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| EK > SEC Filings for EK > Form 10-Q on 30-Oct-2008 | All Recent SEC Filings |
30-Oct-2008
Quarterly Report
Due to recent disruptions in the broad financial markets and global economic weakness, management has placed increased emphasis on monitoring and managing the risks associated with the current economic environment, particularly the collectability of receivables, the fair value of assets, and the Company's liquidity. Management has assessed the implications of these recent events on the Company's current businesses and believes that there has not been a significant impact to the Company's financial position as of September 30, 2008 or liquidity during the first nine months of 2008. Management will continue to monitor and manage the risks associated with the current economic environment and their impact on the Company's financial position. Refer to Item 1A of Part II, "Risk Factors."
Kodak Operating Model and Reporting Structure
The Company has three reportable segments: Consumer Digital Imaging Group (CDG), Film, Photofinishing and Entertainment Group (FPEG), and Graphic Communications Group (GCG). Within each of the Company's reportable segments are various components, or Strategic Product Groups (SPGs). Throughout the remainder of this document, references to the segments' SPGs are indicated in italics. The balance of the Company's continuing operations, which individually and in the aggregate do not meet the criteria of a reportable segment, are reported in All Other. A description of the segments is as follows:
Consumer Digital Imaging Group Segment (CDG): CDG encompasses digital still and video cameras, digital devices such as picture frames, snapshot printers and related media, kiosks and related media, APEX drylab systems which were introduced in the second quarter of 2008, consumer inkjet printing, Kodak Gallery, and imaging sensors. The APEX drylab system provides an alternative to traditional photofinishing processing at retail locations. CDG also includes the licensing activities related to the Company's intellectual property in digital imaging products.
Film, Photofinishing and Entertainment Group Segment (FPEG): FPEG encompasses consumer and professional film, one-time-use cameras, graphic arts film, aerial and industrial film, and entertainment imaging products and services. In addition, this segment also includes paper and output systems, and photofinishing services. This segment provides consumers, professionals, cinematographers, and other entertainment imaging customers with film-related products and services and also provides graphic arts film to the graphics industry.
Graphic Communications Group Segment (GCG): GCG serves a variety of customers in the creative, in-plant, data center, commercial printing, packaging, newspaper and digital service bureau market segments with a range of software, media and hardware products that provide customers with a variety of solutions for prepress equipment, workflow software, digital and traditional printing, document scanning, and multi-vendor services. Products and related services include workflow software and digital controller development; digital printing, which includes continuous inkjet and electrophotographic products, including equipment, consumables and service; prepress consumables; output devices; proofing hardware, media and software; and document scanners.
All Other: All Other is composed of Kodak's display business and other small, miscellaneous businesses.
Effective January 1, 2008, the Company changed its cost allocation methodologies related to employee benefits and corporate expenses. For the three months ended September 30, 2007, this change decreased cost of goods sold by $6 million, increased selling, general, and administrative costs by $3 million, and increased research and development costs by $3 million. For the nine months ended September 30, 2007, this change decreased cost of goods sold by $21 million, increased selling, general, and administrative costs by $11 million, and increased research and development costs by $10 million.
Prior period segment results have been revised to reflect the changes in segment reporting structure and cost allocation methodologies outlined above.
The changes in cost allocation methodologies referred to above increased (decreased) segment operating results for the three and nine months ended September 30, 2007 as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
(in millions) 2007 2007
Consumer Digital Imaging Group $ (10 ) $ (25 )
Film, Photofinishing and Entertainment Group 10 22
Graphic Communications Group (4 ) (15 )
All Other 4 18
Consolidated impact $ - $ -
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Net Sales from Continuing Operations by Reportable Segment and All Other
Three Months Ended September 30, Nine Months Ended September 30,
(in millions) Foreign Currency Foreign Currency
