Exhibit 99.2
FINANCIAL DISCUSSION DOCUMENT
FIRST QUARTER 2007 COMPARED WITH FIRST QUARTER 2006
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
CONSOLIDATED
As of January 1, 2007 the Company has three reportable segments:
Consumer Digital Imaging Group (CDG), Film Products Group (FPG), and
Graphic Communications Group (GCG). Within each of the Company's
reportable segments are various components, or Strategic Product
Groups (SPG's). Throughout the remainder of this document, references
to the segments' SPG's are indicated in Italics.
Worldwide Revenues
Net worldwide sales were $2,119 million for the first quarter of
2007 as compared with $2,292 million for the first quarter of 2006,
representing a decrease of $173 million or 8%. The decrease in net
sales was primarily due to declines in volumes and unfavorable
price/mix, which decreased first quarter sales by approximately 7.5
and 3.1 percentage points, respectively. The decrease in volumes was
primarily driven by Consumer Film Capture within FPG, Digital Capture
and Devices (which includes snapshot printing) and the traditional
portion of Retail Printing, both within CDG, and the traditional
portion of Prepress Solutions within GCG. The negative price/mix was
primarily driven by Digital Capture and Devices within CDG. First
quarter sales were positively impacted by foreign exchange, which
increased sales by $71 million or approximately 3.1 percentage points.
Digital Strategic Product Groups' Revenues
The Company's digital product sales were $1,210 million for the
first quarter of 2007 as compared with $1,250 million for the prior
year quarter, representing a decrease of $40 million, or 3%, primarily
driven by declines in Digital Capture and Devices within CDG,
partially offset by growth in digital prepress consumables sales
within GCG, and kiosks and related media within CDG.
Traditional Strategic Product Groups' Revenues
Net sales of the Company's traditional products were $896 million
for the first quarter of 2007 as compared with $1,026 million for the
prior year quarter, representing a decrease of $130 million, or 13%,
primarily driven by declines in Consumer Film Capture within FPG,
Retail Printing within CDG, and traditional prepress consumables sales
within GCG, partially offset by increases in Entertainment Imaging
within FPG.
Product sales from new technologies were $13 million for the first
quarter of 2007 and $16 million for the first quarter of 2006.
Gross Profit
Gross profit was $429 million for the first quarter of 2007 as
compared with $469 million for the first quarter of 2006, representing
a decrease of $40 million, or 9%. The gross profit margin was 20.2% in
the current quarter as compared with 20.5% in the prior year quarter.
The 0.3 percentage point decrease was primarily attributable to
unfavorable price/mix and volume declines, which reduced gross profit
margins by approximately 1.9 percentage points and 0.4 percentage
points, respectively. The negative price/mix was driven primarily by
Digital Capture and Devices within CDG, and Enterprise Solutions and
Digital Printing Solutions, both within GCG. These declines were
partially offset by foreign exchange, which increased gross profit
margins by approximately 1.2 percentage points. Additionally, reduced
manufacturing costs positively impacted gross profit margins by
approximately 0.8 percentage points, due to a combination of cost
reduction initiatives and lower depreciation charges, which were
partially offset by the impact of increased silver and aluminum costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $395
million for the first quarter of 2007 as compared with $507 million
for the prior year quarter, representing a decrease of $112 million,
or 22%. SG&A as a percentage of sales decreased from 22% in the first
quarter of 2006 to 19% in the first quarter of 2007. The
year-over-year dollar decrease in SG&A is primarily attributable to
significant Company-wide cost reduction actions.
Research and Development Costs
Research and development costs (R&D) were $137 million for the
first quarter of 2007 as compared with $148 million for the first
quarter of 2006, representing a decrease of $11 million, or 7%. R&D as
a percentage of sales remained constant at 6%. This absolute dollar
decrease was primarily driven by the continuing realignment of
resources, as well as the timing of development of new products.
Restructuring Costs and Other
Restructuring costs and other were $85 million for the first
quarter of 2007 as compared with $138 million for the prior year
quarter, representing a decrease of $53 million or 38%. This decrease
is largely due to the timing of specific restructuring actions. These
costs, as well as the restructuring-related costs reported in cost of
goods sold, are discussed in further detail under "RESTRUCTURING COSTS
AND OTHER" below.
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 first quarter of 2007 was $188
million as compared with a loss of $324 million for the first quarter
of 2006, representing an improvement in earnings of $136 million. This
change is attributable to the reasons described above.
