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The Company’s effective tax rate will change throughout 2006 primarily as a result of: (1) the mix of losses generated within the U.S., which will not be benefited, and the earnings that will be generated outside the U.S., (2) the tax impacts of the Company’s ongoing restructuring activity under its 2004-2007 Restructuring Program, which will be based on the specific tax jurisdictions in which those charges are incurred, and (3) other nonrecurring, discrete factors.
On October 3, 2006, the Company filed a claim for a federal tax refund of approximately $650 million related to a 1994 loss recognized on the sale of a subsidiary stock that was disallowed at that time under Internal Revenue Service (IRS) regulations. Since that time, the IRS has issued new regulations that serve as the basis for this refund claim. Due to the uncertainty of the claim, the Company, in accordance with its accounting policies, has not recorded a tax benefit related to this refund claim.
Loss From Continuing Operations
The loss from continuing operations for the nine months ended September 30, 2006 was $617 million, or $2.15 per basic and diluted share, as compared with a loss from continuing operations for the nine months ended September 30, 2005 of $1,217 million, or $4.23 per basic and diluted share, representing an increase in earnings of $600 million. This change 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 $1,766 million for the nine months ended September 30, 2006 as compared with $1,883 million for the nine months ended September 30, 2005, representing a decrease of $117 million, or 6%. The decrease in net sales was comprised of: (1) declines related to negative price/mix, which reduced net sales by approximately 4.5 percentage points, driven primarily by the kiosk SPG and the home printing solutions SPG, and (2) lower volumes, which decreased sales by approximately 1.7 percentage points, driven primarily by declines in the consumer digital capture SPG. Foreign exchange did not have a significant impact on net sales.
CDG segment net sales in the U.S. were $1,054 million for the current year period as compared with $1,095 million for the prior year period, representing a decrease of $41 million, or 4%. CDG segment net sales outside the U.S. were $712 million for the current year period as compared with $788 million for the prior year period, representing a decrease of $76 million, or 10%.
Net worldwide sales of consumer digital capture products, which include consumer digital cameras, accessories, memory products, imaging sensors, and intellectual property royalties, decreased 11% in the nine months ended September 30, 2006 as compared with the prior year period, primarily reflecting volume decreases. Year to date through August, the Company remains in the top three market position, in both the U.S. and worldwide, for consumer digital cameras.
Net worldwide sales of picture maker kiosks/media (the kiosk SPG) increased 6% in the nine months ended September 30, 2006 as compared with the nine months ended September 30, 2005, as a result of significant volume increases, partially offset by negative price/mix.
Net worldwide sales of the home printing solutions SPG, which includes inkjet photo paper and printer docks/media, decreased 6% in the current year period as compared with the prior year period, driven by negative price/mix and unfavorable foreign exchange, partially offset by volume increases. On a year to date basis through August, the Company's printer dock product continues to maintain a leading market share position in the U.S.
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Gross Profit
Gross profit for the CDG segment was $352 million for the nine months ended September 30, 2006 as compared with $351 million for the prior year period, representing an increase of $1 million or less than 1%. The gross profit margin was 19.9% in the current year period as compared with 18.6% in the prior year period. The 1.3 percentage point increase was primarily attributable to improvements in price/mix, which impacted gross profit margins by approximately 3.5 percentage points, mainly due to a non-recurring extension and amendment to an existing license arrangement during the current quarter. This increase was partially offset by increased manufacturing costs, which reduced gross profit margins by approximately 1.9 percentage points, and foreign exchange, which negatively impacted gross profit margins by approximately 0.2 percentage points.
Selling, General and Administrative Expenses
SG&A expenses for the CDG segment decreased $15 million, or 4%, from $386 million in the nine months ended September 2005 to $371 million in the current year period, and remained constant as a percentage of sales at 21%. This decrease was primarily driven by a $13 million reduction in advertising costs.
Research and Development Costs
R&D costs for the CDG segment decreased $6 million, or 4%, from $136 million in the nine months ended September 30, 2005 to $130 million in the current year period 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 $149 million in the nine months ended September 30, 2006 compared with a loss of $171 million in the nine months ended September 30, 2005, representing an increase in earnings of $22 million or 13%, 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 $3,143 million for the nine months ended September 30, 2006 as compared with $4,124 million for the nine months ended September 30, 2005, representing a decrease of $981 million, or 24%. 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 third quarter sales by approximately 21.5 percentage points, and declines related to negative price/mix, driven primarily by the consumer film capture SPG, which reduced net sales by approximately 2.1 percentage points. Unfavorable foreign exchange also decreased net sales by approximately 0.2 percentage points.
FPG segment net sales in the U.S. were $1,025 million for the current year period as compared with $1,359 million for the nine months ended September 30, 2005, representing a decrease of $334 million, or 25%. FPG segment net sales outside the U.S. were $2,118 million for the nine months ended September 30, 2006 as compared with $2,765 million for the prior year period, representing a decrease of $647 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 30% in the nine months ended September 30, 2006 as compared with the nine months ended September 30, 2005, primarily reflecting industry volume declines.
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Net worldwide sales for the consumer and professional output SPGs, which include color negative paper and photochemicals, decreased 22% in the nine months ended September 30, 2006 as compared with the nine months ended September 30, 2005, primarily reflecting volume declines and negative price/mix. The volume declines are largely driven by the substantial reduction of direct sales of minilab equipment, which began in the third quarter of 2005, as the Company has shifted its focus to providing minilab services.
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 46% in the nine months ended September 30, 2006 as compared with the nine months ended September 30, 2005, reflecting continuing volume declines in the development and processing of consumer films.
Net worldwide sales for the entertainment imaging SPGs, including origination and print films for the entertainment industry decreased 3%, primarily reflecting origination film volume declines and negative price/mix for print films. These results also reflect more conservative motion picture release strategies by major studios including the maturation of industry practice regarding simultaneous worldwide releases of major feature films.
Gross Profit
Gross profit for the FPG segment was $825 million for the nine months ended September 30, 2006 as compared with $1,297 million for the prior year period, representing a decrease of $472 million or 36%. The gross profit margin was 26.2% in the current year period as compared with 31.5% in the prior year period. The 5.3 percentage point decrease was primarily attributable to increased depreciation expense principally due to asset useful life changes in third quarter 2005 and higher silver costs, which together reduced gross profit margins by approximately 4.5 percentage points. Volume decreases negatively impacted gross profit margins by approximately 0.6 percentage points. The impacts of price/mix and foreign exchange on gross profit margins were not significant.
Selling, General and Administrative Expenses
SG&A expenses for the FPG segment decreased $224 million, or 30%, from $739 million in the nine months ended September 30, 2005 to $515 million in the current year period, and decreased as a percentage of sales from 18% in the prior year period to 16% in the current year period. The decline in SG&A was attributable to ongoing Company-wide cost reduction initiatives.
Research and Development Costs
R&D costs for the FPG segment decreased $40 million, or 58%, from $69 million in the nine months ended September 30, 2005 to $29 million in the current year period and decreased as a percentage of sales from 2% in the prior year period to 1% in the current year period. The decrease in R&D was primarily attributable to significant 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 $281 million in the nine months ended September 30, 2006 compared with earnings of $489 million in the nine months ended September 30, 2005, representing a decrease of $208 million or 43%, largely resulting from the decrease in sales in the current period, 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, consumables, 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.
