Press Release: Kodak Reports Significant Progress in Digital Transformation


Eastman Kodak Company will inform the investment community today of significant progress in its digital transformation, led by the successful integration underway of the acquisitions comprising the Graphic Communications Group.

At a meeting today with investors, Kodak also will indicate that total digital revenue growth in 2005 is expected to exceed the original full-year forecast. The company will reiterate that it remains committed to achieve its cash flow goals for 2005. The company's forecast for net cash from operating activities plus asset sales is $1.0 billion to $1.2 billion, and the performance so far this year suggests a year-end result in the lower end of that range.
Kodak management will update investors on the path the company is following to generate profitable digital revenue growth between now and the end of 2007. The presentation also will cover Kodak's view of that digital future, when the company expects its business transformation to yield gross profit margins of 30% and digital earnings from operations equal to 10% of revenue.
"We are moving aggressively to boost revenue, generate cash, increase earnings, and extend our leading position in the digital markets that we serve," said Antonio M. Perez, Chief Executive Officer and President, Eastman Kodak Company. "By the middle of 2007, we will have largely completed the restructuring of our traditional business and achieved the cost model necessary for sustained success in digital markets. The path to this future will be uneven, which is typical of a major technology shift, but we remain confident that Kodak's profitability and cash generation will improve along the way.
"In support of these goals, we are strengthening our position in the marketplace," Perez said. "Our Graphic Communications Group, for example, took almost three times as many orders as expected at the recent Print 05 trade show, where Kodak won seven 'Must See 'em' awards - more than any other company. Last week, we announced FDA approval of enhancements to our mammography computer-aided detection (CAD) system, which increase the system's sensitivity while reducing the number of false positive markers. And just yesterday, we announced that we have begun shipping to retailers the groundbreaking EASYSHARE-ONE zoom digital camera, making Kodak the first company to bring to market a Wi-Fi consumer digital camera."
Financial Priorities Update
As noted with the release of the company's second-quarter earnings in July, Kodak is focused on three priorities: digital revenue growth, digital earnings growth and the generation of cash.
For 2005, Kodak expects digital revenue growth to exceed the growth rate of 36% announced at the start of the year. This year will mark the first in the company's history in which digital revenue will exceed traditional revenue.
While digital earnings from operations this year will increase by more than 300%, the growth is projected to be somewhat behind the ambitious target of $275 million to $325 million the company set for 2005. This largely reflects lower-than-expected earnings growth in the Health Group, and the possibility of slower U.S. economic growth for the balance of the year.
As noted above, Kodak remains committed to generate net cash from operating activities plus asset sales this year within the range of $1.0 billion to $1.2 billion. The company also remains committed to paying down debt and working to regain an investment-grade credit rating. In the year 2008, Kodak expects to be generating at least $1.5 billion in net cash from operating activities annually.
As previously announced, and consistent with the company's cash forecasts, Kodak continues to reduce manufacturing capacity in the consumer traditional operations in order to achieve sustained profitability for the remainder of this decade. The plan calls for capacity utilization to increase to about 90% by late 2007, from an average in 2004 of about 65%. The company also continues its program of employment reductions in the traditional operations and among administrative personnel worldwide.
Business Unit Update
Between 2005 and 2007, the company expects earnings from consumer digital products and services to improve, driven by rising sales of digital media and services, increased monetizing of intellectual property, greater efficiency, and an improved cost structure.
As part of that effort, the company will establish its consumer digital portfolio separate from the film systems portfolio, effective January 1, 2006. Kodak's financial reporting will reflect the establishment of these two distinct segments beginning with the earnings release for the first quarter of 2006. This structure will afford the consumer digital portfolio the ability to manage its unique supply chain needs and retail partners in a manner consistent with what digital businesses require. The change also will allow Kodak to streamline its management structure.
Bernard Masson, who is currently President, Digital & Film Imaging Systems, and one of the key architects of the new structure, has decided to retire on January 1. Masson, 57, reports to Perez. In the new structure, Philip J. Faraci, 50, will become President, Consumer Digital Imaging Group, responsible for digital capture, kiosks, home printing systems, business development, inkjet systems, digital imaging services and imaging sensors. Mary Jane Hellyar, 52, will become President, Film Imaging Systems Group, responsible for consumer and professional film, photographic paper and photofinishing, aerial and industrial film, and entertainment imaging products and services. Hellyar also will continue to manage the company's development of display technologies. Both Faraci and Hellyar will report directly to Perez.
"Bernard has made many important contributions to Kodak's success," Perez said. "He articulated a clear vision for the future of consumer photography. Under his leadership, Kodak became the No. 3 seller of digital cameras in the world and the leading digital camera seller in the U.S., as well as number one in the world in snapshot printers, kiosks and online printing. Bernard also led the profit turnaround in Kodak's consumer output portfolio. We thank him for his service, and we wish him well in his retirement.
"We are pleased to be able to promote two exceptional managers to run the digital and traditional segments," Perez said. "Phil Faraci joined Kodak late last year after careers at Phogenix Imaging and Hewlett-Packard. He has demonstrated on multiple occasions his ability to build profitable consumer digital businesses. Mary Jane has a track record of demonstrated performance in managing Kodak's traditional portfolio."
