ek10qjune2008.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] Quarterly
report pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For
the quarterly period ended June 30, 2008
or
[ ] Transition
report pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For
the transition period from ___ to ___
Commission
File Number 1-87
EASTMAN
KODAK COMPANY
(Exact
name of registrant as specified in its charter)
NEW
JERSEY
|
16-0417150
|
(State
of incorporation)
|
(IRS
Employer Identification No.)
|
|
|
343
STATE STREET, ROCHESTER, NEW YORK
|
14650
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area
code: 585-724-4000
_____________
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large
accelerated
filer [X] Accelerated
filer [ ] Non-accelerated
filer [ ] Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Title of each Class
|
Number of shares Outstanding at
July 25, 2008
|
Common
Stock, $2.50 par value
|
288,193,433
|
|
|
|
|
Eastman
Kodak Company
Form
10-Q
June
30, 2008
Table
of Contents
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Page
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3
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3
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4
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5
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6
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7
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26
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41
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47
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47
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48
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48
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50
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51
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
EASTMAN
KODAK COMPANY
(in
millions, except per share data)
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,485 |
|
|
$ |
2,468 |
|
|
|
$ |
4,578 |
|
|
$ |
4,548 |
|
Cost
of goods sold
|
|
|
1,900 |
|
|
|
1,824 |
|
|
|
|
3,569 |
|
|
|
3,476 |
|
Gross
profit
|
|
|
585 |
|
|
|
644 |
|
|
|
|
1,009 |
|
|
|
1,072 |
|
Selling,
general and administrative expenses
|
|
|
435 |
|
|
|
435 |
|
|
|
|
820 |
|
|
|
829 |
|
Research
and development costs
|
|
|
142 |
|
|
|
136 |
|
|
|
|
282 |
|
|
|
277 |
|
Restructuring
costs (curtailment gains) and other
|
|
|
(3 |
) |
|
|
295 |
|
|
|
|
(13 |
) |
|
|
380 |
|
Other
operating (income) expenses, net
|
|
|
(7 |
) |
|
|
(33 |
) |
|
|
|
(17 |
) |
|
|
(39 |
) |
Earnings
(loss) from continuing operations before interest
expense, other income
(charges), net and income taxes
|
|
|
18 |
|
|
|
(189 |
) |
|
|
|
(63 |
) |
|
|
(375 |
) |
Interest
expense
|
|
|
26 |
|
|
|
31 |
|
|
|
|
54 |
|
|
|
56 |
|
Other
income (charges), net
|
|
|
(5 |
) |
|
|
23 |
|
|
|
|
30 |
|
|
|
41 |
|
Loss
from continuing operations before income taxes
|
|
|
(13 |
) |
|
|
(197 |
) |
|
|
|
(87 |
) |
|
|
(390 |
) |
Benefit
for income taxes
|
|
|
(213 |
) |
|
|
(43 |
) |
|
|
|
(173 |
) |
|
|
(61 |
) |
Earnings
(loss) from continuing operations
|
|
|
200 |
|
|
|
(154 |
) |
|
|
|
86 |
|
|
|
(329 |
) |
Earnings
from discontinued operations, net of income taxes
|
|
|
295 |
|
|
|
729 |
|
|
|
|
294 |
|
|
|
753 |
|
NET
EARNINGS
|
|
$ |
495 |
|
|
$ |
575 |
|
|
|
$ |
380 |
|
|
$ |
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.69 |
|
|
$ |
(0.53 |
) |
|
|
$ |
0.30 |
|
|
$ |
(1.14 |
) |
Discontinued
operations
|
|
|
1.03 |
|
|
|
2.53 |
|
|
|
|
1.02 |
|
|
|
2.61 |
|
Total
|
|
$ |
1.72 |
|
|
$ |
2.00 |
|
|
|
$ |
1.32 |
|
|
$ |
1.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.66 |
|
|
$ |
(0.53 |
) |
|
|
$ |
0.30 |
|
|
$ |
(1.14 |
) |
Discontinued
operations
|
|
|
0.96 |
|
|
|
2.53 |
|
|
|
|
1.01 |
|
|
|
2.61 |
|
Total
|
|
$ |
1.62 |
|
|
$ |
2.00 |
|
|
|
$ |
1.31 |
|
|
$ |
1.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of common shares used in basic net earnings (loss)
per share
|
|
|
288.2 |
|
|
|
287.6 |
|
|
|
|
288.2 |
|
|
|
287.5 |
|
Incremental
shares from assumed issuance of unvested share-based
awards
|
|
|
1.6 |
|
|
|
- |
|
|
|
|
1.5 |
|
|
|
- |
|
Convertible
securities
|
|
|
18.5 |
|
|
|
- |
|
|
|
|
- |
|
|
|
- |
|
Number
of common shares used in diluted net earnings (loss)
per share
|
|
|
308.3 |
|
|
|
287.6 |
|
|
|
|
289.7 |
|
|
|
287.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
EASTMAN
KODAK COMPANY
(in
millions)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of period
|
|
$ |
6,348 |
|
|
$ |
5,810 |
|
|
$ |
6,474 |
|
|
$ |
5,967 |
|
Net
earnings
|
|
|
495 |
|
|
|
575 |
|
|
|
380 |
|
|
|
424 |
|
Cash
dividends declared
|
|
|
(72 |
) |
|
|
(72 |
) |
|
|
(72 |
) |
|
|
(72 |
) |
Gain
(loss) from issuance of treasury stock
|
|
|
1 |
|
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(14 |
) |
Retained
earnings at end of period
|
|
$ |
6,772 |
|
|
$ |
6,305 |
|
|
$ |
6,772 |
|
|
$ |
6,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
EASTMAN
KODAK COMPANY
(in
millions)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,308 |
|
|
$ |
2,947 |
|
Receivables,
net
|
|
|
1,892 |
|
|
|
1,939 |
|
Inventories,
net
|
|
|
1,087 |
|
|
|
943 |
|
Other
current assets
|
|
|
222 |
|
|
|
224 |
|
Total current assets
|
|
|
5,509 |
|
|
|
6,053 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated depreciation of $5,572
and $5,516, respectively
|
|
|
1,712 |
|
|
|
1,811 |
|
Goodwill
|
|
|
1,726 |
|
|
|
1,657 |
|
Other
long-term assets
|
|
|
4,085 |
|
|
|
4,138 |
|
TOTAL
ASSETS
|
|
$ |
13,032 |
|
|
$ |
13,659 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and other current liabilities
|
|
$ |
3,137 |
|
|
$ |
3,794 |
|
Short-term
borrowings
|
|
|
59 |
|
|
|
308 |
|
Accrued
income and other taxes
|
|
|
242 |
|
|
|
344 |
|
Total current liabilities
|
|
|
3,438 |
|
|
|
4,446 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
1,296 |
|
|
|
1,289 |
|
Pension
and other postretirement liabilities
|
|
|
3,300 |
|
|
|
3,444 |
|
Other
long-term liabilities
|
|
|
1,475 |
|
|
|
1,451 |
|
Total liabilities
|
|
|
9,509 |
|
|
|
10,630 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, $2.50 par value
|
|
|
978 |
|
|
|
978 |
|
Additional
paid in capital
|
|
|
896 |
|
|
|
889 |
|
Retained
earnings
|
|
|
6,772 |
|
|
|
6,474 |
|
Accumulated
other comprehensive income
|
|
|
627 |
|
|
|
452 |
|
|
|
|
9,273 |
|
|
|
8,793 |
|
Less:
Treasury stock, at cost
|
|
|
5,750 |
|
|
|
5,764 |
|
Total shareholders’ equity
|
|
|
3,523 |
|
|
|
3,029 |
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
$ |
13,032 |
|
|
$ |
13,659 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
EASTMAN
KODAK COMPANY
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
380 |
|
|
$ |
424 |
|
Adjustments
to reconcile to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Earnings
from discontinued operations, net of income taxes
|
|
|
(294 |
) |
|
|
(753 |
) |
Depreciation
and amortization
|
|
|
252 |
|
|
|
446 |
|
Gain
on sales of businesses/assets
|
|
|
(5 |
) |
|
|
(48 |
) |
Non-cash
restructuring costs, asset impairments and other charges
|
|
|
1 |
|
|
|
274 |
|
Provision
for deferred income taxes
|
|
|
102 |
|
|
|
80 |
|
Decrease
in receivables
|
|
|
55 |
|
|
|
49 |
|
Increase
in inventories
|
|
|
(130 |
) |
|
|
(149 |
) |
Decrease
in liabilities excluding borrowings
|
|
|
(921 |
) |
|
|
(937 |
) |
Other
items, net
|
|
|
(49 |
) |
|
|
(81 |
) |
Total
adjustments
|
|
|
(989 |
) |
|
|
(1,119 |
) |
Net
cash used in continuing operations
|
|
|
(609 |
) |
|
|
(695 |
) |
Net
cash provided by (used in) discontinued operations
|
|
|
299 |
|
|
|
(30 |
) |
Net
cash used in operating activities
|
|
|
(310 |
) |
|
|
(725 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to properties
|
|
|
(123 |
) |
|
|
(125 |
) |
Net
proceeds from sales of businesses/assets
|
|
|
57 |
|
|
|
116 |
|
Acquisitions,
net of cash acquired
|
|
|
(35 |
) |
|
|
(2 |
) |
Marketable
securities - sales
|
|
|
95 |
|
|
|
77 |
|
Marketable
securities - purchases
|
|
|
(96 |
) |
|
|
(85 |
) |
Net
cash used in continuing operations
|
|
|
(102 |
) |
|
|
(19 |
) |
Net
cash provided by discontinued operations
|
|
|
- |
|
|
|
2,335 |
|
Net
cash (used in) provided by investing activities
|
|
|
(102 |
) |
|
|
2,316 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from other borrowings
|
|
|
92 |
|
|
|
16 |
|
Repayment
of other borrowings
|
|
|
(329 |
) |
|
|
(1,166 |
) |
Exercise
of employee stock options
|
|
|
- |
|
|
|
5 |
|
Net
cash used in financing activities
|
|
|
(237 |
) |
|
|
(1,145 |
) |
Effect
of exchange rate changes on cash
|
|
|
10 |
|
|
|
10 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(639 |
) |
|
|
456 |
|
Cash
and cash equivalents, beginning of period
|
|
|
2,947 |
|
|
|
1,469 |
|
Cash
and cash equivalents, end of period
|
|
$ |
2,308 |
|
|
$ |
1,925 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
EASTMAN
KODAK COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
NOTE
1: BASIS OF PRESENTATION
BASIS
OF PRESENTATION
The
consolidated interim financial statements are unaudited, and certain information
and footnote disclosures related thereto normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted in accordance with Rule 10-01
of Regulation S-X. In the opinion of management, the accompanying
unaudited consolidated financial statements were prepared following the same
policies and procedures used in the preparation of the audited financial
statements and reflect all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the results of operations, financial
position and cash flows of Eastman Kodak Company and its subsidiaries (the
Company). The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal
year. These consolidated financial statements should be read in
conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007.
Certain
amounts for prior periods have been reclassified to conform to the current
period presentation. Prior period reclassifications relate to changes
in the Company’s segment reporting structure and cost allocation methodologies
related to employee benefits and corporate expenses. Refer to Note
12, “Segment Information.”
CHANGE
IN ESTIMATE
During
2005, the Company performed an assessment of the expected industry-wide declines
in its traditional film and paper businesses. Based on this
assessment, the Company revised the useful lives in 2005 of its existing
production machinery and equipment from 3-20 years to 3-5 years and
manufacturing-related buildings from 10-40 years to 5-20 years.
In the
first quarter of 2008, the Company performed an updated analysis of expected
industry-wide declines in the traditional film and paper businesses and its
useful lives on related assets. This analysis indicated that the
assets will continue to be used in these businesses for a longer period than
previously anticipated. As a result, the Company revised the useful
lives of certain existing production machinery and equipment, and
manufacturing-related buildings effective January 1, 2008. These
assets, which were previously set to fully depreciate by mid-2010, are now being
depreciated with estimated useful lives ending from 2011 to 2015. The
change in useful lives reflects the Company’s estimate of future periods to be
benefited from the use of the property, plant, and equipment.
The
effect of this change in estimate for the three months ended June 30, 2008 was a
reduction in depreciation expense of $27 million, $15 million of which has been
recognized in cost of goods sold and is a benefit to earnings from continuing
operations. In addition, $12 million of the reduction in depreciation
is capitalized as a reduction in inventories at June 30, 2008. The
net impact of the change to earnings from continuing operations for the three
months ended June 30, 2008 is an increase of $27 million, or $.09 on a
fully-diluted earnings per share basis. This includes the $15 million
of current quarter depreciation recognized in cost of goods sold, plus $12
million of depreciation from the previous quarter which was capitalized as a
reduction in inventories at March 31, 2008, but was recognized in cost of goods
sold in the current quarter.
The
effect of this change in estimate for the six months ended June 30, 2008 was a
reduction in depreciation expense of $55 million, $43 million of which has been
recognized in cost of goods sold, and $12 million of which is capitalized as a
reduction in inventories at June 30, 2008. The net impact of this
change is an increase in earnings from continuing operations for the six months
ended June 30, 2008 of $43 million, or $.15 on a fully-diluted earnings per
share basis.
RECENT
ACCOUNTING PRONOUNCEMENTS
FASB
Statement No. 157
In
September 2006, the Financial Accounting Standards Board (FASB) issued the
Statement of Financial Accounting Standard (SFAS) No. 157, "Fair Value
Measurements," which establishes a comprehensive framework for measuring fair
value 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. The Statement defines levels within the hierarchy as
follows:
·
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the reporting entity has the ability to access
at the measurement date.
|
·
|
Level
2 inputs are inputs, other than quoted prices included within Level 1,
which are observable for the asset or liability, either directly or
indirectly.
|
· |
Level
3 inputs are unobservable inputs. |
In
February 2008, the FASB issued FSP 157-2, which delays the effective date of
SFAS No. 157 for all nonfinancial assets and liabilities that are not recognized
or disclosed at fair value in the financial statements on a recurring basis (at
least annually) until fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The Company is currently
evaluating the potential impact that the application of SFAS No. 157 to its
nonfinancial assets and liabilities will have on its Consolidated Financial
Statements.
The
Company adopted the provisions of SFAS No. 157 for financial assets and
liabilities as of January 1, 2008. There was no significant impact to
the Company’s Consolidated Financial Statements as a result of this
adoption.
The
following table sets forth financial assets and liabilities measured at fair
value in the Consolidated Statement of Financial Position and the respective
levels to which the fair value measurements are classified within the fair value
hierarchy as of June 30, 2008:
|
Fair
Value Measurements at Reporting Date Using
|
|
(in
millions)
|
|
Total
Financial Assets & Liabilities
|
|
|
Significant
Other Observable Inputs
|
|
Description
|
|
As of
June 30, 2008
|
|
|
(Level 2)
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
$ |
16 |
|
|
$ |
16 |
|
Total
|
|
$ |
16 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
$ |
(62 |
) |
|
$ |
(62 |
) |
Silver
forward contracts
|
|
|
(2 |
) |
|
|
(2 |
) |
Total
|
|
$ |
(64 |
) |
|
$ |
(64 |
) |
|
|
|
|
|
|
|
|
|
Values
for the Company’s forward contracts are determined based on the present value of
expected future cash flows considering the risks involved and using discount
rates appropriate for the duration of the contracts.
FASB
Statement No. 159
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," which permits entities to choose to
measure, on an item-by-item basis, specified financial instruments and certain
other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are required to be reported in
earnings at each reporting date. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The provisions of this
statement are required to be applied prospectively. The Company
adopted SFAS No. 159 in the first quarter of 2008. There was no
significant impact to the Company’s Consolidated Financial Statements from the
adoption of SFAS No. 159.
FASB
Statement No. 141R
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” a
revision to SFAS No. 141, “Business Combinations.” SFAS No. 141R
provides revised guidance for recognition and measurement of identifiable assets
and goodwill acquired, liabilities assumed, and any noncontrolling interest in
the acquiree at fair value. The Statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of a
business combination. SFAS No. 141R is required to be applied
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008 (January 1, 2009 for the Company). The Company is
currently evaluating the potential impact, if any, of the adoption of SFAS No.
