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KODK > SEC Filings for KODK > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for EASTMAN KODAK CO

Form 10-Q for EASTMAN KODAK CO


5-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Kodak is a technology company that provides commercial imaging products and services built on a foundation of materials science, digital imaging science, and deposition processes. Kodak's portfolio of products and services is designed to meet needs of customers in different sectors and cycles of the commercial imaging and printing markets, including prepress and digital printing, and functional and packaging printing. Kodak also offers brand licensing and intellectual property opportunities, and products and services in entertainment imaging (motion pictures) and other commercial films, and it maintains a presence in the sales of ink for its existing installed consumer inkjet printer base.

Revenue declined $58 million (10%) compared to the prior year quarter and $168 million (14%) compared to the first half of last year. The year over year revenue declines were primarily due to Entertainment Imaging and Commercial Films, as a result of lower demand due to acceleration of digital substitution, and Consumer Inkjet Systems, as the size of the installed base of Kodak consumer inkjet printers continues to decline. Revenue for these businesses is expected to continue to become a smaller percentage of overall revenue, as Kodak invests in the growth of its strategic businesses.

Kodak continues to focus on managing its cost structure. Among other compensation and benefit plan changes, Kodak recently announced plans to amend its U.S. defined benefit pension plan, effective January 1, 2015, that are expected to reduce that pension plan's projected benefit obligation by approximately $55 million.

CURRENT KODAK OPERATING MODEL AND REPORTING STRUCTURE

Kodak has two reportable segments: the Graphics, Entertainment and Commercial Films Segment and the Digital Printing and Enterprise Segment. The balance of Kodak's continuing operations, which do not meet the criteria of a reportable segment, are reported in All Other and are composed of Kodak's consumer film business in countries where that business has not yet transferred ownership to the KPP Purchasing Parties, and a utilities variable interest entity. Effective August 31, 2013, the Company sold certain utilities and related facilities and entered into utilities supply and servicing arrangements with RED Rochester LLC, a variable interest entity.

Within each of Kodak's reportable segments are various product groupings, or Strategic Product Groups ("SPGs"). Throughout the remainder of this document, references to the segments' SPGs are indicated in italics.

Graphics, Entertainment and Commercial Films ("GECF") Segment

The GECF segment is comprised of three SPGs: Graphics, Entertainment Imaging and Commercial Films, and Intellectual Property and Brand Licensing. The GECF segment provides digital and traditional product and service offerings to a variety of commercial industries, including commercial print, direct mail, book publishing, newspapers and magazines, packaging, motion picture entertainment, printed electronics, and the aerial and industrial film markets.

Graphics: Kodak's Graphics portfolio, covering the pre-press segment of the digital offset printing market, includes digital front-end controllers ("DFEs"), Production Software, Computer-to-Plate Equipment and Digital Plates.

Kodak's DFEs (KODAK CREO Servers) drive personalized content to digital presses while controlling color and print consistency.

Production workflow software manages the digital and conventional print content from file creation to output. Kodak's production workflow software includes KODAK PRINERGY Workflow Software, KODAK PREPS Imposition Software, KODAK COLORFLOW Software and the KODAK INSITE Software family of products, managing content and color, reducing manual errors and managing the collaborative creative process.

Computer to plate ("CTP") thermal output devices transfer the desired image for offset printing onto an aluminum plate, and provide a consistent and high quality image carrier for various offset press applications and market segments. Kodak's CTP products include the KODAK MAGNUS Platesetter and TRENDSETTER Platesetter with SQUAREspot Imaging Technology, which provides high resolution, consistency and stability in thermal imaging, as well as the ACHIEVE Platesetter with TH5 imaging technology that provides a highly efficient and cost effective imaging solution for entry level customer needs.

Kodak's digital plate offerings include traditional digital plates and KODAK SONORA Process Free Plates. KODAK SONORA Process Free Plates deliver cost savings and efficiency and promote sustainability practices and credentials because they do not require processing chemistry, processing equipment, or chemical disposal.

