Kodak Reports 3rd Quarter Profit on Sales of $2.405 Billion

Eastman Kodak Company (NYSE:EK) today reported third-quarter earnings from continuing operations of $101 million, or $0.35 per share, on sales of $2.405 billion. Kodak’s revenue from digital businesses rose 2% to $1.641 billion, driven by strong year-over-year increases in digital capture, consumer inkjet systems, and document imaging products.

“Despite the global economic weakness, Kodak was profitable in the third quarter, maintained strong liquidity, and held or improved our market position in key businesses, reflecting the benefits of the company’s multi-year transformation,” said Antonio M. Perez, Chairman and Chief Executive Officer, Eastman Kodak Company. “We remain confident that our strategy is sound, but given today’s challenging economic climate, we are taking a number of specific actions to strengthen our operations going forward. These include more tightly focusing our portfolio of investments, intensifying our emphasis on generating cash, and aligning our cost structure to the new economic realities. These actions will better position Kodak to manage through this economic environment and to take full advantage of the recovery when it comes.”

For the third quarter of 2008:

Sales worldwide totaled $2.405 billion, a decrease of 5% from $2.533 billion in the third quarter of 2007. Revenue from digital businesses totaled $1.641 billion, a 2% increase from $1.603 billion in the prior-year quarter. Revenue from the company’s traditional business decreased 18% to $764 million on continued declines in Film Capture and Traditional Photofinishing.
The company’s third-quarter earnings from continuing operations, before interest expense, other income (charges), net, and income taxes were $147 million, compared with earnings on the same basis of $15 million in the year-ago quarter.

On the basis of U.S. generally accepted accounting principles (GAAP), the company reported third-quarter earnings from continuing operations of $101 million, or $0.35 per share, compared with earnings on the same basis of $32 million, or $0.11 per share, in the year-ago period. Items of net benefit that impacted comparability in the third quarter of 2008 totaled $40 million after tax, or $0.13 per share. The most significant items include certain changes to the company’s post-employment benefits, which provided favorability of $0.31 per share, offset by restructuring and rationalization costs of $0.16 per share. Items of net expense that impacted comparability in the prior-year quarter totaled $101 million after tax, or $0.35 per share, primarily reflecting restructuring costs.

Other third-quarter 2008 details:

Gross Profit margin was 27.5% for the quarter, a slight improvement from 26.7% in the year-ago period. This margin improvement reflects the changes in post-employment benefits along with increased intellectual property licensing revenues, favorable foreign exchange, and cost reduction initiatives including the change in depreciation associated with the previously announced extension of the useful life assumptions of traditional manufacturing assets. These factors were offset by negative price/mix, the continued investment in consumer inkjet, and the impact of higher year-over-year commodity costs for the quarter.
Selling, General and Administrative (SG&A) expenses were $363 million in the third quarter, down 14%, or $61 million, from $424 million in the year-ago quarter. As a percentage of revenue, SG&A was 15.1%, compared with 16.7% in the year-ago quarter.
Third-quarter cash use before dividends was $102 million, a $79 million increase in cash usage from the year-ago period. This corresponds to net cash used in continuing operations from operating activities on a GAAP basis of $50 million in the third quarter, compared with net cash provided of $1 million in the third quarter 2007. This increase in cash used is due primarily to lower cash earnings, including the favorable non-cash impact of a reduction in post-employment benefits and a non-recurring intellectual property licensing agreement for which cash will be received in 2009. These impacts were offset by improvements in working capital and lower restructuring payments.
The company’s debt level stood at $1.303 billion as of Sept. 30, 2008, a reduction of $294 million as compared to the year-end 2007 debt level of $1.597 billion.
Kodak held $1.842 billion in cash and cash equivalents as of Sept. 30, 2008.
In the quarter, the company repurchased approximately 14 million shares of its common stock at a cost of $219 million. Since maintaining financial flexibility is critical in the current environment, additional share repurchases will depend on the company’s assessment of overall economic and market conditions. The previously disclosed share repurchase authorization remains in effect through the end of 2009, and the company will continue to provide updates on the program at the end of each quarter.

