revenue Forecast in Support of Focus on
Digital Margin Expansion
Eastman Kodak Company today reported second-quarter financial
results essentially in line with the company's expectations and the
achievement of digital profitability two quarters ahead of last year's
pace.
The company also reaffirmed its 2006 cash and digital earnings
goals. On the basis of generally accepted accounting principles in the
U.S. (GAAP), Kodak expects net cash provided by operating activities
this year of $800 million to $1.0 billion, which corresponds with
investable cash flow of $400 million to $600 million. In connection
with its digital transformation, the company continues to incur
significant restructuring charges, as expected. Accordingly, as
previously announced, the company expects a GAAP loss from continuing
operations before interest, other income (charges), net, and income
taxes for the full year of $500 million to $850 million. This
corresponds to digital earnings from operations this year in a range
of $350 million to $450 million. Consistent with its previously
announced emphasis on digital margin expansion, the company revised
its 2006 digital revenue growth forecast from a range of 16% to 22% to
approximately 10%, reflecting the company's focus on pursuing
profitable sales. Total 2006 revenue is expected to be down
approximately 3%.
The company reported a second-quarter GAAP net loss of $282
million, or $0.98 per share, largely stemming from restructuring
charges ($214 million after taxes) and rising silver costs. The loss
is consistent with the company's plan, announced in 2004, to create a
digital business model by restructuring its traditional businesses and
the associated manufacturing. The company's second-quarter 2006 GAAP
pre-tax earnings were essentially unchanged from the previous year.
"Our second-quarter results demonstrate continuing progress in the
execution of our digital business strategy and the implementation of
our digital business model," said Antonio M. Perez, Chairman and Chief
Executive Officer, Eastman Kodak Company. "We are coming into the
final stages of our digital transformation. By the end of next year
the majority of the restructuring costs will be behind us and Kodak
will be positioned for sustained success in digital markets."
"We ended the quarter with more than $1 billion in cash on our
balance sheet and we achieved positive digital earnings a full two
quarters ahead of last year's performance -- ahead of my own
prediction that this would occur in the third quarter," said Perez.
"As I've said before, our primary focus this year is on cash and
expanding our digital margins, and that explains our willingness to
change our digital revenue outlook. I remain confident in our ability
to achieve our 2006 performance targets for cash and digital
earnings."
Evolution of Digital Camera Operating Model
In a separate announcement, the company said that it has reached
an agreement with Flextronics International Ltd. in order to
streamline its digital camera operations. Under this agreement, Kodak
will continue to manage high-level system design and advanced research
and development for its digital still cameras, and will retain all of
its intellectual property. Flextronics will manufacture and distribute
Kodak consumer digital cameras on a global basis and will handle
certain design and development functions. Flextronics will also manage
the operations and logistics services for Kodak's digital still
cameras. This is consistent with Kodak's effort to drive further
improvements in the operating model of its Consumer Digital Imaging
Group. Also under the agreement, approximately 550 Kodak personnel are
expected to be transferred to Flextronics facilities.
"This evolution in our digital capture operating model is
consistent with our strategy and will enable us to compete in this
business with greater flexibility, cost efficiency and
predictability," said Perez. "It will support our margin expansion
efforts and enable us to better serve our customers and consumers by
delivering Kodak's innovative digital products through the world class
operations of Flextronics."
For the second quarter of 2006:
-- Sales totaled $3.360 billion, a decrease of 9% from $3.686
billion in the second quarter of 2005. The decline in revenue
was primarily in the Film and Photofinishing Systems Group and
the Consumer Digital Imaging Group. The Film and
Photofinishing Systems Group decline is in line with company
expectations, and the decline in the Consumer Digital Imaging
Group results from the changing market dynamics, as well as
the company's stated goal to emphasize margin expansion over
revenue growth. Digital revenue totaled $1.829 billion, a 6%
increase from $1.720 billion. Traditional revenue totaled
$1.522 billion, a 22% decline from $1.950 billion. New
Technologies contributed an additional $9 million in the
second quarter, compared with $16 million in the year-ago
quarter.
-- The company's loss from continuing operations in the quarter,
before interest, other income (charges), net, and income
taxes, was $167 million, compared with a loss of $137 million
in the year-ago quarter, largely as a result of increased
depreciation expense because of the change in useful life
assumptions implemented in the third quarter of 2005.
-- The GAAP net loss was $282 million, or $0.98 per share,
compared with a GAAP net loss of $155 million, or $0.54 per
share, in the year-ago period.
-- Digital earnings were $4 million, compared with a negative $25
million in the year-ago quarter, primarily because of a
year-over-year improvement in the company's Graphic
Communications Group.
Other second-quarter 2006 details:
-- For the quarter, net cash provided by operating activities on
a GAAP basis was $80 million, compared with a negative $207
million in the year-ago quarter. Investable cash flow for the
quarter was $15 million, compared with negative $297 million
in the year-ago quarter.
-- Kodak held $1.055 billion in cash on its balance sheet as of
June 30, compared with $1.077 billion on March 31, 2006, and
$1.665 billion on December 31, 2005. This is consistent with
the company's stated desire to maintain approximately $1
billion of cash on hand.
-- Debt decreased $34 million from the first-quarter level, to
$3.531 billion as of June 30, 2006, and was down $52 million
from the December 31, 2005 level of $3.583 billion.
-- Gross Profit was 24.1%, down from 28.2%, primarily because of
the negative impact of rising silver prices and higher
depreciation costs from changes in the useful lives of certain
assets implemented in the third quarter of 2005.
-- Selling, General and Administrative expenses were $620
million, compared with $650 million for the prior year
quarter. SG&A, as a percentage of sales, remained unchanged at
18% in the second quarter of 2006 versus the second quarter of
2005. On an absolute dollar basis, SG&A expenses decreased by
$30 million, driven by cost reduction activities within the
Film and Photofinishing segment, partially offset by
acquisition related SG&A costs of $33 million, and $8 million
in costs related to the company's exploration of strategic
alternatives for its Health Group, which was announced on May
4, 2006.
Second quarter segment sales and results from continuing
operations, before interest, other income (charges), net, and income
taxes (earnings from operations), are as follows:
-- Graphic Communications Group sales were $908 million, up 14%,
reflecting the acquisitions of KPG and Creo. Earnings from
operations increased by $64 million, from a loss of $42
million in the year-ago period to earnings of $22 million in
the second quarter of 2006. This improvement was largely
driven by contributions from acquired businesses and cost
reductions from business integration activities, which
positively impacted profit margins, as well as positive
price/mix. Digital earnings increased by $65 million, from a
loss of $26 million in the year-ago period to earnings of $39
million in the second quarter of 2006.
-- Consumer Digital sales totaled $628 million, down 6%. The loss
from operations for the segment was $79 million, compared with
a year-ago loss of $52 million. This primarily reflects lower
volumes and negative price/ mix for consumer digital capture
products. The company continues to realign its portfolio and
cost structure to focus on expanding its digital margins.
-- Film and Photofinishing Systems sales were $1.153 billion,
down from $1.503 billion in the year-ago quarter. Earnings
from operations were $113 million, compared with $244 million
in the year-ago quarter. This decrease was primarily
attributable to an expected decline in revenue; non-cash
charges for depreciation because of the asset useful life
changes made in the third quarter of 2005; and higher silver
prices. During the second quarter of 2006, the group achieved
a 10% operating margin, in line with the company's
expectations.
-- Health Group sales were $655 million, down 6%. Earnings from
operations for the segment were $78 million, compared with
$109 million a year ago. This is primarily due to declines in
price/mix, higher silver costs, higher depreciation as a
result of asset useful life changes made in the third quarter
of 2005, and costs associated with the company's exploration
of strategic alternatives for its Health Group. This was
partially offset by revenue and earnings growth in digital
capture, digital dental and healthcare information solutions
and service and manufacturing productivity gains. Digital
earnings were $42 million in the second quarter of 2006,
compared with $53 million in the year-ago quarter. Health
Group operating margins returned to 12% for the second quarter
of 2006, in line with the company's expectations.
-- All Other sales were $16 million, compared with $24 million
for the second quarter of 2005. The loss from operations
totaled $51 million, compared with a loss of $57 million a
year ago. The digital earnings for this segment were $2
million, compared with no earnings in the year-ago quarter.
The All Other category primarily includes investments in
consumer inkjet and displays.
Restructuring Update
Kodak continues to implement its restructuring program to support
the company's goal of building a business model to achieve sustained
success in digital markets. This program was first announced in
January 2004 and updated in July 2005, and included the elimination of
an estimated 25,000 positions and charges totaling $3.0 billion.