Interest Expense
Interest expense for the first quarter of 2007 was $25 million as
compared with $41 million for the prior year quarter, representing a
decrease of $16 million, or 39%. Lower interest expense is a result of
reductions in total debt levels, primarily from repayment of notes due
in the third quarter of 2006 and prepayments of the Company's Secured
Term Debt in the fourth quarter of 2006.
Other Income (Charges), Net
The other income (charges), net category includes interest income,
income and losses from equity investments, gains and losses on the
sales of assets and investments, and foreign exchange gains and
losses. Other income for the current quarter was $23 million as
compared with other income of $27 million for the first quarter of
2006. The decrease of $4 million is primarily attributable to lower
interest income and lower gains on foreign exchange transactions.
Income Tax (Benefit) Provision
For the first quarter of 2007, the Company recorded a benefit of
$16 million on a pre-tax loss of $190 million, representing an
effective rate of 8.4%. The difference of $51 million between the
recorded benefit of $16 million and the benefit of $67 million that
would result from applying the U.S. statutory rate of 35.0% is
primarily attributable to: (1) losses generated within the U.S. and in
certain jurisdictions outside the U.S., which were not benefited, and
(2) the mix of the earnings from operations in certain lower-taxed
jurisdictions outside the U.S. Other significant items that result in
a difference from the statutory tax rate include non-U.S. tax benefits
of $10 million associated with total worldwide restructuring costs;
and a benefit of $56 million associated with the release of certain
tax reserves in a foreign jurisdiction.
For the first quarter of 2006, the Company recorded a provision of
$8 million on a pre-tax loss of $338 million, representing an
effective rate of (2.4)%. The difference of $126 million between the
recorded provision of $8 million and the benefit of $118 million that
would result from applying the U.S. statutory rate of 35.0% is
primarily attributable to: (1) losses generated within the U.S. and in
certain jurisdictions outside the U.S., which were not benefited, and
(2) the mix of earnings from operations in certain lower-taxed
jurisdictions outside the U.S. Other significant items that result in
a difference from the statutory tax rate include non-U.S. tax benefits
of $29 million associated with total worldwide restructuring costs and
asset impairments; and discrete tax charges relating primarily to
purchase accounting for the Creo and KPG acquisitions within GCG, tax
rate changes, and impacts from ongoing tax audits with respect to open
tax years of $14 million.
Loss From Continuing Operations
The loss from continuing operations for the first quarter of 2007
was $174 million, or $.61 per basic and diluted share, as compared
with a loss from continuing operations for the first quarter of 2006
of $346 million, or $1.21 per basic and diluted share, representing an
improvement in earnings of $172 million. This improvement in earnings
from continuing operations is attributable to the reasons described
above.
CONSUMER DIGITAL IMAGING GROUP
As a result of the changes in reporting structure effective
January 1, 2007, CDG results will be reported using the following
structure:
-- Digital Capture and Devices - digital cameras, imaging devices
and accessories, memory products, snapshot printers and
related media (formerly reported separately within CDG), and
intellectual property royalties
-- Retail Printing - color negative paper, photochemicals,
service and support, photofinishing services (all formerly
reported in FPG) and retail kiosks and related media
-- Consumer Imaging Services - Kodak Gallery online printing and
services
-- Consumer Inkjet Systems - All in One printers, ink and media
(formerly reported in All Other)
-- Imaging Sensors (formerly reported in Digital Capture) - CCD
and CMOS sensors
Worldwide Revenues
Net worldwide sales for CDG were $778 million for the first
quarter of 2007 as compared with $902 million for the first quarter of
2006, representing a decrease of $124 million, or 14%. The decrease in
net sales was comprised of volume declines, which reduced net sales by
approximately 9.4 percentage points, and unfavorable price/mix, which
reduced net sales by approximately 6.0 percentage points. The negative
price/mix was primarily driven by Digital Capture and Devices, while
the decrease in volumes was largely attributable to snapshot printing
and the traditional portion of Retail Printing. These declines were
partially offset by favorable foreign exchange, which increased net
sales by approximately 1.7 percentage points.
Net worldwide sales of Digital Capture and Devices, which includes
consumer digital cameras, accessories, memory products, snapshot
printers and related media, and intellectual property royalties,
decreased 20% in the first quarter of 2007 as compared with the prior
year quarter, primarily reflecting negative price/mix and lower
snapshot printing volumes. For digital still cameras, Kodak remains in
the top three market position on a worldwide basis through March.