141R on its Consolidated Financial Statements.
FASB
Statement No. 160
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” This
Statement establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent. Specifically,
SFAS No. 160 requires the presentation of noncontrolling interests as equity in
the Consolidated Statement of Financial Position, and separate identification
and presentation in the Consolidated Statement of Operations of net income
attributable to the entity and the noncontrolling interest. It also
establishes accounting and reporting standards regarding deconsolidation and
changes in a parent’s ownership interest. SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008 (January 1, 2009 for the Company). The
provisions of SFAS No. 160 are generally required to be applied prospectively,
except for the presentation and disclosure requirements, which must be applied
retrospectively. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 160 on its Consolidated Financial
Statements.
FASB
Statement No. 161
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133.” This Statement amends and expands the disclosure requirements
for derivative instruments and hedging activities, with the intent to provide
users of financial statements with an enhanced understanding of how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for, and how derivative instruments and related
hedged items affect an entity’s financial statements. SFAS No. 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. The Company will comply with the disclosure requirements of
SFAS No. 161 beginning in the first quarter of 2009.
NOTE
2: RECEIVABLES, NET
|
|
As
of
|
|
|
|
June
30,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$ |
1,627 |
|
|
$ |
1,697 |
|
Miscellaneous
receivables
|
|
|
265 |
|
|
|
242 |
|
Total
(net of allowances of $107 and $114 as of June
30, 2008 and December 31, 2007, respectively)
|
|
$ |
1,892 |
|
|
$ |
1,939 |
|
|
|
|
|
|
|
|
|
|
Of the
total trade receivable amounts of $1,627 million and $1,697 million as of June
30, 2008 and December 31, 2007, respectively, approximately $173 million and
$266 million, respectively, are expected to be settled through customer
deductions in lieu of cash payments. Such deductions represent
rebates owed to the customer and are included in accounts payable and other
current liabilities in the accompanying Consolidated Statement of Financial
Position at each respective balance sheet date.
NOTE
3: INVENTORIES, NET
|
|
As of
|
|
(in
millions)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
668 |
|
|
$ |
537 |
|
Work
in process
|
|
|
237 |
|
|
|
235 |
|
Raw
materials
|
|
|
182 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,087 |
|
|
$ |
943 |
|
|
|
|
|
|
|
|
|
|
NOTE
4: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
was $1,726 million and $1,657 million at June 30, 2008 and December 31, 2007,
respectively. The changes in the carrying amount of goodwill by
reportable segment for the six months ended June 30, 2008 were as
follows:
(in
millions)
|
|
As
of June 30, 2008
|
|
|
|
|
|
|
Film,
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Photofinishing
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Entertainment
|
|
|
|
|
|
Consolidated
|
|
|
|
Group
|
|
|
Group
|
|
|
Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
$ |
204 |
|
|
$ |
601 |
|
|
$ |
852 |
|
|
$ |
1,657 |
|
Additions
|
|
|
- |
|
|
|
- |
|
|
|
24 |
|
|
|
24 |
|
Purchase
accounting adjustments
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
6 |
|
Currency
translation adjustments
|
|
|
3 |
|
|
|
24 |
|
|
|
12 |
|
|
|
39 |
|
Balance
as of June 30, 2008
|
|
$ |
207 |
|
|
$ |
625 |
|
|
$ |
894 |
|
|
$ |
1,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate amount of goodwill acquired in the second quarter of 2008 of $24
million was attributable to $14 million for the purchase of Intermate A/S and
$10 million for the purchase of Design2Launch, both in the Graphic
Communications Group segment. Refer to Note 13:
“Acquisitions.”
Due to
the realignment of the Kodak operating model and change in reporting structure,
as described in Note 12, “Segment Information,” effective January 1, 2008, the
Company reassigned goodwill to its reportable segments using a relative fair
value
approach
as required under SFAS No. 142, "Goodwill and Other Intangible
Assets." Prior period amounts have been restated to reflect this
reassignment.
The gross
carrying amount and accumulated amortization by major intangible asset category
as of June 30, 2008 and December 31, 2007 were as follows:
(in
millions)
|
|
As
of June 30, 2008
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
|
Weighted-Average
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Amortization
Period
|
Technology-based
|
|
$ |
336 |
|
|
$ |
190 |
|
|
$ |
146 |
|
7
years
|
Customer-related
|
|
|
290 |
|
|
|
146 |
|
|
|
144 |
|
10
years
|
Other
|
|
|
59 |
|
|
|
39 |
|
|
|
20 |
|
9
years
|
Total
|
|
$ |
685 |
|
|
$ |
375 |
|
|
$ |
310 |
|
8
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
As
of December 31, 2007
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Weighted-Average
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Amortization
Period
|
Technology-based
|
|
$ |
326 |
|
|
$ |
166 |
|
|
$ |
160 |
|
7
years
|
Customer-related
|
|
|
281 |
|
|
|
125 |
|
|
|
156 |
|
10
years
|
Other
|
|
|
82 |
|
|
|
36 |
|
|
|
46 |
|
8
years
|
Total
|
|
$ |
689 |
|
|
$ |
327 |
|
|
$ |
362 |
|
8
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the second quarter of 2008, the Company acquired Design2Launch and Intermate
A/S. The intangible assets of $4 million and $7 million,
respectively, related to these two acquisitions are included in the balances as
of June 30, 2008 above.
During
the first quarter of 2008, the Company sold its stake in Lucky Film Co., Ltd.
including its rights under a manufacturing exclusivity agreement, which resulted
in a decrease in the net intangible asset amount of approximately $25
million.
Amortization
expense related to purchased intangible assets for the three months ended June
30, 2008 and 2007 was $20 million and $28 million,
respectively. Amortization expense related to purchased intangible
assets for the six months ended June 30, 2008 and 2007 was $40 million and $56
million, respectively.
Estimated
future amortization expense related to purchased intangible assets as of June
30, 2008 is as follows (in millions):
2008
|
$ |
40 |
|
2009
|
|
76 |
|
2010
|
|
65 |
|
2011
|
|
42 |
|
2012
|
|
27 |
|
2013
and thereafter
|
|
60 |
|
Total
|
$ |
310 |
|
|
|
|
|
NOTE
5: INCOME TAXES
In June
of 2008, the Company received a tax refund from the U.S. Internal Revenue
Service (IRS) of $581 million. The refund is related to the audit of
certain claims filed for tax years 1993-1998, and is composed of a refund of
past federal income taxes paid of $306 million and $275 million of interest
earned on the refund.
The
federal tax refund claim related primarily to a 1994 loss recognized on the
Company’s sale of stock of a subsidiary, Sterling Winthrop Inc., which was
originally disallowed under IRS regulations in effect at that
time. The IRS subsequently issued revised regulations that served as
the basis for this refund.
The
refund had a positive impact on the Company’s net earnings of $565 million for
the three and six months ended June 30, 2008. Of the $565 million
increase in net earnings, $295 million relates to the 1994 sale of Sterling
Winthrop Inc., which is reflected in earnings from discontinued operations, net
of income taxes. The balance of $270 million, which represents interest, is
reflected in earnings from continuing operations. The difference
between the cash refund received of $581 million and positive net earnings
impact of $565 million represents incremental state tax expense incurred and the
release of an existing income tax receivable related to the refund.
The
Company’s income tax benefit and effective tax rate were as
follows:
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Loss
from continuing operations before income taxes
|
|
$ |
(13 |
) |
|
$ |
(197 |
) |
|
$ |
(87 |
) |
|
$ |
(390 |
) |
Benefit
for income taxes
|
|
$ |
(213 |
) |
|
$ |
(43 |
) |
|
$ |
(173 |
) |
|
$ |
(61 |
) |
Effective
tax rate
|
|
|
1638.5 |
% |
|
|
21.8 |
% |
|
|
198.9 |
% |
|
|
15.6 |
% |
Benefit
for income taxes @ 35%
|
|
$ |
(5 |
) |
|
$ |
(69 |
) |
|
$ |
(30 |
) |
|
$ |
(137 |
) |
Difference
between tax at effective vs. statutory rate
|
|
$ |
(208 |
) |
|
$ |
26 |
|
|
$ |
(143 |
) |
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three and six months ended June 30, 2008, the difference between the Company’s
recorded benefit and the benefit that would result from applying the U.S.
statutory rate of 35.0% is primarily attributable
to: (1) interest earned on the IRS tax refund, partially
offset by (2) losses generated within the U.S. and in certain jurisdictions
outside the U.S. that were not benefited due to previously established
valuation allowances, (3) the mix of earnings from operations in certain
lower-taxed jurisdictions outside the U.S., and (4) discrete tax charges
relating to the impacts from ongoing tax audits with respect to open tax
years.
For the
three and six months ended June 30, 2007, the difference between the Company’s
recorded benefit and the benefit 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. that were not
benefited due to
valuation allowances, (2) the mix of earnings from operations in certain
lower-taxed jurisdictions outside the U.S., and (3) a benefit as a result
of tax reserves, audit settlements and interest.
NOTE
6: COMMITMENTS AND CONTINGENCIES
Environmental
The
Company’s undiscounted accrued liabilities for future environmental
investigation, remediation, and monitoring costs are composed of the following
items:
|
|
As
of
|
|
(in
millions)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Kodak
Park site, Rochester, NY
|
|
$ |
65 |
|
|
$ |
63 |
|
Other
operating sites
|
|
|
17 |
|
|
|
19 |
|
Former
operating sites
|
|
|
22 |
|
|
|
23 |
|
Sites
associated with the non-imaging health business sold in
1994
|
|
|
19 |
|
|
|
20 |
|
Total
|
|
$ |
123 |
|
|
$ |
125 |
|
|
|
|
|
|
|
|
|
|
These
amounts are reported in other long-term liabilities in the accompanying
Statement of Financial Position.
Cash
expenditures for the aforementioned investigation, remediation and monitoring
activities are expected to be incurred over the next twenty-eight years for
several of the sites. For these known environmental liabilities, the
accrual reflects the Company’s best estimate of the amount it will incur under
the agreed-upon or proposed work plans. The Company’s cost estimates
were determined using the ASTM Standard E 2137-06, "Standard Guide for
Estimating Monetary Costs and Liabilities for Environmental Matters," and have
not been reduced by possible recoveries from third parties. The
overall method includes the use of a probabilistic model which forecasts a range
of cost estimates for the remediation required at individual
sites. The projects are closely monitored and the models are reviewed
as significant events occur or at least once per year. The Company’s
estimate includes investigations, equipment and operating costs for remediation
and long-term monitoring of the sites. The Company does not believe
it is reasonably possible that the losses for the known exposures could exceed
the current accruals by material amounts.
The
Company is presently designated as a potentially responsible party (PRP) under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (the Superfund Law), or under similar state laws, for
environmental assessment and cleanup costs as the result of the Company’s
alleged arrangements for disposal of hazardous substances at eight Superfund
sites. With respect to each of these sites, the Company’s liability
is minimal. In addition, the Company has been identified as a PRP in
connection with the non-imaging health businesses in two active Superfund
sites. Numerous other PRPs have also been designated at these
sites. Although the law imposes joint and several liability on PRPs,
the Company’s historical experience demonstrates that these costs are shared
with other PRPs. Settlements and costs paid by the Company in
Superfund matters to date have not been material. Future costs are
also not expected to be material to the Company’s financial position, results of
operations or cash flows.
Estimates
of the amount and timing of future costs of environmental remediation
requirements are by their nature imprecise because of the continuing evolution
of environmental laws and regulatory requirements, the availability and
application of technology, the identification of presently unknown remediation
sites and the allocation of costs among the potentially responsible
parties. Based upon information presently available, such future
costs are not expected to have a material effect on the Company’s competitive or
financial position. However, such costs could be material to results
of operations in a particular future quarter or year.
Asset
Retirement Obligations
The
Company has asset retirement obligations which primarily relate to asbestos
contained in buildings owned by the Company. In many of the countries
in which the Company operates, environmental regulations exist that require the
Company to handle and dispose of asbestos in a special manner if a building
undergoes major renovations or is demolished. Otherwise, the Company
is not required to remove the asbestos from its buildings. The
Company records a liability equal to the estimated fair value of its obligation
to perform asset retirement activities related to the asbestos, computed using
an expected present value technique, when sufficient information exists to
calculate the fair value. The Company does not have a liability
recorded related to each building that contains asbestos because the Company
cannot estimate the fair value of its obligation for certain buildings due to a
lack of sufficient information about the range of time over which the obligation
may be settled through demolition, renovation or sale of the
building. The Company’s asset retirement obligations are included
within other long-term liabilities in the accompanying Consolidated Statement of
Financial Position.
The
change in the Company's asset retirement obligations from December 31, 2007 to
June 30, 2008 was as follows:
(in
millions)
Asset
retirement obligations as of December 31, 2007
|
|
$ |
64 |
|
Liabilities
incurred in the current period
|
|
|
5 |
|
Liabilities
settled in the current period
|
|
|
(8 |
) |
Accretion
expense
|
|
|
1 |
|
Revisions
in estimated cash flows
|
|
|
2 |
|
Currency
translation adjustments
|
|
|
1 |
|
Asset
retirement obligations as of June 30, 2008
|
|
$ |
65 |
|
|
|
|
|
|
Other
Commitments and Contingencies
As of
June 30, 2008, the Company had outstanding letters of credit totaling $141
million and surety bonds in the amount of $72 million primarily to ensure the
payment of possible casualty and workers’ compensation claims, environmental
liabilities, and to support various customs, tax and trade
activities.
The
Company’s Brazilian operations are involved in labor claims and governmental
assessments of indirect and other taxes in various stages of
litigation. The Company is disputing these matters and intends to
vigorously defend its position. Based on the opinion of legal
counsel, management does not believe that the ultimate resolution of these
matters will materially impact the Company’s results of operations, financial
position or cash flows. The Company routinely assesses all these
matters as to the probability of ultimately incurring a liability in its
Brazilian operations, and records its best estimate of the ultimate loss in
situations where it assesses the likelihood of loss as probable.
The
Company and its subsidiaries are involved in various lawsuits, claims,
investigations and proceedings, including commercial, customs, employment,
environmental, and health and safety matters, which are being handled and
defended in the ordinary course of business. In addition, the Company
is subject to various assertions, claims, proceedings and requests for
indemnification concerning intellectual property, including patent infringement
suits involving technologies that are incorporated in a broad spectrum of the
Company’s products. These matters are in various stages of
investigation and litigation and are being vigorously
defended. Although the Company does not expect that the outcome in
any of these matters, individually or collectively, will have a material adverse
effect on its financial condition or results of operations, litigation is
inherently unpredictable. Therefore, judgments could be rendered or
settlements entered, that could adversely affect the Company’s operating results
or cash flow in a particular period. The Company routinely assesses
all its litigation and threatened litigation as to the probability of ultimately
incurring a liability, and records its best estimate of the ultimate loss in
situations where it assesses the likelihood of loss as probable.
NOTE
7: GUARANTEES
The
Company guarantees debt and other obligations of certain
customers. The debt and other obligations are primarily due to banks
and leasing companies in connection with financing of customers' purchases of
product and equipment from the Company. As of June 30, 2008, the
following customer guarantees were in place:
(in
millions)
|
|
As
of June 30, 2008
|
|
|
|
Maximum Amount
|
|
|
Amount Outstanding
|
|
|
|
|
|
|
|
|
Customer
amounts due to banks and leasing companies
|
|
$ |
149 |
|
|
$ |
85 |
|
Other
third-parties
|
|
|
2 |
|
|
|
1 |
|
Total
guarantees of customer debt and other obligations
|
|
$ |
151 |
|
|
$ |
86 |
|
|
|
|
|
|
|
|
|
|
The
guarantees for the third party debt, presented in the table above, mature
between 2008 and 2013. 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.
Eastman
Kodak Company (“EKC”) also guarantees debt owed to banks and other third parties
for some of its consolidated subsidiaries. The maximum amount
guaranteed is $574 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 $224 million. These guarantees expire in 2008
through 2013. 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 (the “Credit Facilities”) and other
obligations of the Company and its subsidiaries to the Credit Facilities’
lenders are guaranteed.
