Kodak Reports Q2 Loss, Expects Improved Second Half of 2009

ROCHESTER, NY—July 30—Eastman Kodak Co. (NYSE:EK) today reported second-quarter 2009 results that reflect the weak global economic climate and forecasted improved financial results for the second half of the year.

The company’s second-quarter results also reflect focused investments that Kodak is making in new products and core growth businesses, as well as disciplined cost management and more tightly focused spending on research and development. These actions will lay the groundwork for the second-half cash and earnings improvement that the company expects.

For the second quarter, Kodak reported a loss from continuing operations of $191 million, or $0.71 per share. Second-quarter sales were $1.766 billion, a 29% decline from the year-ago quarter, including approximately 5% of unfavorable foreign exchange impact.

“While we continue to be challenged by the global recession, we remain committed to our strategy and have the financial resources available to implement our business plans,” said Antonio M. Perez, Chairman and Chief Executive Officer, Eastman Kodak Company. “We have every expectation that our cash flow pattern this year will mirror the pattern of previous years, with a sizable increase in cash generation in the second half of 2009. During the second quarter we continued to execute on our strategy, with our consumer inkjet hardware and ink revenue growth significantly outpacing the market. We’ve recently announced the first sale of our Kodak PROSPER S10 Imprinting System, and the first letter of intent to purchase a Kodak PROSPER Press powered by our Stream Inkjet Technology. We are successfully focusing on those things within our control – strengthening the return on our cash-generating businesses, further developing our core growth businesses, maintaining and enhancing our leading market share position, introducing innovative new products, and driving a leaner cost structure – all of which will create operating leverage and position Kodak for a stronger second half of 2009.”

For the second quarter of 2009:

* Sales worldwide totaled $1.766 billion, a decrease of 29% from $2.485 billion in the second quarter of 2008, including 5% of unfavorable foreign exchange impact. Revenue from digital businesses totaled $1.173 billion, a 28% decline from $1.636 billion in the prior-year quarter, primarily as a result of the global recession and continued restrictions in the credit markets. Revenue from the company’s traditional business decreased 30% to $593 million, primarily as a result of industry-related declines in our traditional businesses and the negative impact on volumes related to the uncertainty of labor contract negotiations in the entertainment industry. These labor contract negotiations were concluded in June 2009.

* The company’s second-quarter loss from continuing operations, before interest expense, other income (charges), net, and income taxes was $119 million, compared with earnings on the same basis of $18 million in the year-ago quarter.

On the basis of U.S. generally accepted accounting principles (GAAP), the company reported a second-quarter loss from continuing operations of $191 million, or $0.71 per share, compared with earnings on the same basis of $200 million, or $0.66 per share, in the year-ago period. Items of net expense that impacted comparability in the second quarter of 2009 totaled $75 million after tax, or $0.28 per share, primarily related to restructuring charges and tax related items. Items of net benefit that impacted comparability in the second quarter of 2008, totaled $245 million after tax, or $0.79 per share, due primarily to a tax refund from the U.S. Internal Revenue Service. (Please refer to the attached Items of Comparability table for more information.)

Other second-quarter 2009 details:

* Gross Profit was 18.5% of sales, a decline from 23.6% in the year-ago period. This decline in margin was driven by reduced volumes, along with the impact of negative price/mix, including lower intellectual property licensing royalties, and unfavorable foreign exchange, partially offset by continued cost reductions.

* Selling, General and Administrative (SG&A) expenses were $324 million in the second quarter, down 26%, or $114 million, from $438 million in the year-ago quarter, as a result of company-wide cost reduction actions.

* Research and Development expenses were $84 million in the second quarter, down 38%, or $51 million, from $135 million in the year-ago quarter, driven by more tightly focused investments in core growth businesses.

* Second-quarter 2009 cash generation, before restructuring, reflected a use of $136 million. This compared with cash usage on the same basis of $158 million in the year-ago quarter, after excluding the impact of a tax refund received from the IRS in that period. This corresponds to net cash used in continuing operations from operating activities on a GAAP basis of $161 million in the second quarter, compared with net cash provided of $162 million in the second quarter of 2008. As was the case in 2008, the company expects cash usage to be heaviest in the first part of the year, with cash trends expected to be significantly improved for the second half of the year.

* Kodak held $1.132 billion in cash and cash equivalents as of June 30, 2009.

* The company’s debt level stood at $1.311 billion as of June 30, 2009.

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 second-quarter sales were $503 million, a 33% decline from the prior-year quarter, including 5% of unfavorable foreign exchange impact. Second-quarter loss from operations for the segment was $99 million, compared with a loss of $49 million in the year-ago quarter. The year-over-year variance was driven primarily by price/mix impacts, including lower intellectual property licensing royalties and unfavorable foreign exchange, and market-related volume declines. This was partially offset by improved profitability in consumer inkjet systems, driven by a 44% revenue increase in consumer inkjet printer hardware and ink, along with lower costs as a result of the company’s move to a more efficient product platform, and reduced SG&A and R&D expenses across the segment. Kodak continues to forecast an average of at least $250 million to $350 million in intellectual property licensing revenue for 2009 and the next few years.

* Graphic Communications Group second-quarter 2009 sales were $670 million, a 24% decline from the second-quarter of 2008, including 5% of unfavorable foreign exchange impact. This revenue decrease was primarily driven by a market-related decline of 27% in Prepress Solutions as well as associated declines in workflow. Second-quarter loss from operations for the segment totaled $28 million, compared with earnings of $13 million in the year-ago quarter. This earnings decline was primarily driven by lower volume and price/mix across several product lines, along with a negative impact from foreign exchange, partially offset by operational improvements in Electrophotographic Printing Solutions.

* Film, Photofinishing and Entertainment Group second-quarter sales were $593 million, a 30% decline from the year-ago quarter, including 6% of unfavorable foreign exchange impact. Second-quarter earnings from operations for the segment were $51 million, compared with earnings of $54 million in the year-ago period. These earnings results were driven by declines in consumer film sales volumes, price/mix across several product lines and unfavorable foreign exchange impacts, primarily in Entertainment Imaging, largely offset by operational improvements in Traditional Photofinishing, significant cost reductions across the segment, improvement in raw material costs, and the impact of previously announced changes in post-employment benefits.

2009 Outlook

For 2009, on a continuing operations basis, Kodak remains focused on three key financial goals, which the company first announced at its February investor meeting: digital and total company revenue, earnings from operations, and cash generation. The company today provided an updated outlook regarding its targets for 2009 performance against these metrics, recognizing the ongoing uncertainty created by the global economic environment.

* For the second half of 2009, Kodak is targeting digital revenue to grow by 1% to 3% and total company revenue to decline 4% to 6%. This is contingent upon the introduction of new, higher margin digital cameras and devices, achievement of intellectual property licensing revenues and demand improvement in Prepress products. For the full-year 2009, the company is targetingto be within the ranges that it presented in its February forecast, including a digital revenue decline of 6% to 12% and a total revenue decline of 12% to 18%.

* Kodak is targeting 2009 segment earnings that will be within the previously communicated range of $0 to $200 million. Correspondingly, the company previously forecasted 2009 GAAP loss from continuing operations of $200 million to $400 million, and now forecasts that GAAP results will be at the low end of that range, reflecting its latest assessment of restructuring charges, interest expense, and interest income.

* For full-year 2009, the company reiterates its goal of achieving positive cash generation before restructuring. The company targets to be at the low end of its February forecast ranges, which included cash generation before restructuring of between $75 million and $325 million and cash generation of negative $200 million to positive $100 million after taking into account restructuring payments.