2008 2007 Change Impact* 2008 2007 Change Impact*
Consumer Digital
Imaging Group
Inside the U.S. $ 476 $ 467 +2 % 0 % $ 1,168 $ 1,122 +4 % 0 %
Outside the U.S. 344 299 +15 +4 962 753 +28 +8
Total Consumer
Digital Imaging
Group 820 766 +7 +2 2,130 1,875 +14 +3
Film,
Photofinishing and
Entertainment Group
Inside the U.S. 211 277 -24 0 647 803 -19 0
Outside the U.S. 553 651 -15 +3 1,688 1,935 -13 +5
Total Film,
Photofinishing
and Entertainment
Group 764 928 -18 +2 2,335 2,738 -15 +4
Graphic
Communications
Group
Inside the U.S. 243 297 -18 0 783 876 -11 0
Outside the U.S. 578 540 +7 +6 1,730 1,584 +9 +9
Total Graphic
Communications
Group 821 837 -2 +4 2,513 2,460 +2 +6
All Other
Inside the U.S. 1 2 - - 6 8 - -
Outside the U.S. (1 ) - - - (1 ) - - -
Total All Other - 2 - - 5 8 - -
Consolidated
Inside the U.S. 931 1,043 -11 0 2,604 2,809 -7 0
Outside the U.S. 1,474 1,490 -1 +5 4,379 4,272 +3 +7
Consolidated Total $ 2,405 $ 2,533 -5 % +3 % $ 6,983 $ 7,081 -1 % +4 %
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* Represents the percentage point change in segment net sales for the period that is attributable to foreign currency fluctuations
Earnings (Loss) from Continuing Operations Before Interest Expense, Other Income
(Charges), Net and Income Taxes by Reportable Segment and All Other
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2008 2007 Change 2008 2007 Change
Consumer Digital
Imaging Group $ 23 $ 18 +28 % $ (137 ) $ (108 ) -27 %
Film, Photofinishing
and Entertainment
Group 77 113 -32 % 157 264 -41 %
Graphic
Communications Group 23 36 -36 % 35 74 -53 %
All Other (5 ) (7 ) +29 % (13 ) (17 ) +24 %
Total of segments $ 118 $ 160 -26 % $ 42 $ 213 -80 %
Restructuring costs,
rationalization and
other (52 ) (127 ) (46 ) (594 )
Postemployment
benefit changes 94 - 94 -
Other operating
income (expenses),
net (3 ) (6 ) 14 33
Legal contingency (10 ) - (10 ) -
Legal settlement - (12 ) (10 ) (12 )
Interest expense (26 ) (28 ) (80 ) (84 )
Other income
(charges), net 8 38 38 79
Consolidated earnings
(loss) from
continuing
operations before
income taxes $ 129 $ 25 +416 % $ 42 $ (365 ) +112 %
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2008 COMPARED WITH 2007
Third Quarter
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
(in millions, except
per share data) Three Months Ended
September 30,
Increase
2008 % of Sales 2007 % of Sales / (Decrease) % Change
Net sales $ 2,405 $ 2,533 $ (128 ) -5 %
Cost of goods sold 1,744 1,856 (112 ) -6 %
Gross profit 661 27.5 % 677 26.7 % (16 ) -2 %
Selling, general and
administrative
expenses 363 15 % 424 17 % (61 ) -14 %
Research and
development costs 100 4 % 132 5 % (32 ) -24 %
Restructuring costs,
rationalization and
other 48 100 (52 ) -52 %
Other operating
expenses (income),
net 3 6 (3 ) -50 %
Earnings from
continuing operations
before interest
expense, other income
(charges), net
and income taxes 147 6 % 15 1 % 132 880 %
Interest expense 26 28 (2 ) -7 %
Other income
(charges), net 8 38 (30 ) -79 %
Earnings from
continuing operations
before income taxes 129 25 104 416 %
Provision (benefit)
for income taxes 28 (7 ) 35 -500 %
Earnings from
continuing operations 101 4 % 32 1 % 69 216 %
(Loss) earnings from
discontinued
operations, net
of income taxes (5 ) 5 (10 ) -200 %
NET EARNINGS $ 96 $ 37 $ 59 159 %
Three Months Ended
September 30, Percent Change vs. 2007
Manufacturing and
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Net sales $ 2,405 -5.1 % -3.2 % -4.7 % 2.8 % n/a
Gross profit margin 27.5 % 0.8pp n/a -5.1pp 0.3pp 5.6pp
Worldwide Revenues
For the three months ended September 30, 2008, net sales decreased compared with the same period in 2007 due to unfavorable price/mix within all three segments and industry-related volume declines driven by Film Capture and Traditional Photofinishing within FPEG. These declines were partially offset by volume increases in CDG, Document Imaging within GCG, and favorable foreign exchange across all segments. Within CDG, Digital Capture and Devices and Consumer Inkjet Systems experienced significant increases in volume over the prior-year period. Unfavorable price/mix was primarily driven by Digital Capture and Devices within CDG.
Gross Profit
Gross profit declined in the third quarter of 2008 in dollars but increased as a percentage of sales, primarily due to reductions in manufacturing and other costs within CDG, partially offset by unfavorable price/mix across all segments. The improvements in manufacturing and other costs were driven by manufacturing efficiencies within CDG, the benefit of lower depreciation expense as a result of the change in useful lives executed during the first quarter of 2008, lower restructuring-related charges and curtailment and other gains caused by changes to certain of the Company's U.S. postemployment benefit plans (see below), partially offset by an increase in silver, paper and petroleum-based raw material and other costs.