During
the fourth quarter of 2007, EKC issued a guarantee to Kodak Limited (the
“Subsidiary”) and the Trustees (the “Trustees”) of the Kodak Pension Plan of the
United Kingdom (the “Plan”). Under this arrangement, EKC guarantees
to the Subsidiary and the Trustees the ability of the Subsidiary, only to the
extent it becomes necessary to do so, to (1) make contributions to the Plan to
ensure sufficient assets exist to make plan benefit payments, and (2) make
contributions to the Plan such that it will achieve full funded status by the
funding valuation for the period ending December 31, 2015. The
guarantee expires upon the conclusion of the funding valuation for the period
ending December 31, 2015 whereby the Plan achieves full funded status or
earlier, in the event that the Plan achieves full funded status for two
consecutive funding valuation cycles which are typically performed at least
every three years.
The limit
of potential future payments is dependent on the funding status of the Plan as
it fluctuates over the term of the guarantee. Currently, the Plan’s
local funding valuation is in process and expected to be completed by March
2009. As of June 30, 2008, management believes that performance under
this guarantee by EKC is unlikely given expected investment performance and cash
available at the Plan’s sponsoring company, Kodak Limited, should future cash
contributions be needed. The funding status of the Plan is included
in Pension and other postretirement liabilities presented in the Consolidated
Statement of Financial Position.
Indemnifications
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 June 30, 2008 was not material to the
Company’s financial position, results of operations or cash flows.
Warranty
Costs
The
Company has warranty obligations in connection with the sale of its products and
equipment. The original warranty period is generally one year or
less. The costs incurred to provide for these warranty obligations
are estimated and recorded as an accrued liability at the time of
sale. The Company estimates its warranty cost at the point of sale
for a given product based on historical failure rates and related costs to
repair. The change in the Company's accrued warranty obligations
balance, which is reflected in accounts payable and other current liabilities in
the accompanying Consolidated Statement of Financial Position, was as
follows:
(in
millions)
Accrued
warranty obligations as of December 31, 2007
|
$ |
44 |
|
Actual
warranty experience during 2008
|
|
(24 |
) |
2008
warranty provisions
|
|
26 |
|
Accrued
warranty obligations as of June 30, 2008
|
$ |
46 |
|
|
|
|
|
The
Company also offers its customers extended warranty arrangements that are
generally one year, but may range from three months to three years after the
original warranty period. The Company provides repair services and
routine maintenance under these arrangements. The Company has not
separated the extended warranty revenues and costs from the routine maintenance
service revenues and costs, as it is not practicable to do
so. Therefore, these revenues and costs have been aggregated in the
discussion that follows. Costs incurred under these arrangements for
the six months ended June 30, 2008 amounted to $89 million. The
change in the Company's deferred revenue balance in relation to these extended
warranty and maintenance arrangements from December 31, 2007 to June 30, 2008,
which is reflected in accounts payable and other current liabilities in the
accompanying Consolidated Statement of Financial Position, was as
follows:
(in
millions)
Deferred
revenue as of December 31, 2007
|
$ |
148 |
|
New
extended warranty and maintenance arrangements in 2008
|
|
188 |
|
Recognition
of extended warranty and maintenance arrangement revenue in
2008
|
|
(182 |
) |
Deferred
revenue as of June 30, 2008
|
$ |
154 |
|
|
|
|
|
NOTE
8: RESTRUCTURING AND RATIONALIZATION LIABILITIES
The
Company has substantially completed the cost reduction program that was
initially announced in January 2004, which was referred to as the “2004–2007
Restructuring Program.” This program was initially expected to result
in total charges of $1.3 billion to $1.7 billion over a three-year
period. Overall, Kodak's worldwide facility square footage was
expected to be reduced by approximately one-third, and approximately 12,000 to
15,000 positions worldwide were expected to be eliminated, primarily in global
manufacturing, selected traditional businesses, and corporate
administration.
As the
2004-2007 Restructuring Program underpinned a dramatic transformation of the
Company, the underlying business model necessarily evolved. This
required broader and more costly manufacturing infrastructure reductions
(primarily non-cash charges) than originally anticipated, as well as similarly
broader rationalization of selling, administrative and other business resources
(primarily severance charges). In addition, the divestiture of the
Health Group further increased the amount of reductions necessary to
appropriately scale the corporate infrastructure. As a result, the
Company expanded the program and increased the expected employment reductions to
28,000 to 30,000 positions and total charges to $3.6 billion to $3.8
billion.
In the
third quarter of 2007, the Company revised its expectations for total employment
reductions to be in the range of 27,000 to 28,000 positions and total charges in
the range of $3.4 billion to $3.6 billion. These new estimates
reflected greater efficiencies in manufacturing infrastructure projects as well
as the Company’s ability to outsource or sell certain operations, which reduced
involuntary severance charges.
The
actual charges for initiatives under this program were recorded in the period in
which the Company committed to formalized restructuring plans or executed the
specific actions contemplated by the program and all criteria for restructuring
charge recognition under the applicable accounting guidance were
met.
Restructuring
Program Summary
The
activity in the accrued restructuring balances and the non-cash charges and
credits incurred in relation to the 2004-2007 Restructuring Program were as
follows for the second quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Balance
|
|
|
|
March
31,
|
|
|
Costs
|
|
|
|
|
|
Cash
|
|
|
Non-cash
|
|
|
and
|
|
|
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
Incurred
|
|
|
Reversals
|
|
|
Payments
|
|
|
Settlements
|
|
|
Reclasses
(1)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and curtailments
|
|
$ |
80 |
|
|
$ |
(3 |
) |
|
$ |
- |
|
|
$ |
(24 |
) |
|
$ |
- |
|
|
$ |
3 |
|
|
$ |
56 |
|
Exit
costs
|
|
|
26 |
|
|
|
2 |
|
|
|
(3 |
) |
|
|
(6 |
) |
|
|
- |
|
|
|
2 |
|
|
|
21 |
|
Total
reserve
|
|
$ |
106 |
|
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
(30 |
) |
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived asset impairments
and inventory
write-downs
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(2 |
) |
|
$ |
1 |
|
|
$ |
- |
|
Accelerated depreciation
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(2 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of 2004-2007 Program
|
|
$ |
106 |
|
|
$ |
2 |
|
|
$ |
(3 |
) |
|
$ |
(30 |
) |
|
$ |
(4 |
) |
|
$ |
6 |
|
|
$ |
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Other Adjustments and Reclasses of $6 million represent adjustments to the
restructuring reserve including (1) environmental remediation credits of
$2 million, and (2) additions to the reserve of $4 million for on-going
rationalization charges, including $3 million for severance and $1 million
for asset impairments. The $4 million of on-going
rationalization charges is reported as follows in the accompanying
Consolidated Statement of Operations for the three months ended June 30,
2008: $2 million in selling, general and administrative
expenses, and $2 million in cost of goods
sold.
|
The net
credit of $1 million, after reversals, for the three months ended June 30, 2008,
includes $2 million of charges related to accelerated depreciation that were
reported in cost of goods sold in the accompanying Consolidated Statement of
Operations for the three months ended June 30, 2008. The remaining
costs were reported as restructuring costs (curtailment gains) and other in the
accompanying Consolidated Statement of Operations for the three months ended
June 30, 2008. The severance and exit costs require the outlay of
cash, while long-lived asset impairments, accelerated depreciation and inventory
write-downs represent non-cash items.
The
Company implemented certain actions related to the 2004-2007 Restructuring
Program during the second quarter of 2008. As a result of these
actions, the Company recorded a net credit of $1 million in the second quarter
of 2008, which was composed of net curtailment gains of $1 million, severance
credits of $2 million, long-lived asset impairments of $1 million, exit costs of
$2 million and accelerated depreciation of $2 million. In addition,
the Company reversed $3 million of exit cost reserves as environmental
remediation and other costs associated with the Harrow manufacturing facility
reduction were less than anticipated. The $2 million of severance
credits related to the cancellation of 50 position eliminations due to staffing
realignment. These positions were primarily related to 25 research
and development positions and 25 manufacturing positions. The
geographic composition of these positions includes approximately 25 in the U.S.
and Canada and 25 throughout the rest of the world.
The $2
million of charges for accelerated depreciation relates to long-lived assets
accounted for under the held-and-used model of SFAS No. 144. The
total amount of $2 million relates to manufacturing facilities and
equipment. The Company will incur approximately $1 million of
accelerated depreciation in the third quarter of 2008 as a result of initiatives
already implemented under the 2004-2007 Restructuring Program.
Under
this program, on a life-to-date basis as of June 30, 2008, the Company has
recorded charges of $3,386 million, which was composed of severance, long-lived
asset impairments, exit costs, inventory write-downs and accelerated
depreciation of $1,383 million, $621 million, $389 million, $80 million and $937
million, respectively, less reversals of $24 million. The severance
costs related to the elimination of approximately 27,575 positions, including
approximately 6,750 photofinishing, 13,100 manufacturing, 1,525 research and
development and 6,200 administrative positions.
The
following table summarizes the activity with respect to the focused cost
reduction actions that the Company committed to under the program and the
remaining balances in the related reserves as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Long-lived
Asset
|
|
|
|
|
|
|
|
|
|
Exit
|
|
|
|
|
|
Impairments
|
|
|
|
|
|
|
Severance
|
|
|
Costs
|
|
|
|
|
|
and
Inventory
|
|
|
Accelerated
|
|
(dollars
in millions)
|
|
Reserve
|
|
|
Reserve
|
|
|
Total
|
|
|
Write-downs
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
charges - continuing operations
|
|
$ |
405 |
|
|
$ |
95 |
|
|
$ |
500 |
|
|
$ |
156 |
|
|
$ |
152 |
|
2004
charges - discontinued operations
|
|
|
13 |
|
|
|
4 |
|
|
|
17 |
|
|
|
1 |
|
|
|
- |
|
2004
reversals - continuing operations
|
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
2004
utilization
|
|
|
(169 |
) |
|
|
(47 |
) |
|
|
(216 |
) |
|
|
(157 |
) |
|
|
(152 |
) |
2004
other adj. & reclasses
|
|
|
24 |
|
|
|
(15 |
) |
|
|
9 |
|
|
|
- |
|
|
|
- |
|
Balance
as of 12/31/04
|
|
|
267 |
|
|
|
36 |
|
|
|
303 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
charges - continuing operations
|
|
|
472 |
|
|
|
82 |
|
|
|
554 |
|
|
|
160 |
|
|
|
391 |
|
2005
charges - discontinued operations
|
|
|
25 |
|
|
|
2 |
|
|
|
27 |
|
|
|
1 |
|
|
|
- |
|
2005
reversals - continuing operations
|
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
2005
utilization
|
|
|
(377 |
) |
|
|
(95 |
) |
|
|
(472 |
) |
|
|
(161 |
) |
|
|
(391 |
) |
2005
other adj. & reclasses
|
|
|
(113 |
) |
|
|
4 |
|
|
|
(109 |
) |
|
|
- |
|
|
|
- |
|
Balance
as of 12/31/05
|
|
|
271 |
|
|
|
23 |
|
|
|
294 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
charges - continuing operations
|
|
|
266 |
|
|
|
66 |
|
|
|
332 |
|
|
|
97 |
|
|
|
273 |
|
2006
charges - discontinued operations
|
|
|
52 |
|
|
|
3 |
|
|
|
55 |
|
|
|
3 |
|
|
|
12 |
|
2006
reversals - continuing operations
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
- |
|
|
|
- |
|
2006
utilization
|
|
|
(416 |
) |
|
|
(67 |
) |
|
|
(483 |
) |
|
|
(100 |
) |
|
|
(285 |
) |
2006
other adj. & reclasses
|
|
|
58 |
|
|
|
- |
|
|
|
58 |
|
|
|
- |
|
|
|
- |
|
Balance
as of 12/31/06
|
|
|
228 |
|
|
|
24 |
|
|
|
252 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
charges - continuing operations
|
|
|
145 |
|
|
|
129 |
|
|
|
274 |
|
|
|
282 |
|
|
|
107 |
|
2007
charges - discontinued operations
|
|
|
20 |
|
|
|
4 |
|
|
|
24 |
|
|
|
- |
|
|
|
- |
|
2007
reversals - continuing operations
|
|
|
(1 |
) |
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
2007
utilization
|
|
|
(289 |
) |
|
|
(129 |
) |
|
|
(418 |
) |
|
|
(282 |
) |
|
|
(107 |
) |
2007
other adj. & reclasses
|
|
|
26 |
|
|
|
2 |
|
|
|
28 |
|
|
|
- |
|
|
|
- |
|
Balance
as of 12/31/07
|
|
|
129 |
|
|
|
30 |
|
|
|
159 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
2008 charges - continuing operations
|
|
|
(12 |
) |
|
|
2 |
|
|
|
(10 |
) |
|
|
- |
|
|
|
- |
|
Q1
2008 utilization
|
|
|
(44 |
) |
|
|
(6 |
) |
|
|
(50 |
) |
|
|
- |
|
|
|
- |
|
Q1
2008 other adj. & reclasses
|
|
|
7 |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
Balance
as of 3/31/08
|
|
|
80 |
|
|
|
26 |
|
|
|
106 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2
2008 charges - continuing operations
|
|
|
(3 |
) |
|
|
2 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
2 |
|
Q2
2008 reversals - continuing operations
|
|
|
- |
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
Q2
2008 utilization
|
|
|
(24 |
) |
|
|
(6 |
) |
|
|
(30 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
Q2
2008 other adj. & reclasses
|
|
|
3 |
|
|
|
2 |
|
|
|
5 |
|
|
|
1 |
|
|
|
- |
|
Balance
as of 6/30/08
|
|
$ |
56 |
|
|
$ |
21 |
|
|
$ |
77 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a
result of the initiatives already implemented under the program, severance
payments will be paid during periods through 2009 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. In addition, certain
exit costs, such as long-term lease payments, will be paid over periods
throughout 2008 and beyond.
The net
credit of $1 million recorded in the second quarter of 2008 included charges
of $1 million applicable to CDG and a net credit of $2
million applicable to GCG.
NOTE
9: RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Components
of the net periodic benefit cost for all major funded and unfunded U.S. and
Non-U.S. defined benefit plans for the three and six months ended June 30, are
as follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
13 |
|
|
$ |
6 |
|
|
$ |
18 |
|
|
$ |
7 |
|
|
$ |
27 |
|
|
$ |
12 |
|
|
$ |
39 |
|
|
$ |
14 |
|
Interest
cost
|
|
|
77 |
|
|
|
57 |
|
|
|
78 |
|
|
|
50 |
|
|
|
154 |
|
|
|
114 |
|
|
|
158 |
|
|
|
98 |
|
Expected
return on plan assets
|
|
|
(136 |
) |
|
|
(69 |
) |
|
|
(136 |
) |
|
|
(61 |
) |
|
|
(272 |
) |
|
|
(137 |
) |
|
|
(272 |
) |
|
|
(122 |
) |
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
net actuarial loss
|
|
|
1 |
|
|
|
16 |
|
|
|
1 |
|
|
|
15 |
|
|
|
2 |
|
|
|
32 |
|
|
|
3 |
|
|
|
34 |
|
Pension
(income) expense before special
termination benefits
and curtailments
|
|
|
(45 |
) |
|
|
10 |
|
|
|
(39 |
) |
|
|
11 |
|
|
|
(89 |
) |
|
|
21 |
|
|
|
(72 |
) |
|
|
24 |
|
Special
termination benefits
|
|
|
1 |
|
|
|
- |
|
|
|
15 |
|
|
|
2 |
|
|
|
6 |
|
|
|
1 |
|
|
|
28 |
|
|
|
7 |
|
Curtailment
gains
|
|
|
(3 |
) |
|
|
- |
|
|
|
(15 |
) |
|
|
(4 |
) |
|
|
(12 |
) |
|
|
- |
|
|
|
(15 |
) |
|
|
(3 |
) |
Settlement
gains
|
|
|
- |
|
|
|
- |
|
|
|
(38 |
) |
|
|
(4 |
) |
|
|
- |
|
|
|
- |
|
|
|
(38 |
) |
|
|
(4 |
) |
Net
pension (income) expense
|
|
|
(47 |
) |
|
|
10 |
|
|
|
(77 |
) |
|
|
5 |
|
|
|
(95 |
) |
|
|
22 |
|
|
|
(97 |
) |
|
|
24 |
|
Other
plans including
unfunded plans
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
3 |
|
Total
net pension (income) expense from
continuing operations
|
|
$ |
(47 |
) |
|
$ |
13 |
|
|
$ |
(77 |
) |
|
$ |
7 |
|
|
$ |
(95 |
) |
|
$ |
27 |
|
|
$ |
(97 |
) |
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three months ended June 30, 2008 and 2007, $1 million and $17 million,
respectively, of special termination benefits charges were incurred as a result
of the Company's restructuring actions and, therefore, have been included in
restructuring costs and other in the Consolidated Statement of
Operations.
