By Steven Schnoll May 4, 2005 -- Eastman Kodak Company (NYSE: EK) reported weak first quarter 2005 results. Sales fell 3% from $2.92 billion to $2.83 billion. The company reported a loss of $142 million, or $0.50 per share, compared to a profit of $21 million, or $0.07 per share, during the same quarter of 2004. Analyst forecasts for the quarter were $0.33 per share. Nearly every segment except Graphic Communications experienced decreases or losses. Despite the difficult quarter, Kodak remains committed to their transition to an all-digital company. Topics of this summary: Quarter Highlights Segment Performance Guidance Raine Radar Q & A Quarter Highlights Standard and Poor’s Rating Service downgrades Kodak’s corporate and senior unsecured debt rating to BB+ from BBB-, pushing it into junk status Kodak’s debt-to-capital ratio increased to 39.7% from 37.9% at the end of 2004 U.S. sales were down $11 million from last year to $1.12 billion Sales outside of U.S. were down $77 million from last year to $1.72 billion Kodak completed the acquisition of Kodak Polychrome Graphics (KPG) through redemption of Sun Chemical Corporation’s 50% interest in the joint venture. KPG will become part of the Graphic Communications Segment starting in the second quarter. Segment Performance Digital and film imaging systems sales were down 9% to $1.801 billion. Earnings from operations were $4 million, compared to $25 million last year, but included a $16 million dollar non-recurring contract termination charge. Digital product sales, excluding new technologies, were $1.318 billion for the first quarter 2005. This was an increase of $245 million, or 23%, over $1.073 billion last year. The growth comes from increases in consumer digital capture sales, the use of Picture Maker kiosks, and home printing. The health segment’s sales were down 1% to $626 million. Earnings from operations were $71 million, compared to $95 million from the same period last year. The graphic communications segment now consists of a diversified group of graphic organizations – Encad for wide format; Versamark for high speed ink jet VDP; NexPress for high-end digital color and monochrome reproduction; KPG for sales and support; Document products, as well as the combination of traditional Kodak analog and digital manufacturing. The addition of KPG will add competencies in sales and support, and Creo will add a workflow solution to the company. The segment reported global revenue of $368 million in the Q1, up from $283 million last year. This 30% increase was primarily due to the NexPress acquisition. Graphics Communications posted a GAAP and operational loss of $20 million, compared to $9 million from a year ago. All other sales, which include display & components and other miscellaneous businesses, were $37 million, up 32% from last year. Operating loss was $42 million. Guidance Kodak is committed to obtaining revenue between $14 to $14.6 billion for 2005 with operational earnings per share between $2.60 and $2.90. Kodak estimates earnings in the first half of the year at $1.10 to $1.20 a share. Raine’s Radar Kodak’s transition from analog to digital isn’t going to be easy, and the first quarter certainly proved that. The company continues to put all the pieces together in a very challenging and competitive climate. The integration of KPG, NexPress, and Creo will also prove difficult, but each has a strong brand and a loyal following that can be leveraged. The dip in sales is not surprising as the company continues to shift to digital. Sales will flatten out and likely increase once Kodak has stabilized, but the bottom line should be the focus right now. Kodak must find the efficiencies in and between their businesses and start trimming costs. Q & A Health group experienced some serious equipment problems that have been fixed. Several large deals are still pending. KPG’s “one stop shop model” will greatly benefit from directional change to digital. 80% of market still analog, so a great opportunity exists. China market experienced an interesting situation with strong digital sales in the coastal cities and an over stocked analog position in interior locations. Should see this problem worked out over time. Entertainment industry moving to digital, but slowly. Current business is growing at 6%. Kodak believes the Q1 is not significant in and of itself, and doesn’t represent the total market picture for the year. Restructuring will continue driven by changing market demands As negative January and February results started to unfold, changes were instituted to salvage some of the quarter. These changes resulted in a better March. Inventory in the quarter was much higher than anticipated. Kodak is assigning people to deal with issue, placing emphasis on reducing the number of sku’s. Margins on digital cameras are very low, and better profits are realized from reproduction processes. Kodak will continue to outsource manufacturing to meet peak demands Steven Schnoll is a contributing analyst and author for Raine Media, Inc. and can be reached at [email protected]