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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.
During the second quarter of 2006, the Company indicated that, as a result of ongoing integration of acquisitions within the Graphic Communications Group, it had become increasingly difficult to report results by the discrete businesses that were acquired. Therefore, beginning with the current quarter, results for the GCG segment are reported using the following SPG structure:
| | • | | Digital Prepress Consumables – digital plates, chemistry, media and services |
| | | |
| • | | NexPress Color – equipment, consumables and services for NexPress color products, and direct image press equipment |
| | | |
| • | | Commercial Inkjet Printing Solutions – Versamark equipment, consumables and service |
| | | |
| • | | Workflow and Prepress – workflow software, output devices, proofing equipment, and services |
| | | |
| • | | Other Digital – electrophotographic black and white equipment and consumables, document scanners and services, wide-format inkjet, imaging services |
| | | |
| • | | Traditional – analog plates, graphics and other films, paper, media equipment, archival products |
Worldwide Revenues
Net worldwide sales for the Graphic Communications Group segment were $2,658 million for the nine months ended September 30, 2006 as compared with $2,048 million for the prior year period, representing an increase of $610 million, or 30%. The increase in net sales was primarily due to the KPG and Creo acquisitions in 2005, which together contributed $639 million or approximately 31.2 percentage points to the year-over-year increase in sales. Also contributing to the increase in net sales were volume increases, largely attributable to the digital prepress consumables SPG and NexPress color SPG, which increased net sales by approximately 0.2 percentage points. These increases were partially offset by: (1) unfavorable price/mix, primarily driven by the workflow and prepress SPG, which decreased sales by approximately 1.1 percentage points, and (2) unfavorable foreign exchange, which negatively impacted net sales by approximately 0.5 percentage points.
Net sales in the U.S. were $941 million for the current year period as compared with $738 million for the prior year period, representing an increase of $203 million, or 28%. Net sales outside the U.S. were $1,717 million in the nine months ended September 30, 2006 as compared with $1,310 million for the prior year period, representing an increase of $407 million, or 31%.
Digital Strategic Product Groups' Revenues
The Graphic Communications Group segment digital product sales are comprised of the digital prepress consumables SPG; NexPress color SPG; commercial inkjet printing solutions SPG; workflow and prepress systems SPG; and other digital SPG.
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Digital product sales for the Graphic Communications Group segment were $2,250 million for the nine months ended September 30, 2006 as compared with $1,652 million for the prior year period, representing an increase of $598 million, or 36%. The increase in digital product sales was primarily attributable to the acquisitions of KPG and Creo in prior year, which generated revenues in the workflow and prepress SPG and the digital prepress consumables SPG.
Net worldwide sales for the NexPress color SPG increased 45% driven by strong volume increases. Sales from NexPress color equipment and consumables increased 52% from the prior year period, while direct image press equipment sales declined 13% year-over-year. The installed base of digital production color presses continues to grow, with total page volumes increasing 65% in the current year period versus the prior year period, leading to an increase in consumables sales of 57%.
Net worldwide sales of commercial inkjet printing solutions increased 6% year-over-year, reflecting volume increases, partially offset by negative price/mix.
Net worldwide sales of other digital products and services decreased 7% year-over-year, primarily driven by volume declines. Sales declines for electrophotographic black and white equipment and consumables, and wide-format inkjet, were partially offset by sales increases for document scanners.
Traditional Strategic Product Groups' Revenues
Segment traditional product sales are primarily comprised of sales of traditional graphics products and other films, paper, media, equipment and analog plates. These sales were $408 million for the current year period compared with $396 million for the prior year period, representing an increase of $12 million, or 3%. The increase in sales was primarily attributable to the acquisition of KPG in the prior year.
Gross Profit
Gross profit for the Graphic Communications Group segment was $754 million for the nine months ended September 30, 2006 as compared with $527 million in the prior year period, representing an increase of $227 million, or 43%. The gross profit margin was 28.4% in the current year period as compared with 25.7% in the prior year period. The increase in the gross profit margin of 2.7 percentage points was primarily attributable to: (1) reductions in manufacturing and other costs, which increased gross profit margins by approximately 1.9 percentage points, and (2) the acquisitions of Creo and KPG, which increased gross profit margins by approximately 0.9 percentage points. The impacts from price/mix and foreign exchange on gross profit margins were not significant.
Selling, General and Administrative Expenses
SG&A expenses for the Graphic Communications Group segment were $521 million for the nine months ended September 30, 2006 as compared with $388 million in the prior year period, representing an increase of $133 million, or 34%, and increased as a percentage of sales from 19% in the prior year period to 20% in the current year period. The increase in SG&A is primarily attributable to $150 million of SG&A costs associated with the acquired KPG and Creo businesses, partially offset by integration synergies.
Research and Development Costs
R&D costs for the nine months ended September 30, 2006 for the Graphic Communications Group segment decreased $60 million, or 29%, from $208 million for the nine months ended September 30, 2005 to $148 million for the current year period, and decreased as a percentage of sales from 10% for the nine months ended September 30, 2005 to 6% for the current year period. The decrease was primarily driven by $52 million of write-offs in the prior year period for purchased in-process R&D associated with acquisitions, and was also driven by integration synergies and reduced spending on other GCG products. These decreases were partially offset by increased R&D costs associated with the acquired businesses of $29 million.
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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 $84 million in the nine months ended September 30, 2006 compared with a loss of $69 million in the nine months ended September 30, 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 $1,837 million for the nine months ended September 30, 2006 as compared with $1,955 million for the prior year period, representing a decrease of $118 million, or 6%. The decrease in sales was attributable to decreases in volume of approximately 4.7 percentage points, primarily driven by the digital output and radiology film SPG, partially offset by the growth in the digital capture, digital dental, and healthcare information SPGs. Unfavorable price/mix reduced sales by approximately 0.7 percentage points, primarily driven by the digital capture SPG and digital output SPG, partially offset by price/mix improvements in the digital dental SPG. Additionally, unfavorable foreign exchange negatively impacted sales by approximately 0.6 percentage points.
Net sales in the U.S. were $692 million for the current year period as compared with $778 million for the nine months ended September 30, 2005, representing a decrease of $86 million, or 11%. Net sales outside the U.S. were $1,145 million for the nine months ended September 30, 2006 as compared with $1,177 million for the prior year period, representing a decrease of $32 million, or 3%, which includes a decline of 1% from the unfavorable impact of exchange.
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 $1,221 million for the current year period as compared with $1,249 million for the nine months ended September 30, 2005, representing a decrease of $28 million, or 2%. This sales decline was driven by lower revenues in the digital output SPG, partially offset by 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 and dental film, equipment, service, and chemistry, were $616 million for the current year period as compared with $706 million for the nine months ended September 30, 2005, representing a decrease of $90 million, or 13%. This decline was largely driven by declines in traditional radiology film sales.
Gross Profit
Gross profit for the Health Group segment was $663 million for the nine months ended September 30, 2006 as compared with $765 million in the prior year period, representing a decrease of $102 million, or 13%. The gross profit margin was 36.1% in the current year period as compared with 39.1% in the prior year period. The decrease in the gross profit margin of 3.0 percentage points was principally attributable to: (1) unfavorable price/mix, which negatively impacted gross profit margins by 2.0 percentage points primarily driven by the digital output SPG and digital capture SPG, and (2) an increase in manufacturing cost, which decreased gross profit margins by 0.8 percentage points, primarily reflecting higher silver and raw material costs. The impacts of volume and foreign exchange on gross profit margin were not significant.
