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| EK > SEC Filings for EK > Form 10-Q on 30-Jul-2009 | All Recent SEC Filings |
30-Jul-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 restructuring
The recessionary trends in the global economy, which began in 2008, continued to significantly affect the Company's revenue during the second quarter of 2009. The Company expects these trends to continue to affect its results for the balance of the year. The Company cannot anticipate with precision the duration and severity of the current economic downturn or when the economy may improve. However, the Company believes that the actions being taken, as described below, will help to mitigate the impacts to its results in 2009 and position it well for the future when the global economy does begin to rebound. The demand for the Company's consumer products was very weak in the first and second quarters 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 implemented 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 implemented temporary compensation-related actions, which reduced 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 are required to 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. 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, kiosks and related media, APEX drylab systems, consumer inkjet printing systems, Kodak Gallery products and services, 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 includeworkflow 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 June 30, Six Months Ended June 30,
Foreign Foreign
(in millions) Currency Currency
2009 2008 Change Impact* 2009 2008 Change Impact*
Consumer Digital
Imaging Group
Inside the U.S. $ 277 $ 401 -31 % 0 % $ 471 $ 692 -32 % 0 %
Outside the U.S. 226 355 -36 -10 401 618 -35 -11
Total Consumer
Digital Imaging
Group 503 756 -33 -5 872 1,310 -33 -5
Film,
Photofinishing and
Entertainment Group
Inside the U.S. 123 237 -48 0 246 436 -44 0
Outside the U.S. 470 610 -23 -8 850 1,135 -25 -9
Total Film,
Photofinishing
and Entertainment
Group 593 847 -30 -6 1,096 1,571 -30 -6
Graphic
Communications
Group
Inside the U.S. 212 273 -22 0 410 540 -24 0
Outside the U.S. 458 607 -25 -7 863 1,152 -25 -8
Total Graphic
Communications
Group 670 880 -24 -5 1,273 1,692 -25 -5
All Other
Inside the U.S. 1 2 - - 4 5 - -
Outside the U.S. (1 ) - - - (2 ) - - -
Total All Other - 2 - - 2 5 - -
Consolidated
Inside the U.S. 613 913 -33 0 1,131 1,673 -32 0
Outside the U.S. 1,153 1,572 -27 -8 2,112 2,905 -27 -9
Consolidated Total $ 1,766 $ 2,485 -29 % -5 % $ 3,243 $ 4,578 -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 Income (Charges), Net and Income Taxes by Reportable Segment and All Other
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2009 2008 Change 2009 2008 Change
Consumer Digital Imaging
Group $ (99 ) $ (49 ) -102 % $ (256 ) $ (160 ) -60 %
Film, Photofinishing and
Entertainment Group 51 54 -6 % 59 80 -26 %
Graphic Communications
Group (28 ) 13 -315 % (88 ) 12 -833 %
All Other (3 ) (4 ) +25 % (6 ) (8 ) +25 %
Total of segments $ (79 ) $ 14 -664 % $ (291 ) $ (76 ) -283 %
Percent of Sales (4 )% 1 % (9 )% (2 )%
Restructuring costs,
rationalization and
other (46 ) (3 ) (162 ) 6
Other operating income
(expenses), net - 7 (3 ) 17
Legal contingencies and
settlements (1 ) - (6 ) (10 )
Negative goodwill
reversal 7 - 7 -
Interest expense (23 ) (26 ) (48 ) (54 )
Other income (charges),
net 14 (5 ) (1 ) 30
Consolidated loss from
continuing
operations before income
taxes $ (128 ) $ (13 ) -885 % $ (504 ) $ (87 ) -479 %
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2009 COMPARED WITH 2008
Second Quarter
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
(dollars in millions) Three Months Ended
June 30,
Increase
2009 % of Sales 2008 % of Sales / (Decrease) % Change
Net sales $ 1,766 $ 2,485 $ (719 ) -29 %
Cost of goods sold 1,440 1,899 (459 ) -24 %
Gross profit 326 18.5 % 586 23.6 % (260 ) -44 %
Selling, general and
administrative expenses 324 18 % 438 18 % (114 ) -26 %
Research and
development costs 84 5 % 135 5 % (51 ) -38 %
Restructuring costs,
rationalization and
other 37 2 35
Other operating
expenses (income), net - (7 ) 7 -100 %
Loss from continuing
operations
before interest
expense, other income
(charges), net
and income taxes (119 ) -7 % 18 1 % (137 ) -761 %
Interest expense 23 26 (3 ) -12 %
Other income (charges),
net 14 (5 ) 19 380 %
Loss from continuing
operations before
income taxes (128 ) (13 ) (115 ) -885 %
Provision (benefit) for
income taxes 63 (213 ) 276 130 %
(Loss) earnings from
continuing
operations (191 ) -11 % 200 8 % (391 ) -196 %
(Loss) earnings from
discontinued
operations, net
of income taxes (4 ) 295 (299 ) -101 %
Extraordinary item, net
of tax 6 - 6
NET (LOSS) EARNINGS
ATTRIBUTABLE TO EASTMAN
KODAK COMPANY $ (189 ) $ 495 $ (684 ) -138 %
Three Months Ended
June 30, Percent Change vs. 2008
Change vs. Foreign Manufacturing and
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Net sales $ 1,766 -28.9 % -17.7 % -6.1 % -5.1 % n/a
Gross profit margin 18.5 % -5.1pp n/a -6.9pp -3.2pp 5.0pp
Executive Summary
The Company's operating results in the second quarter of 2009 continued to be negatively impacted by the 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 continued to be negatively impacted by delays in the creation of feature films caused by the uncertainty around the Screen Actors' Guild contract, which expired in June 2008, and was not replaced until June 2009. In addition, the economic climate adversely impacted financing availability for independent film makers. Also, the secular decline of Film Capture continues to impact the traditional businesses. In response to the global economic slowdown, the Company implemented a targeted cost-reduction program and other measures as discussed in the Overview above.