During the second quarter of 2006, the company eliminated
approximately 1,630 positions, bringing the program's total to-date to
more than 20,500 positions relative to the estimated 25,000.
Based on the restructuring actions completed to date, and an
understanding of the estimated remaining actions to conclude the
restructuring, the company expects that employment reductions and
total charges will now be within the range of 25,000 to 27,000
positions and $3.0 billion to $3.4 billion, respectively. The company
continues to expect that these actions will be essentially complete by
the end of 2007.
Kodak plans to provide a more detailed update on its
transformation during its Annual Strategy Review meeting scheduled for
November 15, 2006 in New York City.
Conference Call Information
Antonio Perez and Robert Brust, Chief Financial Officer, 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: 913-981-4912,
access code 4120771. There is no need to pre-register.
For those wishing to participate via an Internet Broadcast, please
access our Kodak Investor Center web page at:
http://www.kodak.com/go/invest.
The call will be recorded and available for playback by 2:00 p.m.
eastern time today by dialing 719-457-0820, access code 4120771. The
playback number will be active until Tuesday, August 8, at 5:00 p.m.
eastern time.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this 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 earnings, revenue,
revenue growth, losses, cash, operating margins, employment reductions
and charges under its restructuring program 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 a changed segment structure;
-- implementation of the cost reduction program, including asset
rationalization and monetization, reduction in selling,
general and administrative costs and personnel reductions;
-- 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 our debt covenants;
-- implementation of product strategies (including category
expansion, digitization, organic light emitting diode (OLED)
displays and digital products) and go-to-market strategies;
-- protection, enforcement and defense of our intellectual
property;
-- implementation of intellectual property licensing and other
strategies;
-- development and implementation of e-commerce strategies;
-- completion of information systems upgrades, including SAP, our
enterprise system software;
-- completion of various portfolio actions;
-- reduction of inventories;
-- integration of acquired businesses;
-- improvement in manufacturing productivity and techniques;
-- improvement in receivables performance;
-- improvement in supply chain efficiency and management of
third-party sourcing relationships;
-- implementation of our strategies designed to address the
decline in our traditional businesses; and
-- performance of our business in emerging markets like China,
India, Brazil, Mexico and Russia.
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 our debt credit ratings and our ability to access
capital markets;
-- the nature and pace of technology evolution, including the
traditional-to-digital transformation;
-- continuing customer consolidation and buying power;
-- current and future proposed changes to accounting rules and to
tax laws, as well as other factors which could adversely
impact our effective tax rate in the future;
-- general economic, business, geo-political, regulatory and
public health conditions;
-- market growth predictions;
-- continued effectiveness of internal controls; and
-- other factors and uncertainties disclosed from time to time in
our filings with the Securities and Exchange Commission.
Any forward-looking statements in this report should be evaluated
in light of these important factors and uncertainties.
Eastman Kodak Company
Second Quarter 2006 Results
Non-GAAP Reconciliations
Within the Company's second quarter 2006 press release, the
Company makes reference to certain non-GAAP financial measures
including "digital revenues", "traditional revenues", "new
technologies revenues", "digital revenue growth", total Company
"digital earnings", "digital earnings from operations", "digital
earnings" by segment, "investable cash flow", "projected investable
cash flow", "projected digital earnings from operations", and
"projected digital revenue growth". 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 revenue, traditional
revenue, and new technologies revenue amounts and growth rates from
prior year as presented to the most directly comparable GAAP measure
of total consolidated net sales (dollar amounts in millions):
Change
from
prior
Q2 2006 Q2 2005 year
------- ------- -------
Digital revenue, as presented $ 1,829 $ 1,720 +6%
Traditional revenue, as presented 1,522 1,950 -22%
New Technologies revenue, as presented 9 16 -44%
------- ------- -------
Total consolidated net sales (GAAP basis) $ 3,360 $ 3,686 - 9%
======= ======= =======
The following table reconciles digital earnings, both by segment
and in total, to the most directly comparable GAAP measure of
consolidated (loss) from continuing operations before interest, other
income (charges), net and income taxes (dollar amounts in millions):
Q2 2006 Q2 2005
------- -------
Digital earnings (loss) by segment, as presented:
Consumer Digital Imaging Group $ (79)$ (52)
Graphic Communications Group 39 (26)
Health Group 42 53
All Other 2 -
------- -------
Total Company digital earnings (loss), as presented 4 (25)
Traditional earnings 131 283
New Technologies loss (52) (56)
Legal Settlement (4) -
Restructuring costs and other (246) (339)
------- -------
Loss from continuing operations before
interest, other income (charges), net and
income taxes (GAAP basis) $ (167)$ (137)
======= =======
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)
investable cash flow:
2nd Quarter
- ---------------------------------------------------------------------
($ millions) 2006 2005
--------- --------
Net cash provided by (used in) continuing
operations relating to operating activities: $80 ($207)
Additions to properties (91) (111)
--------- --------
Free Cash Flow (continuing operations) (11) (318)
Net proceeds from sales of businesses/assets 27 21
Investments in unconsolidated affiliates (1) 0
Acquisitions, net of cash acquired 0 (940)
Debt assumed through acquisitions 0 (541)
Dividends 0 0
--------- --------
Operating Cash Flow (continuing operations) 15 (1,778)
Acquisitions, net of cash acquired 0 940
Debt assumed through acquisitions 0 541
--------- --------
Investable Cash Flow (continuing operations) $15 ($297)
- ---------------------------------------------------------------------
The following table reconciles projected full year 2006 digital
earnings to the most comparable GAAP measure of projected full year
2006 total Company earnings from continuing operations before
interest, other income (charges), net and income taxes (dollar amounts
in millions):
Digital earnings, as presented $350-$450
Traditional earnings, New Technologies earnings,
restructuring costs and other discrete items (1,200)-(950)
------------
Total Consolidated loss from continuing operations
before interest, other income (charges), net and
income taxes (GAAP basis) $(850)-$(500)
============
The following table reconciles projected full year 2006 digital
revenue growth to the most comparable GAAP measure of projected full
year 2006 total Company revenue growth:
Previous Revised
Forecast Forecast
Digital revenue growth
(including New Technologies), as presented 16%-22% 10%
Traditional revenue decline (22)%-(16)% (22)%
----------- --------
Total Company revenue growth (GAAP basis) (2)%-4% (3)%
=========== ========
The following table reconciles projected full year 2006 investable
cash flow to the most directly comparable GAAP measure of projected
full year 2006 net cash provided by operating activities from
continued operations (dollar amounts in millions):
Investable cash flow, as presented $400-$600
Additions to properties, net proceeds from sales
of businesses/assets, distributions from/
(investments in) unconsolidated
affiliates and dividends 400
-----------
Net cash provided by operating activities
from continued operations (GAAP basis) $800-$1,000
===========
As previously announced, the Company will only report its results
on a GAAP basis, which will be accompanied by a description of the
non-operational items affecting its GAAP quarterly results by line
item in the statement of operations. The following table presents a
description of the non-operational items affecting the Company's
quarterly results by line item in the statement of operations for the
second quarter of 2006 and 2005, respectively.