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

Consumer Digital Imaging Group sales for the third quarter were $820 million, a 7% increase from the prior-year quarter. Earnings from operations for the segment were $23 million, compared with $18 million in the year-ago quarter. Third-quarter earnings were driven primarily by cost improvements in digital cameras and digital picture frames, and increased intellectual property licensing, partially offset by unfavorable price/mix in digital cameras and continued investment in consumer inkjet.
Graphic Communications Group sales for the third quarter were $821 million, a 2% decrease from the year-ago quarter. Earnings from operations for the segment totaled $23 million, compared with earnings of $36 million in the year-ago quarter. This earnings decline was primarily driven by U.S. market softness for Prepress Solutions as well as unfavorable manufacturing costs related to higher year-over-year raw material costs for the quarter.
Film, Photofinishing and Entertainment Group third-quarter revenue was $764 million, down from $928 million in the year-ago quarter, representing a decrease of 18%, attributable to decreased sales volume of Film Capture and Traditional Photofinishing. Earnings from operations for the segment were $77 million, compared with $113 million in the year-ago quarter. These results reflect the effects of lower industry sales volumes and higher year-over-year commodity costs for the quarter, partly offset by decreased SG&A costs and lower depreciation expense related to the company’s change in useful life assumptions regarding traditional manufacturing assets.

“The economic environment is increasingly difficult,” said Perez. “Given the importance of the fourth quarter to the company’s full-year performance, and the unprecedented level of uncertainty surrounding the global economy, we must be prudent going into the fourth quarter and into 2009, which requires us to adjust our financial outlook. That said, we believe in our overall strategy and are optimistic about the future, despite the current economic realities. We have a healthy balance sheet, innovative products and services, and a well-respected brand that will see us beyond this challenging period.”

Updated 2008 Second-Half and Full-Year Outlook

For 2008, Kodak remains focused on three key financial metrics, as it transforms itself into a growing company with sustained profitability: revenue growth driven by digital businesses, earnings from continuing operations, and cash generation. The company is providing an updated outlook for 2008 performance against these metrics to reflect the impact of global economic conditions on projected top-line growth and earnings.

Kodak previously forecasted total revenue growth in the range of 0% to 2% and digital revenue growth in the range of 7% to 10%. For the full year, the company now expects total revenue to decline in the range of 3% to 5%, and digital revenue growth of between 1% to 4%, reflecting its strong performance in the first half of the year. For the second half of the year, the company expects total revenue to decline in the range of 6% to 10% and digital revenue to decline 1% to 5%.

The company previously forecasted earnings from operations (EFO), a non-GAAP measure, to be at the low end of a range of $400 million to $500 million. The company now expects second-half 2008 EFO to be in the range of $275 million to $325 million, which translates to $200 million to $250 million for the full year. This corresponds to forecasted 2008 GAAP earnings from continuing operations before interest expense, other income (charges), net, and income taxes, of between $220 million and $270 million for the second half of 2008, and between $160 million and $210 million for the full year. Full-year GAAP earnings include pre-tax charges of between $125 million and $150 million for carryover restructuring and other rationalization costs. These charges are higher than the previously communicated range of $80 million to $100 million due to intensified efforts around cost rationalization in the current environment. The primary factors resulting in this revised guidance are market-driven softness in overall revenues along with accompanying pricing, mix and foreign exchange effects, thereby reducing gross profit percentage and dollars.

With respect to cash generation, despite the challenging economic environment, the company expects to achieve in excess of $500 million in cash generation before dividends for the fourth quarter. This corresponds to net cash provided by operating activities on a GAAP basis for the fourth quarter in excess of $490 million. Primary factors resulting in the lower cash outlook are: earnings-related reductions associated with revenue softness and gross profit declines across the business driven by price/mix, a change in cash from intellectual property arrangements including an agreement reached in 2008 for which cash will be received in 2009, and a reduction in proceeds from sales of real estate.