ek10qmarch2008.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 March 31, 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
April 25, 2008
|
Common
Stock, $2.50 par value
|
288,213,714
|
|
|
|
|
Eastman
Kodak Company
Form
10-Q
March
31, 2008
Table
of Contents
|
|
Page
|
|
Part I. - Financial
Information
|
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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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23
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32
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37
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38
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38
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38
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39
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40
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Part I. Financial Information
Item 1. Financial Statements
EASTMAN
KODAK COMPANY
(in
millions, except per share data)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,093 |
|
|
$ |
2,080 |
|
Cost
of goods sold
|
|
|
1,669 |
|
|
|
1,652 |
|
Gross
profit
|
|
|
424 |
|
|
|
428 |
|
Selling,
general and administrative expenses
|
|
|
385 |
|
|
|
394 |
|
Research
and development costs
|
|
|
140 |
|
|
|
141 |
|
Restructuring
costs (curtailment gains) and other
|
|
|
(10 |
) |
|
|
85 |
|
Other
operating (income) expenses, net
|
|
|
(10 |
) |
|
|
(6 |
) |
Loss
from continuing operations before interest, other income
(charges), net
and income taxes
|
|
|
(81 |
) |
|
|
(186 |
) |
Interest
expense
|
|
|
28 |
|
|
|
25 |
|
Other
income (charges), net
|
|
|
35 |
|
|
|
18 |
|
Loss
from continuing operations before income taxes
|
|
|
(74 |
) |
|
|
(193 |
) |
Provision
(benefit) for income taxes
|
|
|
40 |
|
|
|
(18 |
) |
Loss
from continuing operations
|
|
|
(114 |
) |
|
|
(175 |
) |
(Loss)
earnings from discontinued operations, net of income taxes
|
|
|
(1 |
) |
|
|
24 |
|
NET
LOSS
|
|
$ |
(115 |
) |
|
$ |
(151 |
) |
|
|
|
|
|
|
|
|
|
Basic
and diluted net (loss) earnings per share:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.40 |
) |
|
$ |
(0.61 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
0.08 |
|
Total
|
|
$ |
(0.40 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
Number
of common shares used in basic net (loss) earnings per
share
|
|
|
288.1 |
|
|
|
287.3 |
|
Incremental
shares from assumed conversion of options
|
|
|
- |
|
|
|
- |
|
Number
of common shares used in diluted net (loss) earnings per
share
|
|
|
288.1 |
|
|
|
287.3 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
EASTMAN
KODAK COMPANY
(in
millions)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of period
|
|
$ |
6,474 |
|
|
$ |
5,967 |
|
Net
loss
|
|
|
(115 |
) |
|
|
(151 |
) |
Loss
from issuance of treasury stock
|
|
|
(11 |
) |
|
|
(6 |
) |
Retained
earnings at end of period
|
|
$ |
6,348 |
|
|
$ |
5,810 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
EASTMAN
KODAK COMPANY
(in
millions)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,203 |
|
|
$ |
2,947 |
|
Receivables,
net
|
|
|
1,760 |
|
|
|
1,939 |
|
Inventories,
net
|
|
|
1,133 |
|
|
|
943 |
|
Deferred
income taxes
|
|
|
124 |
|
|
|
120 |
|
Other
current assets
|
|
|
129 |
|
|
|
104 |
|
Total
current assets
|
|
|
5,349 |
|
|
|
6,053 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,755 |
|
|
|
1,811 |
|
Goodwill
|
|
|
1,691 |
|
|
|
1,657 |
|
Other
long-term assets
|
|
|
4,069 |
|
|
|
4,138 |
|
TOTAL
ASSETS
|
|
$ |
12,864 |
|
|
$ |
13,659 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and other current
|
|
|
|
|
|
|
|
|
liabilities
|
|
$ |
3,031 |
|
|
$ |
3,794 |
|
Short-term
borrowings
|
|
|
314 |
|
|
|
308 |
|
Accrued
income and other taxes
|
|
|
323 |
|
|
|
344 |
|
Total
current liabilities
|
|
|
3,668 |
|
|
|
4,446 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
1,292 |
|
|
|
1,289 |
|
Pension
and other postretirement liabilities
|
|
|
3,347 |
|
|
|
3,444 |
|
Other
long-term liabilities
|
|
|
1,457 |
|
|
|
1,451 |
|
Total
liabilities
|
|
|
9,764 |
|
|
|
10,630 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 6)
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, $2.50 par value
|
|
|
978 |
|
|
|
978 |
|
Additional
paid in capital
|
|
|
890 |
|
|
|
889 |
|
Retained
earnings
|
|
|
6,348 |
|
|
|
6,474 |
|
Accumulated
other comprehensive income
|
|
|
632 |
|
|
|
452 |
|
|
|
|
8,848 |
|
|
|
8,793 |
|
Less:
Treasury stock, at cost
|
|
|
5,748 |
|
|
|
5,764 |
|
Total
shareholders’ equity
|
|
|
3,100 |
|
|
|
3,029 |
|
TOTAL
LIABILITIES ANDSHAREHOLDERS’ EQUITY
|
|
$ |
12,864 |
|
|
$ |
13,659 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
EASTMAN
KODAK COMPANY
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(115 |
) |
|
$ |
(151 |
) |
Adjustments
to reconcile to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss
(earnings) from discontinued operations, net of income
taxes
|
|
|
1 |
|
|
|
(24 |
) |
Depreciation
and amortization
|
|
|
127 |
|
|
|
248 |
|
Gain
on sales of businesses/assets
|
|
|
(3 |
) |
|
|
(8 |
) |
Non-cash
restructuring costs, asset impairments and other charges
|
|
|
1 |
|
|
|
11 |
|
Provision
for deferred income taxes
|
|
|
33 |
|
|
|
14 |
|
Decrease
in receivables
|
|
|
198 |
|
|
|
274 |
|
Increase
in inventories
|
|
|
(177 |
) |
|
|
(152 |
) |
Decrease
in liabilities excluding borrowings
|
|
|
(858 |
) |
|
|
(609 |
) |
Other
items, net
|
|
|
26 |
|
|
|
- |
|
Total
adjustments
|
|
|
(652 |
) |
|
|
(246 |
) |
Net
cash used in continuing operations
|
|
|
(767 |
) |
|
|
(397 |
) |
Net
cash (used in) provided by discontinued operations
|
|
|
(1 |
) |
|
|
43 |
|
Net
cash used in operating activities
|
|
|
(768 |
) |
|
|
(354 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to properties
|
|
|
(52 |
) |
|
|
(66 |
) |
Net
proceeds from sales of businesses/assets
|
|
|
55 |
|
|
|
10 |
|
Acquisitions,
net of cash acquired
|
|
|
- |
|
|
|
(2 |
) |
Marketable
securities - sales
|
|
|
40 |
|
|
|
36 |
|
Marketable
securities - purchases
|
|
|
(43 |
) |
|
|
(41 |
) |
Net
cash used in continuing operations
|
|
|
- |
|
|
|
(63 |
) |
Net
cash used in discontinued operations
|
|
|
- |
|
|
|
(11 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
(74 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from other borrowings
|
|
|
26 |
|
|
|
6 |
|
Repayment
of other borrowings
|
|
|
(15 |
) |
|
|
(25 |
) |
Net
cash provided by (used in) financing activities
|
|
|
11 |
|
|
|
(19 |
) |
Effect
of exchange rate changes on cash
|
|
|
13 |
|
|
|
4 |
|
Net
decrease in cash and cash equivalents
|
|
|
(744 |
) |
|
|
(443 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
2,947 |
|
|
|
1,469 |
|
Cash
and cash equivalents, end of period
|
|
$ |
2,203 |
|
|
$ |
1,026 |
|
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
13, “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 March 31, 2008 was
a reduction in depreciation expense of $28 million, $16 million of which has
been recognized in cost of goods sold and is a benefit to loss from continuing
operations, and $12 million of which is capitalized as a reduction in
inventories at March 31, 2008. The net impact of this change is a
decrease in fully-diluted loss per share of $.06.