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Selling, General and Administrative Expenses
SG&A expenses for the Health Group segment increased $8 million, or 2%, from $357 million in the nine months ended September 30, 2005 to $365 million for the current year period, and increased as a percentage of sales from 18% in the prior year period to 20% in the current year period. The increase in SG&A expenses is primarily attributable to $19 million of costs related to the exploration of strategic alternatives for the Health Group, which was announced on May 4, 2006, partially offset by a favorable legal settlement in the second quarter of 2006 and other cost reductions.
Research and Development Costs
R&D costs for the nine months ended September 30, 3006 decreased $17 million, or 14%, from $124 million in the nine months ended September 30, 2005 to $107 million, and remained constant as a percentage of sales at 6%. This decrease was primarily driven by cost reduction actions implemented in March 2006, which have been primarily focused on the digital output and digital capture SPGs, to reduce overall R&D spending for the Health Group. The year-over-year decrease was also partially due to the write-off of $2 million of purchased in-process R&D in the first quarter of 2005 related to the acquisition of OREX Computed Radiography Ltd.
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 $91 million, or 32%, from $283 million for the prior year period to $192 million for the nine months ended September 30, 2006 due to the reasons described above.
ALL OTHER
Worldwide Revenues
Net worldwide sales for All Other were $49 million for the nine months ended September 30, 2006 as compared with $61 million for the nine months ended September 30, 2005, representing a decrease of $12 million, or 20%. Net sales in the U.S. were $38 million for the nine months ended September 30, 2006 as compared with $33 million for the prior year period, representing an increase of $5 million, or 15%. Net sales outside the U.S. were $11 million in the nine months ended September 30, 2006 as compared with $28 million in the prior year period, representing a decrease of $17 million, or 61%.
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 $142 million in the current year period as compared with a loss of $170 million in the nine months ended September 30, 2005, primarily driven reductions in R&D spending for the display business.
NET LOSS
The consolidated net loss for the nine months ended September 30, 2006 was $617 million, or a loss of $2.15 per basic and diluted share, as compared with a net loss for the nine months ended September 30, 2005 of $1,215 million, or a loss of $4.22 per basic and diluted share, representing an increase in earnings of $598 million or 49%. This increase is attributable to the reasons outlined above.
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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 third quarter of 2006:
| | | | | | | | | | | | | | | | Other | | | |
| | | Balance | | | | | | | | | | | Adjustments | | Balance |
| | June 30, | | Costs | | | | Cash | | Non-cash | | and | | Sept. 30, |
| (in millions) | | 2006 | | Incurred | | Reversals | | Payments | | Settlements | | Reclasses (1) | | 2006 |
| 2004-2007 Restructuring Program: | | | | | | | | | | | | | | | | | | | | |
| Severance reserve | | $ | 280 | | $ | 97 | | $ | — | | $ | ( 90 | ) | $ | — | | $ | 13 | | $ | 300 |
| Exit costs reserve | | | 29 | | | 14 | | — | | | (21 | ) | | — | | | 2 | | | 24 |
| Total reserve | | $ | 309 | | $ | 111 | | $ | — | | $ | (111 | ) | $ | — | | $ | 15 | | $ | 324 |
| Long-lived asset impairments | | | | | | | | | | | | | | | | | | | | |
| and inventory write-downs | | $ | — | | $ | 28 | | $ | — | | $ | — | | $ | (28 | ) | $ | — | | $ | — |
| Accelerated depreciation | | $ | — | | $ | 73 | | $ | — | | $ | — | | $ | (73 | ) | $ | — | | $ | — |
| Pre-2004 Restructuring Programs: | | | | | | | | | | | | | | | | | | | | |
| Severance reserve | | $ | — | | $ | — | | $ | | | $ | — | | $ | — | | $ | — | | $ | — |
| Exit costs reserve | | | 12 | | | — | | — | | | (1 | ) | | — | | | — | | | 11 |
| Total reserve | | $ | 12 | | $ | — | | $ | — | | $ | (1 | ) | $ | — | | $ | — | | $ | 11 |
| Total of all | | | | | | | | | | | | | | | | | | | | |
| restructuring programs | | $ | 321 | | $ | 212 | | $ | — | | $ | (112 | ) | $ | (101 | ) | $ | 15 | | $ | 335 |
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____________________
| (1) | | The total restructuring charges of $212 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 September 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 gains, settlement losses, and special termination benefits of $11 million, and (2) reclassifications to Other long-term liabilities for the restructuring-related impacts on the Company's environmental remediation liabilities of $2 million. Additionally, the Other Adjustments and Reclasses column of the table above includes foreign currency translation adjustments of $2 million, which are reflected in Accumulated other comprehensive loss in the Consolidated Statement of Financial Position. |
The costs incurred, which total $212 million for the three months ended September 30, 2006, include $73 million and $2 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 September 30, 2006. The remaining costs incurred of $137 million were reported as restructuring costs and other in the accompanying Consolidated Statement of Operations for the three months ended September 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 third 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, as indicated in the second quarter 2006 Form 10-Q. 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.
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The Company implemented certain actions under the Program during the third quarter of 2006. As a result of these actions, the Company recorded charges of $139 million in the third quarter of 2006, which were composed of severance, long-lived asset impairments, exit costs and inventory write-downs of $97 million, $26 million, $14 million and $2 million, respectively. The severance costs related to the elimination of approximately 1,650 positions, including approximately 800 manufacturing, 600 administrative, and 250 research and development positions. The geographic composition of the positions to be eliminated includes approximately 1,050 in the United States and Canada and 600 throughout the rest of the world. The reduction of the 1,650 positions and the $111 million charges for severance and exit costs are reflected in the 2004-2007 Restructuring Program table below. The $26 million charge in the third quarter and the $72 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 nine months ended September 30, 2006, respectively. The charges taken for inventory write-downs of $2 million and $8 million were reported in cost of goods sold in the accompanying Consolidated Statement of Operations for the three and nine months ended September 30, 2006, respectively.
As a result of initiatives implemented under the 2004-2007 Restructuring Program, the Company recorded $73 million and $227 million of accelerated depreciation on long-lived assets in cost of goods sold in the accompanying Consolidated Statement of Operations for the three and nine months ended September 30, 2006, respectively. The accelerated depreciation relates to long-lived assets accounted for under the held and used model of SFAS No. 144. The third quarter amount of $73 million relates to $70 million of manufacturing facilities and equipment, $2 million of photofinishing facilities and equipment, and $1 million of administrative facilities and equipment that will be used until their abandonment. The year-to-date amount of $227 million relates to $6 million of photofinishing facilities and equipment, $219 million of manufacturing facilities and equipment, and $2 million of administrative facilities and equipment that will be used until their abandonment. The Company will incur approximately $59 million of accelerated depreciation for the remainder 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 September 30, 2006, the Company has recorded charges of $2,647 million, which was composed of severance, long-lived asset impairments, exit costs, inventory write-downs, and accelerated depreciation of $1,243 million, $334 million, $236 million, $64 million, and $770 million, respectively. The severance costs related to the elimination of approximately 22,200 positions, including approximately 6,025 photofinishing, 10,300 manufacturing, 1,325 research and development and 4,550 administrative positions.