2nd Quarter
------------------------------------
2006 2005
(in millions,
except per share data)
$ EPS $ EPS
----------------- ------------------
Loss from continuing operations -
GAAP $(282) $(0.98) $(155) $(0.54)
COGS
- - Charges for accelerated
depreciation in connection with
the focused cost reduction actions 72 75
- - Charges for inventory writedowns
in connection with focused cost
reduction actions 5 11
-------- -------- -------- ---------
Subtotal 77 0.27 86 0.30
-------- -------- -------- ---------
R&D
- - Charges for in-process research
and development in connection
with the acquisitions of Creo and
KPG of $48 million and $16
million, respectively, in 2005 64
-------- -------- -------- ---------
Subtotal - - 64 0.22
-------- -------- -------- ---------
SG&A
- - Charge for legal settlement 4
-------- -------- -------- ---------
4 0.01 - -
-------- -------- -------- ---------
Restructuring
- - Charges for focused cost
reduction actions 169 253
-------- -------- -------- ---------
Subtotal 169 0.59 253 0.88
-------- -------- -------- ---------
Other Income/(Charges)
- - Gain on the sale of property
related to focused cost reduction
actions (12)
- - Charge for asset impairments 9 19
-------- -------- -------- ---------
Subtotal 9 0.03 7 0.02
-------- -------- -------- ---------
Taxes
- - Charge in 2005 due to a change
in estimate with respect to a
tax benefit recorded in
connection with a donation of
land in a prior period 6
- - Tax impacts of the above-
mentioned items (31) (122)
-------- -------- -------- ---------
Subtotal (31) (0.11) (116) $(0.40)
-------- -------- -------- ---------
Impact of Contingent Convertible
Debt on EPS $(0.02)
- ----------------------------------------------------------------------
CONTACT: Eastman Kodak Company
Media:
David Lanzillo, 585-781-5481
david.lanzillo@kodak.com
or
David Kassnoff, 585-724-2137
david.kassnoff@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
Exhibit 99.2
FINANCIAL DISCUSSION DOCUMENT
SECOND QUARTER 2006 COMPARED WITH SECOND QUARTER 2005
CONSOLIDATED
Worldwide Revenues
Net worldwide sales were $3,360 million for the second quarter of
2006 as compared with $3,686 million for the second quarter of 2005,
representing a decrease of $326 million or 9%. The decrease in net
sales was primarily due to declines in volumes and declines in
price/mix, which decreased second quarter sales by approximately 9.7
and 1.9 percentage points, respectively. The decrease in volumes was
primarily driven by declines in the consumer film capture Strategic
Product Group (SPG), the photofinishing services SPG, the consumer
output SPG, the consumer digital capture SPG, the traditional
consumables SPG within the Graphic Communications Group segment, and
the radiography film and digital output SPGs within the Health Group
segment. The decrease in price/mix was primarily driven by the
consumer film capture SPG, the consumer output SPG, and the kiosk SPG.
These decreases noted above were partially offset by an increase in
net sales due to the June 15, 2005 acquisition of Creo, which
contributed $104 million or approximately 2.8% to the increase in
second quarter sales. The impact of foreign exchange on net sales for
the period was insignificant.
Net sales in the U.S. were $1,340 million for the second quarter
of 2006 as compared with $1,442 million for the prior year quarter,
representing a decrease of $102 million, or 7%. Net sales outside the
U.S. were $2,020 million for the current quarter as compared with
$2,244 million for the second quarter of 2005, representing a decrease
of $224 million, or 10%, which includes the negative impact of foreign
currency fluctuations of $2 million, or less than 1%.
Digital Strategic Product Groups' Revenues
The Company's digital product sales, including new technologies
product sales, were $1,838 million for the second quarter of 2006 as
compared with $1,736 million for the prior year quarter, representing
an increase of $102 million, or 6%, primarily driven by the
acquisition of Creo. Product sales from new technologies, which are
included in digital product sales, were $9 million for the second
quarter of 2006 and $16 million for the second quarter of 2005.
Traditional Strategic Product Groups' Revenues
Net sales of the Company's traditional products were $1,522
million for the second quarter of 2006 as compared with $1,950 million
for the prior year quarter, representing a decrease of $428 million,
or 22%, primarily driven by declines in the consumer film capture SPG,
the photofinishing services SPG and the consumer and professional
output SPGs.
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 $1,054 million for the second
quarter of 2006 as compared with $1,149 million for the prior year
quarter, representing a decrease of $95 million, or 8%. The impact of
foreign currency fluctuations on net sales for the period was
insignificant. Net sales in the Asia Pacific region were $631 million
for the current quarter as compared with $692 million for the prior
year quarter, representing a decrease of $61 million, or 9%. The
decrease in net sales for the period reflected the unfavorable impact
of foreign currency fluctuations of 1%. Net sales in the Canada and
Latin America region were $335 million in the current quarter as
compared with $403 million for the second quarter of 2005,
representing a decrease of $68 million, or 17%. The decrease in net
sales for the period included the favorable impact of foreign currency
fluctuations of 1%.
Gross Profit
Gross profit was $809 million for the second quarter of 2006 as
compared with $1,038 million for the second quarter of 2005,
representing a decrease of $229 million, or 22%. The gross profit
margin was 24.1% in the current quarter as compared with 28.2% in the
prior year quarter. The 4.1 percentage point decrease was primarily
attributable to increased manufacturing costs, which were largely
driven by additional depreciation due to asset useful life changes
made during the third quarter of 2005 and higher silver prices,
partially offset by favorable cost reductions. In total, manufacturing
costs reduced gross profit margins by approximately 2.2 percentage
points. Declines due to volume, driven primarily by the consumer film
capture SPG, reduced gross profit margins by approximately 0.5
percentage points, while declines due to price/mix, which were
primarily attributable to the consumer digital capture SPG and the
kiosk SPG, partially offset by the year-over-year increase in royalty
income related to digital capture, reduced gross profit margins by
approximately 1.2 percentage points. Foreign exchange and the
acquisition of Creo did not have significant impacts on gross profit
margins for the quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $620
million for the second quarter of 2006 as compared with $650 million
for the prior year quarter, representing a decrease of $30 million, or
5%. SG&A as a percentage of sales remained constant at 18% for the
second quarter of 2006 as compared with the prior year quarter. The
absolute dollar decrease in SG&A is primarily attributable to a $34
million reduction in selling expenses related to the FPG segment as a
result of the continued decline in traditional product sales and
ongoing Company-wide cost reduction initiatives, partially offset by
SG&A associated with the prior year acquisition of Creo of $33 million
and by $8 million of costs related to the Company's exploration of
strategic alternatives for the Health Group, which was publicly
announced on May 4, 2006.
Research and Development Costs
Research and development costs (R&D) were $187 million for the
second quarter of 2006 as compared with $272 million for the second
quarter of 2005, representing a decrease of $85 million, or 31%. R&D
as a percentage of sales was 6% for the second quarter of 2006 as
compared with the prior year quarter of 7%. This decrease was
primarily driven by $64 million of write-offs in the prior year
quarter for purchased in-process R&D associated with acquisitions, and
by significant spending reductions in the current quarter related to
traditional products and services. These decreases were partially
offset by additional R&D expenses of $11 million associated with the
acquisition of Creo.
Restructuring Costs and Other
Restructuring costs and other were $169 million for the second
quarter of 2006 as compared with $253 million for the second quarter
of 2005, representing a decrease of $84 million or 33%. 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.
Loss From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
The loss from continuing operations before interest, other income
(charges), net and income taxes for the second quarter of 2006 was
$167 million as compared with a loss of $137 million for the second
quarter of 2005, representing an increased loss of $30 million. This
change is attributable to the reasons described above.
Interest Expense
Interest expense for the second quarter of 2006 was $66 million as
compared with $49 million for the prior year quarter, representing an
increase of $17 million, or 35%. Higher interest expense is a result
of increased levels of debt associated with the prior year
acquisitions of KPG and Creo, and higher interest rates.
Other Income (Charges), Net
The other income (charges), net component includes principally
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 $2
million as compared with other charges of $37 million for the second
quarter of 2005. The increase of $39 million is primarily attributable
to a year-over-year decrease in foreign exchange losses of $14
million, and a year-over-year increase in interest income of $7
million. Also contributing to the year-over-year increase are one-time
charges incurred in the prior-year quarter, consisting of a $19
million impairment charge related to the investment in Lucky Film, and
equity losses from the KPG joint venture of $9 million related to the
acquisition of KPG on April 1, 2005. Partially offsetting these
decreases were impairment charges of $9 million in the current quarter
related to assets held for sale.
Loss From Continuing Operations Before Income Taxes
The loss from continuing operations before income taxes for the
second quarter of 2006 was $231 million as compared with a loss of
$223 million for the second quarter of 2005, representing an increased
loss of $8 million. This change is attributable to the reasons
described above.
Income Tax Provision (Benefit)
For the three months ended June 30, 2006, the Company recorded a
provision of $51 million on a pre-tax loss of $231 million,
representing an effective rate of (22.1)%. The difference of $132
million between the recorded provision of $51 million and the benefit
of $81 million that would result from applying the U.S. statutory rate
of 35.0% is outlined below.
For the three months ended June 30, 2005, the Company recorded a
benefit of $68 million on a pre-tax loss of $223 million, representing
an effective rate of 30.5%. The difference of $10 million between the
recorded benefit of $68 million and the benefit of $78 million that
would result from applying the U.S. statutory rate of 35.0% is
outlined below.