RECENT
ACCOUNTING PRONOUNCEMENTS
FASB
Statement No. 157
In
September 2006, the FASB issued 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 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 from the adoption of SFAS No.
157. 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
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 March 31, 2008:
|
|
Fair
Value Measurements at Reporting Date Using
|
|
(in
millions)
|
|
As
of
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
Description
|
|
March 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
- |
|
Foreign
currency forward contracts
|
|
|
29 |
|
|
|
- |
|
|
|
29 |
|
Silver
forward contracts
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
Total
|
|
$ |
32 |
|
|
$ |
1 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
$ |
(76 |
) |
|
$ |
- |
|
|
$ |
(76 |
) |
Silver
forward contracts
|
|
|
(2 |
) |
|
|
- |
|
|
|
(2 |
) |
Total
|
|
$ |
(78 |
) |
|
$ |
- |
|
|
$ |
(78 |
) |
The
Company values its available-for-sale securities using quoted prices in active
markets. 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.
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
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$ |
1,472 |
|
|
$ |
1,697 |
|
Miscellaneous
receivables
|
|
|
288 |
|
|
|
242 |
|
Total
(net of allowances of $110 and $114 as of March
31, 2008 and December 31, 2007, respectively)
|
|
$ |
1,760 |
|
|
$ |
1,939 |
|
Of the
total trade receivable amounts of $1,472 million and $1,697 million as of March
31, 2008 and December 31, 2007, respectively, approximately $191 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)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
708 |
|
|
$ |
537 |
|
Work
in process
|
|
|
250 |
|
|
|
235 |
|
Raw
materials
|
|
|
175 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,133 |
|
|
$ |
943 |
|
NOTE
4: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
was $1,691 million and $1,657 million at March 31, 2008 and December 31, 2007,
respectively. The changes in the carrying amount of goodwill by
reportable segment for the three months ended March 31, 2008 were as
follows:
(in
millions)
|
|
As
of March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Film,
|
|
|
|
|
|
|
|
|
|
Digital
|
|
|
Photofinishing
|
|
|
Graphic
|
|
|
|
|
|
|
Imaging
|
|
|
and
Entertainment
|
|
|
Communications
|
|
|
Consolidated
|
|
|
|
Group
|
|
|
Group
|
|
|
Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
$ |
204 |
|
|
$ |
601 |
|
|
$ |
852 |
|
|
$ |
1,657 |
|
Currency
translation adjustments
|
|
|
2 |
|
|
|
18 |
|
|
|
14 |
|
|
|
34 |
|
Balance
as of March 31, 2008
|
|
$ |
206 |
|
|
$ |
619 |
|
|
$ |
866 |
|
|
$ |
1,691 |
|
Due to
the realignment of the Kodak operating model and change in reporting structure,
as described in Note 13, “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 March 31, 2008 and December 31, 2007 were as follows:
(in
millions)
|
|
As
of March 31, 2008
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
|
Weighted-Average
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Amortization
Period
|
Technology-based
|
|
$ |
328 |
|
|
$ |
178 |
|
|
$ |
150 |
|
7
years
|
Customer-related
|
|
|
289 |
|
|
|
138 |
|
|
|
151 |
|
10
years
|
Other
|
|
|
58 |
|
|
|
38 |
|
|
|
20 |
|
9
years
|
Total
|
|
$ |
675 |
|
|
$ |
354 |
|
|
$ |
321 |
|
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 first quarter of 2008, the Company sold its stake in Lucky Film Co., Ltd.
including its rights under a manufacturing exclusivity agreement. An
intangible asset related to the manufacturing exclusivity agreement was carried
on the Company’s balance sheet as an other intangible asset with a net book
value of approximately $25 million prior to the transaction.
Amortization
expense related to purchased intangible assets for the three months ended March
31, 2008 and 2007 was $20 million and $28 million, respectively.
Estimated
future amortization expense related to purchased intangible assets as of March
31, 2008 is as follows (in millions):
2008
|
|
$ |
60 |
|
2009
|
|
|
75 |
|
2010
|
|
|
64 |
|
2011
|
|
|
41 |
|
2012
|
|
|
26 |
|
2013 and
thereafter
|
|
|
55 |
|
Total
|
|
$ |
321 |
|
NOTE
5: INCOME TAXES
The
Company’s income tax provision (benefit) and effective tax rate were as
follows:
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Loss
from continuing operations before income taxes
|
|
$ |
(74 |
) |
|
$ |
(193 |
) |
Provision
(benefit) for income taxes
|
|
|
40 |
|
|
|
(18 |
) |
Effective
tax rate
|
|
|
(54.1 |
)% |
|
|
9.3 |
% |
Benefit
for income taxes @ 35%
|
|
$ |
(26 |
) |
|
$ |
(68 |
) |
Difference
between tax at effective vs statutory rate
|
|
$ |
66 |
|
|
$ |
50 |
|
For the
three months ended March 31, 2008, the difference between the Company’s recorded
provision 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., which were not benefited, resulting from previously
established valuation allowances, (2) the mix of earnings from operations
in certain lower-taxed jurisdictions outside the U.S., and (3) discrete tax
charges relating to the impacts from ongoing tax audits with respect to open tax
years.
For the
three months ended March 31, 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., which were not benefited, resulting from previously
established 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 the Company reaching a settlement with a taxing authority in a location
outside the U.S.