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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 September 30, 2006:
| | | | | | | | | | | Long-lived Asset | | | |
| | | | | | | Exit | | | | | Impairments | | | |
| | | Number of | | Severance | | Costs | | | | | and Inventory | | Accelerated |
| (dollars in millions) | | Employees | | Reserve | | Reserve | | | Total | | Write-downs | | Depreciation |
| 2004 charges | | 9,625 | | $ | 418 | | $ | 99 | | $ | 517 | | $ | 157 | | $ | 152 | |
| 2004 reversals | | — | | (6 | ) | (1 | ) | | (7 | ) | — | | — | |
| 2004 utilization | | (5,175 | ) | (169 | ) | (47 | ) | | (216 | ) | (157 | ) | (152 | ) |
| 2004 other adj. & reclasses | | — | | 24 | | (15 | ) | | 9 | | — | | — | |
| Balance at 12/31/04 | | 4,450 | | 267 | | 36 | | | 303 | | — | | — | |
| 2005 charges | | 8,125 | | 497 | | 84 | | | 581 | | 161 | | 391 | |
| 2005 reversals | | — | | (3 | ) | (6 | ) | | (9 | ) | — | | — | |
| 2005 utilization | | (10,225 | ) | (377 | ) | (95 | ) | | (472 | ) | (161 | ) | (391 | ) |
| 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 | | 38 | | 82 | |
| Q1, 2006 reversals | | — | | (1 | ) | — | | | (1 | ) | — | | — | |
| Q1, 2006 utilization | | (1,425 | ) | (97 | ) | (14 | ) | | (111 | ) | (38 | ) | (82 | ) |
| 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 | | 14 | | 72 | |
| Q2, 2006 reversals | | — | | — | | (1 | ) | | (1 | ) | — | | — | |
| Q2, 2006 utilization | | (1,300 | ) | (118 | ) | (15 | ) | | (133 | ) | (14 | ) | (72 | ) |
| Q2, 2006 other adj. & reclasses | | — | | (12 | ) | (4 | ) | | (16 | ) | — | | — | |
| Balance at 06/30/06 | | 2,425 | | 280 | | 29 | | | 309 | | — | | — | |
| Q3, 2006 charges | | 1,650 | | 97 | | 14 | | | 111 | | 28 | | 73 | |
| Q3, 2006 utilization | | (1,075 | ) | (90 | ) | (21 | ) | | (111 | ) | (28 | ) | (73 | ) |
| Q3, 2006 other adj. & reclasses | | — | | 13 | | 2 | | | 15 | | — | | — | |
| Balance at 09/30/06 | | 3,000 | | $ | 300 | | $ | 24 | | $ | 324 | | $ | — | | $ | — | |
As a result of the initiatives already implemented under the 2004-2007 Restructuring Program, severance payments will be paid during periods through 2008 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 $212 million recorded in the third quarter of 2006 included $36 million applicable to the Film and Photofinishing Systems Group segment, $16 million applicable to the Consumer Digital Imaging Group segment, $6 million applicable to the Graphic Communications Group segment, and $3 million applicable to the Health Group segment. The balance of $151 million was applicable to manufacturing, research and development, and administrative functions, which are shared across all segments.
The restructuring actions implemented during the third quarter of 2006 under the 2004-2007 Restructuring Program are expected to generate future annual cost savings of approximately $122 million, of which approximately $120 million represents future annual cash savings. These cost savings began to be realized by the Company beginning in the third quarter of 2006, and are expected to be fully realized by the end of 2007 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 $52 million, $46 million, and $24 million, respectively.
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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 $1,312 million, including annual cash savings of $1,260 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 2007 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 $855 million, $326 million, and $131 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 September 30, 2006, the Company had remaining exit costs reserves of $11 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
The Company’s cash and cash equivalents decreased $563 million from $1,665 million at December 31, 2005 to $1,102 million at September 30, 2006. The decrease resulted primarily from $72 million of net cash used in operating activities, $182 million of net cash used in investing activities, and $319 million of net cash used in financing activities.
The net cash used in operating activities of $72 million was primarily attributable to a decrease in liabilities excluding borrowings of $494 million, which included $408 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 $261 million. The decrease in receivables is a result of lower sales in the three month period ended September 30, 2006 compared with fourth quarter 2005 sales. In addition, the company's net loss of $617 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, provided $316 million of operating cash.
The net cash used in investing activities of $182 million was utilized primarily for capital expenditures of $282 million, partially offset by net proceeds from the sale of assets of $112 million. The net cash used in financing activities of $319 million was the result of a net decrease in borrowings of $247 million and dividend payments of $72 million.
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 $282 million in the nine months ended September 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 nine months ended September 30, 2006, the Company expended $408 million against restructuring reserves and pension and other postretirement liabilities, primarily for the payment of severance benefits. Certain employees whose positions were eliminated could elect to receive severance payments for up to two years following their date of termination.
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As a result of the cumulative impact of the ongoing position eliminations under its 2004-2007 Restructuring Program as disclosed in Note 9 and above as part of Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company incurred curtailment and settlement gains and losses with respect to certain of its retirement plans in 2006. These curtailment events resulted in the remeasurement of the respective plans’ obligations, which impacted the accounting for the additional minimum pension liabilities. As a result of these remeasurements, the Company was required to decrease its additional minimum pension liabilities by $203 million during 2006. This decrease is reflected in the postretirement liabilities component within the accompanying Consolidated Statement of Financial Position as of September 30, 2006. The net-of-tax amount of $146 million relating to the decrease of the additional minimum pension liabilities is reflected in the accumulated other comprehensive loss component within the accompanying Consolidated Statement of Financial Position as of September 30, 2006. The related decrease in the long-term deferred tax asset of $57 million was reflected in the other long-term assets component within the accompanying Consolidated Statement of Financial Position as of September 30, 2006.
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. On October 17, 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 November 1, 2006 and payable on December 14, 2006.
The Company made contributions (funded plans) or paid benefits (unfunded plans) totaling approximately $152 million relating to its major U.S. and non-U.S. defined benefit pension plans in the nine months ended September 30, 2006. The Company expects its contribution (funded plans) and benefit payment (unfunded plans) requirements for its major U.S. and non-U.S. defined benefit pension plans for the balance of 2006 to be approximately $50 million.
The Company paid benefits totaling approximately $170 million relating to its U.S., United Kingdom and Canada postretirement benefit plans in the nine months ended September 30, 2006. The Company expects to pay benefits of $59 million for its U.S., United Kingdom and Canada postretirement plans for the balance of 2006.
The Company believes that its cash flow from operations, in addition to asset sales and intellectual property monetization, will be sufficient to cover its working capital and capital investment needs and the funds required for future debt reduction, restructuring payments, dividend payments, employee benefit plan payments/contributions, and modest acquisitions. The Company's cash balances and its financing arrangements will be used to bridge timing differences between expenditures and cash generated from operations.
Short-Term Borrowings
As of September 30, 2006, the Company and its subsidiaries, on a consolidated basis, maintained $1,105 million in committed bank lines of credit and $641 million in uncommitted bank lines of credit to ensure continued access to short-term borrowing capacity.