Net worldwide sales of Retail Printing decreased 13% in the first
quarter of 2007 as compared with the prior year quarter, reflecting
volume declines and negative price/mix, partially offset by favorable
foreign exchange. Sales of photofinishing services declined 41% from
the first quarter of 2006, reflecting continuing industry film
processing volume declines, but were partially offset by increased
sales of kiosks and related media, which increased 13% from the prior
year quarter. Sales of kiosks/media continue to be driven by strong
consumables sales at retail locations, with 4x6 media volumes
increasing 48% versus last year.
Digital Strategic Product Groups' Revenues
CDG digital product sales are comprised of digital capture and
devices, kiosks/media, online printing, consumer inkjet systems, and
imaging sensors.
Digital product sales for CDG were $461 million for the first
quarter of 2007 as compared with $513 million for the prior year
quarter, representing a decrease of $52 million, or 10%. The decrease
was primarily driven by declines in sales of digital cameras and
snapshot printers and media, partially offset by growth in
kiosks/media, imaging sensors, and intellectual property royalty
revenues.
Traditional Strategic Product Groups' Revenues
CDG traditional product sales are comprised of consumer and
professional photographic paper, photochemicals and photofinishing
services.
Traditional product sales for CDG were $317 million for the first
quarter of 2007 as compared with $389 million for the first quarter of
2006, representing a decrease of $72 million, or 19%. This decrease
was primarily driven by declines in photofinishing services and
consumer photographic paper sold to retailers.
Gross Profit
Gross profit for CDG was $100 million for the first quarter of
2007 as compared with $108 million for the prior year quarter,
representing a decrease of $8 million or 7%. The gross profit margin
was 12.9% in the current quarter as compared with 12.0% in the prior
year quarter. The 0.9 percentage point increase was primarily
attributable to reductions in cost, which improved gross profit
margins by approximately 5.0 percentage points, and favorable foreign
exchange, which improved gross profit margins by approximately 1.1
percentage points. The reductions in cost were primarily driven by
savings realized from manufacturing cost reduction initiatives and
more effective product portfolio management, partially offset by
product launch costs associated with Consumer Inkjet Systems and by
adverse silver costs. These improvements in gross profit margins were
partially offset by unfavorable price/mix and volume declines.
Price/mix negatively impacted gross profit margins by approximately
4.8 percentage points, primarily driven by Digital Capture and Devices
and Retail Printing, partially offset by the year-over-year increase
in intellectual property royalties. Volume declines reduced gross
profit margins by approximately 0.4 percentage points, primarily
driven by Digital Capture and Devices partially offset by kiosks and
related media.
Selling, General and Administrative Expenses
SG&A expenses for CDG decreased $50 million, or 25%, from $202
million in the first quarter of 2006 to $152 million in the current
quarter, and decreased as a percentage of sales from 22% for the first
quarter of 2006 to 20% for the current quarter. This decrease was
primarily driven by focused cost reduction initiatives and improved
go-to-market structure.
Research and Development Costs
R&D costs for CDG decreased $11 million, or 15%, from $73 million
in the first quarter of 2006 to $62 million in the current quarter and
remained constant as a percentage of sales at 8%. This absolute dollar
decrease is largely attributable to spending incurred in 2006 related
to the development of Consumer Inkjet Systems, which were introduced
in the first quarter of 2007, and to cost reduction actions.
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 CDG was $114 million in the first
quarter of 2007 compared with a loss of $167 million in the first
quarter of 2006, representing an improvement in earnings of $53
million or 32%, as a result of the factors described above.
FILM PRODUCTS GROUP
Worldwide Revenues
Net worldwide sales for FPG were $458 million for the first
quarter of 2007 as compared with $500 million for the first quarter of
2006, representing a decrease of $42 million, or 8%. The decrease in
net sales was comprised of: (1) lower volumes, which decreased first
quarter sales by approximately 9.8 percentage points and were
primarily attributable to Consumer Film Capture, and (2) declines
related to negative price/mix, which reduced net sales by
approximately 1.8 percentage points and were primarily attributable to
Consumer Film Capture and Entertainment Imaging. These decreases were
partially offset by favorable foreign exchange, which increased net
sales by approximately 3.1 percentage points.
Net worldwide sales of Consumer Film Capture, including consumer
roll film (35mm and APS film), one-time-use cameras (OTUC),
professional films, and reloadable traditional film cameras, decreased
28% in the first quarter of 2007 as compared with the first quarter of
2006, primarily reflecting continuing industry volume declines and
negative price/mix, partially offset by favorable exchange.
Net worldwide sales for Entertainment Imaging, which includes
origination, intermediate, and print films for the entertainment
industry increased 8%, primarily reflecting significant volume
increases in print films and favorable exchange, partially offset by
unfavorable price/mix.