As
previously reported, on October 3, 2006, the Company filed a claim for a federal
tax refund related to a 1994 loss recognized on the sale of a subsidiary’s stock
that was disallowed at that time under Internal Revenue Service (IRS)
regulations. Since that time, the IRS has issued new regulations that
serve as the basis for this refund claim. As of March 31, 2008, the
claim had been brought to the Joint Committee of Taxation and is pending further
review. Based on information available at this time, and in
accordance with FIN 48, the Company has not recorded a tax benefit due to the
uncertainty of the resolution. Successful resolution of the claim
could have a significant impact on the Company’s effective tax rate and
operating results.
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)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Kodak
Park site, Rochester, NY
|
|
$ |
65 |
|
|
$ |
63 |
|
Other
operating sites
|
|
|
19 |
|
|
|
19 |
|
Former
operating sites
|
|
|
23 |
|
|
|
23 |
|
Sites
associated with the non-imaging health business sold in
1994
|
|
|
20 |
|
|
|
20 |
|
Total
|
|
$ |
127 |
|
|
$ |
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 many
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 2137-01, "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 seven 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
March 31, 2008 was as follows:
(in
millions)
Asset
retirement obligations as of December 31, 2007
|
|
$ |
64 |
|
Liabilities
incurred in the current period
|
|
|
3 |
|
Liabilities
settled in the current period
|
|
|
(6 |
) |
Accretion
expense
|
|
|
- |
|
Revisions
in estimated cash flows
|
|
|
3 |
|
Foreign
exchange
|
|
|
1 |
|
Asset
retirement obligations as of March 31, 2008
|
|
$ |
65 |
|
Other
Commitments and Contingencies
As of
March 31, 2008, the Company had outstanding letters of credit totaling $140
million and surety bonds in the amount of $82 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 the Company’s 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.
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 March 31, 2008, the
following customer guarantees were in place:
(in
millions)
|
|
As
of March 31, 2008
|
|
|
|
Maximum Amount
|
|
|
Amount Outstanding
|
|
|
|
|
|
|
|
|
Customer
amounts due to banks and leasing companies
|
|
$ |
148 |
|
|
$ |
100 |
|
Other
third-parties
|
|
|
2 |
|
|
|
- |
|
Total
guarantees of customer debt and other obligations
|
|
$ |
150 |
|
|
$ |
100 |
|
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.
The
Company also guarantees debt owed to banks and other third parties for some of
its consolidated subsidiaries. The maximum amount guaranteed is $613
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
$223 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 and other obligations of the Company and its
subsidiaries to the $2.7 billion Secured Credit Facilities lenders are
guaranteed.
During
the fourth quarter of 2007, the Eastman Kodak Company issued a guarantee to
Kodak Limited (the “Subsidiary”) and the Trustees of the Kodak Pension Plan of
the United Kingdom (the “Trustees”). Under this arrangement, the
Company 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. However, as of March
31, 2008 management believes that performance under this guarantee by Eastman
Kodak Company is unlikely. 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 March 31, 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
|
|
|
(5 |
) |
2008
warranty provisions
|
|
|
4 |
|
Accrued
warranty obligations as of March 31, 2008
|
|
$ |
43 |
|
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 three months ended March 31, 2008 amounted to $44 million. The
change in the Company's deferred revenue balance in relation to these extended
warranty and maintenance arrangements from December 31, 2007 to March
31, 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
|
|
|
95 |
|
Recognition
of extended warranty and maintenance arrangement revenue in
2008
|
|
|
(82 |
) |
Deferred
revenue as of March 31, 2008
|
|
$ |
161 |
|
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 first quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Balance
|
|
|
|
December
31,
|
|
|
Costs
|
|
|
Cash
|
|
|
and
|
|
|
March
31,
|
|
(in
millions)
|
|
2007
|
|
|
Incurred
(1)
|
|
|
Payments
(2)
|
|
|
Reclasses
(3)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and curtailments
|
|
$ |
129 |
|
|
$ |
(12 |
) |
|
$ |
(44 |
) |
|
$ |
7 |
|
|
$ |
80 |
|
Exit
costs
|
|
|
30 |
|
|
|
2 |
|
|
|
(6 |
) |
|
|
- |
|
|
|
26 |
|
Total
reserve
|
|
$ |
159 |
|
|
$ |
(10 |
) |
|
$ |
(50 |
) |
|
$ |
7 |
|
|
$ |
106 |
|
(1)
|
The
costs incurred include a $10 million curtailment gain, a $2 million net
credit related to severance true-ups, and $2 million in
exit costs.
|
(2)
|
During
the three months ended March 31, 2008, the Company made cash payments of
approximately $60 million related to restructuring. Of this
amount, $50 million was paid out of restructuring liabilities, while $10
million was paid out of pension and other postretirement
liabilities.
|
(3)
|
The
Other Adjustments and Reclasses of $7 million represent adjustments to the
restructuring reserve including (1) net curtailment, settlement and
special termination gains of $3 million, (2) costs associated with ongoing
rationalization activities of $1 million (3) long-term liabilities
associated with lease exit costs of $(1) million, and (4) foreign currency
translation of $4 million.
|
The net
credit of $10 million was reported as restructuring costs (curtailment gains)
and other in the accompanying Consolidated Statement of Operations for the three
months ended March 31, 2008. This credit consisted mainly
of net curtailment gains which are primarily non-cash items.
The
Company implemented certain actions related to the 2004-2007 Restructuring
Program during the first quarter of 2008. As a result of these
actions, the Company recorded a net credit of $10 million in the first quarter
of 2008, which was composed of net curtailment gains of $10 million, severance
credits of $2 million, and exit costs of $2 million. The $2 million
of severance credits related to the cancellation of 25 position eliminations due
to staffing realignment. These positions were primarily related to
R&D in the U.S.
Under
this program, on a life-to-date basis as of March 31, 2008, the Company has
recorded charges of $3,387 million, which was composed of severance, long-lived
asset impairments, exit costs, inventory write-downs and accelerated
depreciation of $1,386 million, $620 million, $387 million, $80 million and $935
million, respectively, less reversals of $(21) million. The severance
costs related to the elimination of approximately 27,625 positions, including
approximately 6,750 photofinishing, 13,125 manufacturing, 1,550 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 March 31, 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 |
|
|
$ |
- |
|
|
$ |
- |
|
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.