Secured Credit Facilities
On October 18, 2005 the Company closed on $2.7 billion of Senior Secured Credit Facilities (Secured Credit Facilities) under a new Secured Credit Agreement (Secured Credit Agreement) and associated Security Agreement and Canadian Security Agreement. The Secured Credit Facilities consists of a $1.0 billion 5-Year Committed Revolving Credit Facility (5-Year Revolving Credit Facility) expiring October 18, 2010 and $1.7 billion of Term Loan Facilities (Term Facilities) expiring October 18, 2012.
The 5-Year Revolving Credit Facility can be used by Eastman Kodak Company (U.S. Borrower) for general corporate purposes including the issuance of letters of credit. Amounts available under the facility can be borrowed, repaid and re-borrowed throughout the term of the facility provided the Company remains in compliance with covenants contained in the Secured Credit Agreement. As of September 30, 2006, there was no debt outstanding and $141 million of letters of credit issued under this facility.
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Under the Term Facilities, $1.2 billion was borrowed at closing primarily to refinance debt originally issued under the Company’s previous $1.225 billion 5-Year Facility to finance the acquisition of Creo Inc. on June 15, 2005. The $1.2 billion consisted of a $920 million 7-Year Term Loan to the U.S. Borrower and $280 million 7-Year Term Loan to Kodak Graphic Communications Canada Company (KGCCC or, the Canadian Borrower). Pursuant to the terms of the Secured Credit Agreement, an additional $500 million was available to the U.S. Borrower under the seven-year term loan facility for advance at any time through June 15, 2006. On June 15, 2006, the Company used this $500 million to refinance $500 million 6.375% Medium Term Notes, Series A, due June 15, 2006. This term loan matures on October 18, 2012 and may be prepaid in whole or in part at specified interest reset dates without penalty. These obligations are secured through asset and equity pledges as described below.
At September 30, 2006, the balances reported in long-term debt, net of current portion, on the Consolidated Statement of Financial Position were $1,412 million and $278 million for the U.S. Borrower and the Canadian Borrower, respectively. The Secured Credit Agreement requires mandatory quarterly prepayment of .25% of the outstanding advances. Debt issue costs incurred of approximately $57 million associated with the Secured Credit Facilities were recorded as an asset and are being amortized over the life of the borrowings.
Pursuant to the Secured Credit Agreement and associated Security Agreement, each subsidiary organized in the U.S. jointly and severally guarantees the obligations under the Secured Credit Agreement and all other obligations of the Company and its subsidiaries to the Lenders. The guaranty is supported by the pledge of certain U.S. assets of the U.S. Borrower and the Company’s U.S. subsidiaries including, but not limited to, receivables, inventory, equipment, deposit accounts, investments, intellectual property, including patents, trademarks and copyrights, and the capital stock of "Material Subsidiaries." Excluded from pledged assets are real property, “Principal Properties” and equity interests in “Restricted Subsidiaries”, as defined in the Company’s 1988 Indenture.
"Material Subsidiaries" are defined as those subsidiaries with revenues or assets constituting 5 percent or more of the consolidated revenues or assets of the corresponding borrower. "Material Subsidiaries" are determined on an annual basis under the Secured Credit Agreement.
Pursuant to the Secured Credit Agreement and associated Canadian Security Agreement, Eastman Kodak Company and Kodak Graphic Communications Company (KGCC, formerly Creo Americas, Inc.), jointly and severally guarantee the obligations of the Canadian Borrower, to the Lenders. Subsequently, KGCC has been merged into Eastman Kodak Company. Certain assets of the Canadian Borrower in Canada were also pledged in support of its obligations, including, but not limited to, receivables, inventory, equipment, deposit accounts, investments, intellectual property, including patents, trademarks and copyrights, and the capital stock of the Canadian Borrower's Material Subsidiaries.
Interest rates for borrowings under the Secured Credit Agreement are dependent on the Company’s Long-Term Senior Secured Credit Rating. 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: 4.00 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 September 30, 2006, the Company's consolidated debt to EBITDA ratio was 2.64 and the consolidated EBITDA to consolidated interest ratio was 5.13. 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.
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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:
| | | | | | Third | | Second | | First | | Fourth |
| | Rolling Four | | Quarter | | Quarter | | Quarter | | Quarter |
| (in millions) | | Quarter Total | | 2006 | | 2006 | | 2006 | | 2005 |
| Net loss | | $ | (663 | ) | $ | (37 | ) | $ | (282 | ) | $ | (298 | ) | $ | (46 | ) |
| Plus: | | | | | | | | | | | | | | | | |
| Interest expense | | | 269 | | | 74 | | | 66 | | | 62 | | | 67 | |
| Provision (benefit) for income taxes | | | 27 | | | 19 | | | 51 | | | 3 | | | (46 | ) |
| Depreciation and amortization | | | 1,481 | | | 300 | | | 345 | | | 371 | | | 465 | |
| Non-cash restructuring charges and asset write-downs/impairments | | | 280 | | | 38 | | | 77 | | | 56 | | | 109 | |
| Loss from cumulative effect of accounting change, net of income taxes (extraordinary loss) | | | 57 | | | — | | | — | | | — | | | 57 | |
| Non-cash stock compensation expense | | | 20 | | | 3 | | | 8 | | | 6 | | | 3 | |
| Non-cash equity in (earnings) loss from unconsolidated affiliates | | | (9 | ) | | (1 | ) | | (7 | ) | | — | | | (1 | ) |
| Impact of change in accounting from LIFO to average cost | | | 4 | | | — | | | — | | | — | | | 4 | |
| Total additions to calculate EBITDA | | | 2,129 | | | 433 | | | 540 | | | 498 | | | 658 | |
| Less: | | | | | | | | | | | | | | | | |
| Earnings from discontinued operations, net of income taxes (extraordinary income) | | | (148 | ) | | — | | | — | | | — | | | (148 | ) |
| Investment income | | | (51 | ) | | (14 | ) | | (13 | ) | | (17 | ) | | (7 | ) |
| Total subtractions to calculate EBITDA | | | (199 | ) | | (14 | ) | | (13 | ) | | (17 | ) | | (155 | ) |
| EBITDA, as included in the debt to EBITDA ratio as presented | | $ | 1,267 | | $ | 382 | | $ | 245 | | $ | 183 | | $ | 457 | |
| |
| |
| |
| | | | | | Third | | Second | | First | | Fourth |
| | Rolling Four | | Quarter | | Quarter | | Quarter | | Quarter |
| (in millions) | | Quarter Total | | 2006 | | 2006 | | 2006 | | 2005 |
| (Following is a reconciliation to the most directly comparable GAAP measure) | | | | | | | | | | |
| EBITDA, as included in the debt to EBITDA ratio as presented | | $ | 1,267 | | $ | 382 | | $ | 245 | | $ | 183 | | $ | 457 | |
| Depreciation and amortization | | | (1,481 | ) | | (300 | ) | | (345 | ) | | (371 | ) | | (465 | ) |
| Non-cash restructuring charges and asset write-downs/impairments | | | (280 | ) | | (38 | ) | | (77 | ) | | (56 | ) | | (109 | ) |
| Other adjustments, net | | | (101 | ) | | (42 | ) | | 10 | | | (15 | ) | | (54 | ) |
| (Loss) earnings from continuing operations before interest, other income (charges), net and income taxes | | $ | (595 | ) | $ | 2 | | $ | (167 | ) | $ | (259 | ) | $ | (171 | ) |
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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:
| | | | | | Third | | Second | | First | | Fourth |
| | Rolling Four | | Quarter | | Quarter | | Quarter | | Quarter |
| (in millions) | | Quarter Total | | 2006 | | 2006 | | 2006 | | 2005 |
| Interest expense, as included in the EBITDA to interest expense ratio | | $ | 246 | | $ | 62 | | $ | 62 | | $ | 59 | | $ | 63 |
| Adjustments to interest expense for purposes of the covenant calculation | | | 23 | | | 12 | | | 4 | | | 3 | | | 4 |
| Interest expense | | $ | 269 | | $ | 74 | | $ | 66 | | $ | 62 | | $ | 67 |
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.