Kodak also provides service and support related to these products to maintain ideal functionality and uptime for continual use.


Graphics products and services are sold globally through a variety of direct and indirect channels. Kodak is managing and building its Graphics business by investing in process-free technology; driving a total, optimized prepress solution; delivering the next-generation print software portfolio; expanding in emerging markets; and, driving manufacturing operational excellence, profitability and sustainable business practices. Kodak faces competition from other companies that offer commercial offset and digital printing equipment, production software, consumables and service. Competitiveness is generally focused on a broad range of technology that provides customers a higher quality, more efficient and cost effective prepress solution at an effective price.

Entertainment Imaging & Commercial Films: Kodak's Entertainment Imaging & Commercial Film group encompasses its motion picture film business, providing motion imaging products (camera negative, intermediate, print and archival film), services and technology for the professional motion picture and exhibition industries. Motion picture products are sold directly to studios, laboratories and independent filmmakers. The group also offers aerial and industrial films, including KODAK Printed Circuit Board film. Kodak expects continuing revenue declines in these products as customers continue to migrate to digital products. This group also includes Kodak's component businesses consisting of: Polyester Film; Specialty Chemicals, Inks & Dispersions, and Solvent Recovery.

Intellectual Property and Brand Licensing: Intellectual Property and Brand Licensing includes licensing activities related to intellectual property and certain branded licensed products.

Digital Printing and Enterprise ("DP&E") Segment

The DP&E segment is comprised of four SPGs: Digital Printing, Packaging and Functional Printing, Enterprise Services & Solutions and Consumer Inkjet Systems. DP&E serves a variety of customers in the creative, in-plant, data center, consumer printing, 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. DP&E products and services are sold through direct and indirect channels.

Digital Printing: Digital Printing includes both the Inkjet Printing Solutions and Electrophotographic Printing Solutions equipment and related consumables and service.

The Inkjet Printing Solutions product offering includes the KODAK PROSPER Press and PROSPER Hybrid Components, featuring ultrafast inkjet droplet generation. PROSPER Hybrid Components are also integrated into original equipment manufacturer partner portfolios, where the partner combines PROSPER Writing Systems with its press systems that transport webs of paper through the press. Equipment sales result in ongoing annuities that yield ink and service revenues. The level of annuity revenue depends on the application for which the equipment is used, which drives the total number of pages printed and ink usage. The PROSPER Press features Stream inkjet technology, which delivers a continuous flow of ink that enables constant and consistent operation, with uniform ink droplet size and accurate placement, even at very high print speeds. Applications include publishing, commercial print, direct mail, and packaging. The business also includes a large customer base of KODAK VERSAMARK Products.

Electrophotographic Printing Solutions encompasses the NEXPRESS Press Platform and the DIGIMASTER Production Platform. The NEXPRESS Press Platform offers high-quality, differentiated printing of short-run, personalized print applications such as direct mail, books, marketing collateral and photo products. The DIGIMASTER Production Platform uses monochrome electrophotographic printing technology to create high-quality printing of statements, short run books, corporate documentation, manuals and direct mail.

Packaging and Functional Printing: Packaging and Functional Printing includes packaging printing equipment and related consumables and services, as well as printed functional materials and components.

The Packaging business includes Kodak's FLEXCEL NX and FLEXCEL Direct Platform that offer digitization into the flexographic print market. The FLEXCEL NX System uses Kodak's proprietary SQUAREspot laser imaging technology to produce high resolution imaging and environmentally friendly solutions. The FLEXCEL Direct Platform delivers process-less high productivity and environmentally friendly solutions. These print production capabilities leverage a portfolio of offset, flexographic, and digital products and services, which help enable customers to preserve brand equity, enhance shelf appeal, and drive efficiency from design to a final solution.

Kodak's Functional Printing business focuses on two separate solutions that provide touch panel sensor films to the touch module industry. These solutions consist of a silver halide-based solution and an additive printing solution. Both solutions are in the commercialization phase.