As for the Graphic Communications Group, Kodak expects a significant increase in the segment's earnings starting next year, helped by the effective integration of the acquisitions made in 2004 and 2005 and the realization of cost savings of approximately $140 million over the next three years from consolidating the businesses. The company also expects GCG to generate double-digit annual digital revenue growth during the interval.
Kodak also expects digital earnings from the Health Group to increase in 2006, led by rising demand for computed and digital radiography systems, as well as healthcare information systems and digital dental systems. The Health Group continues to work to improve profitability across its digital product line, even as demand slows for digital output systems.
Transformation Outlook
"Kodak has a huge opportunity in the digital world, and we are transforming our company and our brand to make sure we do all we can to take advantage of the opportunity," Perez said. "In Graphic Communications, for example, we have created the world's leading single-supplier of equipment, software and consumables to the commercial printing market.
"In our Health business, we have the brand, the heritage and the technology to leverage our relationships in traditional imaging to extend an already solid position in digital imaging," he said. "We improved the organizational structure of the Health Group in the past month by creating four units - Information Technology/Services, Media, Products, and Dental - to drive more focus and accountability, and to better enable us to serve the customer. This change increases our confidence for a significant improvement in Health's earnings performance, which is a management priority during the next six months.
"In our consumer digital portfolio, we enjoy the benefits of differentiated technologies that complement each other and contribute to our overall success," Perez said. "Our market-leading digital cameras, coupled with strong positions in intellectual property and CMOS development, give us the scale necessary to drive down cost and increase the level of technology integration. They also provide a valuable link to our digital output and services. While consumer digital businesses tend to have lower margins, they feature attractive returns on invested capital.
"In summary, we have strong businesses with diverse sources of sales and earnings," Perez said. "By 2008, our consumer and commercial businesses will contribute an equal share to the company's total revenue. As we execute on our strategy, Kodak will become a growing digital company with attractive margins and solid cash generation."
For those unable to attend in person, today's meeting will be available via a live webcast. To access the webcast please go to: http://www.kodak.com/go/invest.
The meeting will also be teleconferenced in listen-only mode. To listen please call 913-981-4911 access code 1842703 or ask for the Kodak Investor Meeting.
An audio replay of the meeting will be available beginning September 29 at 9:00 a.m. and will run until 5:00 p.m. on Thursday, October 6, eastern time. The replay phone number is 719-457-0820 and the reference number is 1842703.
Within this press release, the Company makes reference to "Digital revenue growth", "Digital gross profit margin", "Digital earnings from operations", and "Net cash from operating activities plus asset sales", which are non-GAAP financial measures as defined by the Securities and Exchange Commission's final rules under "Conditions for Use of Non-GAAP Financial Measures." Reconciliations of these items to the most directly comparable GAAP financial measures are included in the attached Schedule.
Certain statements in this press release may be forward looking in nature, or "forward-looking statements" as defined in the United States Private Securities Litigation Reform Act of 1995. For example, references to expectations for the Company's digital earnings, digital revenue growth, gross profit margin, cash and cost savings are forward-looking statements.
Actual results may differ from those expressed or implied in forward-looking statements. In addition, any forward-looking statements represent our estimates only as of the date they are made, and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. The forward-looking statements contained in this press release are subject to a number of factors and uncertainties, including the successful:
-- Implementation of our digital growth strategy and business model;
-- Implementation of our cost reduction program, including asset rationalization, reduction in general and administrative costs and personnel reductions;
-- Implementation of our debt management program;
-- Implementation of product strategies (including category expansion, digitization, organic light emitting diode (OLED) displays, and digital products);
-- Implementation of intellectual property licensing and other strategies;
-- Development and implementation of e-commerce strategies;
-- Completion of information systems upgrades, including SAP, our enterprise system software;
-- Completion of various portfolio actions;
-- Reduction of inventories;
-- Integration of newly acquired businesses;
-- Improvement in manufacturing productivity and techniques;
-- Improvement in receivables performance;
-- Reduction in capital expenditures;
-- Improvement in supply chain efficiency;
-- Implementation of our strategies designed to address the decline in our analog businesses; and
-- Performance of our business in emerging markets like China, India, Brazil, Mexico and Russia;
Forward-looking statements contained in this press release are subject to the following additional risk factors:
-- Inherent unpredictability of currency fluctuations and raw material costs;
-- Competitive actions, including pricing;
-- Changes in our debt credit ratings and our ability to access capital markets;
-- The nature and pace of technology evolution, including analog-to-digital transition;
-- Continuing customer consolidation and buying power;
-- Current and future proposed changes to tax laws, as well as other factors, which could adversely impact our effective tax rate in the future;
-- General economic, business, geopolitical, regulatory and public health conditions;
-- Market growth predictions, and
-- Other factors and uncertainties disclosed from time to time in our filings with the Securities and Exchange Commission;
Any forward-looking statements in this press release should be evaluated in light of these important factors and uncertainties.
Reconciliation of Non-GAAP Financial Measures
to the most directly comparable GAAP Measures