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 months ended March 31 are as
follows:
|
|
Three
Months Ended March 31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
14 |
|
|
$ |
6 |
|
|
$ |
21 |
|
|
$ |
7 |
|
Interest
cost
|
|
|
77 |
|
|
|
57 |
|
|
|
80 |
|
|
|
48 |
|
Expected
return on plan assets
|
|
|
(136 |
) |
|
|
(68 |
) |
|
|
(136 |
) |
|
|
(61 |
) |
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
net actuarial loss
|
|
|
1 |
|
|
|
16 |
|
|
|
2 |
|
|
|
19 |
|
Pension
(income) expense before special
termination benefits and
curtailments
|
|
|
(44 |
) |
|
|
11 |
|
|
|
(33 |
) |
|
|
13 |
|
Special
termination benefits
|
|
|
5 |
|
|
|
1 |
|
|
|
13 |
|
|
|
5 |
|
Curtailment
(gains) losses
|
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Net
pension (income) expense
|
|
|
(48 |
) |
|
|
12 |
|
|
|
(20 |
) |
|
|
19 |
|
Other
plans including unfunded plans
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
1 |
|
Total
net pension (income) expense from
continuing operations
|
|
$ |
(48 |
) |
|
$ |
14 |
|
|
$ |
(20 |
) |
|
$ |
20 |
|
For the
three months ended March 31, 2008 and 2007, $6 million and $18 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 $23 million relating to its major U.S. and non-U.S.
defined benefit pension plans in the first 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 $65 million.
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
|
|
|
|
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest
cost
|
|
|
39 |
|
|
|
41 |
|
Amortization
of:
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
(10 |
) |
|
|
(11 |
) |
Actuarial
loss
|
|
|
6 |
|
|
|
15 |
|
Other
postretirement benefit cost
before curtailments and
settlements
|
|
|
37 |
|
|
|
47 |
|
Curtailment
gain
|
|
|
(5 |
) |
|
|
- |
|
Settlement
gain
|
|
|
(2 |
) |
|
|
- |
|
Total
net postretirement benefit
cost
|
|
$ |
30 |
|
|
$ |
47 |
|
The
Company paid benefits totaling approximately $54 million relating to its U.S.,
United Kingdom and Canada postretirement benefit plans in the first quarter of
2008. The Company expects to pay benefits of $154 million for these
postretirement plans for the balance of 2008.
Certain
of the Company's retirement plans experienced remeasurement events in the first
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 $67 million. As a result of
the Company’s restructuring actions, the Company recognized net curtailment
gains of $10 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 March 31, 2008.
NOTE
10: EARNINGS PER SHARE
As a
result of the net losses from continuing operations presented for the three
months ended March 31, 2008 and 2007, the Company calculated the diluted net
loss per share using weighted average basic shares outstanding for the
respective periods, as utilizing diluted shares would be anti-dilutive to loss
per share. Therefore, outstanding options to purchase 30.1 million
and 32.2 million shares of the Company's common stock were not included in the
computation of diluted net loss per share for the three months ended March 31,
2008 and 2007, respectively.
The
Company currently has approximately $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 loss per share
excludes the effect of the Convertible Securities, as they were anti-dilutive
for all periods presented.
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 March 31,
2008 and December 31, 2007. Treasury stock at cost consists of
approximately 103 million shares as of March 31, 2008 and December 31,
2007.
NOTE
12: COMPREHENSIVE INCOME
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(115 |
) |
|
$ |
(151 |
) |
Realized
and unrealized loss from hedging activity,
net of tax
|
|
|
(4 |
) |
|
|
- |
|
Currency
translation adjustments
|
|
|
120 |
|
|
|
19 |
|
Pension
and other postretirement benefit plan obligation
activity
|
|
|
64 |
|
|
|
332 |
|
Total
comprehensive income, net of tax
|
|
$ |
65 |
|
|
$ |
200 |
|
NOTE
13: 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, kiosks and related media, snapshot printing,
consumer inkjet printing, Kodak Gallery, and imaging sensors. CDG
also includes the licensing activities related to the Company's intellectual
property in digital imaging products.
Film, Photofinishing and
Entertainment Group Segment (FPEG): FPEG encompasses consumer
and professional film, one-time-use cameras, graphic arts, 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 IT
services. Products and related services include workflow software and
digital controller development; 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 March 31, 2008, this change decreased cost of goods sold by $8 million,
increased selling, general, and administrative costs by $4 million, and
increased research and development costs by $4 million.
The
changes in cost allocation methodologies referred to above increased (decreased)
segment earnings (losses) from continuing operations before interest, other
income (charges), net and income taxes for the three months ended March 31, 2007
as follows:
|
|
Three
Months Ended
|
|
(in
millions)
|
|
March 31, 2007
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
(8 |
) |
Film,
Photofinishing and Entertainment Group
|
|
|
5 |
|
Graphic
Communications Group
|
|
|
(4 |
) |
All
Other
|
|
|
7 |
|
Consolidated
impact
|
|
$ |
- |
|
Prior
period segment results have been revised to reflect the changes in segment
reporting structure and cost allocation methodologies outlined
above.
Segment
financial information is shown below:
|
|
|
|
|
|
|
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
554 |
|
|
$ |
462 |
|
Film,
Photofinishing and Entertainment Group
|
|
|
724 |
|
|
|
830 |
|
Graphic
Communications Group
|
|
|
812 |
|
|
|
783 |
|
All
Other
|
|
|
3 |
|
|
|
5 |
|
Consolidated total
|
|
$ |
2,093 |
|
|
$ |
2,080 |
|
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(Loss)
earnings from continuing operations before interest,
other income (charges), net and income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
(111 |
) |
|
$ |
(75 |
) |
Film,
Photofinishing and Entertainment Group
|
|
|
26 |
|
|
|
30 |
|
Graphic
Communications Group
|
|
|
(1 |
) |
|
|
9 |
|
All
Other
|
|
|
(4 |
) |
|
|
(5 |
) |
Total of segments
|
|
|
(90 |
) |
|
|
(41 |
) |
Restructuring
(costs) curtailment gains and other
|
|
|
10 |
|
|
|
(151 |
) |
Rationalization
charges
|
|
|
(1 |
) |
|
|
- |
|
Other
operating income (expenses), net
|
|
|
10 |
|
|
|
6 |
|
Legal
settlement
|
|
|
(10 |
) |
|
|
- |
|
Interest
expense
|
|
|
(28 |
) |
|
|
(25 |
) |
Other
income (charges), net
|
|
|
35 |
|
|
|
18 |
|
Consolidated loss from continuing operations before
income taxes
|
|
$ |
(74 |
) |
|
$ |
(193 |
) |
(in
millions)
|
|
As of
March 31,
2008
|
|
|
As of
December 31,
2007
|
|
|
|
|
|
|
|
|
Segment
total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
2,374 |
|
|
$ |
2,442 |
|
Film,
Photofinishing and Entertainment Group
|
|
|
3,676 |
|
|
|
3,778 |
|
Graphic
Communications Group
|
|
|
3,869 |
|
|
|
3,723 |
|
All
Other
|
|
|
19 |
|
|
|
17 |
|
Total
of segments
|
|
|
9,938 |
|
|
|
9,960 |
|
Cash
and marketable securities
|
|
|
2,235 |
|
|
|
2,976 |
|
Deferred
income tax assets
|
|
|
732 |
|
|
|
757 |
|
Other
corporate assets/reserves
|
|
|
(41 |
) |
|
|
(34 |
) |
Consolidated total assets
|
|
$ |
12,864 |
|
|
$ |
13,659 |
|
NOTE
14: DISCONTINUED OPERATIONS
The
significant components of earnings from discontinued operations, net of income
taxes, are as follows:
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(in
millions)
|
|
2007
|
|
|
|
|
|
Revenues
from Health Group operations
|
|
$ |
558 |
|
Revenues
from HPA operations
|
|
|
39 |
|
Total
revenues from discontinued operations
|
|
$ |
597 |
|
|
|
|
|
|
Pre-tax
income from Health Group operations
|
|
$ |
30 |
|
Pre-tax
income from HPA operations
|
|
|
2 |
|
Provision
for income taxes related to Health Group and HPA
|
|
|
(8 |
) |
Earnings
from discontinued operations, net of income taxes
|
|
$ |
24 |
|
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. If Onex investors realize an internal
rate of return in excess of 25% on their investment, the Company will receive
payment equal to 25% of the excess return, up to $200 million.