Enterprise Services & Solutions: Enterprise Services & Solutions assists with the challenges and opportunities created by the worldwide digital transformation. Kodak brings together its technological strengths to meet the needs of its customers in the areas of print and managed media services, brand protection solutions and services, and document management services.


The group serves customers in enterprises including government, pharmaceuticals and healthcare, consumer and luxury good products, retail, and financial services. With respect to its print and managed media services, Kodak provides consulting services and assists customers by developing solutions for their printing requirements using Kodak technologies. Kodak's brand protection solutions are addressed at the mitigation of counterfeiting and diversion activities. Through its document management services, Kodak provides expertise to customers in order to capture, archive, retrieve and deliver documents to improve information management.

Consumer Inkjet Systems: Consumer Inkjet Systems includes the sale of ink to its existing installed base of consumer inkjet printers.

Revenues from Continuing Operations by Reportable Segment
(in millions)                                       Three Months Ended June 30,                                                        Six Months Ended June 30,
                           Successor           Predecessor           %                                         Successor       Predecessor           %
                              2014                2013            Change        Foreign Currency Impact*         2014             2013            Change        Foreign Currency Impact*
Graphics, Entertainment
and Commercial Films
Inside the U.S.           $         94       $           90              +4 %                           0 %   $       179     $         213             -16 %                           0 %
Outside the U.S.                   263                  281              -6 %                           1 %           496               544              -9 %                           0 %
Total Graphics,
Entertainment and
Commercial Films                   357                  371              -4 %                           1 %           675               757             -11 %                           0 %

Digital Printing and
Enterprise
Inside the U.S.                     68                   92             -26 %                           0 %           148               185             -20 %                           0 %
Outside the U.S.                   100                  106              -6 %                           0 %           186               210             -11 %                           0 %
Total Digital Printing
and Enterprise                     168                  198             -15 %                           0 %           334               395             -15 %                           0 %

All Other
Inside the U.S.                      -                    5                                             0 %             -                 8                                             0 %
Outside the U.S.                     -                    9                                             0 %             -                17                                             0 %
Total All Other                      -                   14            -100 %                           0 %             -                25            -100 %                           0 %

Consolidated
Inside the U.S.                    162                  187             -13 %                           0 %           327               406             -19 %                           0 %
Outside the U.S.                   363                  396              -8 %                           1 %           682               771             -12 %                           0 %
Consolidated Total        $        525       $          583             -10 %                           0 %   $     1,009     $       1,177             -14 %                           0 %

* Represents the percentage change in segment net sales for the period that is attributable to foreign currency fluctuations.


Segment (Loss) Earnings and Consolidated (Loss) Earnings from Continuing

Operations Before Income Taxes

                                                 Three Months Ended                    Six Months Ended
                                                      June 30,                             June 30,
                                            Successor         Predecessor       Successor          Predecessor
(in millions)                                 2014               2013              2014               2013
Segment (loss) earnings and Consolidated
(loss) earnings from continuing
operations before income taxes
Graphics, Entertainment and Commercial
Films                                      $        (8 )     $          (6 )   $        (35 )     $          10
Digital Printing and Enterprise                    (27 )               (11 )            (52 )               (29 )
 Total of reportable segments                      (35 )               (17 )            (87 )               (19 )
All Other                                           (4 )                 -               (7 )                (2 )
Restructuring costs and other                      (20 )               (33 )            (33 )               (46 )
Corporate components of pension and
 OPEB income (1)                                    30                  14               60                  26
Other operating income, net                          -                   1                -                 495
Loss on early extinguishment of debt,
net                                                  -                   -                -                   6
Interest expense                                    16                  47               32                  72
Other charges, net                                  (2 )                (3 )             (3 )               (10 )
Reorganization items, net                            5                  72               10                 192
Consolidated (loss) earnings from
continuing
 operations before income taxes            $       (52 )     $        (157 )   $       (112 )     $         174

(1) Composed of interest cost, expected return on plan assets, amortization of actuarial gains and losses, amortization of prior service credits related to the U.S. Postretirement Benefit Plan and special termination benefits, curtailments and settlement components of pension and other postretirement benefit expenses, except for settlements in connection with the chapter 11 bankruptcy proceedings that are recorded in Reorganization items, net and curtailments and settlements included in (Loss) earnings from discontinued operations, net of income taxes in the Consolidated Statement of Operations.