The
Company made contributions (funded plans) or paid benefits (unfunded plans)
totaling approximately $24 million relating to its major U.S. and non-U.S.
defined benefit pension plans in the second quarter of 2008. 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 2008 to be approximately $44 million.
The
amounts of the Company’s overfunded pension plans were $2,559 million and $2,454
million as of June 30, 2008 and December 31, 2007, respectively, which are
included in Other long-term assets on the Company’s Consolidated Statement of
Financial Position.
Postretirement
benefit cost for the Company's U.S., United Kingdom and Canada postretirement
benefit plans, which represent the Company's major postretirement plans,
includes:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
4 |
|
Interest
cost
|
|
|
39 |
|
|
|
41 |
|
|
|
78 |
|
|
|
82 |
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service credit
|
|
|
(10 |
) |
|
|
(9 |
) |
|
|
(20 |
) |
|
|
(20 |
) |
Actuarial
loss
|
|
|
5 |
|
|
|
12 |
|
|
|
11 |
|
|
|
27 |
|
Other
postretirement benefit cost
before curtailments and
settlements
|
|
|
36 |
|
|
|
46 |
|
|
|
73 |
|
|
|
93 |
|
Curtailment
gain
|
|
|
(2 |
) |
|
|
(5 |
) |
|
|
(7 |
) |
|
|
(5 |
) |
Settlement
gain
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
Total
net postretirement benefit
cost
|
|
$ |
34 |
|
|
$ |
41 |
|
|
$ |
64 |
|
|
$ |
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company paid benefits totaling approximately $44 million relating to its U.S.,
United Kingdom and Canada postretirement benefit plans in the second quarter of
2008. The Company expects to pay benefits of $102 million for these
postretirement plans for the balance of 2008.
Certain
of the Company's retirement plans experienced remeasurement events in the second
quarter of 2008. The remeasurement of the plans' obligations during
the quarter decreased the Company's recognized defined benefit and other
postretirement benefit plan obligation by $16 million. As a result of
the Company’s restructuring actions, the Company recognized net curtailment
gains of $1 million in certain of its defined benefit and other postretirement
benefit obligation plans that have been included in restructuring costs
(curtailment gains) and other in the Consolidated Statement of Operations for
the three months ended June 30, 2008.
NOTE
10: EARNINGS PER SHARE
For the
three and six months ended June 30, 2008, the Company calculated diluted net
earnings per share excluding the assumed conversion of outstanding options to
purchase 23.0 million and 26.6 million shares, respectively, of the Company’s
common stock. These options were excluded in the computation of
diluted net earnings per share because the options’ exercise prices were greater
than the average market price of the common shares for each of these
periods.
As a
result of the net losses from continuing operations presented for the three and
six months ended June 30, 2007, the Company calculated the diluted net earnings
per share using weighted average basic shares outstanding for the respective
periods, as utilizing diluted shares would be
anti-dilutive. Therefore, outstanding options to purchase 30.0
million shares of the Company's common stock were not included in the
computation of diluted net earnings per share for the three and six months ended
June 30, 2007.
The
Company currently has $575 million in contingent convertible notes (the
Convertible Securities) outstanding that were issued in October
2003. Interest on the Convertible Securities accrues at a rate of
3.375% and is payable semi-annually. Under certain conditions, the
Convertible Securities are convertible at an initial conversion rate of 32.2373
shares of the Company's common stock for each $1,000 principal of the
Convertible Securities. The Company's diluted net earnings per share
for the three and six months ended June 30, 2007 and the six months ended June
30, 2008 excludes the effect of the Convertible Securities, as they were
anti-dilutive for each of these periods. Diluted net earnings per
share for the three months ended June 30, 2008 includes the effect of the
convertible securities, as they were dilutive to earnings per
share.
The
following tables set forth the computations of basic and diluted earnings (loss)
from continuing operations per share of common stock for the three and six
months ended June 30, 2008:
|
|
For
the Three Months Ended
|
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Earnings (Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations available to common
stockholders
|
|
$ |
200 |
|
|
|
288.2 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
share-based awards
|
|
$ |
- |
|
|
|
1.6 |
|
|
|
|
|
Convertible
securities
|
|
$ |
5 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
earnings (loss) from continuing operations available to common
stockholders and
assumed issuances and conversions
|
|
$ |
205 |
|
|
|
308.3 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Earnings (Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations available to common
stockholders
|
|
$ |
86 |
|
|
|
288.2 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
share-based awards
|
|
$ |
- |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
earnings (loss) from continuing operations available to common
stockholders and
assumed issuances and conversions
|
|
$ |
86 |
|
|
|
289.7 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
11: SHAREHOLDERS' EQUITY
The
Company has 950 million shares of authorized common stock with a par value of
$2.50 per share, of which 391 million shares had been issued as of June 30, 2008
and December 31, 2007. Treasury stock at cost consists of
approximately 103 million shares as of June 30, 2008 and December 31,
2007.
Share
Repurchase Program
In June
2008, the Company’s Board of Directors authorized a new program to repurchase
shares of the Company’s outstanding common stock for cash. The Board
approved the repurchase of shares having an aggregate market value of up to $1.0
billion, depending on market conditions and other factors. Under the
terms of this program, the Company may repurchase shares in open market
purchases or through privately negotiated transactions, based on the
determination of the Company’s management, through the end of
2009. The share repurchase program does not obligate the Company to
repurchase any dollar amount or number of shares of its common stock, and the
program may be extended, modified, suspended, or discontinued at any
time. No share repurchases were made under the program as of June 30,
2008.
Comprehensive
Income
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
495 |
|
|
$ |
575 |
|
|
$ |
380 |
|
|
$ |
424 |
|
Realized
and unrealized loss from hedging activity,
net of tax
|
|
|
(7 |
) |
|
|
- |
|
|
|
(11 |
) |
|
|
- |
|
Currency
translation adjustments
|
|
|
(29 |
) |
|
|
15 |
|
|
|
91 |
|
|
|
34 |
|
Pension
and other postretirement benefit plan obligation
activity, net of
tax
|
|
|
31 |
|
|
|
357 |
|
|
|
95 |
|
|
|
689 |
|
Total
comprehensive income, net of tax
|
|
$ |
490 |
|
|
$ |
947 |
|
|
$ |
555 |
|
|
$ |
1,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
12: SEGMENT INFORMATION
Kodak
Operating Model and Reporting Structure
The
Company has three reportable segments: Consumer Digital Imaging Group (CDG),
Film, Photofinishing and Entertainment Group (FPEG), and Graphic Communications
Group (GCG). The balance of the Company's continuing operations,
which individually and in the aggregate do not meet the criteria of a reportable
segment, are reported in All Other. A description of the segments is
as follows:
Consumer Digital Imaging Group
Segment (CDG): CDG encompasses digital cameras, digital
devices, such as picture frames, snapshot printers and related media, kiosks and
related media, APEX drylab systems which were introduced in the second quarter
of 2008, consumer inkjet printing, Kodak Gallery, and imaging
sensors. The APEX drylab system provides an alternative to
traditional photofinishing processing at retail locations. CDG also
includes the licensing activities related to the Company's intellectual property
in digital imaging products.
Film, Photofinishing and
Entertainment Group Segment (FPEG): FPEG encompasses consumer
and professional film, one-time-use cameras, graphic arts film, aerial and
industrial film, and entertainment imaging products and
services. In addition, this segment includes paper and output
systems, and photofinishing services. This segment provides
consumers, professionals, cinematographers, and other entertainment imaging
customers with film-related products and services, and also provides graphic
arts film to the graphics industry.
Graphic
Communications Group Segment (GCG): GCG serves a
variety of customers in the creative, in-plant, data center, commercial
printing, packaging, newspaper and digital service bureau market segments with a
range of software, media and hardware products that provide customers with a
variety of solutions for prepress equipment, workflow software, digital and
traditional printing, document scanning and multi-vendor
services. Products and related services include workflow software and
digital controller development; digital printing, which includes continuous
inkjet and electrophotographic products, including equipment, consumables and
service; prepress consumables; output devices; proofing hardware, media and
software; and document scanners.
All Other: All
Other is composed of Kodak's display business and other small, miscellaneous
businesses.
Effective
January 1, 2008, the Company changed its cost allocation methodologies related
to employee benefits and corporate expenses. For the three months
ended June 30, 2007, this change decreased cost of goods sold by $7 million,
increased selling, general, and administrative costs by $4 million, and
increased research and development costs by $3 million. For the six
months ended June 30, 2007, this change decreased cost of goods sold by $15
million, increased selling, general, and administrative costs by $8 million, and
increased research and development costs by $7 million.
Prior
period segment results have been revised to reflect the changes in segment
reporting structure and cost allocation methodologies outlined
above.
The
changes in cost allocation methodologies referred to above increased (decreased)
segment operating results for the three and six months ended June 30, 2007 as
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(in
millions)
|
|
June 30, 2007
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
(7 |
) |
|
$ |
(15 |
) |
Film,
Photofinishing and Entertainment Group
|
|
|
7 |
|
|
|
12 |
|
Graphic
Communications Group
|
|
|
(7 |
) |
|
|
(11 |
) |
All
Other
|
|
|
7 |
|
|
|
14 |
|
Consolidated
impact
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Segment
financial information is shown below:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
756 |
|
|
$ |
647 |
|
|
$ |
1,310 |
|
|
$ |
1,109 |
|
Film,
Photofinishing and Entertainment Group
|
|
|
847 |
|
|
|
980 |
|
|
|
1,571 |
|
|
|
1,810 |
|
Graphic
Communications Group
|
|
|
880 |
|
|
|
840 |
|
|
|
1,692 |
|
|
|
1,623 |
|
All
Other
|
|
|
2 |
|
|
|
1 |
|
|
|
5 |
|
|
|
6 |
|
Consolidated
total
|
|
$ |
2,485 |
|
|
$ |
2,468 |
|
|
$ |
4,578 |
|
|
$ |
4,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings from continuing operations before interest expense,
other income (charges), net
and income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
(49 |
) |
|
$ |
(51 |
) |
|
$ |
(160 |
) |
|
$ |
(126 |
) |
Film,
Photofinishing and Entertainment Group
|
|
|
54 |
|
|
|
121 |
|
|
|
80 |
|
|
|
151 |
|
Graphic
Communications Group
|
|
|
13 |
|
|
|
29 |
|
|
|
12 |
|
|
|
38 |
|
All
Other
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(8 |
) |
|
|
(10 |
) |
Total
of segments
|
|
|
14 |
|
|
|
94 |
|
|
|
(76 |
) |
|
|
53 |
|
Restructuring
(costs) curtailment gains and other
|
|
|
1 |
|
|
|
(316 |
) |
|
|
11 |
|
|
|
(467 |
) |
Rationalization
charges
|
|
|
(4 |
) |
|
|
- |
|
|
|
(5 |
) |
|
|
- |
|
Other
operating income (expenses), net
|
|
|
7 |
|
|
|
33 |
|
|
|
17 |
|
|
|
39 |
|
Legal
settlement
|
|
|
- |
|
|
|
- |
|
|
|
(10 |
) |
|
|
- |
|
Interest
expense
|
|
|
(26 |
) |
|
|
(31 |
) |
|
|
(54 |
) |
|
|
(56 |
) |
Other
income (charges), net
|
|
|
(5 |
) |
|
|
23 |
|
|
|
30 |
|
|
|
41 |
|
Consolidated
loss from continuing operations before
income taxes
|
|
$ |
(13 |
) |
|
$ |
(197 |
) |
|
$ |
(87 |
) |
|
$ |
(390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
As of
June 30,
2008
|
|
|
As of
December 31,
2007
|
|
|
|
|
|
|
|
|
Segment
total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
2,453 |
|
|
$ |
2,442 |
|
Film,
Photofinishing and Entertainment Group
|
|
|
3,640 |
|
|
|
3,778 |
|
Graphic
Communications Group
|
|
|
3,905 |
|
|
|
3,723 |
|
All
Other
|
|
|
9 |
|
|
|
17 |
|
Total
of segments
|
|
|
10,007 |
|
|
|
9,960 |
|
Cash
and marketable securities
|
|
|
2,335 |
|
|
|
2,976 |
|
Deferred
income tax assets
|
|
|
682 |
|
|
|
757 |
|
Other
corporate assets/reserves
|
|
|
8 |
|
|
|
(34 |
) |
Consolidated
total assets
|
|
$ |
13,032 |
|
|
$ |
13,659 |
|
|
|
|
|
|
|
|
|
|
NOTE
13: ACQUISITIONS
On April
4, 2008, the Company announced that it had completed the acquisition of
Design2Launch (D2L), a developer of collaborative end-to-end digital workflow
solutions for marketers, brand owners and creative teams. D2L is part
of the Company’s Graphic Communications Group segment.
On April
10, 2008, the Company announced that it had completed the acquisition of
Intermate A/S, a global supplier of remote monitoring and print connectivity
solutions used extensively in transactional printing. Intermate A/S
is part of the Company’s Graphic Communications Group segment.
The two
acquisitions had an aggregate purchase price of approximately $36 million and
were individually immaterial to the Company’s financial position as of June 30,
2008, and its results of operations and cash flows for the three and six months
ended June 30, 2008.
NOTE
14: DISCONTINUED OPERATIONS
The
significant components of earnings from discontinued operations, net of income
taxes, are as follows:
(in
millions)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from Health Group operations
|
|
$ |
- |
|
|
$ |
196 |
|
|
$ |
- |
|
|
$ |
754 |
|
Revenues
from HPA operations
|
|
|
- |
|
|
|
43 |
|
|
|
- |
|
|
|
82 |
|
Total
revenues from discontinued operations
|
|
$ |
- |
|
|
$ |
239 |
|
|
$ |
- |
|
|
$ |
836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income from Health Group operations
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
34 |
|
Pre-tax
gain on sale of Health Group segment
|
|
|
- |
|
|
|
980 |
|
|
|
- |
|
|
|
980 |
|
Pre-tax
income from HPA operations
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
5 |
|
Benefit
(provision) for income taxes related to
discontinued operations
|
|
|
295 |
|
|
|
(258 |
) |
|
|
295 |
|
|
|
(266 |
) |
All
other items, net
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
Earnings
from discontinued operations, net of income
taxes
|
|
$ |
295 |
|
|
$ |
729 |
|
|
$ |
294 |
|
|
$ |
753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund
In the
second quarter of 2008, the Company received a tax refund from the U.S. Internal
Revenue Service. The refund was related to the audit of certain
claims filed for tax years 1993-1998. A portion of the refund related
to past federal income taxes paid in relation to the 1994 sale of a subsidiary,
Sterling Winthrop Inc., which was reported in discontinued
operations. The refund had a positive impact on the Company’s
earnings from discontinued operations, net of income taxes, for the three and
six months ended June 30, 2008 of $295 million. Please refer to Note
5, “Income Taxes,” for further discussion of the tax refund.
Health
Group
On April
30, 2007, the Company sold all of the assets and business operations of its
Health Group segment to Onex Healthcare Holdings, Inc. (“Onex”) (now known as
Carestream Health, Inc.), a subsidiary of Onex Corporation, for up to $2.55
billion. The price was 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.