The
Company recognized a pre-tax gain of $986 million on the sale of the Health
Group segment in the second quarter of 2007. The pre-tax gain
excludes the following: up to $200 million of potential future payments related
to Onex's return on its investment as noted above; potential charges 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.
Upon
authorization of the Company's Board of Directors on January 8, 2007, the
Company met all the requirements of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," for accounting for the Health Group segment
as a discontinued operation. As such, the Health Group business
ceased depreciation and amortization of long-lived assets on that
date.
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 $30 million for the year ended December 31, 2007
and $23 million for the three months ended March 31,
2007.
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. 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.
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 2007. The assets and liabilities held-for-sale were not
material in any period presented.
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, kiosks and related media, snapshot printing,
consumer inkjet printing, Kodak Gallery, and imaging sensors. CDG
also includes the licensing activities related to the Company's intellectual
property in digital imaging products.
Film, Photofinishing and
Entertainment Group Segment (FPEG): FPEG encompasses consumer
and professional film, one-time-use cameras, graphic arts, 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 IT
services. Products and related services include workflow software and
digital controller development; 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 March 31, 2008, this change decreased cost of goods sold by $8 million,
increased selling, general, and administrative costs by $4 million, and
increased research and development costs by $4 million.
The
changes in cost allocation methodologies referred to above increased (decreased)
segment earnings (losses) from continuing operations before interest, other
income (charges), net and income taxes for the three months ended March 31, 2007
as follows:
|
|
Three
Months Ended
|
|
(in
millions)
|
|
March 31, 2007
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
(8 |
) |
Film,
Photofinishing and Entertainment Group
|
|
|
5 |
|
Graphic
Communications Group
|
|
|
(4 |
) |
All
Other
|
|
|
7 |
|
Consolidated
impact
|
|
$ |
- |
|
Prior
period segment results have been revised to reflect the changes in segment
reporting structure and cost allocation methodologies outlined
above.
Net
Sales from Continuing Operations by Reportable Segment and All
Other
|
|
Three
Months Ended March 31,
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Impact*
|
|
Consumer
Digital Imaging Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
$ |
291 |
|
|
$ |
276 |
|
|
|
+5 |
% |
|
|
0 |
% |
Outside
the U.S.
|
|
|
263 |
|
|
|
186 |
|
|
|
+41 |
|
|
|
+12 |
|
Total
Consumer Digital Imaging Group
|
|
|
554 |
|
|
|
462 |
|
|
|
+20 |
|
|
|
+5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film,
Photofinishing and Entertainment Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
|
199 |
|
|
|
240 |
|
|
|
-17 |
|
|
|
0 |
|
Outside
the U.S.
|
|
|
525 |
|
|
|
590 |
|
|
|
-11 |
|
|
|
+6 |
|
Total
Film, Photofinishing and Entertainment
Group
|
|
|
724 |
|
|
|
830 |
|
|
|
-13 |
|
|
|
+4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphic
Communications Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
|
267 |
|
|
|
278 |
|
|
|
-4 |
|
|
|
0 |
|
Outside
the U.S.
|
|
|
545 |
|
|
|
505 |
|
|
|
+8 |
|
|
|
+10 |
|
Total
Graphic Communications Group
|
|
|
812 |
|
|
|
783 |
|
|
|
+4 |
|
|
|
+6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
|
3 |
|
|
|
4 |
|
|
|
-25 |
|
|
|
0 |
|
Outside
the U.S.
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Total
All Other
|
|
|
3 |
|
|
|
5 |
|
|
|
-40 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside
the U.S.
|
|
|
760 |
|
|
|
798 |
|
|
|
-5 |
|
|
|
0 |
|
Outside
the U.S.