In addition, subject to various conditions and exceptions in the Secured Credit Agreement, in the event the Company sells assets for net proceeds totaling $75 million or more in any year, except for proceeds used within 12 months for reinvestments in the business of up to $300 million, proceeds from sales of assets used in the Company's non-digital products and services businesses to prepay or repay debt or pay cash restructuring charges within 12 months from the date of sale of the assets, or proceeds from the sale of inventory in the ordinary course of business, the amount in excess of $75 million must be applied to prepay loans under the Secured Credit Agreement.
If unused, the 5-Year Revolving Credit Facility has a commitment fee of $5.0 million per year at theCompany’s current credit rating of Ba3 and B+ from Moody's Investor Services, Inc. (Moody's) and Standard & Poor's Rating Services (S&P), respectively.
In addition to the 5-Year Revolving Credit Facility, the Company has other committed and uncommitted lines of credit at September 30, 2006 totaling $105 million and $641 million, respectively. These lines primarily support borrowing needs of the Company’s subsidiaries, which include term loans, overdraft coverage, letters of credit and revolving credit lines. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions. Total outstanding borrowings against these other committed and uncommitted lines of credit at September 30, 2006 were $18 million and $33 million, respectively. These outstanding borrowings are reflected in the short-term borrowings in the accompanying Consolidated Statement of Financial Position at September 30, 2006.
At September 30, 2006, the Company had outstanding letters of credit totaling $144 million and surety bonds in the amount of $95 million primarily to ensure the payment of possible casualty and workers' compensation claims, environmental liabilities, and to support various customs and trade activities.
Debt Shelf Registration and Convertible Securities
On September 5, 2003, the Company filed a shelf registration statement on Form S-3 (the primary debt shelf registration) for the issuance of up to $2.0 billion of new debt securities. Pursuant to Rule 429 under the Securities Act of 1933, $650 million of remaining unsold debt securities under a prior shelf registration statement were included in the primary debt shelf registration, thus giving the Company the ability to issue up to $2.65 billion in public debt. After issuance of $500 million in notes in October 2003, the remaining availability under the primary debt shelf registration was $2.15 billion.
The Company has $575 million of Convertible Senior Notes due 2033 (the Convertible Securities) on which interest accrues at the rate of 3.375% per annum and is payable semiannually. The Convertible Securities are unsecured and rank equally with all of the Company’s other unsecured and unsubordinated indebtedness. The Convertible Securities may be converted, at the option of the holders, to shares of the Company’s common stock if the Company’s Senior Unsecured credit rating assigned to the Convertible Securities by either Moody’s or S&P is lower than Ba2 or BB, respectively. At the Company's current Senior Unsecured credit rating, the Convertible Securities may be converted by their holders.
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The Company's $2.7 billion Secured Credit Facilities, along with other committed and uncommitted credit lines, and cash balances, provide the Company with adequate liquidity to meet its working capital and investing needs.
Credit Quality
Moody's and S&P's ratings for the Company, including their outlooks, as of the filing date of this Form 10-Q are as follows:
| | | Senior | | | | Senior | | |
| | | Secured | | Corporate | | Unsecured | | |
| | | Rating | | Rating | | Rating | | Outlook |
| Moody's | | Ba3 | | B1 | | B2 | | Negative |
| S&P | | B+ | | B+ | | B | | Negative |
Moody’s ratings reflect their views regarding the Company's: (i) execution challenges to achieve digital profitability as its business shifts into highly competitive digital imaging markets, (ii) ongoing exposure to the accelerating secular decline of its consumer film business and potential decline of its entertainment imaging film business, and (iii) variability in the utilization of its traditional manufacturing assets and potential for incremental restructuring costs.
Moody’s Ba3 rating assigned to the Secured Credit Facilities reflects the above factors as well as the security collateral and the secured cross guarantee afforded to the Secured Credit Facilities.
The negative rating outlook reflects Moody's concern regarding the Company's challenges to transition to a digital product and services business, including requirements to fund investment and restructuring costs, and uncertain prospects for achieving solid digital business profitability.
On May 5, 2006, Moody’s placed the Company’s ratings on review for possible downgrade. The review was prompted by the announcement to explore strategic alternatives for the Health Group, declining Health Group revenue and earnings, a Consumer Digital Group revenue decline, and increased operating loss for the quarter ended March 31, 2006.
On August 2, 2006, S&P placed its ratings on the Company on CreditWatch with negative implications reflecting the Company's currently weak profitability and S&P's concern that the rapid decline of the traditional business will not be offset by the slower than expected revenue growth in the Company's digital business. Resolution of the CreditWatch listing will include S&P's updated assessment of the Company's near- and intermediate-term profit and cash flow potential in light of the difficult operating environment, competition and slower than expected digital sales growth.
The Company is in compliance with all covenants or other requirements set forth in its credit agreements and indentures. Further, the Company does not have any rating downgrade triggers that would accelerate the maturity dates of its debt. However, the Company could be required to increase the dollar amount of its letters of credit or provide other financial support up to an additional $74 million at the current credit ratings. At the current Senior Unsecured Rating of B2 by Moody's and B by S&P, Convertible Securities holders may, at their option, convert their Convertible Securities to common stock. Further downgrades in the Company’s credit rating or disruptions in the capital markets could impact borrowing costs and the nature of its funding alternatives. However, further downgrades will not impact borrowing costs under the Company's $2.7 billion Secured Credit Facilities.
OFF-BALANCE SHEET ARRANGEMENTS
The Company guarantees debt and other obligations of certain customers. At September 30, 2006, these guarantees totaled a maximum of $145 million, with outstanding guaranteed amounts of $112 million. The maximum guarantee amount includes guarantees of up to: $143 million of customer amounts due to banks and leasing companies in connection with financing of customers’ purchases of product and equipment from the Company ($112 million outstanding), and $2 million to other third parties (less than $1 million outstanding).
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The guarantees for the third party debt mature between 2006 and 2011. The customer financing agreements and related guarantees typically have a term of 90 days for product and short-term equipment financing arrangements, and up to five years for long-term equipment financing arrangements. These guarantees would require payment from the Company only in the event of default on payment by the respective debtor. In some cases, particularly for guarantees related to equipment financing, the Company has collateral or recourse provisions to recover and sell the equipment to reduce any losses that might be incurred in connection with the guarantees.