The
Company recognized a pre-tax gain of $980 million on the sale of the Health
Group segment in the second quarter of 2007. The pre-tax gain
excluded the following: up to $200 million of potential future payments related
to Onex's return on its investment as noted above; potential charges or credits
related to settling pension obligations with Onex in future periods; and any
adjustments that may be made in the future that are currently under
review.
The
Company was required to use a portion of the initial $2.35 billion cash proceeds
to fully repay its approximately $1.15 billion of Secured Term
Debt. In accordance with EITF No 87-24, “Allocation of Interest to
Discontinued Operations,” the Company allocated to discontinued operations the
interest expense related to the Secured Term Debt because it was required to be
repaid as a result of the sale. Interest expense allocated to
discontinued operations totaled $7 million and $30 million for the three and six
months ended June 30, 2007, respectively.
HPA
On
October 17, 2007, the shareholders of Hermes Precisa Pty. Ltd. (“HPA”), a
majority owned subsidiary of Kodak (Australasia) Pty. Ltd., a wholly owned
subsidiary of the Company, approved an agreement to sell all of the shares of
HPA to Salmat Limited. The sale was approved by the Federal Court of
Australia on October 18, 2007, and closed on November 2, 2007. Kodak
received $139 million in cash at closing for its shares of HPA, and recognized a
pre-tax gain on the sale of $123 million during the fourth quarter of
2007. HPA, a publicly traded Australian company, is a provider of
outsourced services in business communication and data processes and was
formerly reported within the Company’s Graphic Communications Group
segment.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Kodak
Operating Model and Reporting Structure
The
Company has three reportable segments: Consumer Digital Imaging Group (CDG),
Film, Photofinishing and Entertainment Group (FPEG), and Graphic Communications
Group (GCG). Within each of the Company’s reportable segments are
various components, or Strategic Product Groups (SPGs). Throughout
the remainder of this document, references to the segments' SPGs are indicated
in italics. The balance of the Company's continuing operations, which
individually and in the aggregate do not meet the criteria of a reportable
segment, are reported in All Other. A description of the segments is
as follows:
Consumer Digital Imaging Group
Segment (CDG): CDG encompasses digital cameras, digital
devices such as picture frames, snapshot printers and related media, kiosks and
related media, APEX drylab systems which were introduced in the second quarter
of 2008, consumer inkjet printing, Kodak Gallery, and imaging
sensors. The APEX drylab system provides an alternative to
traditional photofinishing processing at retail locations. CDG also
includes the licensing activities related to the Company's intellectual property
in digital imaging products.
Film, Photofinishing and
Entertainment Group Segment (FPEG): FPEG encompasses consumer
and professional film, one-time-use cameras, graphic arts film, aerial and
industrial film, and entertainment imaging products and
services. In addition, this segment also includes paper and
output systems, and photofinishing services. This segment provides
consumers, professionals, cinematographers, and other entertainment imaging
customers with film-related products and services and also provides graphic arts
film to the graphics industry.
Graphic
Communications Group Segment (GCG): GCG serves a
variety of customers in the creative, in-plant, data center, commercial
printing, packaging, newspaper and digital service bureau market segments with a
range of software, media and hardware products that provide customers with a
variety of solutions for prepress equipment, workflow software, digital and
traditional printing, document scanning, and multi-vendor
services. Products and related services include workflow software and
digital controller development; digital printing, which includes continuous
inkjet and electrophotographic products, including equipment, consumables and
service; prepress consumables; output devices; proofing hardware, media and
software; and document scanners.
All Other: All
Other is composed of Kodak's display business and other small, miscellaneous
businesses.
Effective
January 1, 2008, the Company changed its cost allocation methodologies related
to employee benefits and corporate expenses. For the three months
ended June 30, 2007, this change decreased cost of goods sold by $7 million,
increased selling, general, and administrative costs by $4 million, and
increased research and development costs by $3 million. For the six
months ended June 30, 2007, this change decreased cost of goods sold by $15
million, increased selling, general, and administrative costs by $8 million, and
increased research and development costs by $7 million.
Prior
period segment results have been revised to reflect the changes in segment
reporting structure and cost allocation methodologies outlined
above.
The
changes in cost allocation methodologies referred to above increased (decreased)
segment operating results for the three and six months ended June 30, 2007 as
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(in
millions)
|
|
June 30, 2007
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
(7 |
) |
|
$ |
(15 |
) |
Film,
Photofinishing and Entertainment Group
|
|
|
7 |
|
|
|
12 |
|
Graphic
Communications Group
|
|
|
(7 |
) |
|
|
(11 |
) |
All
Other
|
|
|
7 |
|
|
|
14 |
|
Consolidated
impact
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Net
Sales from Continuing Operations by Reportable Segment and All
Other
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Impact*
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Impact*
|
|
Consumer
Digital Imaging Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
$ |
401 |
|
|
$ |
379 |
|
|
|
+6 |
% |
|
|
0 |
% |
|
$ |
692 |
|
|
$ |
655 |
|
|
|
+6 |
% |
|
|
0 |
% |
Outside
the U.S.
|
|
|
355 |
|
|
|
268 |
|
|
|
+32 |
|
|
|
+10 |
|
|
|
618 |
|
|
|
454 |
|
|
|
+36 |
|
|
|
+11 |
|
Total
Consumer Digital Imaging
Group
|
|
|
756 |
|
|
|
647 |
|
|
|
+17 |
|
|
|
+4 |
|
|
|
1,310 |
|
|
|
1,109 |
|
|
|
+18 |
|
|
|
+5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film,
Photofinishing and Entertainment Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
|
237 |
|
|
|
286 |
|
|
|
-17 |
|
|
|
0 |
|
|
|
436 |
|
|
|
526 |
|
|
|
-17 |
|
|
|
0 |
|
Outside
the U.S.
|
|
|
610 |
|
|
|
694 |
|
|
|
-12 |
|
|
|
+6 |
|
|
|
1,135 |
|
|
|
1,284 |
|
|
|
-12 |
|
|
|
+6 |
|
Total
Film, Photofinishing and Entertainment
Group
|
|
|
847 |
|
|
|
980 |
|
|
|
-14 |
|
|
|
+5 |
|
|
|
1,571 |
|
|
|
1,810 |
|
|
|
-13 |
|
|
|
+4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphic
Communications Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
|
273 |
|
|
|
301 |
|
|
|
-9 |
|
|
|
0 |
|
|
|
540 |
|
|
|
579 |
|
|
|
-7 |
|
|
|
0 |
|
Outside
the U.S.
|
|
|
607 |
|
|
|
539 |
|
|
|
+13 |
|
|
|
+12 |
|
|
|
1,152 |
|
|
|
1,044 |
|
|
|
+10 |
|
|
|
+11 |
|
Total
Graphic Communications
Group
|
|
|
880 |
|
|
|
840 |
|
|
|
+5 |
|
|
|
+8 |
|
|
|
1,692 |
|
|
|
1,623 |
|
|
|
+4 |
|
|
|
+7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
|
2 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
Outside
the U.S.
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Total
All Other
|
|
|
2 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
|
913 |
|
|
|
967 |
|
|
|
-6 |
|
|
|
0 |
|
|
|
1,673 |
|
|
|
1,765 |
|
|
|
-5 |
|
|
|
0 |
|
Outside
the U.S.
|
|
|
1,572 |
|
|
|
1,501 |
|
|
|
+5 |
|
|
|
+9 |
|
|
|
2,905 |
|
|
|
2,783 |
|
|
|
+4 |
|
|
|
+9 |
|
Consolidated
Total
|
|
$ |
2,485 |
|
|
$ |
2,468 |
|
|
|
+1 |
% |
|
|
+6 |
% |
|
$ |
4,578 |
|
|
$ |
4,548 |
|
|
|
+1 |
% |
|
|
+5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Represents the percentage point change in segment net sales for the period that
is attributable to foreign currency
fluctuations
(Loss)
Earnings from Continuing Operations Before Interest Expense, Other Income
(Charges), Net and Income Taxes by Reportable Segment and All Other
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
(49 |
) |
|
$ |
(51 |
) |
|
|
+4 |
% |
|
$ |
(160 |
) |
|
$ |
(126 |
) |
|
|
-27 |
% |
Film,
Photofinishing and Entertainment Group
|
|
|
54 |
|
|
|
121 |
|
|
|
-55 |
% |
|
|
80 |
|
|
|
151 |
|
|
|
-47 |
% |
Graphic
Communications Group
|
|
|
13 |
|
|
|
29 |
|
|
|
-55 |
% |
|
|
12 |
|
|
|
38 |
|
|
|
-68 |
% |
All
Other
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
+20 |
% |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
+20 |
% |
Total
of segments
|
|
$ |
14 |
|
|
$ |
94 |
|
|
|
-85 |
% |
|
$ |
(76 |
) |
|
$ |
53 |
|
|
|
-243 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
(costs) curtailment gains and
other
|
|
|
1 |
|
|
|
(316 |
) |
|
|
|
|
|
|
11 |
|
|
|
(467 |
) |
|
|
|
|
Rationalization
charges
|
|
|
(4 |
) |
|
|
- |
|
|
|
|
|
|
|
(5 |
) |
|
|
- |
|
|
|
|
|
Other
operating income (expenses), net
|
|
|
7 |
|
|
|
33 |
|
|
|
|
|
|
|
17 |
|
|
|
39 |
|
|
|
|
|
Legal
settlement
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(10 |
) |
|
|
- |
|
|
|
|
|
Interest
expense
|
|
|
(26 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
(54 |
) |
|
|
(56 |
) |
|
|
|
|
Other
income (charges), net
|
|
|
(5 |
) |
|
|
23 |
|
|
|
|
|
|
|
30 |
|
|
|
41 |
|
|
|
|
|
Consolidated
loss from continuing operations before
income taxes
|
|
$ |
(13 |
) |
|
$ |
(197 |
) |
|
|
+93 |
% |
|
$ |
(87 |
) |
|
$ |
(390 |
) |
|
|
+78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
COMPARED WITH 2007
Second
Quarter
RESULTS
OF OPERATIONS – CONTINUING OPERATIONS
CONSOLIDATED
(in
millions, except per share data)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
Increase
/ (Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,485 |
|
|
|
|
|
$ |
2,468 |
|
|
|
|
|
$ |
17 |
|
|
|
1 |
% |
Cost
of goods sold
|
|
|
1,900 |
|
|
|
|
|
|
1,824 |
|
|
|
|
|
|
76 |
|
|
|
4 |
% |
Gross
profit
|
|
|
585 |
|
|
|
23.5 |
% |
|
|
644 |
|
|
|
26.1 |
% |
|
|
(59 |
) |
|
|
-9 |
% |
Selling,
general and administrative expenses
|
|
|
435 |
|
|
|
18 |
% |
|
|
435 |
|
|
|
18 |
% |
|
|
- |
|
|
|
0 |
% |
Research
and development costs
|
|
|
142 |
|
|
|
6 |
% |
|
|
136 |
|
|
|
6 |
% |
|
|
6 |
|
|
|
4 |
% |
Restructuring
costs (curtailment gains) and
other
|
|
|
(3 |
) |
|
|
|
|
|
|
295 |
|
|
|
|
|
|
|
(298 |
) |
|
|
101 |
% |
Other
operating expenses (income), net
|
|
|
(7 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
26 |
|
|
|
-79 |
% |
Earnings
(loss) from continuing operations
before interest
expense, other
income (charges), net and income
taxes
|
|
|
18 |
|
|
|
1 |
% |
|
|
(189 |
) |
|
|
-8 |
% |
|
|
207 |
|
|
|
110 |
% |
Interest
expense
|
|
|
26 |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
(5 |
) |
|
|
-16 |
% |
Other
income (charges), net
|
|
|
(5 |
) |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
(28 |
) |
|
|
-122 |
% |
Loss
from continuing operations
before income taxes
|
|
|
(13 |
) |
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
184 |
|
|
|
93 |
% |
Benefit
for income taxes
|
|
|
(213 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
(170 |
) |
|
|
395 |
% |
Earnings
(loss) from continuing
operations
|
|
|
200 |
|
|
|
8 |
% |
|
|
(154 |
) |
|
|
-6 |
% |
|
|
354 |
|
|
|
230 |
% |
Earnings
from discontinued operations,
net of income
taxes
|
|
|
295 |
|
|
|
|
|
|
|
729 |
|
|
|
|
|
|
|
(434 |
) |
|
|
-60 |
% |
NET
EARNINGS
|
|
$ |
495 |
|
|
|
|
|
|
$ |
575 |
|
|
|
|
|
|
$ |
(80 |
) |
|
|
-14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,485 |
|
|
|
0.7 |
% |
|
|
2.8 |
% |
|
|
-7.7 |
% |
|
|
5.6 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
23.5 |
% |
|
-2.6pp
|
|
|
|
n/a |
|
|
-8.2pp
|
|
|
1.6pp
|
|
|
4.0pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Revenues
For the
three months ended June 30, 2008, net sales increased compared with the same
period in 2007 due to favorable foreign exchange across all segments and volume
increases in CDG, partly offset by industry-related volume declines driven
largely by consumer film within FPEG and unfavorable price/mix within all three
segments. Digital cameras, digital picture frames, and Consumer Inkjet Systems
within CDG experienced significant increases in volume over the prior year
period. In addition, prepress digital plates within
GCG experienced volume increases. Unfavorable price/mix was primarily
driven by Consumer Inkjet
Systems and Digital
Capture and Devices within CDG, Traditional Photofinishing
within FPEG, and Digital Printing Solutions
and Document Imaging
within GCG.
Gross
Profit
Gross
profit declined in the second quarter of 2008 in both dollars and as a
percentage of sales, due largely to unfavorable price/mix across all segments
and the effects of declines in sales volume in Film Capture within FPEG,
partially offset by reductions in manufacturing and other costs within Consumer Inkjet Systems and
Digital Capture and
Devices within CDG, and favorable foreign exchange as a result of the
weak U.S. dollar. The improvements in manufacturing and other costs
were driven by the benefit of lower depreciation expense as a result of the
change in useful lives executed during the first quarter of 2008 as well as
lower restructuring-related charges, partially offset by increased silver,
aluminum, paper and petroleum-based raw material and other
costs.
In the
first quarter of 2008, the Company performed an updated analysis of expected
industry-wide declines in the traditional film and paper businesses and its
useful lives on related assets. This analysis indicated that the
assets will continue to be used in these businesses for a longer period than
previously anticipated. As a result, the Company revised the useful
lives of certain existing production machinery and equipment, and
manufacturing-related buildings effective January 1, 2008. These
assets, which were previously set to fully depreciate by mid-2010, are now being
depreciated with estimated useful lives ending from 2011 to 2015. The
change in useful lives reflects the Company’s estimate of future periods to be
benefited from the use of the property, plant, and equipment. As a
result of these changes, for 2008 the Company expects that depreciation expense
will be reduced by approximately $108 million, of which approximately $96
million will benefit pretax earnings from continuing operations. The
net impact of the change in estimate to earnings from continuing operations for
the three months ended June 30, 2008 is an increase of $27 million, or $.09 on a
fully-diluted earnings per share basis. Refer to Note 1, “Basis of
Presentation.”
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses (SG&A) were $435 million for
both the three months ended June 30, 2008 and 2007, as company-wide cost
reduction actions were offset by unfavorable foreign exchange, increased costs
associated with the Company’s participation in the drupa tradeshow in the second
quarter of 2008, and increased expenses to support Consumer Inkjet Systems’
go-to-market activities within CDG.
Restructuring
Costs (Curtailment Gains) and Other
These
costs, as well as the restructuring-related costs reported in cost of goods
sold, are discussed under "RESTRUCTURING COSTS (CURTAILMENT GAINS) AND OTHER"
section.
Other
Operating Expenses (Income), Net
The other
operating expenses (income), net category includes gains and losses on sales of
capital assets and businesses and certain asset impairment
charges. The year-over-year change in other operating expenses
(income), net was largely driven by higher gains on sales of capital assets and
businesses in the second quarter of 2007, as compared with 2008.
Other
Income (Charges), Net
The other
income (charges), net category primarily includes interest income, income and
losses from equity investments, and foreign exchange gains and
losses. The decrease in other income (charges), net was primarily
attributable to a decrease in interest income due to lower interest rates in the
second quarter of 2008 as compared with 2007, an increase in losses on foreign
exchange transactions as compared with the prior year quarter, and expense
related to support of an educational institution in the second quarter of
2008.
