EK: Kodak Reports 3rd-Quarter Sales of $3.204 Billion and Improved Earnings

Eastman Kodak Company (NYSE:EK) today reported a GAAP earnings improvement
of $877 million for the third quarter of 2006, on sales of $3.204 billion,
largely as the result of the recording of a tax valuation charge in the
year-ago quarter of $778 million. The company also delivered a $98
million increase in digital earnings, driven by wider gross profit margins,
from strong earnings performance in the Graphic Communications and Consumer
Digital businesses, and the result of the company’s global cost-reduction
initiatives.


Based on its third-quarter 2006 performance, the company is confident of
achieving its 2006 cash and digital earnings goals, and expects digital revenue
growth somewhat below its 10% target, as a result of the company’s focus on
margin expansion. This corresponds to a total revenue decline of
approximately 6%.


“Our business transformation is on track,” said Antonio M. Perez, Chairman
and Chief Executive Officer, Eastman Kodak Company. “I am encouraged by our
third-quarter results, especially because they reinforce our confidence in our
full-year performance, which is the basis on which I manage the company.


“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.
While I am fully aware of the challenges to largely complete our restructuring
by the end of next year, this performance represents clear progress toward our
goals and gives us good momentum to carry into the fourth quarter and
2007.”


For the third quarter of 2006:

• Sales totaled $3.204 billion, a decrease of 10% from $3.553 billion in the
  third quarter of 2005, largely attributable to a 19% decline in traditional
  sales. Third-quarter traditional revenue totaled $1.402 billion, compared to
  $1.725 billion in the year-ago quarter, while digital revenue totaled $1.793
  billion, as compared to $1.814 billion in the year-ago quarter.


• The company’s earnings from continuing operations in the quarter, before
  interest, other income (charges), net, and income taxes, were $2 million,
  compared with a loss from operations of $123 million in the year-ago
  quarter.


• On the basis of generally accepted accounting principles in the U.S.
  (GAAP), 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. By comparison, the third quarter 2005 GAAP net loss was $914
  million, or $3.18 per share. The difference is largely driven by the inclusion
  in last year’s third quarter of a $778 million, or $2.71 per share, non-cash
  charge to record a valuation allowance against the net deferred tax assets in
  the U.S.


• Digital earnings were $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. This
  performance was primarily due to operational improvements throughout the
  digital portfolio, the impact of a non-recurring licensing arrangement within
  the Consumer Digital Group, and strong results in the Graphic Communications
  Group.

Other third-quarter 2006 details:

• For the quarter, net cash provided by operating activities on a GAAP basis
  was $329million, 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 as of September 30,
  2006, compared with $610 million on September 30, 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 as of September 30, 2006, 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 the previously noted 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.

Third-quarter segment sales and results from continuing operations, before
interest, other income (charges), net, and income taxes (earnings from
operations), are as follows:

• Graphic Communications Group sales were $880 million, compared with $886
  million in the year-ago quarter. Strong digital revenue growth from digital
  plates, commercial inkjet, NexPress color and document scanners during the
  quarter was offset by expected declines in the traditional product portfolio.
  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 Group sales totaled $640 million, down 3%. 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. The earnings results
  reflect improvements across virtually the entire digital portfolio.


• Film and Photofinishing System sales 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 silver prices. During the
  third quarter of 2006, the group achieved a 12.9% operating margin, maintaining
  the performance from the year-ago quarter.


• Health Group sales 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 its Health Group. Despite these
  challenges, the Health Group maintained operating margins of 11.4%.


• All Other sales 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. The All
  Other category includes the Display & Components operation and other
  miscellaneous businesses.

2006 Goals


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. Accordingly, the company expects a
GAAP loss from continuing operations before interest, other income (charges),
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. This
corresponds to digital earnings from operations this year in a range of $350
million to $450 million. 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%.