Gross Profit
Gross profit for FPG was $158 million for the first quarter of
2007 as compared with $179 million for the prior year quarter,
representing a decrease of $21 million or 12%. The gross profit margin
was 34.5% in the current quarter as compared with 35.8% in the prior
year quarter. The 1.3 percentage point decrease was primarily
attributable to increased unit manufacturing and other costs, which
reduced gross profit margins by approximately 3.0 percentage points,
largely driven by adverse silver costs. These cost increases were
partially offset by favorable foreign exchange, which increased gross
profit margins by approximately 1.9 percentage points. The impact of
price/mix on gross profit margins was not significant.
Selling, General and Administrative Expenses
SG&A expenses for FPG decreased $40 million, or 34%, from $117
million in the first quarter of 2006 to $77 million in the current
quarter, and decreased as a percentage of sales from 23% in the prior
year quarter to 17% in the current quarter. The decline in SG&A was
attributable to the impacts of focused cost reduction actions.
Research and Development Costs
R&D costs for FPG decreased $4 million, or 36%, from $11 million
in the first quarter of 2006 to $7 million in the current quarter and
remained constant as a percentage of sales at 2%. The decrease in R&D
was primarily attributable to further reductions in spending
corresponding with film-related 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 FPG were $74 million in the first
quarter of 2007 compared with $51 million in the first quarter of
2006, representing an increase of $23 million or 45%, as a result of
the factors described above.
GRAPHIC COMMUNICATIONS GROUP
As GCG continues its integration process in 2007 and further
aligns the discrete businesses that were acquired in 2004 and 2005,
GCG results will be reported using the following organizational
structure:
-- Enterprise Solutions - workflow software and digital
controller development
-- Digital Printing Solutions - all continuous inkjet and
electrophotographic products, including equipment, consumables
and service
-- Prepress Solutions - prepress consumables, prepress equipment
and related services
-- Document Imaging Business - document scanners and services,
media, and imaging services
Worldwide Revenues
Net worldwide sales for GCG were $864 million for the first
quarter of 2007 as compared with $870 million for the prior year
quarter, representing a decrease of $6 million, or 1%. The decrease in
net sales was primarily attributable to volume declines, which reduced
net sales by approximately 4.2 percentage points, and negative
price/mix, which reduced net sales by approximately 1.0 percentage
point, partially offset by favorable foreign exchange, which increased
net sales by approximately 4.6 percentage points. The volume declines
were primarily driven by the traditional products within Prepress
Solutions, as well as by equipment within Digital Printing Solutions.
Unfavorable price/mix was primarily attributable to Digital Printing
Solutions and Enterprise Solutions.
Net worldwide sales of Prepress Solutions increased 1%, primarily
driven by increased sales of digital plates, partially offset by
declines in sales of analog plates, proofing media and equipment.
Net worldwide sales of Document Imaging increased 1%, primarily
driven by increased sales in scanners and services, partially offset
by declines in sales of traditional document imaging media.
Net worldwide sales of Digital Printing Solutions decreased 5%,
primarily driven by declines in electrophotographic color printing
equipment, partially offset by revenue growth in consumables and
service. Equipment sales were higher in the first quarter of 2006 as
compared with the first quarter of 2007, partially due to timing of
equipment orders and installations. The year-over-year decline in
equipment sales was also impacted by product mix and lower volumes,
including lower sales of direct image press equipment. Printed page
volumes continue to grow, resulting in revenue growth in
electrophotographic color consumables and service of 25% versus the
prior year quarter. Continuous inkjet consumables and service revenue
grew 30% versus the prior year quarter.
Net worldwide sales of Enterprise Solutions decreased 8%,
primarily driven by declines in digital controller sales as a result
of certain products being discontinued for which replacement products
will be available in the second quarter.
Digital Strategic Product Groups' Revenues
GCG digital product sales are comprised of Enterprise Solutions,
Digital Printing Solutions, portions of Prepress Solutions, and
Document Imaging.
Sales of digital products and services for GCG were $749 million
for the first quarter of 2007 as compared with $737 million for the
prior year quarter, representing an increase of $12 million, or 2%.
The increase in digital products and services revenue was primarily
attributable to increased sales from the digital portions of Prepress
Solutions and Document Imaging, partially offset by decreases in
Digital Printing and Enterprise Solutions.
