Kodak’s Quarterly Report Highlights Progress in Business Transformation

Antonio Perez’ Letter to Kodak Employees

Kodak shared the following letter from Antonio M. Perez, Chairman and CEO, to the company’s employees that provides his perspective on the company’s latest financial report, released today:

Dear Colleagues,

If I could write the headlines for the Kodak news stories that will appear today, I'd write this:

Kodak Makes Steady Progress in Digital Transformation During Challenging Times

That headline, for me, is the message in the third-quarter results we released today. The results show, upon close examination, considerable progress in our digital growth businesses even as we contend with stubborn challenges in some of our cash-generating businesses.

The results also show that we ended the quarter with $862 million of cash in the bank, with plans to end the year with $1.3 billion to $1.4 billion in cash—and that's before the sale of our digital imaging patent portfolios, which would materially increase our cash balance. (By the way, we're pleased with the progress we've made on the patent sale, and we're confident that the value of these patents, which represent just 10% of our total patent portfolio, will be recognized in the marketplace and materially increase our cash position.) Importantly, 2010 and 2011 represent the peak years for cash usage by our business units during our corporate transformation. The good news is that in 2012, we expect cash usage attributed to the operating businesses to decline notably, stemming from significant profitability improvements in consumer and commercial inkjet as well as digital cameras. In short, we feel confident we will secure the resources necessary to complete our transformation to a profitable, sustainable digital company.

Our third-quarter sales were $1.462 billion, a 17% decrease from the year-ago quarter. But let's take a closer look. In last year's third quarter, we enjoyed the benefit of a $210 million non-recurring patent licensing transaction. Excluding that year-ago non-recurring intellectual property revenue and a 25% decline in the company's Digital Cameras & Devices business, which reflects the strategic decision this year to trade revenue for improved earnings, third-quarter digital revenue actually grew 3%. What's more, the new approach in digital cameras drove a $53 million earnings improvement in the Consumer Digital Imaging Group in the third quarter. That also contributed to a gross profit improvement for the company of 3 percentage points, excluding the prior-year non-recurring patent licensing revenue and certain higher raw material costs, yet another sign of better operating performance.

Helping to offset the digital camera revenue decline was the performance of our four core digital growth businesses—Consumer and Commercial Inkjet, Packaging Solutions, and Workflow Software & Services. Their sales increased 13% as a group, fueled by a 44% increase in Consumer Inkjet printers and ink, as well as an 89% increase in Packaging Solutions. Specific to Consumer Inkjet, our installed base of printers is now big enough that we expect to meet a key milestone in the fourth quarter—achieving positive gross profit for this business as a whole, driven by ink gross profit. In both businesses, customers continue to embrace our revolutionary technology. We are outpacing the market by a wide margin.

In Commercial Inkjet, we continued to incur higher-than-planned start-up costs for PROSPER systems in the quarter and associated delays in booking revenue, while demand declined for our legacy VERSAMARK inkjet products, resulting in a 9% revenue decline. But let's take a closer look at just the PROSPER product line, which is our big future play in this category. Revenue for the entire PROSPER product line rose 40% in the third quarter. We anticipate that sales of PROSPER presses will accelerate in the fourth quarter, based on installations already in the field and continued success in the marketplace. PROSPER customers are placing additional orders as they experience the revolutionary value proposition of offset-class quality and productivity combined with the flexibility and speed of digital. That's the best measure of success.

For all of 2011, we now are forecasting a growth rate from our four digital growth businesses of approximately 25%, in markets that are generally flat, because we are stealing market share from our competitors. That's lower than the 30%-40% growth we had predicted in late July, reflecting slower economic momentum. However, 25% is still a substantial improvement year-over-year and points to a very promising future for these businesses. It is for this future that we are making investments today. I know this is hard work, but hard work is what gets the reward.

As for the stubborn challenges, in our Graphic Communications Group, we continue to see pricing pressure on digital plates as industry growth slows. This issue is compounded by higher raw material costs, especially aluminum. We are working hard to address this issue. Another business facing cost pressure is our Film, Photofinishing and Entertainment Group. Yet FPEG's third-quarter sales were better than expected at a decline of 10%, while earnings also came in better than expected at $15 million. This reflects successful pricing efforts and other cost controls that helped to offset significantly higher raw material costs, particularly silver.

So that's the closer look at today's Kodak—a company that's making steady progress in its growth businesses while managing the challenge of businesses that are mature or in decline. We are on a path to complete the transformation by the end of 2012. The key measures of success will be for our major digital growth businesses to reach break-even or better profitability in the fourth quarter of next year. We are on track to achieve that.

In times like these, it is useful to seek wisdom from those who've had to travel a tough road. My thoughts turn to the great American civil rights leader, Martin Luther King Jr., who famously said:

"The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy."

The world is taking our measure today, and we, the determined employees of Kodak, will measure up. We will continue to serve our customers with innovative products and solutions, especially in the critical remaining months of the fourth quarter. We will continue to meet our commitments and fulfill our obligations. We will not be distracted by the noise and speculation that surround us.

In time, we will be rewarded for our perseverance and for the work we do on behalf of our customers and, ultimately, our stakeholders.

I thank all of you for your hard work, your resilience, and your dedication. Let's stay true to the path we have set for ourselves, however challenging and controversial, because it is the surest way to achieve this historic transformation.

Antonio

ROCHESTER, NY—Nov. 03, 2011—Eastman Kodak reported steady progress toward becoming a profitable and sustainable digital company as third-quarter digital earnings improved, excluding non-recurring patent licensing revenue in the prior-year period, and sales increased in its core digital growth businesses. Total company revenue declined largely because of lower sales of traditional products, a planned reduction in digital camera sales, and the absence—compared to the year-ago period—of significant non-recurring patent licensing revenue.

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