(dollars in millions) 3 Months Ended 3 Months Ended
June 30, 2006 June 30, 2005
- -- The ongoing impact of not providing
any tax benefit on the losses
incurred in the U.S., 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. The
Company was recording tax benefits
on its U.S losses as of and for the
three months ended June 30, 2005. $32 $(37)
- -- The Company recorded discrete pre-
tax charges for restructuring, asset
impairments and a legal settlement
charge totaling $259 million in the
second quarter of 2006, relating to
which the Company recorded a tax
benefit of $31 million. This
benefit differs from the benefit
that would have resulted using the
U.S. statutory rate of $90 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 59 --
- -- The Company recorded discrete pre-
tax charges for restructuring, asset
sale gains, asset impairments and
in-process R&D charges totaling $409
million in the second quarter of
2005, relating to which the Company
recorded a tax benefit of $122
million. This benefit differs from
the benefit that would have resulted
using the U.S. statutory rate of
$143 million due to the fact that
the restructuring 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 -- 21
- -- The Company recorded discrete tax
charges in the second quarter of
2006 relating primarily to purchase
accounting, tax rate changes and
impacts from the ongoing tax audits
with respect to open tax years. The
tax charge of $41 million includes a
charge of $29 million relating to
the finalization of the CREO
purchase accounting and related
changes to the allocation of the
purchase price to the respective tax
jurisdiction. Due to changes in the
allocation of the purchase price
between the U.S. and other
countries, the finalization of the
purchase accounting had a $29
million impact on the valuation
allowance in the U.S. 41 --
- -- The Company recorded discrete tax
charges in the second quarter of
2005 relating primarily to tax rate
changes, the establishment of a
valuation allowance against deferred
tax assets in Brazil, the planned
remittance of earnings from
subsidiary companies outside the
U.S. and a change in estimate with
respect to a tax benefit recorded in
connection with a land donation in a
prior period. -- 26
-------------- --------------
Total tax provision difference
resulting from the Company's effective
tax rate vs. the U.S. statutory rate $132 $10
============== ==============
Loss From Continuing Operations
The loss from continuing operations for the second quarter of 2006
was $282 million, or $.98 per basic and diluted share, as compared
with a loss from continuing operations for the second quarter of 2005
of $155 million, or $.54 per basic and diluted share, representing a
decrease in earnings of $127 million. This decrease in earnings 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 $628 million for the second quarter of 2006 as compared
with $671 million for the second quarter of 2005, representing a
decrease of $43 million, or 6%. The decrease in net sales was
comprised of: (1) declines related to negative price/mix, driven
primarily by the kiosk SPG and the home printing solutions SPG, which
reduced net sales by approximately 4.2 percentage points, and (2)
lower volumes, which decreased second quarter sales by approximately
2.5 percentage points, driven primarily by declines in the consumer
digital capture SPG. These decreases were partially offset by
favorable exchange, which increased net sales by approximately 0.4
percentage points.
CDG segment net sales in the U.S. were $378 million for the
current quarter as compared with $391 million for the second quarter
of 2005, representing a decrease of $13 million, or 3%. CDG segment
net sales outside the U.S. were $250 million for the second quarter of
2006 as compared with $280 million for the prior year quarter,
representing a decrease of $30 million, or 11%.
Net worldwide sales of consumer digital capture products, which
include consumer digital cameras, accessories, memory products,
imaging sensors, and royalties, decreased 15% in the second quarter of
2006 as compared with the prior year quarter, primarily reflecting
volume decreases and unfavorable price/mix, partially offset by
favorable exchange. Through May, the Company remains in one of the top
three market positions in the U.S. and on a worldwide basis for
consumer digital cameras.
Net worldwide sales of picture maker kiosks/media increased 13% in
the second quarter of 2006 as compared with the second quarter of
2005, as a result of significant 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 67% versus last year.
Net worldwide sales of the home printing solutions SPG, which
includes inkjet photo paper and printer docks/media, increased 1% in
the current quarter as compared with the second quarter of 2005 driven
by volume increases mostly offset by negative price/mix. Through May,
the Company's printer dock product continues to maintain leading
market share positions on a weighted average basis in six key
countries where market share is measured.
Gross Profit
Gross profit for the CDG segment was $93 million for the second
quarter of 2006 as compared with $122 million for the prior year
quarter, representing a decrease of $29 million or 24%. The gross
profit margin was 14.8% in the current quarter as compared with 18.2%
in the prior year quarter. The 3.4 percentage point decrease was
primarily attributable to (1) unfavorable price/mix, primarily driven
by the consumer digital capture SPG, the home printing solutions SPG,
and the kiosk SPG, partially offset by the year-over-year increase in
royalty income related to digital capture, which decreased gross
profit margins by approximately 2.6 percentage points, and (2)
manufacturing-related costs, inclusive of inventory write-downs, which
negatively impacted gross profit margins by approximately 0.8
percentage points. These declines in gross profit margins were
partially offset by favorable exchange, which positively impacted
gross profit margins by approximately 0.2 percentage points.
Selling, General and Administrative Expenses
SG&A expenses for the CDG segment remained unchanged at $128
million for both the second quarter of 2005 and in the current
quarter, and increased as a percentage of sales from 19% for the
second quarter of 2005 to 20% for the current quarter. This percentage
increase was driven by the year-over-year decline in sales.
Research and Development Costs
R&D costs for the CDG segment decreased $1 million, or 2%, from
$46 million in the second quarter of 2005 to $45 million in the
current quarter and remained constant as a percentage of sales at 7%.
Loss From Continuing Operations Before Interest, Other Income
(Charges), Net and Income Taxes
The loss from continuing operations before interest, other income
(charges), net and income taxes for the CDG segment was $79 million in
the second quarter of 2006 compared with a loss of $52 million in the
second quarter of 2005, representing a decrease in earnings of $27
million or 52%, 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 $1,153 million for the second quarter of 2006 as
compared with $1,503 million for the second quarter of 2005,
representing a decrease of $350 million, or 23%. The decrease in net
sales was comprised of lower volumes driven primarily by declines in
the consumer film capture SPG, the consumer output SPG, and the
photofinishing services SPG, which decreased second quarter sales by
approximately 20.9 percentage points, and declines related to negative
price/mix, driven primarily by the consumer film capture SPG and
consumer output SPG, which reduced net sales by approximately 2.2
percentage points. Unfavorable foreign exchange also decreased net
sales by approximately 0.1 percentage points.
FPG segment net sales in the U.S. were $391 million for the
current quarter as compared with $512 million for the second quarter
of 2005, representing a decrease of $121 million, or 24%. FPG segment
net sales outside the U.S. were $762 million for the second quarter of
2006 as compared with $991 million for the prior year quarter,
representing a decrease of $229 million, or 23%.
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 29% in the second quarter of 2006 as
compared with the second quarter of 2005, primarily reflecting volume
declines and negative price/mix.
Net worldwide sales for the consumer output SPG, which includes
color negative paper and photochemicals, decreased 24% in the second
quarter of 2006 as compared with the second quarter of 2005, primarily
reflecting volume declines and unfavorable price/mix.
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 44% in the second quarter of 2006 as compared with the
second quarter of 2005, reflecting continuing volume declines.
Net worldwide sales for the entertainment imaging SPGs, including
origination and print films for the entertainment industry, decreased
5%, primarily reflecting volume declines and unfavorable price/mix for
print films, as well as unfavorable exchange. These results reflect
more conservative motion picture release strategies by major studios
including the maturation of industry practice regarding simultaneous
worldwide releases of major feature films, as well as revenue in 2005
from non-recurring transactions.
Gross Profit
Gross profit for the FPG segment was $303 million for the second
quarter of 2006 as compared with $513 million for the prior year
quarter, representing a decrease of $210 million or 41%. The gross
profit margin was 26.3% in the current quarter as compared with 34.1%
in the prior year quarter. The 7.8 percentage point decrease was
primarily attributable to increased manufacturing costs, which reduced
gross profit margins by approximately 7.3 percentage points and were
largely driven by higher depreciation as a result of the asset useful
life changes made in the third quarter of 2005 and increased silver
costs. Volume declines reduced gross profit margins by approximately
0.4 percentage points, while negative price/mix unfavorably impacted
gross profit margins by approximately 0.1 percentage points.
Selling, General and Administrative Expenses
SG&A expenses for the FPG segment decreased $64 million, or 26%,
from $246 million in the second quarter of 2005 to $182 million in the
current quarter, and remained constant as a percentage of sales at
16%. The decline in SG&A was attributable to a reduction in selling
expenses of $34 million, a reduction in administrative expenses of $17
million and a reduction in advertising costs of $13 million.