Revenues
For the three months ended June 30, 2009, net sales decreased 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 Digital Capture and Devices in the CDG segment, and Prepress Solutions in the GCG segment, as well as continuing secular declines in Traditional Photofinishing and Film Capture in the FPEG segment. Unfavorable price/mix was primarily driven by Digital Capture and Devices within CDG, Entertainment Imaging within FPEG, and Prepress Solutions within GCG. Foreign exchange negatively impacted sales across all three segments, due to a strong U.S. dollar.
Gross Profit
Gross profit declined in the second quarter of 2009 in dollars and as a percentage of sales, primarily due to lower sales volumes 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 and lower raw material costs in FPEG.
The current quarter results also include a decline of approximately $46 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 in response to the current economic conditions.
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 the "RESTRUCTURING COSTS, RATIONALIZATION AND OTHER" section.
Other Income (Charges), Net
The other income (charges), net category primarily includes interest income, income and losses from equity investments, and foreign exchange gains and losses. The increase in other income (charges), net was primarily attributable to gains on foreign exchange in the second quarter of 2009 as compared with losses on foreign exchange in the prior year quarter, and expense related to support of an educational institution in the second quarter of 2008. This was partially offset by a decrease in interest income due to lower interest rates and lower cash balances in the second quarter of 2009 as compared with 2008.
Income Tax Provision (Benefit)
In June 2008, the Company received a tax refund from the U.S. Internal Revenue
Service (IRS). This refund was related to the audit of certain claims filed for
tax years 1993-1998. The refund had a positive impact on the Company's net
earnings of $565 million for the three months ended June 30, 2008, of which $295
million of the refund is reflected in earnings from discontinued operations. The
balance of $270 million, which represents interest, is reflected in earnings
from continuing operations.
(dollars in millions) Three Months Ended
June 30,
2009 2008
Loss from continuing operations before income taxes $ (128 ) $ (13 )
Provision (benefit) for income taxes $ 63 $ (213 )
Effective tax rate (49.2 )% 1638.5 %
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The change in the Company's effective tax rate from continuing operations is primarily attributable to: (1) a $270 million benefit recognized during the second quarter of 2008 related to the aforementioned IRS refund; (2) 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; (3) the impact of previously established valuation allowances in jurisdictions with current earnings; (4) changes to the mix of earnings from operations in certain lower-taxed jurisdictions outside the U.S.; (5) tax accounting impacts related to items reported in Accumulated other comprehensive income; and (6) adjustments for uncertain tax positions and audit settlements.
CONSUMER DIGITAL IMAGING GROUP
(dollars in millions) Three Months Ended
June 30,
Increase
2009 % of Sales 2008 % of Sales / (Decrease) % Change
Net sales $ 503 $ 756 $ (253 ) -33 %
Cost of goods sold 448 610 (162 ) -27 %
Gross profit 55 10.9 % 146 19.3 % (91 ) -62 %
Selling, general and
administrative
expenses 119 24 % 143 19 % (24 ) -17 %
Research and
development costs 35 7 % 52 7 % (17 ) -33 %
Loss from continuing
operations
before interest
expense, other
income(charges), net
and income taxes $ (99 ) -20 % $ (49 ) -6 % $ (50 ) -102 %
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Three Months Ended
June 30, Percent Change vs. 2008
Change vs. Foreign Manufacturing and
2009 Amount 2008 Volume Price/Mix Exchange Other Costs
Net sales $ 503 -33.5 % -16.3 % -12.6 % -4.6 % n/a
Gross profit margin 10.9 % -8.4pp n/a -15.3pp -5.2pp 12.1pp
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Revenues
CDG's second 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 declines in CDG revenues in the second quarter.
The decrease in net sales for CDG was primarily driven by volume declines in Digital Capture and Devices. Net sales of Digital Capture and Devices, which includes consumer digital still and video cameras, digital picture frames, accessories, memory products, and intellectual property royalties, decreased 44% in the second quarter of 2009 as compared with the prior year quarter, primarily reflecting lower volumes and unfavorable price/mix of digital cameras and digital picture frames as a result of continuing weakness in consumer demand, and lower intellectual property royalties (see gross profit discussion below).
Net sales of Retail Systems Solutions, which includes kiosks and related media and APEX drylab systems, decreased 14% in the second quarter of 2009, primarily driven by unfavorable foreign exchange and lower media volumes. The decline in media volumes was largely driven by continued inventory contractions at major U.S. retailers.
Net sales of Consumer Inkjet Systems, which includes inkjet printers and related consumables, increased 20% due to higher volumes for printers and ink cartridges, partially offset by declines in media volumes. The volume increases experienced by the Company during the current economic situation, despite overall declines in the consumer printing industry, are reflective of favorable consumer response to the Company's unique value proposition.
Gross Profit
The decrease in gross profit, both in dollars and as a percentage of sales, for CDG was primarily attributable to unfavorable price/mix within Digital Capture and Devices, including lower intellectual property royalty revenues, and unfavorable foreign exchange. In addition, the decrease in gross profit dollars for CDG was due to lower sales volumes as discussed above. Partially offsetting these unfavorable factors was the benefit of lower product costs versus prior year.
The current quarter results include a decline of approximately $46 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, partially offset by increased advertising expense related to Consumer Inkjet Systems.
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
June 30,
Increase
2009 % of Sales 2008 % of Sales / (Decrease) % Change
. . .
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