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| EK > SEC Filings for EK > Form 10-Q on 30-Apr-2009 | All Recent SEC Filings |
30-Apr-2009
Quarterly Report
Overview
The Company's key priorities for 2009 are:
· Align the Company's cost structure with external economic realities
· Fund core investments
· Transform portions of its product portfolio
· Drive positive cash flow before dividends and restructuring
The continuing recessionary trends in the global economy have significantly affected the Company's revenue during the first quarter of 2009. The Company expects these trends to continue to affect its results in the second quarter. The Company cannot anticipate with precision the duration and severity of the current economic downturn. However, the Company believes that the actions being taken, as described below, will bolster its results in 2009 and position it well for the future when the global economy begins to rebound. The demand for the Company's consumer products was very weak in the first quarter of 2009 as a result of the drop-off of consumer discretionary spending, consistent with trends that emerged in the fourth quarter of 2008. In addition, as it did in late 2008, the weak economic environment continued to affect global print demand, which is a key driver of the Company's GCG business. The GCG equipment businesses also continue to be affected by the lack of credit availability in the financial markets. In anticipation of the continuation of the recession in 2009, the Company began to formulate and implement in the fourth quarter of 2008 and continues to implement a number of actions it deems necessary in order to successfully accomplish the key priorities listed above.
Specifically, the Company has outlined actions to focus business investments in certain areas that are core to the Company's strategy (see below), while also maintaining an intense focus on cash generation and conservation in 2009. On April 30, 2009, the Company announced that its Board of Directors decided to suspend future cash dividends on its common stock effective immediately. Further, the Company also announced temporary compensation-related actions, which will reduce compensation for the chief executive officer and several other senior executives, as well as the Board of Directors, of the Company for the rest of 2009. In addition, U.S. based employees of the Company will take one-week of unpaid leave during 2009. These actions are in addition to a targeted cost reduction program announced earlier this year (the 2009 Program). This 2009 cost reduction program is designed to more appropriately size the organization's cost structure with its expected revenue reductions as a result of the current economic environment. The program involves the rationalization of selling, marketing, administrative, research and development, supply chain and other business resources in certain areas and the consolidation of certain facilities. Also, the Company has initiated other actions to curb discretionary expenditures and employment-related costs, as well as to reduce capital expenditures where possible.
As previously disclosed, the Company also made a decision in late 2008 to focus its investments on businesses at the core of its strategy, which are consumer inkjet, commercial inkjet (including Stream technology) and enterprise workflow. The Company will continue to build upon its other cash generating businesses and reposition certain other businesses to generate maximum value.
In addition, on March 31, 2009, as previously disclosed, the Company and its Canadian subsidiary entered into an Amended and Restated Credit Agreement (the "Amended Credit Agreement") with its lenders, which provides for an asset-based revolving credit facility of up to $500 million, under certain conditions, including up to $250 million of availability for letters of credit. Additionally, the Company is no longer subject to quarterly compliance for the two financial covenants under its previously existing credit agreement. These two financial covenants are replaced by a minimum fixed charge coverage ratio that will apply if excess borrowing availability under the Amended Credit Agreement is less than $100 million, or in the case of certain other circumstances as described in the amended agreement. This agreement resolves the uncertainties disclosed in the 2008 Annual Report on Form 10-K, which stated that the Company's financial forecast at that time indicated that it was reasonably likely that during the first quarter of 2009 the Company would not be in compliance with its financial covenants associated with the previously existing credit agreement. The Amended Credit Agreement provides continued financial flexibility for the Company in this challenging economic environment.
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, consumer inkjet printing, Kodak Gallery, and imaging sensors. 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. As previously announced, Kodak closed its Qualex central lab operations in the U.S. and Canada at the end of March 2009.
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, analog and digital printing, and document scanning. Products and related services include workflow software and digital controllers; digital printing, which includes commercial inkjet and electrophotographic products, including equipment, consumables and service; prepress consumables; prepress equipment; and document scanners.
All Other: All Other is composed of Kodak's display business and other small, miscellaneous businesses.