Income
Tax Benefit
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
Loss
from continuing operations before income taxes
|
|
$ |
(13 |
) |
|
$ |
(197 |
) |
Benefit
for income taxes
|
|
|
(213 |
) |
|
|
(43 |
) |
Effective
tax rate
|
|
|
1638.5 |
% |
|
|
21.8 |
% |
|
|
|
|
|
|
|
|
|
The
change in the Company’s effective tax rate from continuing operations is
primarily attributable to: (1) a $270 million benefit recognized during the
second quarter of 2008 for interest earned on a refund received from the U.S.
Internal Revenue Service, (2) changes in the amount of losses generated within
the U.S. and in certain jurisdictions outside the U.S. that were not benefited
due to previously established valuation allowances, (3) changes to the mix of
earnings from operations in certain lower-taxed jurisdictions outside the U.S.,
and (4) discrete tax
charges relating to the impacts from ongoing tax audits with respect to open tax
years.
CONSUMER
DIGITAL IMAGING GROUP
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
Increase
/ (Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
756 |
|
|
|
|
|
$ |
647 |
|
|
|
|
|
$ |
109 |
|
|
|
17 |
% |
Cost
of goods sold
|
|
|
610 |
|
|
|
|
|
|
504 |
|
|
|
|
|
|
106 |
|
|
|
21 |
% |
Gross
profit
|
|
|
146 |
|
|
|
19.3 |
% |
|
|
143 |
|
|
|
22.1 |
% |
|
|
3 |
|
|
|
2 |
% |
Selling,
general and administrative expenses
|
|
|
140 |
|
|
|
19 |
% |
|
|
133 |
|
|
|
21 |
% |
|
|
7 |
|
|
|
5 |
% |
Research
and development costs
|
|
|
55 |
|
|
|
7 |
% |
|
|
61 |
|
|
|
9 |
% |
|
|
(6 |
) |
|
|
-10 |
% |
Loss
from continuing operations before interest
expense, other income (charges), net
and income taxes
|
|
$ |
(49 |
) |
|
|
-6 |
% |
|
$ |
(51 |
) |
|
|
-8 |
% |
|
$ |
2 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
756 |
|
|
|
16.8 |
% |
|
|
32.6 |
% |
|
|
-20.1 |
% |
|
|
4.3 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
19.3 |
% |
|
-2.8pp
|
|
|
|
n/a |
|
|
-21.2pp
|
|
|
2.9pp
|
|
|
15.5pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Revenues
Net sales
in CDG increased 17% primarily due to increases in Digital Capture and Devices,
Consumer Inkjet Systems and Retail Systems
Solutions.
Net sales
of Digital Capture and
Devices, which includes consumer digital cameras, digital picture frames,
accessories, memory products, snapshot printers and related media, and
intellectual property royalties, increased 18% in the second quarter of 2008 as
compared with the prior year quarter, primarily reflecting higher volumes of
digital cameras and digital picture frames, and favorable foreign exchange,
partially offset by unfavorable price/mix.
Net
worldwide sales of Consumer
Inkjet Systems, which includes inkjet printers and related consumables,
increased significantly, reflecting volume improvements due to the launch of the
product line at the end of the first quarter of 2007 and the introduction of the
second generation of printers in the first quarter of 2008, partially offset by
unfavorable price/mix.
Net sales
of Retail Systems Solutions,
which includes kiosks and related media and APEX drylab systems,
increased 15% in the second quarter of 2008 reflecting higher equipment and
media volumes as well as favorable foreign exchange. Contributing to
these increases was the introduction of APEX drylab systems in the current
quarter.
Gross Profit
The
decrease in gross profit margin for CDG was primarily attributable to
unfavorable price/mix primarily within Consumer Inkjet Systems and
Digital Capture and
Devices, partially offset by reduced manufacturing and other costs
primarily within both of these SPGs, and favorable foreign exchange across all
SPGs.
The
current quarter results include approximately $31 million related to
intellectual property licensing arrangements under which the Company’s
continuing obligations are expected to be fulfilled by the end of
2008. The Company expects to secure other new licensing arrangements,
the timing and amounts of which are difficult to predict.
As of
June 30, 2008, the Company has approximately $430 million in deferred revenue
related to intellectual property licenses. Of this amount,
approximately $88 million is expected to be recognized in the Consolidated
Statement of Operations through the remainder of 2008. The remaining
portion of this deferred revenue is being recognized through 2015.
Selling,
General and Administrative Expenses
The
increase in SG&A expenses for CDG was primarily driven by increased expenses
to support Consumer Inkjet
Systems’ go-to-market activities, and unfavorable foreign
exchange.
Research
and Development Costs
The decrease in research and
development (R&D) costs for CDG was primarily attributable to increased
spending in 2007 due to the introduction of consumer inkjet printers, and
decreased spending in the current quarter as a result of cost reduction actions
taken throughout the segment.
FILM,
PHOTOFINISHING AND ENTERTAINMENT GROUP
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
Increase
/ (Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
847 |
|
|
|
|
|
$ |
980 |
|
|
|
|
|
$ |
(133 |
) |
|
|
-14 |
% |
Cost
of goods sold
|
|
|
662 |
|
|
|
|
|
|
706 |
|
|
|
|
|
|
(44 |
) |
|
|
-6 |
% |
Gross
profit
|
|
|
185 |
|
|
|
21.8 |
% |
|
|
274 |
|
|
|
28.0 |
% |
|
|
(89 |
) |
|
|
-32 |
% |
Selling,
general and administrative expenses
|
|
|
116 |
|
|
|
14 |
% |
|
|
137 |
|
|
|
14 |
% |
|
|
(21 |
) |
|
|
-15 |
% |
Research
and development costs
|
|
|
15 |
|
|
|
2 |
% |
|
|
16 |
|
|
|
2 |
% |
|
|
(1 |
) |
|
|
-6 |
% |
Earnings
from continuing operations before interest
expense, other income (charges), net
and income taxes
|
|
$ |
54 |
|
|
|
6 |
% |
|
$ |
121 |
|
|
|
12 |
% |
|
$ |
(67 |
) |
|
|
-55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
847 |
|
|
|
-13.6 |
% |
|
|
-14.0 |
% |
|
|
-4.1 |
% |
|
|
4.5 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
21.8 |
% |
|
-6.2pp
|
|
|
|
n/a |
|
|
-2.4pp
|
|
|
1.0pp
|
|
|
-4.8pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Revenues
Net sales
on FPEG decreased 14% primarily due to decreases in Film Capture and Traditional Photofinishing.
Net worldwide sales of Film
Capture and Traditional
Photofinishing decreased 37% and 15%, respectively, in the second quarter
of 2008 as compared with the second quarter of 2007, primarily reflecting
continuing declines in the consumer film industry, and unfavorable price/mix
within Traditional
Photofinishing, partially offset by favorable foreign
exchange.
Net
worldwide sales for Entertainment Imaging
increased 2% compared with the prior year, reflecting the impact of favorable
foreign exchange partially offset by declines in price/mix.
Gross
Profit
The
decrease in FPEG gross profit dollars is primarily a result of declines in sales
volume within Film Capture
as described above, unfavorable price/mix primarily within Traditional Photofinishing
and Entertainment
Imaging and increased manufacturing costs across all SPGs.
The
decrease in FPEG gross profit margin was primarily driven by increased
manufacturing and other costs across all SPGs, as well as unfavorable price/mix
within Traditional
Photofinishing and Entertainment Imaging.
Increased manufacturing and other costs were driven by increased costs for
silver, paper, and petroleum-based raw material and other
costs. These cost increases were partially offset by the benefit of
lower depreciation expense as a result of the change in useful lives executed
during the first quarter of this year. Refer to Note 1, “Basis of
Presentation.”
Selling,
General and Administrative Expenses
The
decline in SG&A expenses for FPEG was attributable to ongoing efforts to
achieve target cost models, partially offset by unfavorable foreign
exchange.
GRAPHIC
COMMUNICATIONS GROUP
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
Increase
/ (Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
880 |
|
|
|
|
|
$ |
840 |
|
|
|
|
|
$ |
40 |
|
|
|
5 |
% |
Cost
of goods sold
|
|
|
626 |
|
|
|
|
|
|
593 |
|
|
|
|
|
|
33 |
|
|
|
6 |
% |
Gross
profit
|
|
|
254 |
|
|
|
28.9 |
% |
|
|
247 |
|
|
|
29.4 |
% |
|
|
7 |
|
|
|
3 |
% |
Selling,
general and administrative expenses
|
|
|
176 |
|
|
|
20 |
% |
|
|
165 |
|
|
|
20 |
% |
|
|
11 |
|
|
|
7 |
% |
Research
and development costs
|
|
|
65 |
|
|
|
7 |
% |
|
|
53 |
|
|
|
6 |
% |
|
|
12 |
|
|
|
23 |
% |
Earnings
from continuing operations before
interest expense, other income (charges),
net and income taxes
|
|
$ |
13 |
|
|
|
1 |
% |
|
$ |
29 |
|
|
|
3 |
% |
|
$ |
(16 |
) |
|
|
-55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
880 |
|
|
|
4.8 |
% |
|
|
-0.4 |
% |
|
|
-2.6 |
% |
|
|
7.8 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
28.9 |
% |
|
-0.5pp
|
|
|
|
n/a |
|
|
-1.3pp
|
|
|
0.3pp
|
|
|
0.5pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Revenues
GCG net
sales for the quarter increased 5% as compared with the prior-year
quarter. Unfavorable price/mix in Digital Printing Solutions
and Document
Imaging was more than offset by favorable foreign
exchange. Volumes for GCG overall declined slightly.
Net
worldwide sales of Prepress
Solutions increased 9%, primarily driven by favorable foreign exchange
and a strong performance in digital plates, partially offset by volume declines
in analog plates and output devices.
Net
worldwide sales of Digital
Printing Solutions decreased 1%, primarily driven by unfavorable
price/mix and declining volumes in electrophotographic black and white products,
partially offset by favorable foreign exchange and an increase in digital
printing consumable volumes.
Net
worldwide sales of Document
Imaging increased 1%. Favorable foreign exchange and scanner
volume growth were largely offset by unfavorable price/mix in the scanner
business.
Net
worldwide sales of Enterprise
Solutions decreased 8%, primarily attributable to declines in volumes due
to seasonality in equipment and workflow sales associated with the drupa trade
show, which occurs once every four years, partially offset by favorable foreign
exchange.
Gross
Profit
The
slight decline in gross profit margin was primarily driven by unfavorable
price/mix, largely related to
Digital Printing Solutions and Document Imaging.
Favorable foreign exchange and
manufacturing productivity and other cost reductions were partially offset by
higher aluminum and other commodity costs.
Selling,
General and Administrative Expenses
The
increase in SG&A expenses for GCG was attributable to the increased costs
associated with the Company’s participation in the drupa tradeshow in the second
quarter of 2008, as well as unfavorable foreign exchange.
Research
and Development Costs
The
increase in R&D costs for GCG was attributable to new product development
within Enterprise Solutions,
and unfavorable foreign exchange.
RESULTS
OF OPERATIONS - DISCONTINUED OPERATIONS
For
discussion of the results of operations – discontinued operations please refer
to Note 14, “Discontinued Operations,” in the Notes to Financial
Statements.
Year
to Date
RESULTS
OF OPERATIONS – CONTINUING OPERATIONS
CONSOLIDATED
(in
millions, except per share data)
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
Increase
/ (Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
4,578 |
|
|
|
|
|
$ |
4,548 |
|
|
|
|
|
$ |
30 |
|
|
|
1 |
% |
Cost
of goods sold
|
|
|
3,569 |
|
|
|
|
|
|
3,476 |
|
|
|
|
|
|
93 |
|
|
|
3 |
% |
Gross
profit
|
|
|
1,009 |
|
|
|
22.0 |
% |
|
|
1,072 |
|
|
|
23.6 |
% |
|
|
(63 |
) |
|
|
-6 |
% |
Selling,
general and administrative expenses
|
|
|
820 |
|
|
|
18 |
% |
|
|
829 |
|
|
|
18 |
% |
|
|
(9 |
) |
|
|
-1 |
% |
Research
and development costs
|
|
|
282 |
|
|
|
6 |
% |
|
|
277 |
|
|
|
6 |
% |
|
|
5 |
|
|
|
2 |
% |
Restructuring
costs (curtailment gains) and
other
|
|
|
(13 |
) |
|
|
|
|
|
|
380 |
|
|
|
|
|
|
|
(393 |
) |
|
|
103 |
% |
Other
operating expenses (income), net
|
|
|
(17 |
) |
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
22 |
|
|
|
-56 |
% |
Loss
from continuing operations before
interest expense,
other income (charges),
net and income taxes
|
|
|
(63 |
) |
|
|
-1 |
% |
|
|
(375 |
) |
|
|
-8 |
% |
|
|
312 |
|
|
|
83 |
% |
Interest
expense
|
|
|
54 |
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
(2 |
) |
|
|
-4 |
% |
Other
income (charges), net
|
|
|
30 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
(11 |
) |
|
|
-27 |
% |
Loss
from continuing operations before
income taxes
|
|
|
(87 |
) |
|
|
|
|
|
|
(390 |
) |
|
|
|
|
|
|
303 |
|
|
|
78 |
% |
Benefit
for income taxes
|
|
|
(173 |
) |
|
|
|
|
|
|
(61 |
) |
|
|
|
|
|
|
(112 |
) |
|
|
184 |
% |
Earnings
(loss) from continuing operations
|
|
|
86 |
|
|
|
2 |
% |
|
|
(329 |
) |
|
|
-7 |
% |
|
|
415 |
|
|
|
126 |
% |
Earnings
from discontinued operations,
net of income taxes
|
|
|
294 |
|
|
|
|
|
|
|
753 |
|
|
|
|
|
|
|
(459 |
) |
|
|
-61 |
% |
NET
EARNINGS
|
|
$ |
380 |
|
|
|
|
|
|
$ |
424 |
|
|
|
|
|
|
$ |
(44 |
) |
|
|
-10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
4,578 |
|
|
|
0.7 |
% |
|
|
1.7 |
% |
|
|
-6.4 |
% |
|
|
5.4 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
22.0 |
% |
|
-1.6pp
|
|
|
|
n/a |
|
|
-6.7pp
|
|
|
1.3pp
|
|
|
3.8pp
|
|
Worldwide
Revenues
For the
six months ended June 30, 2008, net sales increased compared with the same
period in 2007 due to favorable foreign exchange across all segments and volume
increases in CDG, partly offset by industry-related volume declines driven
largely by consumer film within FPEG and unfavorable price/mix within all three
segments. Digital cameras, digital picture frames, and Consumer Inkjet Systems
within CDG experienced significant increases in volume over the prior year
period. In addition, within GCG, prepress digital plates experienced
volume increases. Unfavorable price/mix was primarily driven by Consumer Inkjet Systems and
Digital Capture and
Devices within CDG, Traditional Photofinishing
within FPEG, and Document Imaging within
GCG.
Gross
Profit
Gross
profit declined in the six months of 2008 in both dollars and as a percentage of
sales, due largely to unfavorable price/mix across all segments and the effects
of declines in sales volume in Film Capture within FPEG,
partially offset by reductions in manufacturing and other costs within Consumer Inkjet Systems
and Digital Capture and
Devices within CDG, and favorable foreign exchange as a result of the
weak U.S. dollar. The improvements in manufacturing and other costs
were driven by the benefit of lower depreciation expense as a result of the
change in useful lives executed during the first quarter of 2008, lower
restructuring-related charges, partially offset by increased silver, aluminum,
paper, and petroleum-based raw material and other costs. The net
impact of the change in useful lives is an increase in earnings from continuing
operations for the six months ended June 30, 2008 of $43 million, or $.15 on a
fully-diluted earnings per share basis. Refer to Note 1, “Basis of
Presentation.”
Selling,
General and Administrative Expenses
The
year-over-year decrease in consolidated SG&A was primarily attributable to
Company-wide cost reduction actions, partially offset by unfavorable foreign
exchange, increased expenses to support Consumer Inkjet Systems’
go-to-market activities, and costs associated with
the Company’s participation in the drupa tradeshow in the second quarter of
2008.