Management believes the likelihood is remote that material payments will be required under any of the guarantees disclosed above. With respect to the guarantees that the Company issued in the quarter ended September 30, 2006, the Company assessed the fair value of its obligation to stand ready to perform under these guarantees by considering the likelihood of occurrence of the specified triggering events or conditions requiring performance as well as other assumptions and factors. The Company has determined that the fair value of the guarantees is not material to the Company's financial position, results of operations or cash flows.
The Company also guarantees debt owed to banks for some of its consolidated subsidiaries. The maximum amount guaranteed is $824 million, and the outstanding debt under those guarantees, which is recorded within the short-term borrowings and long-term debt, net of current portion components in the accompanying Consolidated Statement of Financial Position, is $253 million. These guarantees expire in 2006 through 2013. As of the closing of the $2.7 billion Secured Credit Facilities on October 18, 2005, a $160 million KPG credit facility was closed. Debt outstanding under the KPG credit facility of $57 million was repaid and the guarantees of $160 million were terminated. Pursuant to the terms of the Company's $2.7 billion Senior Secured Credit Agreement dated October 18, 2005, obligations under the $2.7 billion Secured Credit Facilities and other obligations of the Company and its subsidiaries to the $2.7 billion Secured Credit Facilities lenders are guaranteed.
The Company issues indemnifications in certain instances when it sells businesses and real estate, and in the ordinary course of business with its customers, suppliers, service providers and business partners. Further, the Company indemnifies its directors and officers who are, or were, serving at the Company’s request in such capacities. Historically, costs incurred to settle claims related to these indemnifications have not been material to the Company’s financial position, results of operations or cash flows. Additionally, the fair value of the indemnifications that the Company issued during the quarter ended September 30, 2006 was not material to the Company’s financial position, results of operations or cash flows.
OTHER
As of September 30, 2006, there has been no material change in the Company's environmental liability exposure and, therefore, no material change in the undiscounted accrued liabilities for environmental remediation costs relative to December 31, 2005 or September 30, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs” that amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" (ARB No. 43) to clarify the accounting for abnormal idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, this Statement requires that an allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred for fiscal years beginning after June 15, 2005 (year ending December 31, 2006 for the Company). The adoption of SFAS No. 151 did not have a material impact on the Consolidated Financial Statements of the Company.
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In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments (an amendment of FASB Statements No. 133 and 140)." This Statement permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006 (year ending December 31, 2007 for the Company). Additionally, the fair value option may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under previous accounting guidance prior to the adoption of this Statement. The Company is currently evaluating the impact of SFAS No. 155.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes recognized in accordance with SFAS No. 109, "Accounting for Income Taxes." This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken, or expected to be taken, in income tax returns. The Company is currently evaluating the impact of FIN 48. The Company will adopt this Interpretation in the first quarter of 2007.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which establishes a comprehensive framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Specifically, this Statement sets forth a definition of fair value, and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS No. 157 are generally required to be applied on a prospective basis, except to certain financial instruments accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," for which the provisions of SFAS No. 157 should be applied retrospectively. The Company will adopt SFAS No. 157 in the first quarter of 2008.
In September 2006, the FASB issued SFAS No. 158, "Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R))", which is effective in fiscal years ending after December 15, 2006. This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 does not change the amount of actuarially determined expense that is recorded in the Consolidated Statement of Operations. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, which is consistent with the Company's present measurement date. Utilizing current assumptions, which may change by the December 31, 2006 measurement date, the estimated impact of adopting the provisions of SFAS No. 158 is a pre-tax decrease to accumulated other comprehensive income, which would result in a decrease in shareholders' equity of approximately $550 million. The actual impact of adoption will depend on the funded status of the Company's plans at December 31, 2006, which will depend on several factors, principally 2006 returns on plan assets and discount rates at the end of the year. The estimated impact does not include any deferred tax impacts, as the Company has not yet completed its evaluation of the tax effect of adoption of SFAS No. 158. The adoption of SFAS No. 158 will have no impact on the Company’s Statement of Cash Flows or compliance with its debt covenants.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB No. 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. This SAB establishes a "dual approach" methodology that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements (both the statement of operations and statement of financial position). The SEC has stated that SAB No. 108 should be applied no later than the annual financial statements for the first fiscal year ending after November 15, 2006, with earlier application encouraged. SAB No. 108 permits a company to elect either retrospective or prospective application. Prospective application requires recording a cumulative effect adjustment in the period of adoption, as well as detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. TheCompany’s application of SAB No. 108 in the fourth quarter of 2006 is not expected to have any impact on its consolidated financial statements.
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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 digital earnings, revenue, digital revenue growth, losses, cash, business transformation and debt reduction plans 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 the Company's debt covenants; implementation of product strategies (including category expansion and digital products) and go-to-market strategies; protection, enforcement and defense of the Company's intellectual property, including defense of our products against the intellectual property challenges of others; implementation of intellectual property licensing and other strategies; development and implementation of e-commerce strategies, including on-line services; completion of information systems upgrades, including SAP, the Company's 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; and implementation of the strategies designed to address the decline in the Company's traditional businesses. 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 the Company's debt credit ratings and its 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 the Company's reported financial position or effective tax rate in the future; general economic, business, geo-political and regulatory conditions; market growth predictions; continued effectiveness of internal controls; and other factors and uncertainties disclosed from time to time in the Company's 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.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company, as a result of its global operating and financing activities, is exposed to changes in foreign currency exchange rates, commodity prices, and interest rates, which may adversely affect its results of operations and financial position. In seeking to minimize the risks associated with such activities, the Company may enter into derivative contracts.
Foreign currency forward contracts may be used to hedge existing foreign currency denominated assets and liabilities, especially those of the Company’s International Treasury Center, as well as forecasted foreign currency denominated intercompany sales. Silver forward contracts may be used to mitigate the Company’s risk to fluctuating silver prices. The Company’s exposure to changes in interest rates results from its investing and borrowing activities used to meet its liquidity needs. Long-term debt is generally used to finance long-term investments, while short-term debt is used to meet working capital requirements. The Company does not utilize financial instruments for trading or other speculative purposes.
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Using a sensitivity analysis based on estimated fair value of open forward currency contracts using available forward rates, if the U.S. dollar had been 10% weaker at September 30, 2006 and 2005, the fair value of open forward currency contracts would have decreased $27 million and $5 million, respectively. Such gains or losses would be substantially offset by losses or gains from the revaluation or settlement of the underlying positions hedged.
There were no open forward contracts hedging silver at September 30, 2006. Using a sensitivity analysis based on estimated fair value of open forward contracts using available forward prices, if available forward silver prices had been 10% lower at September 30, 2005, the fair value of open forward contracts would have decreased $2 million. Such losses in fair value, if realized, would be offset by lower costs of manufacturing silver-containing products.
The Company is exposed to interest rate risk primarily through its borrowing activities and, to a lesser extent, through investments in marketable securities. The Company may utilize borrowings to fund its working capital and investment needs. There is inherent roll-over risk for borrowings and marketable securities as they mature and are renewed at current market rates. The extent of this risk is not predictable because of the variability of future interest rates and business financing requirements.
Using a sensitivity analysis based on estimated fair value of short-term and long-term borrowings, if available market interest rates had been 10% (about 68 basis points) higher at September 30, 2006, the fair value of short-term and long-term borrowings would have decreased less than $1 million and $63 million, respectively. Using a sensitivity analysis based on estimated fair value of short-term and long-term borrowings, if available market interest rates had been 10% (about 52 basis points) higher at September 30, 2005, the fair value of short-term and long-term borrowings would have decreased $4 million and $64 million, respectively.