Traditional Strategic Product Groups' Revenues
GCG traditional product sales are comprised of sales of
traditional prepress consumables, including analog plates and graphics
film, and traditional document imaging equipment and media. These
sales were $115 million for the current quarter compared with $133
million for the prior year quarter, representing a decrease of $18
million, or 14%. The decrease in sales was primarily attributable to
lower volumes of analog plates and graphics film.
Gross Profit
Gross profit for GCG was $230 million for the first quarter of
2007 as compared with $254 million in the prior year quarter,
representing a decrease of $24 million, or 9%. The gross profit margin
was 26.6% in the current quarter as compared with 29.2% in the prior
year quarter. The decrease in the gross profit margin of 2.6
percentage points was primarily attributable to aluminum and silver
costs and other manufacturing costs, which together decreased gross
profit margins by approximately 2.3 percentage points. Unfavorable
price/mix decreased gross profit margins by approximately 0.7
percentage points. These declines in gross profit margins were
partially offset by favorable foreign exchange, which increased gross
profit margins by approximately 0.4 percentage points.
Selling, General and Administrative Expenses
SG&A expenses for GCG were $163 million for the first quarter of
2007 as compared with $182 million in the prior year quarter,
representing a decrease of $19 million, or 10%, and decreased as a
percentage of sales from 21% to 19%. The decrease in SG&A is largely
attributable to integration synergies and targeted cost reduction
strategies, partially offset by unfavorable foreign exchange.
Research and Development Costs
R&D costs for GCG increased $3 million, or 6%, from $48 million
for the first quarter of 2006 to $51 million for the current quarter,
and remained constant as a percentage of sales at 6%. The dollar
increase is largely driven by increased investments in product
portfolio development and unfavorable foreign exchange.
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 GCG were $16 million in the first
quarter of 2007 compared with earnings of $24 million in the first
quarter of 2006. This decrease in earnings is attributable to the
reasons outlined above.
ALL OTHER
Worldwide Revenues
Net worldwide sales for All Other were $19 million for the first
quarter of 2007 as compared with $20 million for the first quarter of
2006, representing a decrease of $1 million, or 5%.
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 $13 million in the
current quarter as compared with a loss of $16 million in the first
quarter of 2006. This improvement in earnings is primarily
attributable to lower R&D spending related to the display business.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
On January 8, 2007, the Company's Board of Directors authorized
management to enter into a definitive agreement to sell all of the
assets and business operations of the Health Group to Onex Healthcare
Holdings, Inc. ("Onex") (now known as Carestream Health, Inc.), a
subsidiary of Onex Corporation, for up to $2.55 billion. This
definitive agreement was signed on January 9, 2007. The sale price is
composed of $2.35 billion in cash at closing and $200 million in
additional future payments if Onex achieves certain returns with
respect to its investment. If Onex investors realize an internal rate
of return in excess of 25% on their investment, the Company will
receive payment equal to 25% of the excess return, up to $200 million.
The sale closed on April 30, 2007. The Company will report the
gain associated with this sale in its Form 10-Q for the second quarter
of 2007. Because of tax-loss carryforwards and other tax attributes,
the Company retained the vast majority of the initial $2.35 billion
cash proceeds, a portion of which were used to fully repay its
approximately $1.15 billion of Secured Term Debt. About 8,100
employees of the Company associated with the Health Group have
transitioned to Carestream Health, Inc. as part of the transaction.
Also included in the sale are manufacturing operations focused on the
production of health imaging products, as well as an office building
in Rochester, NY.
Total Company earnings from discontinued operations for three
months ended March 31, 2007 and 2006 of $23 million and $48 million,
respectively, were net of a provision for income taxes of $7 million,
and a benefit for income taxes of $4 million, respectively.
NET LOSS
The net loss for the first quarter of 2007 was $151 million, or a
loss of $.53 per basic and diluted share, as compared with a net loss
for the first quarter of 2006 of $298 million, or $1.04 per basic and
diluted share, representing an improvement in earnings of $147 million
or 49%. This improvement in earnings is attributable to the reasons
outlined above.
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, and (4) the total
restructuring charges to be incurred.