Included in gross profit for the quarter is a non-recurring amendment of an intellectual property licensing agreement within Digital Capture and Devices. The amendment of this licensing agreement contributed approximately 4.7% of consolidated revenue to consolidated gross profit dollars in the current quarter, as compared with 2.7% of consolidated revenue to consolidated gross profit dollars for a non-recurring arrangement in the prior year quarter.
In the first quarter of 2008, the Company performed an updated analysis of expected industry-wide declines in the traditional film and paper businesses and its useful lives on related assets. This analysis indicated that the assets will continue to be used in these businesses for a longer period than previously anticipated. As a result, the Company revised the useful lives of certain existing production machinery and equipment, and manufacturing-related buildings effective January 1, 2008. These assets, which were previously set to fully depreciate by mid-2010, are now being depreciated with estimated useful lives ending from 2011 to 2015. The change in useful lives reflects the Company's estimate of future periods to be benefited from the use of the property, plant, and equipment. As a result of these changes, for 2008 the Company expects that depreciation expense will be reduced by approximately $107 million, of which approximately $95 million will benefit pretax earnings from continuing operations. The net impact of the change in estimate to earnings from continuing operations for the three months ended September 30, 2008 is an increase of $26 million, or $.09 on a fully-diluted earnings per share basis. Refer to Note 1, "Basis of Presentation."
Selling, General and Administrative Expenses
The decrease in consolidated selling, general and administrative expenses (SG&A) was a result of company-wide cost reduction actions and curtailment and other gains recognized due to changes to certain of the Company's U.S. postemployment benefit plans (see below), partially offset by unfavorable foreign exchange.
Research and Development Costs
The decrease in consolidated research and development costs (R&D) was a result of curtailment and other gains recognized due to changes to certain of the Company's U.S. postemployment benefit plans (see below), and reduced spending in 2008 in CDG related to the introduction of consumer inkjet printers in 2007.
Postemployment Benefit Plan Changes
In the third quarter of 2008, the Company amended certain of its U.S. postemployment benefits effective as of January 1, 2009. As a result of these plan changes, curtailment and other gains of $94 million were recognized in the third quarter of 2008. The gains are reflected in the Consolidated Statement of Operations as follows: $48 million in cost of goods sold, $27 million in SG&A, and $19 million in R&D. The impact of these gains is not reflected in segment results. Refer to Note 10, "Retirement Plans and Other Postretirement Benefits" and Note 13, "Segment Information."
Restructuring Costs, Rationalization and Other
These costs, as well as the restructuring and rationalization-related costs reported in cost of goods sold, are discussed under "RESTRUCTURING COSTS, RATIONALIZATION AND OTHER" section.
The other income (charges), net category primarily includes interest income, income and losses from equity investments, and foreign exchange gains and losses. The decrease in other income (charges), net was primarily attributable to a decrease in interest income due to lower interest rates and lower cash balances in the third quarter of 2008 as compared with 2007, and an increase in losses on foreign exchange transactions as compared with the prior year quarter.
Income Tax Provision (Benefit)
(dollars in millions) Three Months Ended
September 30,
2008 2007
Earnings from continuing operations before income taxes $ 129 $ 25
Provision (benefit) for income taxes $ 28 $ (7 )
Effective tax rate 21.7 % (28.0 )%
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The change in the Company's effective tax rate from continuing operations is
primarily attributable to: (1) earnings generated within the U.S. in the third
quarter of 2008 that were not taxed due to the impact of valuation allowances,
(2) a tax benefit recorded in continuing operations in 2007 for losses in
certain jurisdictions where historically there have been valuation allowances
due to the recognition of the pre-tax gain in discontinued operations, (3)
losses generated in certain jurisdictions outside the U.S. that were not
benefited due to the impact of valuation allowances, (4) the mix of earnings
from operations in certain lower-taxed jurisdictions outside the U.S., and (5)
adjustments for uncertain tax positions and audit settlements.
CONSUMER DIGITAL IMAGING GROUP
(dollars in millions) Three Months Ended
September 30,
Increase
2008 % of Sales 2007 % of Sales / (Decrease) % Change
Net sales $ 820 $ 766 $ 54 7 %
Cost of goods sold 603 538 65 12 %
Gross profit 217 26.5 % 228 29.8 % (11 ) -5 %
Selling, general and
administrative
expenses 140 17 % 148 19 % (8 ) -5 %
Research and
development costs 54 7 % 62 8 % (8 ) -13 %
Earnings from
continuing operations
before interest
expense, other income
(charges), net and
income taxes $ 23 3 % $ 18 2 % $ 5 28 %
Three Months Ended
September 30, Percent Change vs. 2007
Manufacturing and
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Net sales $ 820 7.0 % 15.4 % -10.0 % 1.6 % n/a
Gross profit margin 26.5 % -3.3pp n/a -9.9pp 0.8pp 5.8pp
Worldwide Revenues
Net sales for CDG increased 7% due to growth in Digital Capture and Devices and Consumer Inkjet Systems.