Restructuring
Costs (Curtailment Gains) and Other
These
costs, as well as the restructuring-related costs reported in cost of goods
sold, are discussed under "RESTRUCTURING COSTS (CURTAILMENT GAINS) AND OTHER"
section.
Other
Operating Expenses (Income), Net
The other
operating expenses (income), net category includes gains and losses on sales of
capital assets and businesses and certain asset impairment
charges. The year-over-year change in other operating expenses
(income), net was largely driven by higher gains on sales of capital assets and
businesses in the six months ended June 30, 2007, as compared with
2008.
Other
Income (Charges), Net
The other
income (charges), net category includes interest income, income and losses from
equity investments, and foreign exchange gains and losses. The
decrease in other income (charges), net was primarily attributable to expense
related to support of an educational institution in the second quarter of 2008,
partially offset by higher interest income due to higher year-over-year average
invested cash balances resulting from the proceeds on the sale of the Health
Group completed in the second quarter of 2007.
Income
Tax Benefit
(dollars
in millions)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
Loss
from continuing operations before income taxes
|
|
$ |
(87 |
) |
|
$ |
(390 |
) |
Benefit
for income taxes
|
|
|
(173 |
) |
|
|
(61 |
) |
Effective
tax rate
|
|
|
198.9 |
% |
|
|
15.6 |
% |
|
|
|
|
|
|
|
|
|
The
change in the Company’s effective tax rate from continuing operations is
primarily attributable to: (1) a $270 million benefit recognized during the
second quarter of 2008 for interest earned on a refund received from the U.S.
Internal Revenue Service, (2) changes in the amount of losses generated within
the U.S. and in certain jurisdictions outside the U.S. that were not benefited
due to previously established valuation allowances, (3) changes to the mix of
earnings from operations in certain lower-taxed jurisdictions outside the U.S.,
and (4) discrete tax
charges relating to the impacts from ongoing tax audits with respect to open tax
years.
CONSUMER
DIGITAL IMAGING GROUP
(dollars
in millions)
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
Increase
/ (Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$ |
1,310 |
|
|
|
|
|
$ |
1,109 |
|
|
|
|
|
$ |
201 |
|
|
|
18 |
% |
Cost
of goods sold
|
|
|
1,096 |
|
|
|
|
|
|
868 |
|
|
|
|
|
|
228 |
|
|
|
26 |
% |
Gross
profit
|
|
|
214 |
|
|
|
16.3 |
% |
|
|
241 |
|
|
|
21.7 |
% |
|
|
(27 |
) |
|
|
-11 |
% |
Selling,
general and administrative expenses
|
|
|
263 |
|
|
|
20 |
% |
|
|
244 |
|
|
|
22 |
% |
|
|
19 |
|
|
|
8 |
% |
Research
and development costs
|
|
|
111 |
|
|
|
8 |
% |
|
|
123 |
|
|
|
11 |
% |
|
|
(12 |
) |
|
|
-10 |
% |
Loss
from continuing operations before interest
expense, other income (charges), net
and income taxes
|
|
$ |
(160 |
) |
|
|
-12 |
% |
|
$ |
(126 |
) |
|
|
-11 |
% |
|
$ |
(34 |
) |
|
|
-27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,310 |
|
|
|
18.1 |
% |
|
|
29.4 |
% |
|
|
-15.9 |
% |
|
|
4.6 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
16.3 |
% |
|
-5.4pp
|
|
|
|
n/a |
|
|
-17.0pp
|
|
|
2.9pp
|
|
|
8.7pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Revenues
Net sales
in CDG increased 18% primarily due to increases in Digital Capture and Devices,
Consumer Inkjet Systems and Retail Systems
Solutions.
Net worldwide sales of Digital Capture and
Devices, which includes
consumer digital cameras, digital picture frames, accessories, memory products,
snapshot printers and related media, and intellectual property royalties,
increased 23% in the six months ended June 30, 2008 as compared with the prior
year period. This increase primarily reflects higher volumes for
digital cameras and digital picture frames, and favorable foreign exchange,
partially offset by unfavorable price/mix. Digital picture frames
were introduced at the end of the first quarter of 2007.
Net
worldwide sales of Consumer
Inkjet Systems, which includes inkjet printers and related consumables,
increased significantly, reflecting volume improvements due to the launch of the
product line at the end of the first quarter of 2007 and the introduction of the
second generation of printers in the first quarter of 2008, partially offset by
unfavorable price/mix.
Net
worldwide sales of Retail
Systems Solutions, which includes kiosks and related media and APEX
drylab systems, increased 8% in the first six months ended June 30, 2008 as
compared with the prior year period, reflecting higher equipment and media
volumes as well as favorable foreign exchange, partially offset by unfavorable
price/mix. Contributing to these increases was the introduction of
APEX drylab systems in the second quarter of 2008.
Gross Profit
The
decrease in gross profit margin for CDG was primarily attributable to
unfavorable price/mix within Consumer Inkjet Systems and
Digital Capture and
Devices, partially offset by reduced manufacturing and other costs for
those two SPGs , and favorable foreign exchange across all
SPGs.
The
current year-to-date results include approximately $63 million related to
intellectual property licensing arrangements under which the Company’s
continuing obligations are expected to be fulfilled by the end of
2008. The Company expects to secure other new licensing arrangements,
the timing and amounts of which are difficult to predict.
Selling,
General and Administrative Expenses
The
increase in SG&A expenses for CDG was primarily driven by increased expenses
to support Consumer Inkjet
Systems’ go-to-market activities, and unfavorable foreign
exchange.
Research
and Development Costs
The decrease in R&D costs for CDG
was primarily attributable to increased spending in 2007 due to the introduction
of consumer inkjet printers, and decreased spending in the six months ended June
30, 2008 as compared with the prior year period as a result of cost reduction
actions taken throughout the segment.
FILM,
PHOTOFINISHING AND ENTERTAINMENT GROUP
(dollars
in millions)
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
Increase
/ (Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$ |
1,571 |
|
|
|
|
|
$ |
1,810 |
|
|
|
|
|
$ |
(239 |
) |
|
|
-13 |
% |
Cost
of goods sold
|
|
|
1,240 |
|
|
|
|
|
|
1,363 |
|
|
|
|
|
|
(123 |
) |
|
|
-9 |
% |
Gross
profit
|
|
|
331 |
|
|
|
21.1 |
% |
|
|
447 |
|
|
|
24.7 |
% |
|
|
(116 |
) |
|
|
-26 |
% |
Selling,
general and administrative expenses
|
|
|
220 |
|
|
|
14 |
% |
|
|
262 |
|
|
|
14 |
% |
|
|
(42 |
) |
|
|
-16 |
% |
Research
and development costs
|
|
|
31 |
|
|
|
2 |
% |
|
|
34 |
|
|
|
2 |
% |
|
|
(3 |
) |
|
|
-9 |
% |
Earnings
from continuing operations before interest
expense, other income (charges), net
and income taxes
|
|
$ |
80 |
|
|
|
5 |
% |
|
$ |
151 |
|
|
|
8 |
% |
|
$ |
(71 |
) |
|
|
-47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$ |
1,571 |
|
|
|
-13.2 |
% |
|
|
-14.2 |
% |
|
|
-3.4 |
% |
|
|
4.4 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
21.1 |
% |
|
-3.6pp
|
|
|
|
n/a |
|
|
-3.2pp
|
|
|
0.8pp
|
|
|
-1.2pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Revenues
Net sales
in FPEG decreased 13% primarily due to Film Capture and Traditional
Photofinishing. Net worldwide sales of Film Capture and Traditional Photofinishing
decreased 34% and 15%, respectively, in the six months ended June 30, 2008 as
compared with the comparable period of 2007, primarily reflecting continuing
industry volume declines in both of these SPGs, and unfavorable price/mix within
Traditional
Photofinishing.
Net
worldwide sales for Entertainment Imaging
decreased 4% compared with the prior year period, primarily reflecting the
effects of the writers’ strike, which negatively impacted volumes in the first
quarter of 2008. This decrease was partially offset by favorable
foreign exchange.
Gross
Profit
The
decrease in FPEG gross profit dollars is primarily a result of declines in sales
volume within Film Capture
as described above, unfavorable price/mix primarily within Traditional Photofinishing
and Entertainment
Imaging and increased manufacturing costs across all SPGs.
The
decrease in FPEG gross profit margin was primarily driven by unfavorable
price/mix mainly within Traditional Photofinishing
and increased manufacturing and other costs within Entertainment Imaging
and Film
Capture, partially offset by favorable foreign exchange. Increased
manufacturing and other costs were driven by increased costs of silver, paper,
and petroleum-based raw material and other costs. These cost
increases were partially offset by the benefit of lower depreciation expense as
a result of the change in useful lives. Refer to Note 1, “Basis of
Presentation.”
Selling,
General and Administrative Expenses
The
decline in SG&A expenses for FPEG was attributable to ongoing efforts to
achieve target cost models, partially offset by unfavorable foreign
exchange.
GRAPHIC
COMMUNICATIONS GROUP
(dollars
in millions)
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
Increase
/ (Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$ |
1,692 |
|
|
|
|
|
$ |
1,623 |
|
|
|
|
|
$ |
69 |
|
|
|
4 |
% |
Cost
of goods sold
|
|
|
1,220 |
|
|
|
|
|
|
1,157 |
|
|
|
|
|
|
63 |
|
|
|
5 |
% |
Gross
profit
|
|
|
472 |
|
|
|
27.9 |
% |
|
|
466 |
|
|
|
28.7 |
% |
|
|
6 |
|
|
|
1 |
% |
Selling,
general and administrative expenses
|
|
|
333 |
|
|
|
20 |
% |
|
|
321 |
|
|
|
20 |
% |
|
|
12 |
|
|
|
4 |
% |
Research
and development costs
|
|
|
127 |
|
|
|
8 |
% |
|
|
107 |
|
|
|
7 |
% |
|
|
20 |
|
|
|
19 |
% |
Earnings
from continuing operations before interest
expense, other income (charges), net
and income taxes
|
|
$ |
12 |
|
|
|
1 |
% |
|
$ |
38 |
|
|
|
2 |
% |
|
$ |
(26 |
) |
|
|
-68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,692 |
|
|
|
4.3 |
% |
|
|
0.4 |
% |
|
|
-3.1 |
% |
|
|
7.0 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
27.9 |
% |
|
-0.8pp
|
|
|
|
n/a |
|
|
-1.1pp
|
|
|
-0.2pp
|
|
|
0.5pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Revenues
GCG net
sales for the six months ended June 30, 2008 increased 4% as compared with the
prior year period. Favorable foreign exchange was partially offset by
unfavorable price/mix that was largely driven by Document
Imaging.
Net
worldwide sales of Prepress
Solutions increased 6%, primarily driven by favorable foreign exchange
and a strong performance in digital plates, partially offset by volume declines
in analog plates and output devices.
Net
worldwide sales of Digital
Printing Solutions increased 1%. Favorable foreign exchange
and volume growth in electrophotographic color equipment and digital printing
consumables was largely offset by volume and price/mix declines attributable to
electrophotographic black and white equipment and inkjet equipment.
Net
worldwide sales of Document
Imaging increased 3% compared with the prior
year period. Scanner volume growth and favorable foreign exchange
were partially offset by unfavorable price/mix and decreased volumes in the
traditional product lines and service business.
Net
worldwide sales of Enterprise
Solutions were flat as compared with prior year. Volume
increases in production workflow and favorable foreign exchange were offset by
unfavorable price/mix.
Gross
Profit
The
slight decline in gross profit margin was primarily driven by unfavorable
price/mix, largely related to Document Imaging.
Manufacturing productivity and other cost reductions were partially offset
by higher aluminum and other commodity costs.
Selling,
General and Administrative Expenses
The
increase in SG&A expenses for GCG was attributable to increased costs
associated with the Company’s participation in the drupa tradeshow in the second
quarter of 2008, go-to-market investments, as well as unfavorable foreign
exchange.
Research
and Development Costs
The
increase in R&D costs for GCG was attributable to new product development
within Digital Printing
Solutions and
Enterprise Solutions, as well as unfavorable foreign
exchange.
RESULTS
OF OPERATIONS - DISCONTINUED OPERATIONS
For
discussion of the results of operations – discontinued operations please refer
to Note 14, “Discontinued Operations,” in the Notes to Financial
Statements.
RESTRUCTURING
COSTS (CURTAILMENT GAINS) AND OTHER
The
Company has substantially completed the cost reduction program that was
initially announced in January 2004, which was referred to as the “2004–2007
Restructuring Program.” This program was initially expected to result
in total charges of $1.3 billion to $1.7 billion over a three-year period ending
in 2006. Overall, Kodak's worldwide facility square footage was
expected to be reduced by approximately one-third, and approximately 12,000 to
15,000 positions worldwide were expected to be eliminated, primarily in global
manufacturing, selected traditional businesses, and corporate
administration.
As the
2004-2007 Restructuring Program underpinned a dramatic transformation of the
Company, the underlying business model necessarily evolved. This
required broader and more costly manufacturing infrastructure reductions
(primarily non-cash charges) than originally anticipated, as well as similarly
broader rationalization of selling, administrative and other business resources
(primarily severance charges). In addition, the divestiture of the
Health Group in the second quarter of 2007 further increased the amount of
reductions necessary to appropriately scale the corporate
infrastructure. As a result, the Company expanded the program and
increased the expected employment reductions to 28,000 to 30,000 positions and
total charges to $3.6 billion to $3.8 billion.
In the
third quarter of 2007, the Company revised its expectations for total employment
reductions to be in the range of 27,000 to 28,000 positions and total charges in
the range of $3.4 billion to $3.6 billion. These new estimates
reflected greater efficiencies in manufacturing infrastructure projects as well
as the Company’s ability to outsource or sell certain operations, which reduced
involuntary severance charges.
During
the second quarter ended June 30, 2008, the Company made cash payments of
approximately $30 million related to restructuring.
The net
credit of $1 million, after reversals, for the three months ended June 30, 2008,
includes $2 million of charges related to accelerated depreciation that were
reported in cost of goods sold in the accompanying Consolidated Statement of
Operations for the three months ended June 30, 2008. The remaining
costs were reported as restructuring costs (curtailment gains) and other in the
accompanying Consolidated Statement of Operations for the three months ended
June 30, 2008. The severance and exit costs require the outlay of
cash, while long-lived asset impairments, accelerated depreciation and inventory
write-downs represent non-cash items. The Company expects to incur
approximately $1 million of additional accelerated depreciation in the third
quarter of 2008 as a result of the initiatives already implemented under the
program.
The
cancellation of 50 position eliminations under the program in the second quarter
of 2008 resulted in a reduction to the expected future annual cash savings of
approximately $2 million, primarily related to R&D. Based on all
of the actions taken to date under the program, annual cost savings of
approximately $1,675 million, including annual cash savings of $1,600 million,
are expected to be generated, as compared with pre-program
levels. The Company began realizing these savings in the second
quarter of 2004, and expects the majority of the savings to be realized by the
end of 2008 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 annually by approximately $1,051
million, $472 million, and $152 million, respectively.
These
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.
Under
this program, on a life-to-date basis as of June 30, 2008, the Company has
recorded charges of $3,386 million, which were composed of severance, long-lived
asset impairments, exit costs, inventory write-downs and accelerated
depreciation of $1,383 million, $621 million, $389 million, $80 million and $937
million, respectively, less reversals of $24 million. The severance
costs related to the elimination of approximately 27,575 positions, including
approximately 6,750 photofinishing, 13,100 manufacturing, 1,525 research and
development and 6,200 administrative positions.
Modest
rationalization charges are expected in 2008 and beyond as the Company will
continue to explore and execute on cost efficiency opportunities with respect to
its sales, manufacturing and administrative infrastructure.