The Company’s financial instrument counterparties are high-quality investment or commercial banks with significant experience with such instruments. The Company manages exposure to counterparty credit risk by requiring specific minimum credit standards and diversification of counterparties. The Company has procedures to monitor the credit exposure amounts. The maximum credit exposure at September 30, 2006 was not significant to the Company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. As described below, the Company continues to report a material weakness in the internal control over financial reporting as of September 30, 2006. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as a result of the unremediated material weakness relating to certain internal controls, further outlined below, surrounding the accounting for income taxes. To address this control weakness, the Company performed additional analysis and performed other procedures in order to prepare the unaudited quarterly consolidated financial statements in accordance with generally accepted accounting principles in the United States of America. Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
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Management’s assessment identified a material weakness in internal controls surrounding the accounting for income taxes as of December 31, 2005 that is in the process of being remediated as of September 30, 2006. This section of Item 4, “Controls and Procedures,” should be read in conjunction with Item 9A, “Controls and Procedures,” included in the Company’s Form 10-K for the year ended December 31, 2005, for additional information on Management’s Report on Internal Controls Over Financial Reporting.
Internal Controls Surrounding the Accounting for Income Taxes:
As of December 31, 2005, management concluded that the controls surrounding the completeness and accuracy of the Company's deferred income tax valuation allowance account were ineffective. Specifically, certain incorrect assumptions were made with respect to certain deferred income tax valuation allowance computations that were not detected in the related review and approval process. This control deficiency resulted in audit adjustments to the 2005 consolidated financial statements. In addition, this control deficiency, if unremediated, could result in a misstatement of the deferred income tax valuation allowance account and the related provision for income taxes that would result in a material misstatement of the annual or interim financial statements that might not be prevented or detected. Remediation efforts are in process, but have not been completed as of September 30, 2006. Accordingly, management has concluded that this control deficiency continues to constitute a material weakness.
Remediation Efforts on the Internal Controls Surrounding the Accounting for Income Taxes
During the year ended December 31, 2005 the Company made significant progress in executing the remediation plans that were established to address the material weakness in its internal controls surrounding the accounting for income taxes. This resulted in material improvements in the Company’s internal control over financial reporting.
This is supported by the Company’s overall positive results from its 2005 internal control compliance testing required by the Sarbanes-Oxley Act of 2002, which was carried out by the Company in the third and fourth quarters of 2005. In making its determination as to the status of the remediation of this material weakness as of September 30, 2006, the Company has considered all of the remediation efforts to date and has concluded that the internal controls surrounding the accounting for income taxes are effectively designed. However, as a result of the audit adjustments identified in 2005, the Company has not demonstrated operating effectiveness with respect to controls over the completeness and accuracy of its deferred income tax valuation allowance account. Accordingly, the Company continues to report this as a material weakness as of September 30, 2006.
In order to remediate this deficiency in internal controls, the following remediation actions are in process:
- The Company continues to utilize personnel from a third-party professional services firm with expertise in accounting for income taxes to assist in the preparation and review of the Company’s income tax provision and the income tax related balance sheet accounts;
- The Company will continue its training and education efforts in this area so that operating effectiveness can be demonstrated over a period of time that is sufficient to support the conclusion that the material weakness has been remediated;
- The Company continues to progress with the implementation of an IT solution to enable the collection, tracking and bookkeeping of detailed tax information on a global basis; and
- The Company is developing an effective and efficient forecasting process for purposes of determining its effective tax rate.
Changes in Internal Control over Financial Reporting
Except as otherwise discussed above, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
During March 2005, the Company was contacted by members of the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) concerning the announced restatement of the Company’s financial statements for the full year and the quarters of 2003 and the first three unaudited quarters of 2004. An informal inquiry by the staff of the SEC into the substance of that restatement is continuing. The Company has fully cooperated with this inquiry, and the staff has indicated that the inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred.
On June 13, 2005, a purported shareholder class action lawsuit was filed against the Company and two of its then current executives in the United States District Court for the Southern District of New York. On June 20, 2005 and August 10, 2005, similar lawsuits were filed against the same defendants in the United States District Court for the Western District of New York. The cases have been consolidated in the Western District of New York and the lead plaintiffs are John Dudek and the Alaska Electrical Pension Fund. The complaints filed in each of these actions (collectively, the “Complaints”) seek to allege claims under the Securities Exchange Act on behalf of a proposed class of persons who purchased securities of the Company between April 23, 2003 and September 25, 2003, inclusive. The substance of the Complaints is that various press releases and other public statements made by the Company during the proposed class period allegedly misrepresented the Company’s financial condition and omitted material information regarding, among other things, the state of the Company’s film and paper business. An amended complaint was filed on January 20, 2006, containing essentially the same allegations as the original complaint but adding an additional named defendant. Defendants’ motion to dismiss was argued on October 3, 2006 and granted on November 1, 2006.
On or about November 9, 2005, the Company was served with a purported derivative lawsuit that had been commenced against the Company, as a nominal defendant, and eleven current and former directors and officers of the Company, in the New York State Supreme Court, Monroe County. The Complaint seeks to allege claims on behalf of the Company that, between April 2003 and September 2003, the defendant officers and directors caused the Company to make allegedly improper statements, in press release and other public statements, which falsely represented or omitted material information about the Company’s financial results and guidance. The plaintiff alleges that this conduct was a breach of the defendants’ common law fiduciary obligations to the Company, and constituted an abuse of control, gross mismanagement, waste and unjust enrichment.Defendants’ initial responses to the Complaint are not yet due. The Company intends to defend this lawsuit vigorously but is unable currently to predict the outcome of the litigation or to estimate the range of possible loss, if any.
The Company is named a Potentially Responsible Party (“PRP”) along with seven other companies in connection with certain alleged environmental contamination at the Rochester Fire Academy, located in Rochester, New York. The Company provided flammable materials to the Fire Academy, which were used in fire-fighting training. The Company and the seven other PRPs have been negotiating with the New York State Attorney General’s office. On November 15, 2005, the New York State Attorney General filed a complaint in the U.S. District Court, Western District of New York against all eight PRPs seeking recovery of expenses to remediate the site. The Company has not yet been served and therefore its initial response is not yet due. The potential monetary sanction may be in excess of $100,000 but is not expected to be material.
Item 6. Exhibits
(a) Exhibits required as part of this report are listed in the index appearing on page 78.
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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 thereunto duly authorized.
| | | EASTMAN KODAK COMPANY | |
| | | (Registrant) | |
| | | |
| Date: | November 3, 2006 | /s/ Diane E. Wilfong | |
| | | Diane E. Wilfong | |
| | | Controller | |
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Eastman Kodak Company and Subsidiary Companies
Index to Exhibits
| Exhibit | | |
| Number | | |
| (10.1) | | | Frank S. Sklarsky Agreement dated September 19, 2006. |
| | | |
| (10.2) | | | Amendment, dated September 26, 2006, to Frank S. Sklarsky Agreement dated September 19, 2006. |
| |
| (12) | | | Statement Re Computation of Ratio of Earnings to Fixed Charges. |
| | | |
| (31.1) | | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| (31.2) | | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| (32.1) | | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| (32.2) | | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