2014 COMPARED WITH 2013
SECOND QUARTER AND YEAR TO DATE
RESULTS OF OPERATIONS

(in millions)                    Three Months Ended June 30,                                               Six Months Ended June 30,
                            Successor                    Predecessor                                Successor                   Predecessor
                     2014          % of Sales       2013       % of Sales      % Change       2014        % of Sales       2013        % of Sales       % Change

Revenues            $   525                        $  583                            -10 %   $ 1,009                      $ 1,177                             -14 %
Cost of revenues        423                           450                             -6 %       818                          895                              -9 %
  Gross profit          102                 19 %      133               23 %         -23 %       191               19 %       282               24 %          -32 %
Selling, general
and
administrative
expenses                 85                 16 %      115               20 %         -26 %       172               17 %       233               20 %          -26 %
Research and
development costs        26                  5 %       25                4 %           4 %        53                5 %        50                4 %            6 %
Restructuring
costs and other          20                  4 %       29                5 %         -31 %        33                3 %        40                3 %          -18 %
Other operating
income, net               -                            (1 )                                        -                         (495 )
(Loss) earnings
from continuing
operations before
interest expense,
other income
(charges), net,
reorganization
items, net and
income taxes            (29 )               -6 %      (35 )             -6 %          17 %       (67 )             -7 %       454               39 %         -115 %
Interest expense         16                  3 %       47                8 %         -66 %        32                3 %        72                6 %          -56 %
Loss on early
extinguishment of
debt, net                 -                             -                                          -                            6
Other charges,
net                      (2 )                          (3 )                                       (3 )                        (10 )
Reorganization
items, net                5                  1 %       72               12 %         -93 %        10                1 %       192               16 %          -95 %
(Loss) earnings
from continuing
operations before
income taxes            (52 )              -10 %     (157 )            -27 %          67 %      (112 )            -11 %       174               15 %         -164 %
Provision for
income taxes              8                  2 %       51                9 %         -84 %         -                0 %        58                5 %          100 %
(Loss) earnings
from continuing
operations              (60 )              -11 %     (208 )            -36 %          71 %      (112 )            -11 %       116               10 %         -197 %
(Loss) earnings
from discontinued
operations, net
of
income taxes             (2 )                         (16 )                                       17                          (57 )
Net (loss)
earnings                (62 )              -12 %     (224 )            -38 %          72 %       (95 )             -9 %        59                5 %         -261 %
Less: Net
earnings
attributable to
noncontrolling
interests                 -                             -                                          3                            -
NET (LOSS)
EARNINGS
ATTRIBUTABLE TO
EASTMAN KODAK
COMPANY             $   (62 )              -12 %   $ (224 )            -38 %          72 %   $   (98 )            -10 %   $    59                5 %         -266 %





                                 Three Months Ended
                                      June 30,                                                 Percent Change vs. 2013
                                                                                                                               Manufacturing and
                         2014 Amount         Change vs. 2013          Volume          Price/Mix         Foreign Exchange          Other Costs

Revenues                $         525                     -10 %            -11 %                1 %                     -                     n/a

Gross profit margin 19% -4 pp n/a -3 pp 0pp -1pp

                                  Six Months Ended
                                      June 30,                                             Percent Change vs. 2013
                                                                                                                          Manufacturing and

2014 Amount Change vs. 2013 Volume Price/Mix Foreign Exchange Other Costs

Revenues $ 1,009 -14 % -12 % -2 % - n/a

Gross profit margin 19% -5 pp n/a -3 pp 0pp -2pp


Revenues

Current Quarter

For the three months ended June 30, 2014, revenues decreased approximately 10% compared with the same period in 2013, primarily due to volume declines in Entertainment Imaging and Commercial Films (-4%) and Consumer Inkjet Systems (-3%). This was partially offset by favorable price/mix within Intellectual Property and Brand Licensing (+2%). See segment discussions below for additional information.