Cash
Flow Activity
Net cash
used in operating activities was $310 million for the six months ended June 30,
2008. The Company’s primary uses of cash in operating activities for
the six months ended June 30, 2008 include:
·
|
Net
decrease in liabilities resulting from payment of trade payables and other
accruals from year-end 2007 levels;
|
·
|
Increases
in inventories, driven by seasonal build and the introduction of new
products, and increased raw material
prices;
|
·
|
Contributions
(funded plans) or benefit payments (unfunded plans) totaling approximately
$145 million relating to major defined
benefit
pension and postretirement benefit
plans.
|
The
Company’s primary sources of cash provided by operating activities for the six
months ended June 30, 2008 include:
·
|
Receipt
of a tax refund from the U.S. Internal Revenue Service of $581 million,
which is composed of a refund of past federal income
taxes
paid of $306 million and $275 million of interest earned on the
refund. $300 million of the $306 million portion of the refund
related
to past federal income taxes paid is reflected in net cash provided by
(used in) discontinued operations, while the $275 million
of
interest earned on the refund plus $6 million for past federal income
taxes paid is reflected in net cash used in continuing
operations. See
Note 5, “Income Taxes”;
|
·
|
Earnings
from continuing operations, as adjusted for non-cash items of income and
expense and excluding the benefit related to the
tax
refund, which provided $166 million of operating cash;
and
|
· |
Lower
receivables due to seasonal collections. |
The
primary driver of net cash used in investing activities of $102 million for the
six months ended June 30, 2008 was capital additions of $123
million. The majority of the spending supports new products,
manufacturing productivity and quality improvements, infrastructure
improvements, equipment placements with customers, and ongoing environmental and
safety initiatives. Proceeds from sales of businesses and assets in
the period provided cash of $57 million, primarily attributable to the sale of
the Company’s share in Lucky Film Co., Ltd., in the first quarter of
2008.
During
the second quarter of 2008, the Company announced that it had completed the
acquisition of Design2Launch (D2L), a developer of collaborative end-to-end
digital workflow solutions for marketers, brand owners and creative
teams. D2L is part of the Company’s Graphic Communications Group
segment. Also during the second quarter of 2008, the Company
announced that it had completed the acquisition of Intermate A/S, a global
supplier of remote monitoring and print connectivity solutions used extensively
in transactional printing. Intermate A/S is part of the Company’s
Graphic Communications Group segment. The two acquisitions had an
aggregate purchase price of approximately $35 million (net of cash received in
the amount of $1 million).
Net cash
used in financing activities of $237 million was the result of a net decrease in
borrowings, including the scheduled repayment of $250 million of Medium Term
Notes in the second quarter of 2008.
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 14, 2008, 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, 2008. This dividend, which amounted
to $72 million, was paid on July 16, 2008.
In June
2008, the Company’s Board of Directors authorized a stock repurchase program
totaling up to $1.0 billion of the Company’s outstanding common
stock. No share repurchases were made under this program
as of June 30, 2008. See Note 11: “Shareholders’
Equity.”
The
Company plans to fund the majority of the stock repurchase program, which is
authorized through the end of 2009, with the tax refund received in the second
quarter of 2008 as discussed above. The remainder of the funding will
come from available cash on hand.
The
Company believes that its cash flow from operations, in addition to asset sales,
will be sufficient to cover its working capital and capital investment needs and
the funds required for future debt reduction, restructuring payments, dividend
payments, and employee benefit plan payments/contributions. 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
June 30, 2008, the Company and its subsidiaries, on a consolidated basis,
maintained $1,052 million in committed bank lines of credit and $519 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 consist 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 Term Facilities were
repaid during 2007 and are no longer available for new borrowings.
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 June 30, 2008, there was no debt outstanding and $138 million of letters of
credit issued under this facility.
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 Kodak
Graphic Communications Canada Company (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, 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 on a
rolling four-quarter basis of not greater than 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 3.00 to
1. As of June 30, 2008, the Company was in compliance with all
covenants under the Secured Credit Agreement.
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.
The
Company pays a commitment fee at an annual rate of 37.5 basis points on the
undrawn balance of the 5-Year Revolving Credit Facility at the Company’s current
Senior Secured credit rating of Ba1 and BB from Moody's Investor Services, Inc.
(Moody's) and Standard & Poor's Rating Services (S&P),
respectively. This fee amounts to $3.75 million annually, and is
reported as interest expense in the Company's Consolidated Statement of
Operations.
In
addition to the 5-Year Revolving Credit Facility, the Company has other
committed and uncommitted lines of credit as of June 30, 2008 totaling $52
million and $519 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 as of June 30, 2008 were $1 million
and $10 million, respectively. These outstanding borrowings are reflected
in the short-term borrowings in the accompanying Consolidated Statement of
Financial Position as of June 30, 2008.
As of
June 30, 2008, the Company had outstanding letters of credit totaling $141
million and surety bonds in the amount of $72 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 aggregate principal amount 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.
The
Company's $1.0 billion 5-year Committed Revolving Credit Facility, 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
|
Ba1
|
|
|
B1
|
|
|
|
B2
|
|
Stable
|
S&P
|
BB
|
|
|
B+
|
|
|
|
B
|
|
Stable
|
|
|
|
|
|
|
|
|
|
|
|
On April 23, 2008,
Standard & Poor’s (S&P) reconfirmed its ratings and changed its outlook
for the Company from negative to stable. S&P's ratings
reflect their concern about the Company's earnings and cash flow prospects in
light of the ongoing and rapid deterioration of its traditional consumer imaging
business, the unproven long-term profit potential of its consumer digital
imaging businesses, its still meaningful cash restructuring costs and its
leveraged financial profile. The stable outlook
reflects S&P's view that the Company has substantial liquid
resources, leverage is not likely to increase in the near term and discretionary
cash flow generation will improve this year because the Company will incur lower
cash restructuring payments than it did last year, making a near-term downgrade
unlikely.
Moody’s
ratings reflect their views regarding the Company’s significant challenges to
replace revenue and cash flow from declining legacy film businesses as well as
the Company’s market position, operating profit margin and free cash flow
volatility, asset returns (net of cash), financial leverage, and
liquidity. The stable rating outlook reflects Moody’s expectation
that the Company will continue to maintain liquidity and generate earnings
sufficient to withstand further secular declines of its legacy film businesses,
lack of substantial profitability in certain of its digital businesses and its
sizable new business start up costs.
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 $67 million at the current credit ratings. As of the
filing date of this Form 10-Q, the Company has not been requested to materially
increase its letters of credit or other financial support. Downgrades
in the Company’s credit rating or disruptions in the capital markets could
impact borrowing costs and the nature of its funding alternatives.
Off-Balance
Sheet Arrangements
The
Company guarantees debt and other obligations of certain
customers. The debt and other obligations are primarily due to banks
and leasing companies in connection with financing of customers' purchases of
product and equipment from the Company. As of June 30, 2008, the
following customer guarantees were in place:
(in
millions)
|
|
As
of June 30, 2008
|
|
|
|
Maximum Amount
|
|
|
Amount Outstanding
|
|
|
|
|
|
|
|
|
Customer
amounts due to banks and leasing companies
|
|
$ |
149 |
|
|
$ |
85 |
|
Other
third-parties
|
|
|
2 |
|
|
|
1 |
|
Total
guarantees of customer debt and other obligations
|
|
$ |
151 |
|
|
$ |
86 |
|
|
|
|
|
|
|
|
|
|
The
guarantees for the third party debt, presented in the table above, mature
between 2008 and 2013. 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 June 30, 2008, 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.
Eastman
Kodak Company (“EKC”) also guarantees debt owed to banks and other third parties
for some of its consolidated subsidiaries. The maximum amount
guaranteed is $574 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 $224 million. These guarantees expire in 2008
through 2013. 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 (the “Credit Facilities”) and other
obligations of the Company and its subsidiaries to the Credit Facilities’
lenders are guaranteed.
During
the fourth quarter of 2007, EKC issued a guarantee to Kodak Limited (the
“Subsidiary”) and the Trustees (the “Trustees”) of the Kodak Pension Plan of the
United Kingdom (the “Plan”). Under this arrangement, EKC guarantees
to the Subsidiary and the Trustees the ability of the Subsidiary, only to the
extent it becomes necessary to do so, to (1) make contributions to the Plan to
ensure sufficient assets exist to make plan benefit payments, and (2) make
contributions to the Plan such that it will achieve full funded status by the
funding valuation for the period ending December 31, 2015. The
guarantee expires upon the conclusion of the funding valuation for the period
ending December 31, 2015 whereby the Plan achieves full funded status or
earlier, in the event that the Plan achieves full funded status for two
consecutive funding valuation cycles which are typically performed at least
every three years. The limit of potential future payments is
dependent on the funding status of the Plan as it fluctuates over the term of
the guarantee. Currently, the Plan’s local funding valuation is
in process and expected to be completed by March 2009. As of June 30,
2008 management believes that performance under this guarantee by EKC is
unlikely given expected investment performance and cash available at the Plan’s
sponsoring company, Kodak Limited, should future cash contributions be
needed. The funding status of the Plan is included in pension and
other postretirement liabilities presented in the Consolidated Statement of
Financial Position.
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 June 30, 2008 was not material to the
Company’s financial position, results of operations or cash flows.
Other
Refer to
Note 6, “Commitments and Contingencies” in the Notes to Financial Statements for
discussion regarding the Company’s undiscounted liabilities for environmental
remediation costs, asset retirement obligations, and other commitments and
contingencies including legal matters.
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 the Company's expectations
regarding its revenue, cash flow, new licensing arrangements, cost of
environmental compliance, results of litigation, cost of retirement related
benefits, guarantees, depreciation, asset impairments, rationalization
charges, and savings from rationalization charges 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;
|
·
|
management
of the Company’s global shared services model including its outsourced
functions;
|
·
|
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 its products against the intellectual property challenges of
others;
|
·
|
execution
of intellectual property licensing programs and other
strategies;
|
·
|
integration
of the Company's businesses to SAP, the Company's enterprise system
software;
|
·
|
execution
of the Company’s planned process driven productivity
gains;
|
·
|
commercialization
of the Company’s breakthrough
technologies;
|
·
|
expansion
of the Company’s product portfolios in each of its business
segments;
|
·
|
ability
to accurately predict product, customer and geographic sales mix and
seasonal sales trends;
|
·
|
reduction
of inventories;
|
·
|
integration
of acquired businesses and consolidation of the Company's
subsidiary structure;
|
·
|
improvement
in manufacturing productivity and
techniques;
|
·
|
improvement
in working capital management and cash conversion
cycle;
|
·
|
continued
availability of essential components and services from concentrated
sources of supply;
|
·
|
implementation
of, and performance under, the Company’s share repurchase
program;
|
·
|
improvement
in supply chain efficiency and dependability;
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;
|
·
|
uncertainty
generated by recent volatility in the commercial paper, debt and equity
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;
|
·
|
pension
and other postretirement benefit cost factors such as actuarial
assumptions, market performance, and employee retirement
decisions;
|
·
|
general
economic, business, geo-political and regulatory conditions or
unanticipated environmental liabilities or
costs;
|
·
|
changes
in market growth;
|
·
|
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. The
Company does not utilize financial instruments for trading or other speculative
purposes.
Foreign
currency forward contracts are 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 are 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.
Using a
sensitivity analysis based on estimated fair value of open foreign currency
forward contracts using available forward rates, if the U.S. dollar had been 10%
stronger at June 30, 2008 and 2007, the fair value of open forward contracts
would have decreased $25 million and decreased $41 million,
respectively. Such losses would be substantially offset by gains from
the revaluation or settlement of the underlying positions hedged.
Using a
sensitivity analysis based on estimated fair value of open silver forward
contracts using available forward prices, if available forward silver prices had
been 10% lower at June 30, 2008 and 2007, the fair value of open forward
contracts would have decreased $3 million and $2 million,
respectively. 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. The majority of short-term and
long-term borrowings are in fixed-rate instruments. 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 59 basis
points) lower at June 30, 2008, the fair value of short-term and long-term
borrowings would have increased less than $1 million and $56 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 57 basis points) lower at June 30, 2007, the fair value of
short-term and long-term borrowings would have increased $2 million and $59
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 June 30, 2008 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. 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 effective.
Changes
in Internal Control over Financial Reporting
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.
Part II. Other Information
Item 1. Legal Proceedings
During
March 2005, the Company was contacted by members of the Division of Enforcement
of the SEC concerning the announced restatement of the Company's financial
statements for the full year and 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
continues to fully cooperate 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 July
9, 2008, the Company received a proposed Consent Order from the New York State
Department of Environmental Conservation ("DEC") resolving alleged violations of
the environmental quality programs at the Company's primary manufacturing
facility in Rochester, New York ("Kodak Park") which have occurred between
February 28, 2005 and June 30, 2008. These alleged violations include
violations of the solid and hazardous waste management regulations, the
facility-wide air permit and the waste water discharge permit; most were
discovered by Kodak and self-reported to the DEC. Kodak is evaluating
the allegations and the terms of the draft order which proposes a penalty of
$150,000.
The
Company and its subsidiaries are involved in various lawsuits, claims,
investigations and proceedings, including commercial, customs, employment,
environmental, and health and safety matters, which are being handled and
defended in the ordinary course of business. In addition, the Company
is subject to various assertions, claims, proceedings and requests for
indemnification concerning intellectual property, including patent infringement
suits involving technologies that are incorporated in a broad spectrum of the
Company’s products. These matters are in various stages of
investigation and litigation, and are being vigorously
defended. Although the Company does not expect that the outcome in
any of these matters, individually or collectively, will have a material adverse
effect on its financial condition or results of operations, litigation is
inherently unpredictable. Therefore, judgments could be rendered or
settlements entered, that could adversely affect the Company’s operating results
or cash flows in a particular period. The Company routinely assesses
all its litigation and threatened litigation as to the probability of ultimately
incurring a liability, and records its best estimate of the ultimate loss in
situations where it assesses the likelihood of loss as probable.
Item 4. Submission of Matters to a Vote of
Security Holders
The 2008
Annual Meeting of Shareholders of Eastman Kodak Company was held on May 14,
2008.
A total
of 248,013,242 of the Company’s shares were present or represented by proxy at
the meeting. This represented 86% of the Company’s shares
outstanding.
The
individuals named below were re-elected to a one-year term as
Directors:
Name
|
|
Votes
Received
|
|
|
Votes
Withheld
|
|
|
|
|
|
|
|
|
Richard
S. Braddock
|
|
|
243,561,211 |
|
|
|
4,452,031 |
|
Timothy
M. Donahue
|
|
|
220,578,466 |
|
|
|
27,434,776 |
|
Michael
J. Hawley
|
|
|
244,146,019 |
|
|
|
3,867,223 |
|
William
H. Hernandez
|
|
|
244,316,213 |
|
|
|
3,697,029 |
|
Douglas
R. Lebda
|
|
|
244,100,013 |
|
|
|
3,913,229 |
|
Debra
L. Lee
|
|
|
239,010,694 |
|
|
|
9,002,548 |
|
Delano
E. Lewis
|
|
|
244,215,235 |
|
|
|
3,798,007 |
|
William
G. Parrett
|
|
|
244,236,504 |
|
|
|
3,776,738 |
|
Antonio
M. Perez
|
|
|
243,945,328 |
|
|
|
4,067,914 |
|
Hector
de J. Ruiz
|
|
|
220,544,853 |
|
|
|
27,468,389 |
|
Dennis
F. Strigl
|
|
|
244,303,570 |
|
|
|
3,709,672 |
|
Laura
D'Andrea Tyson
|
|
|
219,836,562 |
|
|
|
28,176,680 |
|
|
|
|
|
|
|
|
|
|
The
election of PricewaterhouseCoopers LLP as independent accountants was ratified,
with 244,697,188 shares voting for, 1,367,806 shares voting against, 1,948,248
abstaining, and 0 non-votes.
The
shareholder proposal on majority voting requirements for director nominees
passed, with 131,726,714 shares voting for, 81,768,116 shares voting against,
5,806,661 shares abstaining, and 28,711,751 non-votes.
(a) Exhibits
required as part of this report are listed in the index appearing on page
51.
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:July
31,
2008
/s/ Diane E. Wilfong
Diane
E. Wilfong
Chief
Accounting Officer and Controller
Eastman
Kodak Company and Subsidiary Companies
Exhibit
Number