By Trevor Shackelford May 12, 2006 -- Eastman Kodak Corp. (NASDAQ: EK) announced their first quarter 2006 earnings recently. Sales totaled $2.889 billion, an increase of 2% from $2.832 billion in the first quarter of 2005. This includes a negative foreign exchange impact of 2%. Digital revenue totaled $1.616 billion, a 29% increase from $1.250 billion. Traditional revenue totaled $1.257 billion, a 20% decline from $1.573 billion. New technologies contributed an additional $16 million in the first quarter, compared with $9 million in the year-ago quarter. The company’s loss from continuing operations in the quarter, before income taxes, interest, and net of other income and charges, was $259 million, compared with a loss of $201 million in the quarter a year ago. GAAP net loss for the quarter was $298 million, or $1.04 per share, compared with a GAAP net loss of $146 million, or $0.51 per share, in the same quarter last year. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Kodak is considering selling its Health Group. • Kodak’s debt rating placed on review by Moody’s. • Debt decreased $18 million from the fourth quarter to $3.565 billion at the end of the first quarter 2006. • Kodak held $1.077 billion in cash on its balance sheet at quarter end, compared with $1.031 billion at quarter end a year ago. This is consistent with the company’s stated desire to maintain approximately $1 billion of cash on hand. • For the quarter, net cash from operating activities was a negative $481 million, compared with a negative $223 million in the year-ago quarter. Investable cash flow for the quarter was negative $576 million, compared with negative $258 million in the year-ago quarter. • Gross profit was 23.5%, down from 24.4%, primarily because of the negative impact of foreign exchange and lower volumes and prices. Gross profit was also negatively impacted by the increased depreciation charges due to the asset useful life changes made in the third quarter of 2005. • SG&A expenses were 21% of sales, consistent with the same period last year. Segment Performance Graphic Communications Group Sales for the segment were $870 million, up 136%, reflecting the acquisition of KPG and Creo. Earnings from operations were $31 million, up from a loss of $34 million last year. This improvement was largely driven by contributions from acquired businesses and strong year-over-year earnings improvement from NexPress. Digital earnings increased by $67 million, from a loss of $24 million last year to earnings of $43 million in the first quarter of 2006. Consumer Digital Sales for the segment totaled $498 million, down 10% from last year. Loss from operations for the segment was $94 million, compared with a year-ago loss of $58 million. This primarily reflects higher retailer inventory on an industry-wide basis, previously announced price reductions for thermal media, and increased depreciation charges due to the asset useful life changes made in the third quarter of 2005, partially offset by a year-over-year improvement in digital capture earnings. Film and Photo-finishing System Segment sales were $916 million, down from $1.268 billion in the same quarter last year. Earnings from operations were $29 million, compared with $71 million in the year-ago quarter. The increased non-cash charges for depreciation, due to the asset useful life changes made in the third quarter of 2005, account for more than half of this decline. Health Group Segment sales were $585 million, down 7%. Earnings from operations for the segment were $46 million, compared with $78 million a year ago. This is primarily the result of lower earnings from traditional radiography film and digital output and higher silver costs, which affect the Health Group more than any other Kodak business because of the higher silver content of its products. This was partially offset by improved earnings in computed radiography, healthcare information systems and digital radiography. Digital earnings were $17 million, down from $33 million a year ago. Other Sales All other sales were $20 million, up 18% from the year-ago quarter. The loss from operations totaled $43 million, compared with a loss of $52 million a year ago. Digital loss for this segment was $3 million, compared with a $2 million loss in the first quarter a year ago. The “Other Sales” category includes displays, consumer inkjet, and other miscellaneous businesses. Guidance Kodak continues to expect that it will increase digital earnings to a range of $350 million to $450 million, with digital revenue growth expected to be between 16% and 22% next quarter. The company also expects investable cash flow to be between $400 million and $600 million, with net cash provided by operating activities from continued operations of $800 million to $1.0 billion next quarter. Raine Radar Kodak posted its sixth straight quarterly loss and named the latest victims of its long running downsizing activities. Kodak stated that three top executives will be leaving and the company is considering selling off its profitable health care imaging business. Kodak is trying to bounce back from a long year of profit shortfalls and accounting issues. The company had high hopes for returning to profitability in the first quarter, but instead had to report a loss of $1.04 a share, which was twice the loss of last year’s same-quarter deficit. On the subject, Antonio Perez, CEO, stated, “These are all important steps toward completing the creation of the new Kodak.” Although the company did make a substantial improvement in digital earnings, profitability may not happen until the back half of 2006, if then. Q & A 1. Kodak is still uncertain about whether or not they will sell off the Health Care side of their business. At this time the Board of Directors has given management the directive to seek “options and alternatives.” 2. Perez is certain that the consumer digital segment in the first quarter of the year is always the slowest. In Q1 the company did not have many of their strategies and initiatives come to fruition. 3. Kodak stated that the company’s need to make some moves in management was a natural and necessary step in the progression and growth of a business. 4. The company fully expects digital revenue to continue to grow in Q2 with expectations remaining in the $350-450 million range. 5. Digital earnings were a negative $37 million, compared with a negative $51 million in the same quarter a year ago. 6. Speaking about the consumer health segment, Perez stated that the EASYSHARE system just marked its fifth anniversary and continues to set the standard for ease of use and imaging innovation.