By Trevor Shackelford November 15, 2006 -- Eastman Kodak Corp. (NASDAQ: EK) announced their third quarter 2006 earnings recently. Sales totaled $3.20 billion, a decrease of 10% from $3.55 billion in the third quarter of 2005. Third quarter “traditional” revenue totaled $1.402 billion, compared to $1.725 billion in the same quarter a year ago, while digital revenue totaled $1.793 billion, as compared to $1.814 billion in the same quarter last year. The company's earnings from continuing operations in the quarter, before interest, other income charges, net, and income taxes, were $2.0 million, compared with a loss from operations of $123 million in the year-ago quarter. The company reported a third quarter net loss of $37 million, or $0.13 per share, which includes after-tax restructuring costs of $202 million, or $0.70 per share. Contents of this Summary • Quarter Highlights • Segment Performance • Guidance • Raine Radar • Q & A Quarter Highlights • For the quarter, net cash provided by operating activities on a GAAP basis was $329 million, compared with $370 million in the year-ago quarter. Investable cash flow for the quarter was $237 million, compared with $216 million in the year-ago quarter. • Kodak held $1.102 billion in cash on its balance sheet at the end of the third quarter, compared with $610 million in the third quarter of 2005. This is consistent with the company's stated desire to maintain approximately $1.0 billion of cash on hand. • Debt decreased $192 million from the second-quarter level, to $3.339 billion at the end of the third quarter, and was down $244 million from the December 31, 2005 level of $3.583 billion. The company intends to reduce debt by approximately $800 million in 2006. • Gross profit was 27.3% in the current quarter, up from 25.9% in the prior year quarter, primarily because of reductions in manufacturing costs and the favorable impact of a licensing arrangement, offset by volume declines in traditional product sales. • Selling, general and administrative expenses declined by $105 million in the third quarter, to $565 million, compared with $670 million for the prior-year quarter. As a percentage of sales, SG&A decreased from 18.9% in the prior-year quarter to 17.6% in the third quarter of 2006. Segment Performance Graphic Communications Group Segment Third quarter revenues were $880 million, compared with $886 million in the year-ago quarter. Revenue saw some growth in digital plates, commercial inkjet, the NexPress digital press, and color and document scanners during the quarter, but they were offset by declines in the “traditional” product lines. Earnings from operations were $31 million, compared with $7 million in the year-ago quarter. This improvement was largely driven by contributions from the group's core digital businesses and cost reductions from business integration activities. Consumer Digital Segment Third quarter revenues totaled $640 million, down 3%, from the same quarter a year ago. Earnings from operations increased by $85 million, from a loss of $61 million in the year-ago period, to earnings of $24 million in the current quarter. Kodak was pleased with the earnings performance across the entire segment. Film and Photo-Finishing System Segment Third quarter revenues were $1.074 billion, down from $1.353 billion in the year-ago quarter. Earnings from operations were $139 million, compared with $174 million in the year-ago quarter. This decrease was primarily driven by an expected decline in revenue and higher input costs. During the third quarter of 2006, the segment achieved a 12.9% operating margin, flat from last year. Health Group Segment Third quarter revenues were $597 million, down 6%. Earnings from operations for the segment were $68 million, compared with $96 million a year ago. This is primarily due to higher silver prices, and costs associated with the company's exploration of strategic alternatives for this segment. Despite these challenges, the Health Group maintained operating margins of 11.4%. Other Sales Segment Third quarter revenues were $13 million, compared with $20 million in the year-ago quarter. For the third quarter, the loss from operations was $48 million, compared with a loss of $61 million in the year-ago quarter. Guidance Kodak continues to expect net cash provided by operating activities this year of $800 million to $1.0 billion, which corresponds with investable cash flow of $400 million to $600 million. The company expects a GAAP loss from continuing operations before interest, other income, net, and income taxes for the full year of $400 million to $600 million, which includes approximately $1.0 billion in pre-tax restructuring charges. The company forecasts 2006 digital revenue growth somewhat below 10%, reflecting the company's focus on targeted participation in the consumer digital market. Total 2006 revenue is expected to be down approximately 6%. Raine Radar All in all, a mixed quarter for Kodak. On the one hand, earnings are much improved from last year. However, earnings are still negative and revenue was down almost 10% year-over-year. Even worse, the declines happened in the digital business as well as the traditional lines. Hopefully, fourth quarter results will show greater stability in digital, and positive earnings. Q & A 1. The company had digital earnings of $105 million, compared with $7 million in the year-ago quarter, marking the first time that the company's quarterly digital earnings growth exceeded the quarterly decline in traditional earnings. 2. Chairman and CEO Anthony M. Perez said, "We measure our progress against three important metrics: cash generation, digital earnings, and digital revenue. Our year-over-year digital revenues were down slightly during the quarter, reflecting our strong focus on margin expansion and willingness to pursue more profitable sales, the universe of which expands as our cost structure improves. Our digital earnings were vastly improved this quarter and our cash balance continues to exceed $1 billion.” 3. Kodak announced that more than 30 healthcare facilities in Australia, China, Central America and South America have purchased its Kodak Directview CR mammography feature. This feature enables Kodak computed radiography systems to capture high resolution mammography images with traditional x-ray equipment. 4. The company mentioned that on October 18, 2006 its Board of Directors elected Douglas J. Edwards and Gerard K. Meuchner as vice presidents, effective immediately. 5. Acuity, a printing company in Ontario, Canada, has purchased a Kodak NexPress 2500 digital production color press. The press boasts speed, productivity and inline features that allow Acuity to offer digital printing that complements its high quality litho printing work. Kodak hopes that this purchase will be noticed by other customers in the upcoming quarters.