Kodak Looses a Lot of Money

Third quarter financial results are not positive for Kodak
In the third quarter Kodak sales went up by 5%. However, it gets
interesting when you examine the breakdown. Digital products and
services rose by 47%, which is a great result. However traditional
product revenue fell by 20% in the quarter. In total, Kodak lost
US$1.029 Billion in the quarter.

The figures give hope for Kodak in the great sales result in their
digital products and services, but their is undoubtedly more pain to go
as Kodak restructures into a digital company.

The full financial press release is given below.

Kodak’s 3rd-Quarter Sales Rise 5% to $3.553 Billion

Digital Sales Surge 47%, Led by Graphic Communications and Consumer
Portfolio; 3rd-Qtr GAAP Net Loss Totals $1.029 Billion ($3.58 Per
Share), Largely Reflecting Tax Valuation Allowances and Accelerated
Restructuring Charges;  Company Reaffirms Three Key Metrics from
September Investor Meeting: Digital Revenue Growth, Digital Earnings
Growth and Cash Generation

ROCHESTER, N.Y., October 19 — Eastman Kodak Company reported that
revenue rose 5% in the third quarter, led by a 47% increase in the sale
of digital products and services. The performance primarily reflects
strong demand for the market-leading offerings from the company’s
Graphic Communications and consumer digital portfolio.

On the basis of generally accepted accounting principles in the U.S.
(GAAP), the company reported a third-quarter loss of $1.029 billion, or
$3.58 per share, largely stemming from a $900 million ($3.13 per share)
non-cash charge to record a valuation allowance against the net
deferred tax assets in the U.S. This reservewas an accounting
requirement resulting from the company’s continuing losses in the U.S.
created by the accelerated and extensive restructuring activity
required by the decline in the traditional business.

For the third quarter of 2005:

  • Sales totaled $3.553 billion, an increase of 5% from $3.374
    billion in the third quarter of 2004. Digital revenue totaled $1.888
    billion, a 47% increase from $1.283 billion. Traditional revenue
    totaled $1.661 billion, a 20% decline from $2.085 billion.
  • The GAAP net loss was $1.029 billion, or $3.58 per share,
    compared with GAAP earnings of $458 million, or $1.60 per share, in the
    year-ago period.
  • The company’s loss from continuing operations in the quarter,
    before income taxes, interest, and the net of other income and charges,
    was $103 million, compared with earnings from operations of $3 million
    in the year-ago quarter.
  • Digital earnings were $10 million, compared with $6 million in
    the year-ago quarter. This includes the favorable impact of $18 million
    in the third quarter of reallocating certain costs from the digital
    business to the traditional business, as well as a $5 million charge
    for reducing the useful life of certain digital assets. To calculate a
    common basis of comparison with the company’s full-year digital
    earnings projection, as adjusted for the two accounting changes cited,
    requires the exclusion of $44 million of costs associated with Creo’s
    operating results and purchase accounting for the KPG and Creo
    acquisitions, as well as the exclusion of $12 million of in-process
    research and development credits. On this basis, digital earnings in
    the third quarter were $42 million, and they were greatly improved in
    September versus the first two months of the quarter. This supports the
    company’s previously expressed view that the bulk of Kodak’s digital
    earnings in 2005 will be generated in the last four months of the year.

“In the third quarter, our digital revenue exceeded our traditional
revenue for the first time on a quarterly basis, representing another
milestone in our digital transformation,” said Antonio M. Perez, Chief
Executive Officer and President, Eastman Kodak Company .  “As
importantly, on the basis outlined above, our digital earnings were 3.5
times greater than in the year-ago quarter, and September’s significant
improvement increases our confidence for strong digital earnings in the
fourth quarter.

“We remain committed to the 2005 cash flow target presented at our
Sept. 28 investor meeting,” Perez said. “For the quarter, our cash flow
performance was consistent with our expectations, our cash balance
increased, and our debt decreased sequentially from the second quarter.
We are delivering on the three key metrics by which we are managing the
company: digital revenue growth, digital earnings growth and the
generation of cash.

“Within the business units, we continue to see widespread evidence of
the success of our digital transformation,” Perez said. “Our Graphic
Communications Group continues to demonstrate strong growth, coming off
a very successful Print 05 trade show in September. In our Health
Group, operating margins in the quarter rebounded from a soft start
earlier this year, led by solid sales of computed radiography systems.
On the consumer side, we began shipping last month the groundbreaking
EASYSHARE-ONE zoom digital camera, making Kodak the first company to
bring a Wi-Fi consumer digital camera to market.”

Other third-quarter 2005 details:

  • Net cash provided by operating activities from continuing
    operations, as determined in accordance with GAAP, totaled $370 million
    in the third quarter, compared with $411 million in the year-ago
    quarter.
  • Gross Profit on a GAAP basis was 26.3%, down from 32.0%,
    primarily because of increased restructuring activity compared with the
    year-ago period.
  • Selling, General and Administrative expenses were 18.9% of sales,
    up from 18.6%, primarily reflecting the additional costs incurred
    through the ownership of KPG and Creo.
  • Debt decreased $158 million from the second-quarter level, to
    $3.563 billion as of Sept. 30. So far this year, debt has increased
    $1.242 billion, reflecting more than $1.5 billion relating to
    acquisitions.
  • Kodak held $610 million in cash on its balance sheet as of Sept.
    30, up from $553 million on June 30, and down from $1.255 billion at
    the end of 2004. The company expects its cash balance to exceed $1
    billion by the end of 2005.