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 first quarter of
2007:
Balance
Dec. 31 Costs Cash
(in millions) 2006 Incurred (1) Reversals Payments (2)
--------- ------------ --------- ------------
2004-2007 Restructuring
Program:
Severance reserve $ 228 $ 70 $ - $ (84)
Exit costs reserve 24 22 - (20)
--------- ------------ --------- ------------
Total reserve $ 252 $ 92 $ - $ (104)
Long-lived asset
impairments and
inventory write-downs $ - $ 11 $ - $ -
Accelerated depreciation $ - $ 65 $ - $ -
Pre-2004 Restructuring
Programs:
Severance reserve $ - $ - $ - $ -
Exit costs reserve 11 - (1) (4)
--------- ------------ --------- ------------
Total reserve $ 11 $ - $ (1) $ (4)
--------- ------------ --------- ------------
Total of all
restructuring programs $ 263 $ 168 $ (1) $ (108)
========= ============ ========= ============
Other
Adjustments Balance
Non-cash and March 31
(in millions) Settlements Reclasses (3) 2007
------------ ------------- -----------
2004-2007 Restructuring
Program:
Severance reserve $ - $ (18) $ 196
Exit costs reserve - - 26
------------ ------------- -----------
Total reserve $ - $ (18) $ 222
Long-lived asset impairments
and inventory write-downs $ (11) $ - $ -
Accelerated depreciation $ (65) $ - $ -
Pre-2004 Restructuring
Programs:
Severance reserve $ - $ - $ -
Exit costs reserve - - 6
------------ ------------- -----------
Total reserve $ - $ - $ 6
------------ ------------- -----------
Total of all restructuring
programs $ (76) $ (18) $ 228
============ ============= ===========
(1) The costs incurred include both continuing operations of $151
million and discontinued operations of $17 million.
(2) During the three months ended March 31, 2007, the Company paid
approximately $115 million related to restructuring. Of this total
amount, $108 million was recorded against restructuring reserves,
while $7 million was recorded against pension and other
postretirement liabilities.
(3) The total restructuring charges of $168 million, excluding
reversals, include pension and other postretirement charges and
credits for curtailments, settlements and special termination
benefits. However, because the impact of these charges and credits
relate to the accounting for pensions and other postretirement
benefits, 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 March 31,
2007. Accordingly, the Other Adjustments and Reclasses column of the
table above includes 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 and settlement losses and special termination benefits of
$19 million. Additionally, the Other Adjustments and Reclasses column
of the table above includes foreign currency translation of $1
million.
The costs incurred, net of reversals, which total $167 million for
the three months ended March 31, 2007, include $65 million and $1
million of charges related to accelerated depreciation and inventory
write-downs that were reported in cost of goods sold in the
accompanying Consolidated Statement of Operations for the three months
ended March 31, 2007. Of the remaining costs incurred, net of
reversals, $16 million was included in discontinued operations and $85
million was reported as restructuring costs and other in the
accompanying Consolidated Statement of Operations for the three months
ended March 31, 2007. 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, Kodak'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.
The Company subsequently expanded the program to extend into 2007,
and increased the expected employment reductions and total charges. On
February 8, 2007, the Company updated the ranges for anticipated
restructuring activity. The Company now expects that the total
employment reductions will be in the range of 28,000 to 30,000
positions and total charges will be in the range of $3.6 billion to
$3.8 billion.
The Company implemented certain actions under the program during
the first quarter of 2007. As a result of these actions, the Company
recorded charges of $168 million in the first quarter of 2007, which
were composed of severance, long-lived asset impairments, exit costs,
inventory write-downs, and accelerated depreciation of $70 million,
$10 million, $22 million, $1 million, and $65 million, respectively.
Included in these amounts, $17 million of severance is presented as
discontinued operations. The severance costs related to the
elimination of approximately 1,125 positions, including approximately
50 photofinishing, 625 manufacturing, 50 research and development and
400 administrative positions. The geographic composition of the
positions to be eliminated includes approximately 425 in the United
States and Canada and 700 throughout the rest of the world. The
reduction of the 1,125 positions and the $92 million charges for
severance and exit costs are reflected in the 2004-2007 Restructuring
Program table below. The $10 million charge in the first quarter for
long-lived asset impairments were included in restructuring costs and
other in the accompanying Consolidated Statement of Operations for the
three months ended March 31, 2007, respectively. The charges taken for
inventory write-downs of $1 million were reported in cost of goods
sold in the accompanying Consolidated Statement of Operations forthe
three months ended March 31, 2007.
As a result of initiatives implemented under the 2004-2007
Restructuring Program, the Company also recorded $65 million of
accelerated depreciation on long-lived assets in cost of goods sold in
the accompanying Consolidated Statement of Operations for the three
months ended March 31, 2007. The accelerated depreciation relates to
long-lived assets accounted for under the held and used model of SFAS
No. 144. The total amount of $65 million relates to $1 million of
photofinishing facilities and equipment, $63 million of manufacturing
facilities and equipment, and $1 million of administrative facilities
that will be used until their abandonment. The Company will incur
approximately $15 million of accelerated depreciation in the second
quarter of 2007 as a result of the initiatives already implemented
under the 2004-2007 Restructuring Program.