Research and Development Costs
R&D costs for the FPG segment decreased $14 million, or 58%, from
$24 million in the second quarter of 2005 to $10 million in the
current quarter and decreased as a percentage of sales from 2% in the
prior year quarter to 1% in the current 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 $113 million
in the second quarter of 2006 compared with $244 million in the second
quarter of 2005, representing a decrease of $131 million or 54%,
largely resulting from the decrease in sales in the current quarter,
higher silver prices, and the impacts of asset useful life changes
that were made in the third quarter of 2005.
GRAPHIC COMMUNICATIONS GROUP
The Graphic Communications Group (GCG) segment serves a variety of
customers in the in-plant, data center, commercial printing,
packaging, newspaper and digital service bureau markets with a range
of software and hardware products that provide customers with a range
of solutions for prepress, traditional and digital printing, and
document scanning and multi-vendor IT services.
On April 1, 2005, the Company became the sole owner of KPG through
the redemption of Sun Chemical Corporation's 50 percent interest in
the KPG joint venture. Under the terms of the transaction, the Company
redeemed all of Sun Chemical's shares in KPG by providing $317 million
in cash at closing and by entering into two notes payable
arrangements, one that will be payable within the U.S. (the U.S. note)
and one that will be payable outside of the U.S. (the non-U.S. note),
that will require principal and interest payments of $200 million in
the third quarter of 2006, and $50 million annually from 2008 through
2013. The total payments due under the U.S. note and the non-U.S. note
are $100 million and $400 million, respectively. The aggregate fair
value of these notes payable arrangements of approximately $395
million as of the acquisition date was recorded as long-term debt in
the Company's Consolidated Statement of Financial Position.
On June 15, 2005, the Company completed the acquisition of Creo
Inc. (Creo), a premier supplier of prepress and workflow systems used
by commercial printers around the world. The Company paid $954 million
(excluding approximately $11 million in transaction related costs), or
$16.50 per share, for all of the outstanding shares of Creo. The
Company used its bank lines to initially fund the acquisition, which
has been refinanced with a term loan under the Company's Secured
Credit Agreement.
As a result of the ongoing integration within the Graphic
Communications Group segment, it will become increasingly difficult to
report results by discrete entities within the business. Starting in
the third quarter of 2006, the Company will report results for the
Graphic Communications Group segment consistent with the
organizational structure of the business.
Worldwide Revenues
Net worldwide sales for the Graphic Communications Group segment
were $908 million for the second quarter of 2006 as compared with $794
million for the prior year quarter, representing an increase of $114
million, or 14%. The increase in net sales was primarily due to: (1)
the acquisition of Creo, which contributed $104 million or
approximately 13.1 percentage points to the year-over-year increase in
sales, and (2) volume increases, primarily driven by digital printing
and digital consumables, which increased sales by approximately 2.0
percentage points. These increases were partially offset by (1)
unfavorable price/mix, primarily driven by the inkjet SPG, workflow
and prepress SPG, and digital printing SPG, which decreased second
quarter sales by approximately 0.3 percentage points, and (2)
unfavorable exchange, which decreased second quarter sales by
approximately 0.4 percentage points.
Net sales in the U.S. were $314 million for the current quarter as
compared with $251 million for the prior year quarter, representing an
increase of $63 million, or 25%. Net sales outside the U.S. were $594
million in the second quarter of 2006 as compared with $543 million
for the prior year quarter, representing an increase of $51 million,
or 9%, which includes a decrease of $4 million or 1% from the
unfavorable impact of exchange.
Digital Strategic Product Groups' Revenues
The Graphic Communications Group segment digital product sales are
comprised of KPG digital revenues; NexPress Solutions, a producer of
digital color and black and white printing solutions; Creo, a supplier
of prepress and workflow systems; Kodak Versamark, a provider of
continuous inkjet technology; document scanners; Encad, a maker of
wide-format inkjet printers, inks and media; and service and support.
Digital product sales for the Graphic Communications Group segment
were $765 million for the second quarter of 2006 as compared with $607
million for the prior year quarter, representing an increase of $158
million, or 26%. The increase in digital product sales was primarily
attributable to the acquisition of Creo, as well as increases in
digital consumables sales.
Net worldwide sales for NexPress digital printing increased 9%
driven by strong color volume increases partially offset by negative
price/mix and unfavorable foreign exchange. The installed base of
digital production color presses continues to grow and increases in
customer average monthly page volumes are leading to higher sales of
consumables.
Sales of Kodak Versamark products and services increased 7% in the
current quarter as compared with the second quarter of 2005,
reflecting volume increases for both consumables and services,
partially offset by negative price/mix and unfavorable exchange.
Traditional Strategic Product Groups' Revenues
Segment traditional product sales are primarily comprised of sales
of traditional graphics products, KPG's analog plates and other films,
and microfilm products. These sales were $143 million for the current
quarter compared with $187 million for the prior year quarter,
representing a decrease of $44 million, or 24%. The decrease in sales
was primarily attributable to declines in KPG-related analog plates
and graphic films.
Gross Profit
Gross profit for the Graphic Communications Group segment was $253
million for the second quarter of 2006 as compared with $213 million
in the prior year quarter, representing an increase of $40 million, or
19%. The gross profit margin was 27.9% in the current quarter as
compared with 26.8% in the prior year quarter. The increase in the
gross profit margin of 1.1 percentage points was primarily
attributable to: (1) favorable price/mix, primarily driven by the
digital consumables SPG, which increased gross profit margins by
approximately 1.5 percentage points, and (2) reductions in
manufacturing and other costs, which increased gross profit margins by
approximately 0.9 percentage points. These positive impacts were
partially offset by negative impacts from: (1) declines related to the
acquisition of Creo, which reduced gross profit margins by
approximately 1.2 percentage points, and (2) unfavorable exchange,
which decreased gross profit margins by approximately 0.1 percentage
points.
Selling, General and Administrative Expenses
SG&A expenses for the Graphic Communications Group segment were
$180 million for the second quarter of 2006 as compared with $142
million in the prior year quarter, representing an increase of $38
million, or 27%, and increased as a percentage of sales from 18% to
20%. The increase in SG&A in absolute dollars is primarily
attributable to the acquisition of Creo.
Research and Development Costs
Second quarter R&D costs for the Graphic Communications Group
segment decreased $60 million, or 54%, from $112 million for the
second quarter of 2005 to $52 million for the current quarter, and
decreased as a percentage of sales from 14% for the second quarter of
2005 to 6% for the current quarter. The year-over-year dollar decrease
was primarily driven by $64 million of write-offs in the prior year
quarter for purchased in-process R&D associated with acquisitions.
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 Graphic Communications Group
segment were $22 million in the second quarter of 2006 compared with a
loss of $42 million in the second quarter of 2005. This increase in
earnings is attributable to the reasons outlined above.
HEALTH GROUP
Worldwide Revenues
Net worldwide sales for the Health Group segment were $655 million
for the second quarter of 2006 as compared with $694 million for the
prior year quarter, representing a decrease of $39 million, or 6%. The
decrease in sales was attributable to volume declines of approximately
4.8 percentage points, primarily driven by the radiology film and
digital output SPGs, partially offset by the growth in the digital
capture, digital dental, and healthcare information solutions SPGs.
Price/mix decreases reduced second quarter sales by approximately 0.8
percentage points, primarily driven by the traditional radiology film
SPG. Foreign exchange did not significantly impact second quarter
sales.
Net sales in the U.S. were $244 million for the current quarter as
compared with $273 million for the second quarter of 2005,
representing a decrease of $29 million, or 11%. Net sales outside the
U.S. were $411 million for the second quarter of 2006 as compared with
$421 million for the prior year quarter, representing a decrease of
$10 million, or 2%.
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 $436 million
for the current quarter as compared with $442 million for the second
quarter of 2005, representing a decrease of $6 million, or 1%. This
sales decline was driven by lower volumes in the digital output SPG,
partially offset by volume growth in the digital capture SPG, digital
dental SPG, and healthcare information solutions SPG.
Traditional Strategic Product Groups' Revenues
Segment traditional product sales, including analog film,
equipment, service, and chemistry, were $219 million for the current
quarter as compared with $252 million for the second quarter of 2005,
representing a decrease of $33 million, or 13%. Sales declines were
primarily driven by volume decreases.
Gross Profit
Gross profit for the Health Group segment was $238 million for the
second quarter of 2006 as compared with $273 million in the prior year
quarter, representing a decrease of $35 million, or 13%. The gross
profit margin was 36.3% in the current quarter as compared with 39.3%
in the second quarter of 2005. The decrease in the gross profit margin
of 3.0 percentage points was principally attributable to price/mix,
which negatively impacted gross profit margins by approximately 3.2
percentage points primarily driven by the digital capture SPG. This
decline was partially offset by reductions in manufacturing cost,
which increased gross profit margins by approximately 0.3 percentage
points, as increased silver costs and higher depreciation as a result
of asset useful life changes made in the third quarter of 2005 were
more than offset by service and manufacturing productivity gains.
