By Trevor Shackelford October 25, 2005 -- Eastman Kodak Company (NYSE: EK) announced their third quarter results today. Total revenue for Kodak’s third quarter was $3.553 billion, 5% higher than the $3.374 billion reported for the third quarter of 2004. Digital revenue was $1.89 billion, 47% higher than the $1.28 billion reported for the same period in 2004, primarily driven by the Creo and KPG acquisitions and the digital capture SPG. Net loss for the quarter was $1.3 billion, or $3.58 per share compared with earnings of $458 million, or $1.60 per share reported for the same period in 2004, largely stemming from $900 million, or $3.13 per share, non-cash charge recorded due to tax valuation allowances and accelerated restructuring charges. Contents of this Summary • Quarter Highlights • Segment Performance • Guidance • Raine Radar • Q & A Quarter Highlights • The increase in revenue for the quarter reflected a $22 million, or 1%, favorable impact of foreign currency. • Gross profit margin decreased by 5.7% due to price/mix variance and increased raw material prices. • Gross profit for the quarter includes the additional year-over-year restructuring costs of $78 million, write-off physical assets of $30 million and additional depreciation due to asset useful life changes of $66 million. • SG&A expenses increased by $44 million, or 7% from the year-ago quarter due to acquisitions. As a percentage of sales, SG&A was 19% for the current quarter, no change from the year-ago quarter. • R&D expenses declined by $ 2 million or 1% despite R&D acquisitions of $10 million. • The company recorded pre tax charges of $261 million, or $0.71 per share, as a part of cost reduction program which included severance costs associated with the elimination of approximately 2000 positions. • Loss from continuing operations before income taxes, interest, and the net of other income and charges for the quarter was $103 million, compared with $3 million reported in the year-ago quarter. • Effective tax rate for the quarter was 37% as compared to 17% for the year-ago quarter. Tax rate increased as a result of valuation allowance against net U.S deferred tax assets. • Company’s free cash flow and investable cash flow for the quarter decreased, as compared with year-ago quarter. • Debt decreased $158 million from the second-quarter level, to $3.563 billion as of September 30. So far this year, debt has increased $1.242 billion, reflecting more than $1.5 billion relating to acquisitions. • Company’s cash and cash equivalents at the end of third quarter were $610 million, down from $1.255 billion at the end of 2004. • Company introduced the first Wi-Fi consumer digital camera to market during September, 2005. Segment Performance The total sales mix was made up of digital product sales of $1.89 billion, up by 47% from the same period in 2004 and traditional product sales of $1.66 billion, down by 20%. The growth in digital was driven primarily by the Creo and KPG acquisitions while the decrease in traditional products was driven by declines in the film capture SPG, and the wholesale and retail photofinishing portions of the consumer output SPG. Revenues generated from U.S. for the third quarter were $1.446 billion, up by 2% from the same period in 2004. Revenues from non-U.S. operations were $2.107 billion, up by 8% from the same period in 2004. Digital and Film Imaging Systems Segment Kodak reported revenues for the segment of $1.995 billion for the quarter, down 16% from the same period in 2004, driven down by reductions in volume and changes to the product mix. The digital product sales within this segment were $708 million, up 22% from the year-ago quarter, primarily driven by the consumer digital capture SPG, the kiosks/media portion of the consumer output SPG, and the home printing SPG. Traditional product sales were $1.287 billion, down 28% from the year-ago quarter, primarily driven by declines in the consumer output and film capture SPG’s. Earnings from operations for the segment decreased $122 million, or 25%, from the same period in 2004 and the operating earnings margin also decreased from 10% in the prior year quarter to 5% in the current quarter. Health Group Segment Kodak reported revenues for the segment of $635 million, down 1% from the same period in 2004. Digital product sales were $416 million, up approximately 1% from the year-ago quarter, as modest volume increases were largely offset by negative price/mix. Traditional product sales were $228 million, down 4% from the same period in 2004, reflected by volume declines and negative product price mix. Earnings from operations for the segment decreased $16 million, or 15%, from the same period in 2004 and the operating earnings margin also decreased from 16.5% in the prior year quarter to 14.2% in the current quarter. Graphic Communications Segment Kodak reported revenues for the segment were $886 million, up 158% from the same period in 2004. Digital product sales were $737 million, up 165% from the year-ago quarter, mostly due to the acquisition of KPG and Creo. Traditional product sales were $149 million, up 126% from the same period in 2004. The increase in total segment revenue was primarily due to the acquisitions of KPG and Creo. Earnings from operations for the segment were $15 million in the third quarter versus losses of $16 million for the same period in 2004. All Other Segments Kodak reported revenues for the segment were $37 million, up 48% from the same period in 2004. The loss from operations for the segment was $55 million, a decrease in earnings of $2 million, or 4%, as compared with a loss from operations of $53 million in the third quarter of 2004. The loss from operations was primarily driven by digital investments, which include the inkjet and display programs. Guidance The company did not provide any financial forecast for the fourth quarter. Instead, the company reaffirmed the three key metrics from September’s investor meeting: digital revenue growth, digital earnings growth, and cash generation. The company expects the following for the fourth quarter of 2005: • Expects to generate $400 to $450 million investable cash • Expects to decrease the digital inventory by $300 million and traditional inventory by $200 million. • The company expects to generate $100 to $200 million in cash from the sale of assets. • Total capital expenditure for the full year of 2005 will be $450 million, out of which capital expenditure for the fourth quarter will be $100 million. • The company expects its cash balance to exceed $1 billion by the end of 2005. • The company expects its graphic communications group to continue to demonstrate strong growth. • The company anticipates that more than 40% of the company’s total digital revenue in 2005 will occur in the last four months of the year. Raine Radar In 2003, no one at Kodak wanted to believe that the revenues from film, their “razors,” would disappear as fast as it has. Two years later, Kodak began rapidly adapting to the new reality of digital, but it has been a painful process to watch. Kodak is now looking for new razors, because people don’t print nearly the same percentage of digital images as they do traditional images, and they don’t buy film anymore, either. Financially the company is in a weakened position, but with digital revenues growing as they have been, the company should theoretically start to see that position improve. The key for Kodak will be finding enough razors, or profitable and repeatable business like supplying its consumer kiosk business. The company is expecting seasonally much higher numbers next quarter, so it will be a critical quarter in understanding what 2006 holds for Kodak. Q & A 1. The company cut back 1.6 million digital cameras or about 400% in the month of September, 2005 with an intention to provide flexibility. The company is planning to maintain no stock of digital cameras with them by the end of the fourth quarter. 2. The company hopes that picture maker kiosks/media sales in the fourth quarter will be approximately flat from the third quarter. 3. The company is highly confident about being capable of generating approximately $800 million cash in the fourth quarter based on last four years experience. 4. Kodak believes it is not having any problems with quality, and cited the company’s receiving the JP Power award twice in the last two years. 5. The average interest rate on debt is 6.5% 6. Expected restructuring costs for the full year of 2005 will be $625 million, with $180 million being incurred in the fourth quarter.