Year to Date

For the six months ended June 30, 2014, revenues decreased approximately 14% compared with the same period in 2013, primarily due to volume declines in Entertainment Imaging and Commercial Films (-5%) and Consumer Inkjet Systems (-3%). Also contributing to the decrease was unfavorable price/mix due to lower licensing revenue (-1%). See segment discussions below for additional information.

Gross Profit

Current Quarter

The decrease in gross profit percent for the three months ended June 30, 2014 of approximately 4pp as compared with the prior year period was driven by unfavorable price/mix within Consumer Inkjet Systems (-2pp) and increased manufacturing and other costs within Graphics, Entertainment & Commercial Films
(-1pp). See segment discussions below for additional details.

Year to Date

The decrease in gross profit percent for the six months ended June 30, 2014 of approximately 5pp as compared with the prior year period was driven by increased manufacturing and other costs within Graphics, Entertainment & Commercial Films
(-2pp). Also contributing to the decrease was unfavorable price/mix primarily within Consumer Inkjet Systems (-1pp) and Entertainment Imaging and Commercial Films (-1pp) and lower licensing revenue (-1pp). See segment discussions below for additional details.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses (SG&A) decreased (26%) for both the three and six months ended June 30, 2014, as compared with the prior year periods partially reflecting lower pension costs for the quarter and year-to-date periods (8% and 9%, respectively) with the remaining decrease primarily due to the impact of cost reduction actions.

Research and Development Costs

Consolidated research and development (R&D) expenses increased for the three and six months ended June 30, 2014 (4% and 6% respectively) as compared with the prior year periods primarily due to increased expenditures in the Digital Printing and Enterprise Segment as new products get closer to commercialization. For both the three and six months ended June 30, 2014, increased depreciation expense from the application of fresh start accounting (10% for both periods) was mitigated by lower pension expense (-14% for both periods).

Other Operating Income, Net

For details, refer to Note 7, "Other Operating Income, Net."

Reorganization Items, Net

For details, refer to Note 2, "Reorganization Items, Net."


                                       30
--------------------------------------------------------------------------------



Income Tax (Benefit) Provision

                                                  Three Months Ended                    Six Months Ended
                                                       June 30,                             June 30,
(in millions)                               Successor          Predecessor        Successor         Predecessor
                                               2014               2013               2014              2013
(Loss) earnings from continuing
operations before income taxes             $        (52 )     $        (157 )    $       (112 )    $         174
Provision for income taxes                 $          8       $          51      $          -      $          58
Effective tax rate                                (15.4 )%            (32.5 )%            0.0 %             33.3 %

Current Quarter

The change in Kodak's effective tax rate from continuing operations for the quarter as compared to 2013 is primarily attributable to: (1) a decrease as a result of losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management's conclusion that it was more likely than not that the tax benefits would not be realized, (2) a provision as a result of the establishment of a deferred tax asset valuation allowance in certain jurisdictions outside the U.S. in the three months ended June 30, 2013, (3) a provision associated with withholding taxes on foreign dividends paid in the three months ended June 30, 2013, (4) a benefit associated with foreign withholding taxes on undistributed earnings in the three months ended June 30, 2013 and (5) a benefit as a result of tax accounting impacts related to items reported in Accumulated other comprehensive loss in the Consolidated Statement of Financial Position in the three months ended June 30, 2013.

Year to Date

The change in Kodak's effective tax rate from continuing operations for the six months ended June 30, 2014 as compared to 2013 is primarily attributable to: (1) a provision as a result of losses generated within the U.S. for which no benefit . . .

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