Selling, General and Administrative Expenses
SG&A expenses for the Health Group segment decreased $1 million,
or 1%, from $124 million in the second quarter of 2005 to $123 million
for the current quarter, and increased as a percentage of sales from
18% in the prior year quarter to 19% in the current year quarter. The
decrease in SG&A expenses is primarily attributable to cost reduction
activities and a favorable legal settlement of $2 million in the
current quarter, partially offset by $8 million of spending related to
the Company's exploration of strategic alternatives for the Health
Group, which was publicly announced on May 4, 2006.
Research and Development Costs
Second quarter R&D costs decreased $3 million, or 8%, from $40
million in the second quarter of 2005 to $37 million, and remained
constant as a percentage of sales at 6%.
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 $31
million, or 28%, from $109 million for the prior year quarter to $78
million for the second quarter of 2006 due to the reasons described
above.
ALL OTHER
Worldwide Revenues
Net worldwide sales for All Other were $16 million for the second
quarter of 2006 as compared with $24 million for the second quarter of
2005, representing a decrease of $8 million, or 33%. Net sales in the
U.S. were $13 million for the second quarter of 2006 as compared with
$15 million for the prior year quarter, representing a decrease of $2
million, or 13%. Net sales outside the U.S. were $3 million in the
second quarter of 2006 as compared with $9 million in the prior year
quarter, representing a decrease of $6 million, or 67%.
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 $51 million in the
current quarter as compared with a loss of $57 million in the second
quarter of 2005, primarily driven by digital investments, which
include the consumer inkjet and display programs.
NET LOSS
The net loss for the second quarter of 2006 was $282 million, or a
loss of $.98 per basic and diluted share, as compared with a net loss
for the second quarter of 2005 of $155 million, or $.54 per basic and
diluted share, representing a decrease in earnings of $127 million or
82%. This decrease 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 second quarter of 2006:
Balance
(in millions) March 31, Costs Cash
2006 Incurred Reversals(1) Payments
--------- -------- ------------ --------
2004-2007 Restructuring
Program:
Severance reserve $269 $141 $ - $(118)
Exit costs reserve 29 20 (1) (15)
--------- -------- ------------ --------
Total reserve $298 $161 $ (1) $(133)
========= ======== ============ ========
Long-lived asset
impairments and inventory
write-downs $ - $ 14 $ - $ -
========= ======== ============ ========
Accelerated depreciation $ - $ 72 $ - $ -
========= ======== ============ ========
Pre-2004 Restructuring
Programs:
Severance reserve $ 1 $ - $ - $ (1)
Exit costs reserve 12 - - (1)
-------- ------- --------- -------
Total reserve $ 13 $ - $ - $ (2)
======== ======= ========= =======
Total of all
restructuring programs $311 $247 $ (1) $(135)
======== ======= ========= =======
Other
Adjustments Balance
Non-cash and June 30,
Settlements Reclasses(2) 2006
----------- ------------ --------
2004-2007 Restructuring Program:
Severance reserve $ - $ (12) $ 280
Exit costs reserve - (4) 29
----------- ------------ --------
Total reserve $ - $ (16) $ 309
=========== ============ ========
Long-lived asset
impairments and inventory
write-downs $ (14) $ - $ -
=========== ============ ========
Accelerated depreciation $ (72) $ - $ -
=========== ============ ========
Pre-2004 Restructuring Programs:
Severance reserve $ - $ - $ -
Exit costs reserve - 1 12
----------- ------------ --------
Total reserve $ - $ 1 $ 12
=========== ============ ========
Total of all
restructuring programs $ (86) $ (15) $ 321
=========== =========== ========
(1) During the three months ended June 30, 2006, the Company reversed
$1 million of exit cost reserves, as exit costs were settled for
amounts less than originally estimated. These reserve reversals
were included in restructuring costs and other in the accompanying
Statement of Operations for the three months ended June 30, 2006.
(2) The total restructuring charges of $247 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 the
impact of 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 June 30, 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 losses, settlement losses,
and special termination benefits of $(21) million, and (2)
reclassifications to Other long-term liabilities for the
restructuring-related impacts on the Company's environmental
remediation liabilities of $(7) million. Additionally, the Other
Adjustments and Reclasses column of the table above includes: (1)
adjustments to the restructuring reserves of $9 million related to
the Creo purchase accounting impacts that were charged
appropriately to Goodwill as opposed to Restructuring charges, and
(2) foreign currency translation adjustments of $4 million, which
are reflected in Accumulated other comprehensive loss in the
Consolidated Statement of Financial Position.
The costs incurred, net of reversals, which total $246 million for
the three months ended June 30, 2006, include $72 million and $5
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 June 30, 2006. The remaining costs incurred, net of
reversals, of $169 million were reported as restructuring costs and
other in the accompanying Consolidated Statement of Operations for the
three months ended June 30, 2006. The severance costs and exit costs
require the outlay of cash, while long-lived asset impairments,
accelerated depreciation and inventory write-downs represent non-cash
items.
2004-2007 Restructuring Program
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 second 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. When
essentially completed in 2007, the activities under this Program will
result in a business model consistent with what is necessary to
compete profitably in digital markets.
The Company implemented certain actions under the Program during
the second quarter of 2006. As a result of these actions, the Company
recorded charges of $175 million in the second quarter of 2006, which
were composed of severance, long-lived asset impairments, exit costs
and inventory write-downs of $141 million, $9 million, $20 million and
$5 million, respectively. The severance costs related to the
elimination of approximately 1,625 positions, including approximately
200 photofinishing, 900 manufacturing, and 525 administrative
positions. The geographic composition of the positions to be
eliminated includes approximately 600 in the United States and Canada
and 1,025 throughout the rest of the world. Included in the 1,625
positions are approximately 25 positions related to Creo, which was
acquired in 2005. The severance charge related to these positions is
included in Goodwill as part of the purchase accounting related to
Creo. The reduction of the 1,625 positions and the $161 million
charges for severance and exit costs are reflected in the 2004-2007
Restructuring Program table below. The $9 million charge in the second
quarter and the $46 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
six months ended June 30, 2006, respectively. The charges taken for
inventory write-downs of $5 million and $6 million were reported in
cost of goods sold in the accompanying Consolidated Statement of
Operations for the three and six months ended June 30, 2006,
respectively.
As a result of initiatives implemented under the 2004-2007
Restructuring Program, the Company recorded $72 million and $154
million of accelerated depreciation on long-lived assets in cost of
goods sold in the accompanying Consolidated Statement of Operations
for the three and six months ended June 30, 2006, respectively. The
accelerated depreciation relates to long-lived assets accounted for
under the held and used model of SFAS No. 144. The second quarter
amount of $72 million relates to $71 million of manufacturing
facilities and equipment, and $1 million of administrative facilities
and equipment that will be used until their abandonment. The
year-to-date amount of $154 million relates to $4 million of
photofinishing facilities and equipment, $149 million of manufacturing
facilities and equipment, and $1 million of administrative facilities
and equipment that will be used until their abandonment. The Company
will incur approximately $50 million of accelerated depreciation in
the third quarter of 2006 as a result of the initiatives already
implemented under the 2004-2007 Restructuring Program.
Under this Program, on a life-to-date basis as of June 30, 2006,
the Company has recorded charges of $2,435 million, which was composed
of severance, long-lived asset impairments, exit costs, inventory
write-downs, and accelerated depreciation of $1,146 million, $308
million, $222 million, $62 million, and $697 million, respectively.
The severance costs related to the elimination of approximately 20,550
positions, including approximately 6,025 photofinishing, 9,500
manufacturing, 1,075 research and development and 3,950 administrative
positions.
The following table summarizes the activity with respect to the
charges recorded in connection with the focused cost reduction actions
that the Company has committed to under the 2004-2007 Restructuring
Program and the remaining balances in the related reserves at June 30,
2006:
(dollars in millions)
Exit
Number of Severance Costs
Employees Reserve Reserve Total
--------- --------- ------- -------
2004 charges 9,625 $418 $ 99 $ 517
2004 reversals - (6) (1) (7)
2004 utilization (5,175) (169) (47) (216)
2004 other adj. &
reclasses - 24 (15) 9
--------- --------- ------- -------
Balance at 12/31/04 4,450 267 36 303
2005 charges 8,125 497 84 581
2005 reversals - (3) (6) (9)
2005 utilization (10,225) (377) (95) (472)
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
Q1, 2006 reversals - (1) - (1)
Q1, 2006 utilization (1,425) (97) (14) (111)
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
Q2, 2006 reversals - - (1) (1)
Q2, 2006 utilization (1,300) (118) (15) (133)
Q2, 2006 other adj.