Net Sales from Continuing Operations by Reportable Segment and All Other
Three Months Ended March 31,
Foreign
(in millions) Currency
2009 2008 Change Impact*
Consumer Digital Imaging Group
Inside the U.S. $ 194 $ 291 -33% 0%
Outside the U.S. 175 263 -33 -11
Total Consumer Digital Imaging Group 369 554 -33 -5
Film, Photofinishing and
Entertainment Group
Inside the U.S. 123 199 -38 0
Outside the U.S. 380 525 -28 -9
Total Film, Photofinishing
and Entertainment Group 503 724 -31 -7
Graphic Communications Group
Inside the U.S. 198 267 -26 0
Outside the U.S. 405 545 -26 -9
Total Graphic Communications Group 603 812 -26 -6
All Other
Inside the U.S. 3 3 - -
Outside the U.S. (1 ) - - -
Total All Other 2 3 - -
Consolidated
Inside the U.S. 518 760 -32 0
Outside the U.S. 959 1,333 -28 -9
Consolidated Total $ 1,477 $ 2,093 -29% -6%
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* Represents the percentage point change in segment net sales for the period that is attributable to foreign currency fluctuations
(Loss) Earnings from Continuing Operations Before Interest Expense, Other (Charges) Income, Net and Income Taxes by Reportable Segment and All Other
Three Months Ended
March 31,
(in millions) 2009 2008 Change
Consumer Digital Imaging Group $ (157 ) $ (111 ) -41 %
Film, Photofinishing and Entertainment Group 8 26 -69 %
Graphic Communications Group (60 ) (1 ) -5900 %
All Other (3 ) (4 ) +25 %
Total of segments $ (212 ) $ (90 ) -136 %
Percent of Sales (14 )% (4 )%
Restructuring costs, rationalization and other (116 ) 9
Other operating (expenses) income, net (3 ) 10
Legal contingencies and settlements (5 ) (10 )
Interest expense (25 ) (28 )
Other (charges) income, net (15 ) 35
Consolidated loss from continuing
operations before income taxes $ (376 ) $ (74 ) -408 %
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2009 COMPARED WITH 2008
First Quarter
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
(in millions, except
per share data) Three Months Ended
March 31,
Increase
2009 % of Sales 2008 % of Sales / (Decrease) % Change
Net sales $ 1,477 $ 2,093 $ (616 ) -29 %
Cost of goods sold 1,283 1,669 (386 ) -23 %
Gross profit 194 13.1 % 424 20.3 % (230 ) -54 %
Selling, general and
administrative
expenses 308 21 % 385 18 % (77 ) -20 %
Research and
development costs 110 7 % 140 7 % (30 ) -21 %
Restructuring costs,
rationalization and
other 109 (10 ) 119
Other operating
expenses (income),
net 3 (10 ) 13 -130 %
Loss from continuing
operations
before interest
expense, other
(charges) income, net
and income taxes (336 ) -23 % (81 ) -4 % (255 ) -315 %
Interest expense 25 28 (3 ) -11 %
Other (charges)
income, net (15 ) 35 (50 ) -143 %
Loss from continuing
operations before
income taxes (376 ) (74 ) (302 ) -408 %
(Benefit) provision
for income taxes (16 ) 40 (56 ) 140 %
Loss from continuing
operations (360 ) -24 % (114 ) -5 % (246 ) -216 %
Earnings (loss) from
discontinued
operations, net
of income taxes 7 (1 ) 8 800 %
Net loss (353 ) (115 ) (238 ) -207 %
Net earnings
attributable to
noncontrolling
interests - - -
NET LOSS ATTRIBUTABLE
TO EASTMAN KODAK
COMPANY $ (353 ) $ (115 ) $ (238 ) -207 %
Three Months Ended
March 31, Percent Change vs. 2008
Change vs. Foreign Manufacturing and
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Net sales $ 1,477 -29.4 % -18.6 % -4.8 % -6.0 % n/a
Gross profit margin 13.1 % -7.2pp n/a -7.3pp -4.2pp 4.3pp
Executive Summary
The Company's operating results in the first quarter of 2009 were negatively impacted by a continued decline in demand as a result of the global economic slowdown which began in 2008. The demand for the Company's consumer products is largely discretionary in nature, and sales and earnings of the Company's consumer businesses are linked to the timing of holidays, vacations, and other leisure or gifting seasons. Continued declines in consumer spending have had significant impacts in the Company's digital camera and digital picture frame businesses in the CDG segment. In addition, intellectual property royalty revenue within CDG decreased versus the prior year. In the GCG segment, lack of credit availability, combined with the weak economy, has resulted in low capital spending by businesses, negatively impacting sales. The reduction of global print demand had a negative impact on the GCG business. The Entertainment Imaging business within the FPEG segment was negatively impacted by the uncertainty around the Screen Actors' Guild contract and the impact of the economic climate on financing availability for independent film makers, which have resulted in delays of creation of feature films. The weak economy is also accelerating the secular decline of Film Capture within the FPEG segment. In response to the current economic environment, the Company has implemented a targeted cost-reduction program and other measures as discussed in the Overview above.