|
|
|
1,333 |
|
|
|
1,282 |
|
|
|
+4 |
|
|
|
+8 |
|
Consolidated
Total
|
|
$ |
2,093 |
|
|
$ |
2,080 |
|
|
|
+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, Other Income (Charges), Net
and Income Taxes by Reportable Segment and All Other
|
|
Three
Months Ended
March
31,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Digital Imaging Group
|
|
$ |
(111 |
) |
|
$ |
(75 |
) |
|
|
-48 |
% |
Film,
Photofinishing and Entertainment Group
|
|
|
26 |
|
|
|
30 |
|
|
|
-13 |
% |
Graphic
Communications Group
|
|
|
(1 |
) |
|
|
9 |
|
|
|
-111 |
% |
All
Other
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
20 |
% |
Total of segments
|
|
$ |
(90 |
) |
|
$ |
(41 |
) |
|
|
-120 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
(costs) curtailment gains and other
|
|
|
10 |
|
|
|
(151 |
) |
|
|
|
|
Rationalization
charges
|
|
|
(1 |
) |
|
|
- |
|
|
|
|
|
Other
operating income (expenses), net
|
|
|
10 |
|
|
|
6 |
|
|
|
|
|
Legal
settlement
|
|
|
(10 |
) |
|
|
- |
|
|
|
|
|
Interest
expense
|
|
|
(28 |
) |
|
|
(25 |
) |
|
|
|
|
Other
income (charges), net
|
|
|
35 |
|
|
|
18 |
|
|
|
|
|
Consolidated loss from continuing operations before
income taxes
|
|
$ |
(74 |
) |
|
$ |
(193 |
) |
|
|
+62 |
% |
2008
COMPARED WITH 2007
First
Quarter
RESULTS
OF OPERATIONS – CONTINUING OPERATIONS
CONSOLIDATED
(in
millions, except per share data)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
|
|
|
Increase
/ |
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
(Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,093 |
|
|
|
|
|
$ |
2,080 |
|
|
|
|
|
$ |
13 |
|
|
|
1 |
% |
Cost
of goods sold
|
|
|
1,669 |
|
|
|
|
|
|
1,652 |
|
|
|
|
|
|
17 |
|
|
|
1 |
% |
Gross
profit
|
|
|
424 |
|
|
|
20.3 |
% |
|
|
428 |
|
|
|
20.6 |
% |
|
|
(4 |
) |
|
|
-1 |
% |
Selling,
general and administrative
expenses
|
|
|
385 |
|
|
|
18 |
% |
|
|
394 |
|
|
|
19 |
% |
|
|
(9 |
) |
|
|
-2 |
% |
Research
and development costs
|
|
|
140 |
|
|
|
7 |
% |
|
|
141 |
|
|
|
7 |
% |
|
|
(1 |
) |
|
|
-1 |
% |
Restructuring
costs (curtailment gains)
and other
|
|
|
(10 |
) |
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
(95 |
) |
|
|
-112 |
% |
Other
operating expenses (income), net
|
|
|
(10 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
67 |
% |
Loss
from continuing operations
before interest, other
income
(charges), net and income taxes
|
|
|
(81 |
) |
|
|
-4 |
% |
|
|
(186 |
) |
|
|
-9 |
% |
|
|
105 |
|
|
|
56 |
% |
Interest
expense
|
|
|
28 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
3 |
|
|
|
12 |
% |
Other
income (charges), net
|
|
|
35 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
17 |
|
|
|
94 |
% |
Loss
from continuing operations
before income taxes
|
|
|
(74 |
) |
|
|
|
|
|
|
(193 |
) |
|
|
|
|
|
|
119 |
|
|
|
62 |
% |
Provision
(benefit) for income taxes
|
|
|
40 |
|
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
58 |
|
|
|
322 |
% |
Loss
from continuing operations
|
|
|
(114 |
) |
|
|
-5 |
% |
|
|
(175 |
) |
|
|
-8 |
% |
|
|
61 |
|
|
|
35 |
% |
(Loss)
earnings from discontinued
operations, net of income
taxes
|
|
|
(1 |
) |
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
(25 |
) |
|
|
-104 |
% |
NET
LOSS
|
|
$ |
(115 |
) |
|
|
|
|
|
$ |
(151 |
) |
|
|
|
|
|
$ |
36 |
|
|
|
24 |
% |
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,093 |
|
|
|
0.6 |
% |
|
|
-1.1 |
% |
|
|
-3.4 |
% |
|
|
5.1 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
20.3 |
% |
|
-0.3pp
|
|
|
0.0pp
|
|
|
-3.2pp
|
|
|
0.6pp
|
|
|
2.3pp
|
|
Worldwide
Revenues
For the
three months ended March 31, 2008, net sales increased compared with the same
period in 2007 due to foreign exchange and volume increases in both CDG and GCG,
partly offset by industry-related volume declines within FPEG and unfavorable
price/mix within CDG and GCG. Digital cameras, digital picture
frames, and Inkjet
Systems within CDG experienced significant increases in volume over the
prior year period. In addition, within GCG, prepress plates experienced
volume increases. Unfavorable price/mix was primarily driven by
digital cameras within CDG, and Document Imaging and prepress
plates within GCG.
Gross
Profit
Gross
profit declined in the first quarter of 2008 in both dollars and as a percentage
of sales, due largely to unfavorable price/mix and the sale of inkjet printers
during 2008, partially offset by favorable manufacturing and other costs, and
favorable foreign exchange as a result of the weak U.S. dollar. The
improvements in manufacturing and other costs were driven by lower
restructuring-related charges, partially offset by increased silver and aluminum
costs. The unfavorable price/mix was primarily driven by Digital Capture and Devices
within CDG, and Prepress
Solutions within GCG.
In the
first quarter of 2008, the Company performed an 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. Based on this analysis, 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, 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 in 2008. Refer to
Note 1, “Basis of Presentation.”
The
effect of this change in estimate for the three months ended March 31, 2008 was
a reduction in depreciation expense of $28 million, $16 million of which has
been recognized in cost of goods sold and is a benefit to loss from continuing
operations, and $12 million of which is capitalized as a reduction in
inventories at March 31, 2008. The net impact of this change is a
decrease in fully-diluted loss per share of $.06.
Selling,
General and Administrative Expenses
The
year-over-year decrease in consolidated selling, general and administrative
expenses (SG&A) was primarily attributable to Company-wide cost reduction
actions, partially offset by unfavorable foreign exchange.
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"
below.
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 first quarter of 2008, as compared with 2007.
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
increase in other income (charges), net was primarily attributable to higher
interest income due to higher year-over-year cash balances resulting from the
proceeds on the sale of the Health Group completed in the second quarter of
2007, and was also impacted by higher gains on foreign exchange transactions
than in the prior year.
Income
Tax (Benefit) Provision
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Loss
from continuing operations before income taxes
|
|
$ |
(74 |
) |
|
$ |
(193 |
) |
Provision
(benefit) for income taxes
|
|
|
40 |
|
|
|
(18 |
) |
Effective
tax rate
|
|
|
(54.1 |
)% |
|
|
9.3 |
% |
The
change in the Company’s effective tax rate from continuing operations is
primarily attributable to: (1) changes in the amount of losses generated within
the U.S. and in certain jurisdictions outside the U.S., which were not
benefited, resulting from previously established valuation allowances, (2)
changes to the mix of earnings from operations in certain lower-taxed
jurisdictions outside the U.S., (3) a benefit recognized during the first
quarter of 2007 as a result of the Company reaching a settlement with a taxing
authority in a location 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
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Increase
/ |
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
(Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
554 |
|
|
|
|
|
$ |
462 |
|
|
|
|
|
$ |
92 |
|
|
|
20 |
% |
Cost
of goods sold
|
|
|
486 |
|
|
|
|
|
|
364 |
|
|
|
|
|
|
122 |
|
|
|
34 |
% |
Gross
profit
|
|
|
68 |
|
|
|
12.3 |
% |
|
|
98 |
|
|
|
21.2 |
% |
|
|
(30 |
) |
|
|
-31 |
% |
Selling,
general and administrative
expenses
|
|
|
123 |
|
|
|
22 |
% |
|
|
111 |
|
|
|
24 |
% |
|
|
12 |
|
|
|
11 |
% |
Research
and development costs
|
|
|
56 |
|
|
|
10 |
% |
|
|
62 |
|
|
|
13 |
% |
|
|
(6 |
) |
|
|
-10 |
% |
Loss
from continuing operations
before interest,
other income
(charges), net and
income taxes
|
|
$ |
(111 |
) |
|
|
-20 |
% |
|
$ |
(75 |
) |
|
|
-16 |
% |
|
$ |
(36 |
) |
|
|
-48 |
% |
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
554 |
|
|
|
19.9 |
% |
|
|
24.9 |
% |
|
|
-10.0 |
% |
|
|
5.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
12.3 |
% |
|
-8.9pp
|
|
|
0.0pp
|
|
|
-11.2pp
|
|
|
2.9pp
|
|
|
-0.6pp
|
|
Worldwide
Revenues
Net sales
in CDG increased 20% primarily due to increases in Digital Capture and Devices
and Consumer Inkjet
Systems. Volume increases were primarily attributable to
digital cameras, digital picture frames and inkjet systems, partially offset by
negative price/mix within those product lines.