Within the accompanying press release, the Company makes reference to
certain non-GAAP financial measures including "Digital revenue
growth", "Digital gross profit margin", "Digital earnings from
operations", and "Net cash from operating activities plus asset
sales", which have directly comparable GAAP financial measures. The
Company believes that these measures represent important internal
measures of performance. Accordingly, where these non-GAAP measures
are provided, it is done so that investors have the same financial
data that management uses with the belief that it will assist the
investment community in properly assessing the underlying performance
of the Company on a year-over-year basis. Whenever such information is
presented, the Company has complied with the provisions of the rules
under Regulation G.

The following reconciliations are provided with respect to the
non-GAAP measures referenced in the accompanying press release:


Digital Gross Profit
--------------------

2008 Digital gross profit %, as presented 30%
2008 Traditional gross profit % 30%
---

2008 Consolidated gross profit % (GAAP basis) 30%
===


Digital earnings from operations as a percent of sales
------------------------------------------------------

2008 Digital earnings from operations as a
percent of net sales, as presented 10%
2008 Traditional earnings from operations as a
percent of net sales 12%
---

2008 Consolidated earnings from
continuing operations before interest,
other income (charges), net and income
taxes as a percent of net sales, as presented
(GAAP basis) 10%
===

2005 Digital Revenue Growth
---------------------------

2005 Digital revenue growth, as presented (greater than) 36%
2005 Traditional revenue decline (greater than) (17)%
2005 New Technologies revenue decline (greater than) (30)%
-----

Consolidated revenue growth (GAAP basis) (greater than) 5%
=====


2005 Digital Earnings from Operations Growth
--------------------------------------------

The digital earnings from operations growth rate for 2005 of greater
than 300% is a non-GAAP measure. In the Company's second quarter 2005
earnings release on July 20, 2005, the Company indicated that, due to
the accelerated digital transformation and the resulting restructuring
charges relating to the traditional infrastructure, it has become
increasingly difficult to provide per share earnings forecasts with
any reasonable precision. Accordingly, the Company is not able to
reconcile, without unreasonable efforts and with the necessary degree
of accuracy, the digital earnings growth rate to the most comparable
GAAP financial measure.

January 2005 Digital Earnings from Operations Outlook
-----------------------------------------------------

The digital earnings from operations outlook for 2005 of $275 million
to $325 million is a non-GAAP measure that was first disclosed in the
January 26, 2005, investor meeting. In the Company's second quarter
2005 earnings release on July 20, 2005, the Company indicated that,
due to the accelerated digital transformation and the resulting
restructuring charges relating to the traditional infrastructure, it
has become increasingly difficult to provide per share earnings
forecasts with any reasonable precision. Accordingly, the Company is
not able to reconcile, without unreasonable efforts and with the
necessary degree of accuracy, the digital earnings outlook to the most
comparable GAAP financial measure.

Net cash from operating activities plus asset sales
---------------------------------------------------

($ in millions)

2005 net cash from operating activities plus asset
sales, as presented $1,000 - $1,200

Less:
2005 asset sales $250 - $350
-------------

2005 net cash from operating activities (GAAP basis) $750 - $850
=============

Posted: Wed - September 28, 2005 at 09:10 AM          

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