Net sales of Digital Capture and Devices, which includes consumer digital still and video cameras, digital picture frames, accessories, memory products, snapshot printers and related media, and intellectual property royalties, increased 7% in the third quarter of 2008 as compared with the prior year quarter, primarily reflecting higher volumes of digital cameras and digital picture frames, increased intellectual property royalties (see gross profit discussion below), and favorable foreign exchange, partially offset by unfavorable price/mix.
Net worldwide sales of Consumer Inkjet Systems, which includes inkjet printers and related consumables, increased significantly, reflecting volume improvements due to the launch of the product line at the end of the first quarter of 2007 and the introduction of the second generation of printers in the first quarter of 2008, and favorable foreign exchange, partially offset by unfavorable price/mix.
Net sales of Retail Systems Solutions, which includes kiosks and related media and APEX drylab systems, increased 2% in the third quarter of 2008, reflecting higher media volumes and favorable foreign exchange. These increases were partially offset by unfavorable price/mix.
Gross Profit
The decrease in gross profit margin for CDG was primarily attributable to unfavorable price/mix primarily within Digital Capture and Devices and Consumer Inkjet Systems, partially offset by reduced manufacturing and other costs and favorable foreign exchange within both of these SPGs. The reduction in manufacturing and other costs was due to manufacturing efficiencies driven by improved leverage of product platforms.
Included in gross profit for the quarter is a non-recurring amendment of an intellectual property licensing agreement with an existing licensee. The impact of this licensing arrangement contributed approximately 13.7% of segment revenue to segment gross profit dollars in the current quarter, as compared with 8.8% of segment revenue to segment gross profit dollars for a non-recurring arrangement in the prior year quarter.
The current quarter results also include approximately $32 million related to intellectual property licensing arrangements under which the Company's continuing obligations are expected to be fulfilled by the end of 2008. The Company expects to secure other new licensing arrangements, the timing and amounts of which are difficult to predict. These types of arrangements provide the Company with a return on portions of historical R&D investments and new licensing opportunities are expected to have a continuing impact on the results of operations.
Selling, General and Administrative Expenses
The decrease in SG&A expenses for CDG was primarily driven by ongoing efforts to achieve target cost models, partially offset by unfavorable foreign exchange.
Research and Development Costs
The decrease in research and development (R&D) costs for CDG was primarily attributable to lower spending in 2008 as compared to the prior year due to the introduction of consumer inkjet printers in 2007, and decreased spending in the current quarter as a result of cost reduction actions taken throughout the segment. These decreases were partially offset by increased spending on CMOS sensor R&D activities.
FILM, PHOTOFINISHING AND ENTERTAINMENT GROUP
(dollars in millions) Three Months Ended
September 30,
Increase
2008 % of Sales 2007 % of Sales / (Decrease) % Change
Net sales $ 764 $ 928 $ (164 ) -18 %
Cost of goods sold 583 682 (99 ) -15 %
Gross profit 181 23.7 % 246 26.5 % (65 ) -26 %
Selling, general and
administrative
expenses 93 12 % 120 13 % (27 ) -23 %
Research and
development costs 11 1 % 13 1 % (2 ) -15 %
Earnings from
continuing operations
before interest
expense, other income
(charges), net and
income taxes $ 77 10 % $ 113 12 % $ (36 ) -32 %
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Three Months Ended
September 30, Percent Change vs. 2007
Change vs. Manufacturing and
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Net sales $ 764 -17.7 % -18.9 % -1.3 % 2.5 % n/a
Gross profit margin 23.7 % -2.8pp n/a -3.1pp 0.0pp 0.3pp
Worldwide Revenues
Net sales for FPEG decreased 18% primarily due to decreases in Film Capture and Traditional Photofinishing. Net worldwide sales of Film Capture and Traditional Photofinishing decreased 40% and 17%, respectively, in the third quarter of 2008 as compared with the third quarter of 2007, primarily reflecting continuing declines in the consumer film industry, partially offset by favorable foreign exchange.
Net worldwide sales for Entertainment Imaging decreased 3% compared with the prior year, reflecting slight unfavorability in volumes and price/mix, partially offset by favorable foreign exchange. These volume declines are primarily due to the delay in creation of feature films resulting from current contract negotiations between the studios and the Screen Actors' Guild.
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