& reclasses - (12) (4) (16)
--------- --------- ------- -------
Balance at 06/30/06 2,425 $ 280 $ 29 $ 309
========= ========= ======= =======
Long-lived
Asset
Impairments
and Inventory Accelerated
Write-downs Depreciation
------------- ------------
2004 charges $ 157 $ 152
2004 reversals - -
2004 utilization (157) (152)
2004 other adj. &
reclasses - -
------------- ------------
Balance at 12/31/04 - -
2005 charges 161 391
2005 reversals - -
2005 utilization (161) (391)
2005 other adj. &
reclasses - -
------------- ------------
Balance at 12/31/05 - -
Q1, 2006 charges 38 82
Q1, 2006 reversals - -
Q1, 2006 utilization (38) (82)
Q1, 2006 other adj.
& reclasses - -
------------- ------------
Balance at 03/31/06 - -
Q2, 2006 charges 14 72
Q2, 2006 reversals - -
Q2, 2006 utilization (14) (72)
Q2, 2006 other adj.
& reclasses - -
------------- ------------
Balance at 06/30/06 $ - $ -
============= ============
As a result of the initiatives already implemented under the
2004-2007 Restructuring Program, severance payments will be paid
during periods through 2007 since, in many instances, the employees
whose positions were eliminated can elect or are required to receive
their payments over an extended period of time. Most exit costs have
been paid or will be paid during 2006. However, certain costs, such as
long-term lease payments, will be paid over periods after 2006.
The charges of $247 million recorded in the second quarter of
2006, excluding reversals, included $56 million applicable to the Film
and Photofinishing Systems Group segment, $5 million applicable to the
Graphic Communications Group segment, and $2 million applicable to the
Consumer Digital Imaging Group segment. The balance of $184 million
was applicable to manufacturing, research and development, and
administrative functions, which are shared across all segments.
The restructuring actions implemented during the second quarter of
2006 under the 2004-2007 Restructuring Program are expected to
generate future annual cost savings of approximately $109 million, of
which approximately $107 million represents future annual cash
savings. These cost savings began to be realized by the Company
beginning in the second quarter of 2006, and are expected to be fully
realized by the end of 2006 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 $71
million, $37 million, and $1 million, respectively.
Based on all of the actions taken to date under the 2004-2007
Restructuring Program, the program is expected to generate annual cost
savings of approximately $1,190 million, including annual cash savings
of $1,140 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 2006 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 $803 million, $280 million, and $107
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 is updating its
estimate of total annual cost savings under the extended 2004-2007
Restructuring Program of $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 June 30, 2006, the Company had remaining exit costs reserves of
$12 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 $610 million to
$1,055 million at June 30, 2006. The decrease resulted primarily from
$401 million of net cash used in operating activities, $163 million of
net cash used in investing activities, and $52 million of net cash
used in financing activities.
The net cash used in operating activities of $401 million was
primarily attributable to a decrease in liabilities excluding
borrowings of $482 million, which included $279 million of payments
for restructuring-related severance benefits and exit costs, as well
as timing of payments of customer rebates and trade payables. These
uses of cash were partially offset by decreases in receivables of $216
million. The decrease in receivables is a result of seasonally lower
sales levels in the three month period ended June 30, 2006 compared
with fourth quarter 2005 sales. In addition, the company's net loss of
$580 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 benefit for deferred taxes, used $28
million of operating cash.
The net cash used in investing activities of $163 million was
utilized primarily for capital expenditures of $184 million. The net
cash used in financing activities of $52 million was the result of a
net decrease in borrowings.
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 $184 million in the six months ended June
30, 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. For the year ending December 31,
2006, the Company expects capital additions of less than $500 million.
During the six months ended June 30, 2006, the Company expended
$279 million against restructuring reserves and pension and other
postretirement liabilities, primarily for the payment of severance
benefits. Employees whose positions were eliminated could elect to
receive severance payments for up to two years following their date of
termination.
The Company has a dividend policy whereby it makes semi-annual
payments which, when declared, will be paid on the Company's 10th
business day each July and December to shareholders of record on the
close of the first business day of the preceding month. On May 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.
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: 4.25 to 1 as of June 30, 2006;
4.00 to 1 as of September 30, 2006; and 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 June 30, 2006, the Company's consolidated debt to EBITDA
ratio was 2.90 and the consolidated EBITDA to consolidated interest
ratio was 5.14. 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:
(in millions) Second First Fourth Third
Rolling Four Quarter Quarter Quarter Quarter
Quarter Total 2006 2006 2005 2005
Net loss $(1,540) $ (282) $(298) $ (46) $(914)
Plus:
Interest expense 252 66 62 67 57
Provision (benefit)
for income taxes 736 51 3 (46) 728
Depreciation and
amortization 1,577 345 371 465 396
Non-cash
restructuring
charges and asset
write-downs/
impairments 294 77 56 109 52
Loss from cumulative
effect of
accounting change,
net of income taxes
(extraordinary
loss) 57 - - 57 -
Non-cash purchase
accounting
adjustments 16 - - - 16
Non-cash stock
compensation
expense 20 8 6 3 3
Non-cash equity in
(earnings) loss
from unconsolidated
affiliates (7) (7) - (1) 1
Impact of change in
accounting from
LIFO to average
cost 5 - - 4 1
------------- ------- ------- ------- -------
Total additions
to calculate
EBITDA 2,950 540 498 658 1,254
Less:
Earnings from
discontinued
operations, net of
income taxes
(extraordinary
income) (149) - - (148) (1)
Investment income (43) (13) (17) (7) (6)
------------- ------- ------- ------- -------
Total subtractions
to calculate
EBITDA (192) (13) (17) (155) (7)
------------- ------- ------- ------- -------
EBITDA, as included
in the debt to
EBITDA ratio as
presented $ 1,218 $ 245 $183 $457 $333
============= ======= ======= ======= =======
(Following is a reconciliation to the most directly comparable
GAAP measure)
EBITDA, as included
in the debt to
EBITDA ratio as
presented $ 1,218 $ 245 $183 $457 $333
Depreciation and
amortization (1,577) (345) (371) (465) (396)
Non-cash
restructuring
charges and asset
write-downs/
impairments (294) (77) (56) (109) (52)
Other adjustments,
net (67) 10 (15) (54) (8)
------------- ------- ------- ------- -------
Loss from continuing
operations before
interest, other
income (charges),
net and income
taxes $ (720) $(167) $ (259) $(171) $(123)
============= ======= ======= ======= =======
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:
(in millions) Second First Fourth Third
Rolling Four Quarter Quarter Quarter Quarter
Quarter Total 2006 2006 2005 2005
Interest expense, as
included in the
EBITDA to interest
expense ratio $ 237 $ 62 $ 59 $ 63 $ 53
Adjustments to
interest expense
for purposes of the
covenant
calculation 15 4 3 4 4
------------- ------- ------- ------- -------
Interest expense $ 252 $ 66 $ 62 $ 67 $ 57
============= ======= ======= ======= =======
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 earnings, revenue,
revenue growth, losses, cash, operating margins, employment reductions
and charges under its restructuring program 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 a changed segment structure;
-- implementation of the cost reduction program, including asset
rationalization and monetization, reduction in selling,
general and administrative costs and personnel reductions;
-- 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 our debt covenants;
-- implementation of product strategies (including category
expansion, digitization, organic light emitting diode (OLED)
displays and digital products) and go-to-market strategies;
-- protection, enforcement and defense of our intellectual
property;
-- implementation of intellectual property licensing and other
strategies;
-- development and implementation of e-commerce strategies;
-- completion of information systems upgrades, including SAP, our
enterprise system software;
-- completion of various portfolio actions;
-- reduction of inventories;
-- integration of acquired businesses;
-- improvement in manufacturing productivity and techniques;
-- improvement in receivables performance;
-- improvement in supply chain efficiency and management of
third-party sourcing relationships;
-- implementation of our strategies designed to address the
decline in our traditional businesses; and
-- performance of our business in emerging markets like China,
India, Brazil, Mexico and Russia.