Revenues
For the three months ended March 31, 2009, net sales decreased significantly compared with the same period in 2008 primarily due to volume declines within all three segments driven by lower demand as a result of the global economic slowdown, particularly within Prepress Solutions in the GCG segment and Digital Capture and Devices within CDG. Foreign exchange negatively impacted sales across all three segments, due to the strengthening of the U.S. dollar. Unfavorable price/mix was primarily driven by Digital Capture and Devices within CDG, Entertainment Imaging within FPEG, and Digital Printing Solutions within GCG. These declines were partially offset by strong increases in revenues from Consumer Inkjet Systems.
Gross Profit
Gross profit declined significantly in the first quarter of 2009 in dollars and as a percentage of sales, primarily due to lower revenues as discussed above, as well as unfavorable price/mix, which impacted all segments but was most prominent in CDG, and unfavorable foreign exchange. These items were partially offset by cost improvements, driven by ongoing cost reduction efforts across all segments.
The current quarter results also include a decline of approximately $55 million in intellectual property royalty revenues as compared with the prior year quarter, related to certain arrangements under which the Company fulfilled its continuing obligations as of the end of 2008, as well as overall volume declines in the digital capture device market. The Company expects to secure future 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 research and development investments.
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 to respond to the current economic conditions, and favorable foreign exchange.
Research and Development Costs
The decrease in consolidated research and development (R&D) costs was a result of focused cost reduction efforts.
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.
Other (Charges) Income, Net
The other (charges) income, net category primarily includes interest income, income and losses from equity investments, and foreign exchange gains and losses. The decrease in other (charges) income, net was primarily attributable to losses on foreign exchange in the first quarter of 2009 as compared with gains on foreign exchange in the prior year quarter. Also contributing to the decline in other (charges) income, net was a decrease in interest income due to lower interest rates and lower cash balances in the first quarter of 2009 as compared with 2008.
Income Tax (Benefit) Provision
(dollars in millions) Three Months Ended
March 31,
2009 2008
Loss from continuing operations before income taxes $ (376 ) $ (74 )
(Benefit) provision for income taxes $ (16 ) $ 40
Effective tax rate 4.3 % (54.1 )%
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The change in the Company's effective tax rate from continuing operations is primarily attributable to: (1) losses generated in the U.S. and in certain jurisdictions outside the U.S. that were not benefited due to management's conclusion that it was not more likely than not that the tax benefits would be realized , (2) additional valuation allowances recorded during the period, (3) the mix of earnings from operations in certain lower-taxed jurisdictions outside the U.S., and (4) adjustments for uncertain tax positions and audit settlements.