“Even after paying down debt and spending more on restructuring, I am
pleased with our ability to increase our cash balance from the previous
quarter,” said Robert H. Brust, Kodak’s Chief Financial Officer. “We
remain confident in our ability to generate cash, and we note that the
$900 million charge involving deferred tax assets in the U.S. has no
cash impact. What’s more, the net deferred tax assets can be realized
in the future. The write-down results from current and expected future
losses in the U.S. created by our accelerated and extensive
restructuring actions. As a result, management has concluded that a
valuation allowance is required under U.S. accounting rules.”

Segment sales and results from continuing operations, before interest,
taxes, and other income and charges (earnings from operations), are as
follows:

  • Digital & Film Imaging sales totaled $1.995 billion, down
    16%. Earnings from operations for the segment were $108 million,
    compared with $230 million a year ago. Highlights for the quarter
    included a 48% increase in the sales of KODAK PICTURE MAKER kiosks and
    related media; a 45% increase in sales of home print
    ing products and
    media, including KODAK EASYSHARE Printer Docks; and a 20% increase in
    consumer digital capture sales, which includes KODAK EASYSHARE cameras.
  • Graphic Communications Group sales were $886 million, up 158%,
    largely reflecting the acquisition of KPG and Creo. Earnings from
    oper
    ations in the third quarter were $15 million, compared with a loss
    of $16 million in the year-ago quarter.
  • Health Group sales were $635 million, down 1%. Earnings from
    operations for the segment were $90 million, compared with $106 million
    a year ago. Highlights included a 24% increase in digital capture
    systems, reflecting a rebound in sales of computed radiography systems,
    as well as strong sales of healthcare information systems. 
  • All Other sales were $37 million, up 48% from the year-ago
    quarter. The loss from operations totaled $55 million, compared with a
    loss of $53 million a year ago. The All Other category includes the
    Display & Components operation and other miscellaneous businesses.

“As I indicated at our investor meeting on Sept. 28, we anticipate that
more than 40% of the company’s total digital revenue in 2005 will occur
in the last four months of the year, reflecting the seasonality common
to digital markets and the company’s acquisitions earlier this year,”
Perez said. “As those sales occur, we will enjoy increased digital
earnings, as September’s performance shows.

“We’ve made it clear that we measure success against the three critical
metrics that best reflect the company we are building – digital revenue
growth, digital earnings growth and cash flow,” Perez said. “In each
category, our performance in the third quarter was in line with the
expectations presented on Sept. 28, and we intend to carry this
momentum into the fourth quarter and 2006.”

Digital and traditional revenues, digital earnings, and digital
earnings excluding certain purchase accounting costs for KPG and Creo
and operating results for Creo are non-GAAP financial measures as
defined by the Securities and Exchange Commission’s final rules under
“Conditions for Use of Non-GAAP Financial Measures.” Reconciliations of
these measures included in this press release to the most directly
comparable GAAP financial measures can be found in the Financial
Discussion Document attached to this press release.

Certain statements in this press release may be forward looking in
nature, or “forward-looking statements” as defined in the United States
Private Securities Litigation Reform Act of 1995. For example,
references to expectations for the Company’s earnings, revenue, and
cash are forward-looking statements.

Actual results may differ from those expressed or implied in
forward-looking statements.  In addition, any forward-looking
statements represent our estimates only as of the date they are made,
and should not be relied upon as representing our estimates as of any
subsequent date.  While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any
obligation to do so, even if our estimates change.  The
forward-looking statements contained in this press release are subject
to a number of factors and uncertainties, including the successful:

  • Implementation of our digital growth strategy and business model;
  • Implementation of a changed segment structure;
  • Implementation of our cost reduction program, including asset
    rationalization, reduction in general and administrative costs and
    personnel reductions;
  • Implementation of, and performance under, our debt management program;
  • Implementation of product strategies (including category
    expansion, digitization, organic light emitting diode (OLED) displays,
    and digital products);
  • Implementation of intellectual property licensing and other strategies;
  • Development and implementation of e-commerce strategies;
  • Completion of information systems upgrades, including SAP, our enterprise system software;
  • Completion of various portfolio actions;
  • Reduction of inventories;
  • Integration of newly acquired businesses;
  • Improvement in manufacturing productivity and techniques;
  • Improvement in receivables performance;
  • Reduction in capital expenditures;
  • Improvement in supply chain efficiency;
  • Implementation of our strategies designed to address the decline in our analog businesses; and
  • Performance of our business in emerging markets like China, India, Brazil, Mexico and Russia;

Forward-looking statements contained in this press release are subject to the following additional risk factors:

  • Inherent unpredictability of currency fluctuations and raw material costs;
  • Competitive actions, including pricing;
  • Changes in our debt credit ratings and our ability to access capital markets;
  • The nature and pace of technology evolution, including the analog-to-digital transition;
  • Continuing customer consolidation and buying power;
  • Current and future proposed changes to tax laws, as well as other
    factors which could adversely impact our effective tax rate in the
    future;
  • General economic, business, geopolitical, regulatory and public health conditions;
  • Market growth predictions, and
  • Other factors and uncertainties disclosed from time to time in our filings with the Securities and Exchange Commission;
  • Any forward-looking statements in this press release should be evaluated in light of these important factors and uncertainties.

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