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 our debt credit ratings and our ability to access
capital markets;
-- the nature and pace of technology evolution, including the
traditional-to-digital transformation;
-- continuing customer consolidation and buying power;
-- current and future proposed changes to accounting rules and to
tax laws, as well as other factors which could adversely
impact our effective tax rate in the future;
-- general economic, business, geo-political, regulatory and
public health conditions;
-- market growth predictions;
-- continued effectiveness of internal controls; and
-- other factors and uncertainties disclosed from time to time in
our filings with the Securities and Exchange Commission.
Any forward-looking statements in this 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 Six Months Ended
June 30 June 30
------------------ -------------------
2006 2005 2006 2005
Net sales $3,360 $3,686 $6,249 $6,518
Cost of goods sold 2,551 2,648 4,762 4,789
------ ------ ------ ------
Gross profit 809 1,038 1,487 1,729
Selling, general and
administrative expenses 620 650 1,229 1,231
Research and development costs 187 272 370 468
Restructuring costs and other 169 253 314 368
------ ------ ------ ------
Loss from continuing
operations before interest,
other income (charges), net
and income taxes (167) (137) (426) (338)
Interest expense 66 49 128 87
Other income (charges), net 2 (37) 28 (2)
------ ------ ------ ------
Loss from continuing
operations before income
taxes (231) (223) (526) (427)
Provision (benefit) for income
taxes 51 (68) 54 (125)
------ ------ ------ ------
Loss from continuing
operations $ (282) $ (155) $ (580) $(302)
====== ====== ====== ======
Earnings from discontinued
operations, net of income
taxes $ - $ - $ - $ 1
====== ====== ====== ======
NET LOSS $ (282) $ (155) $ (580) $(301)
====== ====== ====== ======
Basic and diluted net loss
per share:
Continuing operations $ (.98) $ (.54) $(2.02) $(1.05)
Discontinued operations - - - -
------ ------ ------ ------
Total $ (.98) $ (.54) $(2.02) $(1.05)
====== ====== ====== ======
Number of common shares used
in basic net loss per share 287.3 287.1 287.2 287.0
Incremental shares from
assumed conversion of options - - - -
------ ------ ------ ------
Number of common shares used
in diluted net loss per share 287.3 287.1 287.2 287.0
====== ====== ====== ======
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - UNAUDITED
(in millions)
June 30, Dec. 31,
2006 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,055 $1,665
Receivables, net 2,580 2,760
Inventories, net 1,439 1,455
Deferred income taxes 111 100
Other current assets 132 116
-------- --------
Total current assets 5,317 6,096
-------- --------
Property, plant and equipment, net 3,250 3,778
Goodwill 2,174 2,141
Other long-term assets 3,510 3,221
-------- --------
TOTAL ASSETS $14,251 $15,236
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities $ 3,655 $ 4,187
Short-term borrowings 284 819
Accrued income taxes 769 483
-------- --------
Total current liabilities 4,708 5,489
OTHER LIABILITIES
Long-term debt, net of current portion 3,247 2,764
Pension and other postretirement
liabilities 3,218 3,476
Other long-term liabilities 1,203 1,225
-------- --------
Total liabilities 12,376 12,954
SHAREHOLDERS' EQUITY
Common stock at par 978 978
Additional paid in capital 883 873
Retained earnings 6,062 6,717
Accumulated other comprehensive loss (234) (467)
Unvested stock (4) (6)
-------- --------
7,685 8,095
Less: Treasury stock at cost 5,810 5,813
-------- --------
Total shareholders' equity 1,875 2,282
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $14,251 $15,236
======== ========
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(in millions)
Six Months Ended
June 30
----------------
2006 2005
Cash flows relating to operating activities:
Net loss $(580) $(301)
Adjustments to reconcile to net cash used in
operating activities:
Earnings from discontinued operations - (1)
Equity in earnings from unconsolidated
affiliates (7) (12)
Depreciation and amortization 716 541
Purchased research and development - 66
Loss (gain) on sales of businesses/assets 1 (16)
Restructuring costs, asset impairments and
other non-cash charges 79 101
Benefit for deferred taxes (237) (122)
Decrease in receivables 216 69
Decrease (increase) in inventories 28 (72)
Decrease in liabilities excluding borrowings (482) (707)
Other items, net (135) 24
------ -------
Total adjustments 179 (129)
------ -------
Net cash used in operating activities (401) (430)
------ -------
Cash flows relating to investing activities:
Additions to properties (184) (210)
Net proceeds from sales of businesses/assets 33 22
Acquisitions, net of cash acquired - (987)
(Investments in) distributions from
unconsolidated affiliates (9) 63
Marketable securities - purchases (60) (55)
Marketable securities - sales 57 45
------ -------
Net cash used in investing activities (163) (1,122)
------ -------
Cash flows relating to financing activities:
Net (decrease) increase in borrowings
with original maturity of 90 days or less (21) 87
Proceeds from other borrowings 568 1,068
Repayment of other borrowings (599) (296)
Exercise of employee stock options - 12
------ -------
Net cash (used in) provided by financing
activities (52) 871
------ -------
Effect of exchange rate changes on cash 6 (21)
------ -------
Net decrease in cash and cash equivalents (610) (702)
Cash and cash equivalents, beginning of year 1,665 1,255
------ -------
Cash and cash equivalents, end of quarter $1,055 $ 553
====== =======
Net Sales from Continuing Operations by Reportable Segment and
All Other - Unaudited
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
2006 2005 Change 2006 2005 Change
Consumer Digital
Imaging Group
Inside the U.S. $ 378 $ 391 - 3% $ 653 $ 695 - 6%
Outside the U.S. 250 280 -11 473 529 -11
------ ------ ------ ------ ------ ------
Total CDG 628 671 - 6 1,126 1,224 - 8
------ ------ ------ ------ ------ ------
Film and Photofinishing
Systems Group
Inside the U.S. 391 512 -24 675 914 -26
Outside the U.S. 762 991 -23 1,394 1,857 -25
------ ------ ------ ------ ------ ------
Total FPG 1,153 1,503 -23 2,069 2,771 -25
------ ------ ------ ------ ------ ------
Graphic Communications
Group
Inside the U.S. 314 251 +25 627 407 +54
Outside the U.S. 594 543 + 9 1,151 755 +52
------ ------ ------ ------ ------ ------
Total Graphic
Communications Group 908 794 +14 1,778 1,162 +53
------ ------ ------ ------ ------ ------
Health Group
Inside the U.S. 244 273 -11 477 518 - 8
Outside the U.S. 411 421 - 2 763 802 - 5
------ ------ ------ ------ ------ ------
Total Health Group 655 694 - 6 1,240 1,320 - 6
------ ------ ------ ------ ------ ------
All Other
Inside the U.S. 13 15 -13 30 23 +30
Outside the U.S. 3 9 -67 6 18 -67
------ ------ ------ ------ ------ ------
Total All Other 16 24 -33 36 41 -12
------ ------ ------ ------ ------ ------
Consolidated total $3,360 $3,686 - 9% $6,249 $6,518 - 4%
====== ====== ====== ====== ====== ======
(Loss) Earnings from Continuing Operations Before Interest, Other
Income (Charges), Net and Income Taxes by Reportable Segment and All
Other - Unaudited
(in millions)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
2006 2005 Change 2006 2005 Change
Consumer Digital
Imaging Group $ (79) $ (52) -52% $(173) $(110) - 57%
Percent of Sales (13)% (8)% (15)% (9)%
Film and Photofinishing
Systems Group $ 113 $ 244 -54% $ 142 $ 315 - 55%
Percent of Sales 10% 16% 7% 11%
Graphic Communications
Group $ 22 $ (42) +152% $ 53 $ (76) +170%
Percent of Sales 2% (5)% 3% (7)%
Health Group $ 78 $ 109 - 28% $ 124 $ 187 - 34%
Percent of Sales 12% 16% 10% 14%
All Other $ (51) $ (57) + 11% $ (94) $(109) + 14%
Percent of Sales (319)% (238)% (261)% (266)%
------ ------ ------ ------ ------ ------
Total of segments $ 83 $ 202 - 59% $ 52 $ 207 - 75%
Percent of Sales 2% 5% 1% 3%
Restructuring costs and
other (246) (339) (474) (545)
Legal settlement (4) - (4) -
Interest expense (66) (49) (128) (87)
Other income (charges),
net 2 (37) 28 (2)
------ ------ ------ ------ ------ ------
Consolidated loss
from continuing
operations before
income taxes $(231) $(223) - 4% $(526) $(427) - 23%
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