CONSUMER DIGITAL IMAGING GROUP
(dollars in millions) Three Months Ended
March 31,
Increase
2009 % of Sales 2008 % of Sales / (Decrease) % Change
Net sales $ 369 $ 554 $ (185 ) -33 %
Cost of goods sold 382 486 (104 ) -21 %
Gross profit (13 ) -3.5 % 68 12.3 % (81 ) -119 %
Selling, general and
administrative
expenses 101 27 % 123 22 % (22 ) -18 %
Research and
development costs 43 12 % 56 10 % (13 ) -23 %
Loss from continuing
operations
before interest
expense, other
(charges) income, net
and income taxes $ (157 ) -43 % $ (111 ) -20 % $ (46 ) -41 %
Three Months Ended
March 31, Percent Change vs. 2008
Change vs. Foreign Manufacturing and
2009 Amount 2008 Volume Price/Mix Exchange Other Costs
Net sales $ 369 -33.4 % -15.5 % -12.5 % -5.4 % n/a
Gross profit margin -3.5 % -15.8pp n/a -26.0pp -7.6pp 17.8pp
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Revenues
CDG's first quarter performance reflects the continued weakness in the global economy, combined with lower intellectual property royalty revenues. The demand for many of the consumer products within the CDG portfolio is discretionary in nature and consumer discretionary spending remains weak leading to significant declines in CDG revenues in the first quarter.
The decrease in net sales for CDG was primarily driven by declines in Digital Capture and Devices, partially offset by growth in 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, decreased 44% in the first quarter of 2009 as compared with the prior year quarter, primarily reflecting lower intellectual property royalties (see gross profit discussion below), lower volumes of digital cameras and digital picture frames as a result of continuing weakness in consumer demand, unfavorable price/mix, and unfavorable foreign exchange.
Net sales of Retail Systems Solutions, which includes kiosks and related media and APEX drylab systems, decreased 21% in the first quarter of 2009, driven by lower media volumes, unfavorable price/mix, and unfavorable foreign exchange. The decline in media volumes was largely driven by inventory contraction at major U.S. retailers, whereas global consumer demand increased slightly.
Net sales of Consumer Inkjet Systems, which includes inkjet printers and related consumables, increased significantly, reflecting volume improvements due to consumer response to the Company's unique value proposition, resulting in gains in market share, and favorable price/mix, partially offset by unfavorable foreign exchange.
Gross Profit
The significant decrease in gross profit both in dollars and as a percentage of sales for CDG was primarily attributable to the effects of lower revenues as mentioned above, as well as unfavorable price/mix primarily within Digital Capture and Devices due to lower intellectual property royalty revenues, and unfavorable foreign exchange. Partially offsetting these unfavorable factors were the benefit of lower product costs and favorable price/mix versus prior year within Consumer Inkjet Systems.
The current quarter results include a decline of approximately $55 million in intellectual property royalty revenues as compared with the prior year quarter, related to certain arrangements under which the Company fulfilled its continuing obligations as of the end of 2008, as well as overall volume declines in the digital capture device market. The Company expects to secure future 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 Research and Development investments.
Selling, General and Administrative Expenses
The decrease in SG&A expenses for CDG was primarily driven by focused cost reduction actions to respond to the current economic conditions.
Research and Development Costs
The decrease in R&D costs for CDG was primarily attributable to lower spending related to Consumer Inkjet Systems, resulting from the movement of product offerings from the development phase into the market introduction and growth phases, as well as portfolio rationalization within the other CDG businesses.
FILM, PHOTOFINISHING AND ENTERTAINMENT GROUP
(dollars in millions) Three Months Ended
March 31,
Increase
2009 % of Sales 2008 % of Sales / (Decrease) % Change
Net sales $ 503 $ 724 $ (221 ) -31 %
Cost of goods sold 414 578 (164 ) -28 %
Gross profit 89 17.7 % 146 20.2 % (57 ) -39 %
Selling, general and
administrative
expenses 72 14 % 104 14 % (32 ) -31 %
Research and
development costs 9 2 % 16 2 % (7 ) -44 %
Earnings from
continuing operations
before interest
expense, other
(charges) income, net
and income taxes $ 8 2 % $ 26 4 % $ (18 ) -69 %
Three Months Ended
March 31, Percent Change vs. 2008
Change vs. Foreign Manufacturing and
2009 Amount 2008 Volume Price/Mix Exchange Other Costs
Net sales $ 503 -30.5 % -21.4 % -2.5 % -6.6 % n/a
Gross profit margin 17.7 % -2.5pp n/a -0.3pp -4.8pp 2.6pp
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Revenues
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