In April 2007, the Company entered into an agreement to sell its
manufacturing site in Xiamen, China. This sale is expected to close in
the second quarter of 2007 and will result in a non-cash charge of
approximately $220 million. This action is part of the 2004-2007
Restructuring Program.
Under this program, on a life-to-date basis as of March 31, 2007,
the Company has recorded charges of $2,127 million, which was composed
of severance, long-lived asset impairments, exit costs, inventory
write-downs and accelerated depreciation of $985 million, $272
million, $205 million, $57 million and $608 million, respectively. The
severance costs related to the elimination of approximately 24,500
positions, including approximately 6,250 photofinishing, 11,525
manufacturing, 1,425 research and development and 5,300 administrative
positions.
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 March
31, 2007:
Exit
Number of Severance Costs
(dollars in millions) Employees Reserve Reserve
--------- --------- -------
2004 charges - continuing operations 8,975 $405 $95
2004 charges - discontinued operations 650 13 4
2004 reversals - continuing operations - (6) (1)
2004 utilization (5,175) (169) (47)
2004 other adj. & reclasses - 24 (15)
--------- --------- -------
Balance at 12/31/04 4,450 267 36
2005 charges - continuing operations 7,850 472 82
2005 charges - discontinued operations 275 25 2
2005 reversals - continuing operations - (3) (6)
2005 utilization (10,225) (377) (95)
2005 other adj. & reclasses - (113) 4
--------- --------- -------
Balance at 12/31/05 2,350 271 23
2006 charges - continuing operations 5,150 266 66
2006 charges - discontinued operations 475 52 3
2006 reversals - continuing operations - (3) (1)
2006 utilization (5,700) (416) (67)
2006 other adj. & reclasses - 58 -
--------- --------- -------
Balance at 12/31/06 2,275 228 24
Q1 2007 charges - continuing operations 1,075 53 22
Q1 2007 charges - discontinued operations 50 17 -
Q1 2007 reversals - discontinued
operations - - (1)
Q1 2007 utilization (1,000) (84) (20)
Q1 2007 other adj. & reclasses - (18) -
--------- --------- -------
Balance at 3/31/07 2,400 $196 $25
========= ========= =======
Long-lived Asset
Impairments
and Inventory Accelerated
(dollars in millions) Total Write-downs Depreciation
------- ---------------- ------------
2004 charges - continuing
operations $500 $156 $152
2004 charges - discontinued
operations 17 1 -
2004 reversals - continuing
operations (7) - -
2004 utilization (216) (157) (152)
2004 other adj. & reclasses 9 - -
------- ---------------- ------------
Balance at 12/31/04 303 - -
2005 charges - continuing
operations 554 160 391
2005 charges - discontinued
operations 27 1 -
2005 reversals - continuing
operations (9) - -
2005 utilization (472) (161) (391)
2005 other adj. & reclasses (109) - -
------- ---------------- ------------
Balance at 12/31/05 294 - -
2006 charges - continuing
operations 332 97 273
2006 charges - discontinued
operations 55 3 12
2006 reversals - continuing
operations (4) - -
2006 utilization (483) (100) (285)
2006 other adj. & reclasses 58 - -
------- ---------------- ------------
Balance at 12/31/06 252 - -
Q1 2007 charges - continuing
operations 75 11 65
Q1 2007 charges - discontinued
operations 17 - -
Q1 2007 reversals - discontinued
operations (1) - -
Q1 2007 utilization (104) (11) (65)
Q1 2007 other adj. & reclasses (18) - -
------- ---------------- ------------
Balance at 3/31/07 $221 $- $-
======= ================ ============
As a result of the initiatives already implemented under the
2004-2007 Restructuring Program, severance payments will be paid
during periods through 2007 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 2007. However, certain costs, such as
long-term lease payments, will be paid over periods after 2007.
The charges of $168 million recorded in the first quarter of 2007,
excluding reversals, included $16 million applicable to FPG, $8
million applicable to CDG, $16 million applicable to the GCG, and $111
million that was applicable to manufacturing, research and
development, and administrative functions, which are shared across all
segments. The remaining $17 million is applicable to discontinued
operations.
The restructuring actions implemented during the first quarter of
2007 under the 2004-2007 Restructuring Program are expected to
generate future annual cost savings of approximately $61 million and
future annual cash savings of approximately $59 million. These cost
savings began to be realized by the Company beginning in the first
quarter of 2005, 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 $24 million, $32 million, and
$5 million, respectively.