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 30% in the first quarter of 2008 as compared with the prior year
quarter, primarily reflecting higher digital camera volumes, sales of digital
picture frames, which were introduced at the end of the first quarter of 2007,
and favorable exchange, partially offset by negative price/mix.
Net
worldwide sales of Consumer
Inkjet Systems, which includes inkjet printers and related consumables,
increased significantly, reflecting the launch of the product line at the end of
the first quarter of 2007.
Gross Profit
The
decrease in gross profit margin for CDG was primarily attributable to the sale
of inkjet printers during 2008, partially offset by
favorable foreign exchange.
Intellectual
property royalties were flat compared with prior year. The current
quarter results include approximately $32 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
March 31, 2008, the Company has approximately $481 million in deferred revenue
related to intellectual property licenses. Of this amount,
approximately $131 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 selling
expenses to support the inkjet printing category, and unfavorable foreign
exchange.
Research
and Development Costs
The decrease in R&D costs for CDG
was attributable to decreases in spending related to Consumer Inkjet
Systems.
FILM,
PHOTOFINISHING AND ENTERTAINMENT GROUP
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Increase / |
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
(Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
724 |
|
|
|
|
|
$ |
830 |
|
|
|
|
|
$ |
(106 |
) |
|
|
-13 |
% |
Cost
of goods sold
|
|
|
578 |
|
|
|
|
|
|
657 |
|
|
|
|
|
|
(79 |
) |
|
|
-12 |
% |
Gross
profit
|
|
|
146 |
|
|
|
20.2 |
% |
|
|
173 |
|
|
|
20.8 |
% |
|
|
(27 |
) |
|
|
-16 |
% |
Selling,
general and administrative
expenses
|
|
|
104 |
|
|
|
14 |
% |
|
|
125 |
|
|
|
15 |
% |
|
|
(21 |
) |
|
|
-17 |
% |
Research
and development costs
|
|
|
16 |
|
|
|
2 |
% |
|
|
18 |
|
|
|
2 |
% |
|
|
(2 |
) |
|
|
-11 |
% |
Earnings
from continuing operations
before interest,
other income
(charges), net and income
taxes
|
|
$ |
26 |
|
|
|
4 |
% |
|
$ |
30 |
|
|
|
4 |
% |
|
$ |
(4 |
) |
|
|
-13 |
% |
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
724 |
|
|
|
-12.8 |
% |
|
|
-18.0 |
% |
|
|
0.9 |
% |
|
|
4.3 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
20.2 |
% |
|
-0.6pp
|
|
|
0.0pp
|
|
|
-0.1pp
|
|
|
0.5pp
|
|
|
-1.0pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Revenues
The
decrease in FPEG worldwide net sales was comprised of industry-related lower
volumes and the effects of the writers’ strike. These decreases were
partially offset by favorable foreign exchange.
Net
worldwide sales of Film
Capture and Photofinishing decreased 29%
and 16%, respectively, in the first quarter of 2008 as compared with the first
quarter of 2007, primarily reflecting continuing industry volume
declines.
Net
worldwide sales for Entertainment Imaging
decreased 10% compared with the prior year, primarily reflecting the effects of
the writers’ strike.
Gross
Profit
The
decrease in FPEG gross profit margin was primarily attributable to increased
commodity costs, primarily silver, and unfavorable price/mix within Film Capture, partially
offset by favorable foreign exchange and 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)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Increase
/
|
|
|
|
|
|
|
2008
|
|
|
%
of Sales
|
|
|
2007
|
|
|
%
of Sales
|
|
|
(Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
812 |
|
|
|
|
|
$ |
783 |
|
|
|
|
|
$ |
29 |
|
|
|
4 |
% |
Cost
of goods sold
|
|
|
594 |
|
|
|
|
|
|
564 |
|
|
|
|
|
|
30 |
|
|
|
5 |
% |
Gross
profit
|
|
|
218 |
|
|
|
26.8 |
% |
|
|
219 |
|
|
|
28.0 |
% |
|
|
(1 |
) |
|
|
0 |
% |
Selling,
general and administrative
expenses
|
|
|
157 |
|
|
|
19 |
% |
|
|
156 |
|
|
|
20 |
% |
|
|
1 |
|
|
|
1 |
% |
Research
and development costs
|
|
|
62 |
|
|
|
8 |
% |
|
|
54 |
|
|
|
7 |
% |
|
|
8 |
|
|
|
15 |
% |
(Loss)
earnings from continuing
operations before
interest, other
income (charges), net and
income
taxes
|
|
$ |
(1 |
) |
|
|
0 |
% |
|
$ |
9 |
|
|
|
1 |
% |
|
$ |
(10 |
) |
|
|
-111 |
% |
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Percent
Change vs. 2007
|
|
|
|
2008
Amount
|
|
|
Change
vs. 2007
|
|
|
Volume
|
|
|
Price/Mix
|
|
|
Foreign
Exchange
|
|
|
Manufacturing
and Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
812 |
|
|
|
3.7 |
% |
|
|
1.3 |
% |
|
|
-3.8 |
% |
|
|
6.2 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
26.8 |
% |
|
-1.2pp
|
|
|
0.0pp
|
|
|
-0.5pp
|
|
|
-0.9pp
|
|
|
0.2pp
|
|
Worldwide
Revenues
GCG net
sales for the quarter increased 4% as compared with the prior-year
quarter. The favorable impact of higher volumes and foreign exchange
were partially offset by unfavorable price/mix. Volume growth was
primarily attributable to prepress plates, Document Imaging, and Enterprise Solutions.
Net
worldwide sales of Prepress
Solutions increased 3%, primarily driven by increased sales of plates,
partially offset by declines in sales of prepress equipment and
service.
Net
worldwide sales of Document
Imaging increased 5% compared with prior
year, driven by increased revenue in distributed and production scanners.
Net
worldwide sales of Digital
Printing Solutions increased 2%, primarily driven by
color electrophotographic equipment and consumables, and inkjet
consumables, partially offset by inkjet equipment, and black and white
electrophotographic equipment.
Net
worldwide sales of Enterprise
Solutions increased 10%, primarily attributable to revenue growth from
portal and production workflow software products.
Gross
Profit
The
declines in both gross profit dollars and gross profit margin were primarily
driven by unfavorable price/mix, largely related to Document Imaging and Prepress Solutions. The
decrease in manufacturing and other costs were driven by the Company’s cost
reduction initiatives, partially offset by adverse aluminum
costs.
Research
and Development Costs
The
increase in R&D costs for GCG was attributable to new product development
within Enterprise Solutions
and Digital Printing
Solutions.
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 first quarter ended March 31, 2008, the Company made cash payments of
approximately $60 million related to restructuring. Of this amount
$50 million was paid out of restructuring reserves, while $10 million was paid
out of reserves for pension and other postretirement liabilities.
The net
credit of $10 million was reported as restructuring costs (curtailment gains)
and other in the accompanying Consolidated Statement of Operations for the three
months ended March 31, 2008. This credit consisted mainly of net
curtailment gains, which are primarily non-cash items. The Company
expects to incur approximately $1 million of additional accelerated depreciation
in 2008 as a result of the initiatives already implemented under the
program.
The
cancellation of 25 position eliminations under the program in the first quarter
of 2008 resulted in an adjustment to the expected future annual cash savings of
approximately $(3) million, including $(2) million related to R&D and $(1)
million related to SG&A. Based on all of the actions taken to
date under the program, annual cost savings of approximately $1,677 million,
including annual cash savings of $1,602 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 $154 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 March 31, 2008, the Company has
recorded charges of $3,387 million, which were composed of severance, long-lived
asset impairments, exit costs, inventory write-downs and accelerated
depreciation of $1,386 million, $620 million, $387 million, $80 million and $935
million, respectively, less reversals of $(21) million. The severance
costs related to the elimination of approximately 27,625 positions, including
approximately 6,750 photofinishing, 13,125 manufacturing, 1,550 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
The
Company’s primary uses and sources of cash for the three month period ended
March 31, 2008 included a loss from continuing operations, as adjusted for
non-cash items of income and expense, restructuring payments, capital additions,
working capital needs and employee benefit plan
payments/contributions.
Net cash
used in operating activities was $768 million for the three months ended March
31, 2008. The Company’s primary sources of cash from operating
activities for the period are a loss from continuing operations, as adjusted for
non-cash items of income and expense, which provided $44 million of operating
cash. The Company’s primary uses and sources of cash in operating
activities include:
·
|
Increases
in inventories, driven by seasonal build and the introduction of new
products, and increased raw material
prices;
|
·
|
Net
decrease in liabilities resulting from payment of trade payables and other
accruals from year-end 2007 levels;
and
|
·
|
Lower
receivables due to seasonal collections, which partially offset the
decreases described above.
|
Included
in the uses of cash in operating activities discussed above were:
·
|
Cash
expenditures of $60 million primarily for the payment of severance
benefits.
|
·
|
Contributions
(funded plans) or benefit payments (unfunded plans) totaling approximately
$23 million relating to major U.S. and non-U.S. defined benefit pension
plans. 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 $65 million.
|
·
|
Benefit
payments totaling approximately $54 million relating to U.S., United
Kingdom and Canada postretirement benefit plans. The Company
expects to pay benefits of $154 million for its U.S., United Kingdom and
Canada postretirement plans for the balance of
2008.
|
Net cash
used in investing activities for the three months ended March 31, 2008 includes
capital additions of $52 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 $55 million.
Net cash
provided by financing activities of $11 million was the result of a net increase
in borrowings.
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
March 31, 2008, the Company and its subsidiaries, on a consolidated basis,
maintained $1,057 million in committed bank lines of credit and $505 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 March 31, 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 March 31, 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 March 31, 2008 totaling $57
million and $505 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 March 31, 2008 were $4 million
and $7 million, respectively. These outstanding borrowings are
reflected in the short-term borrowings in the accompanying Consolidated
Statement of Financial Position as of March 31, 2008.
As of
March 31, 2008, the Company had outstanding letters of credit totaling $140
million and surety bonds in the amount of $82 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 $70 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 March 31, 2008, the
following customer guarantees were in place:
(in
millions)
|
|
As
of March 31, 2008
|
|
|
|
Maximum Amount
|
|
|
Amount Outstanding
|
|
|
|
|
|
|
|
|
Customer
amounts due to banks and leasing companies
|
|
$ |
148 |
|
|
$ |
100 |
|
Other
third-parties
|
|
|
2 |
|
|
|
- |
|
Total
guarantees of customer debt and other obligations
|
|
$ |
150 |
|
|
$ |
100 |
|
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 March 31, 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.
The
Company also guarantees debt owed to banks and other third parties for some of
its consolidated subsidiaries. The maximum amount guaranteed is $613
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
$223 million. These guarantees expire between 2008 and
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 and other obligations of the Company and its
subsidiaries to the $2.7 billion Secured Credit Facilities lenders are
guaranteed.
During
the fourth quarter of 2007, Eastman Kodak Company (the “Parent”) issued a
guarantee to Kodak Limited (the “Subsidiary”) and the Trustees of the Kodak
Pension Plan of the United Kingdom (the “Trustees”). Under this
arrangement, the Parent 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. However, as of March
31, 2008 management believes that performance under this guarantee by Eastman
Kodak Company is unlikely. 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 March 31, 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 revenue
expectations, cash flow, taxes, portfolio expansion, seasonality of sales,
cost of environmental compliance, results of litigation, cost of retirement
related benefits, depreciation, asset impairments 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;
|
·
|
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 March 31, 2008 and 2007, the fair value of open forward contracts
would have decreased $67 million and increased $11 million,
respectively. Such losses or gains would be substantially offset by
gains or losses 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 March 31, 2008, the fair value of open forward contracts would
have decreased $5 million. Such losses in fair value, if realized,
would be offset by lower costs of manufacturing silver-containing
products. There were no open forward contracts hedging silver at
March 31, 2007.
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 66 basis
points) lower at March 31, 2008, the fair value of short-term and long-term
borrowings would have increased less than $1 million and $57 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 64 basis points) lower at March 31, 2007, the fair value of
short-term and long-term borrowings would have increased less than $1 million
and $62 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 March 31, 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.
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.
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.
(a) Exhibits
required as part of this report are listed in the index appearing on page
40.
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:May
1,
2008
/s/ Diane E. Wilfong
Diane
E. Wilfong
Chief
Accounting Officer and Controller
Eastman
Kodak Company and Subsidiary Companies
Exhibit
Number