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 $1,446 million, including annual cash savings
of $1,390 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 $921 million, $383 million, and $142
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 reaffirms its
estimate of total annual cost savings including both employee-related
costs and facility-related costs under the extended 2004-2007
Restructuring Program of $1.6 billion to $1.8 billion, as announced in
July 2005, and does not expect the final annual cost savings to differ
materially from this estimate.
Pre-2004 Restructuring Programs
At March 31, 2007, the Company had remaining exit costs reserves
of $6 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 2007.
Eastman Kodak Company
CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(in millions, except per share data)
Three Months Ended
March 31
------------------
2007 2006
------------------
Net sales $ 2,119 $ 2,292
Cost of goods sold 1,690 1,823
--------- --------
Gross profit 429 469
Selling, general and administrative expenses 395 507
Research and development costs 137 148
Restructuring costs and other 85 138
--------- --------
Loss from continuing operations before interest,
other income (charges), net and income taxes (188) (324)
Interest expense 25 41
Other income (charges), net 23 27
--------- --------
Loss from continuing operations before income taxes (190) (338)
(Benefit) provision for income taxes (16) 8
--------- --------
Loss from continuing operations (174) (346)
Earnings from discontinued operations, net of
income taxes 23 48
--------- --------
NET LOSS $ (151) $ (298)
========= ========
Basic and diluted net (loss) earnings per share:
Continuing operations $ (0.61) $ (1.21)
Discontinued operations 0.08 0.17
--------- --------
Total $ (0.53) $ (1.04)
========= ========
Number of common shares used in basic net loss per
share 287.3 287.2
Incremental shares from assumed conversion of
options - -
--------- --------
Number of common shares used in diluted net loss
per share 287.3 287.2
========= ========
Net Sales from Continuing Operations by Reportable Segment and All
Other - Unaudited
(in millions)
Three Months Ended Foreign
March 31 Currency
Impact*
------------------------------------
2007 2006 Change
--------- -------- -------
Consumer Digital Imaging Group
Inside the U.S. $ 389 $ 425 -8% 0%
Outside the U.S. 389 477 -18 +3
--------- --------
Total Consumer Digital Imaging
Group 778 902 -14 +2
--------- --------
Film Products Group
Inside the U.S. 117 131 -11 0
Outside the U.S. 341 369 -8 +4
--------- --------
Total Film Products Group 458 500 -8 +3
--------- --------
Graphic Communications Group
Inside the U.S. 282 313 -10 0
Outside the U.S. 582 557 +4 +7
--------- --------
Total Graphic Communications
Group 864 870 -1 +5
--------- --------
All Other
Inside the U.S. 10 17 -41 0
Outside the U.S. 9 3 +200 0
--------- --------
Total All Other 19 20 -5 0
--------- --------
Consolidated
Inside the U.S. 798 886 -10 0
Outside the U.S. 1,321 1,406 -6 +5
--------- --------
Consolidated Total $ 2,119 $ 2,292 -8% +3%
========= ========
* Represents the percentage point change in segment net sales for the
period that is attributable to foreign currency fluctuations
(Loss) Earnings from Continuing Operations Before Interest, Other
Income (Charges), Net and Income Taxes by Reportable Segment and All
Other - Unaudited
(in millions)
Three Months Ended
-----------------------
2007 2006 Change
------- ------- -------
Consumer Digital Imaging Group $ (114) $ (167) +32%
Percent of Sales (15)% (19)%
Film Products Group $ 74 $ 51 +45%
Percent of Sales 16% 10%
Graphic Communications Group $ 16 $ 24 -33%
Percent of Sales 2% 3%
All other $ (13) $ (16) +19%
Percent of Sales (68)% (80)%
------- -------
Total of segments $ (37) $ (108) +66%
Percent of Sales (2)% (5)%
Restructuring costs and other (151) (216)
Interest expense (25) (41)
Other income (charges), net 23 27
------- -------
Consolidated loss from continuing operations
before income taxes $ (190) $ (338) +44%
======= =======
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this press release 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 the Company's expectations regarding its restructuring
plans and the expected cash savings, cost savings, employment
reductions, and total charges from such 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 the cost reduction programs;
-- 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;
-- development and implementation of product go-to-market and
e-commerce 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;
-- 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
-- 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;
-- changes to accounting rules and tax laws, as well as other
factors which could impact the Company's reported financial
position or effective tax rate;
-- 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.