By Susan Kelly October 23, 2003 – Eastman Kodak Company (NYSE: EK) Rochester, NY, a worldwide leader in imaging products and services for businesses and consumers reported its third quarter results for 2003. For the third quarter of 2003 revenues totaled $3.4 billion, up 3% from $3.3 billion in the third quarter of 2002. Excluding foreign exchange, sales declined 1%. The company reported net income of $122 million, or $0.42 cents per share, compared with net income of $334 million, or $1.15 per share, in the third quarter of 2002. Editor’s Note: Kodak made headlines in the Wall Street Journal on October 21st, a day before their earnings call. A group of restive shareholders aims to upend Kodak’s newly announced strategy to move away from its traditional film business by slashing its dividend and spending $3 billion on digital print acquisitions. Investors, surprised by the radical plan, have trampled Kodak stock with shares down 14% to $23.12 since the announcement, hitting15-year lows. It was surprising to hear that this earnings call was almost a repeat performance of the second quarter call. There were no introductory statements from the Chairman, Mr. Dan Carp, to address analyst concerns. His comments made later in the call, were basically the same messages delivered last quarter. Topics of this summary: * Financial Summary * 2003 Guidance * Commercial Imaging Division: Kodak Polychrome Graphics (KPG) and NexPress * Q & A Summary Financial Summary Mr. Robert Brust, Kodak’s CFO, initiated the conference to stress the positive results: * Regional highlights: China rebounded back with 14% increase in sales in the third quarter. Sales in U.S. were down 3% and up the similar amounts in non-US regions. Other major shifts include: Russia up 15% , India up 23%, and Mexico down 8%. * For the quarter, operating cash flow was $243 million, compared with $345 million in the third quarter of 2002. * The company’s debt totaled $2.9 billion at the end of the quarter, compared with $2.7 billion in the year-ago quarter. * The company held $983 million in cash on its balance sheet at the end of the quarter, up from $561 million at the end of the third quarter of 2002. * Net debt totaled $1.9 billion at the end of the third quarter, down $274 million from the year-ago quarter. These figures don’t include the $1.1 billion in debt that Kodak issued in October. * Gross profit on an operational basis was 33.7%, compared with 38.5% in the year-ago period due to unfavorable price and mix. * Selling, general and administrative expenses were basically flat from a year ago with 18.3% of sales. * Acquisition of PracticeWorks which took place on July 21st, 2003 for approximately $500 million in cash was completed in October. 2003 Guidance * Kodak is forecasting free cash for the full year 2003 to be $700 million which exceeds current guidance. (Editor’s Note: up $200 million from last quarter). These monies will be available for debt reduction or potential acquisitions. * Net debt is expected to be $2.1 – $2.4 billion by year end even with the newest acquisition. No significant maturities are due this year. * The company expects operational earnings of $2.10 to $2.20 per share, and GAAP earnings of $1.15 to $1.30 per share, for all of 2003. Commercial Imaging Division Revenues totaled $373 million for the third quarter of 2003 as compared with $352 million for the prior year quarter, representing an increase of $21 million, or 6% as reported, or an increase of 3% excluding the favorable impact of exchange. Revenue from Kodak Polychrome Graphics (“KPG”) decreased 14% in the current quarter as compared with the third quarter of 2002, primarily reflecting volume and negative price/mix in graphic arts film. This reduction resulted largely from digital technology transition and the effect of continuing economic weakness in the commercial printing market. Despite continued weakness in the global economy, KPG’s earnings performance continues to improve driven primarily by its leading position in the growth segments of digital proofing and digital printing plates, coupled with favorable foreign exchange. KPG’s operating profit has been positive for 13 consecutive quarters and continued to contribute positively to Kodak’s “Other Charges” during the third quarter of 2003. NexPress continues to experience good customer acceptance on its sales of NexPress 2100 Digital Production Color Presses despite a weak printing market, with average monthly page volumes for these units running higher than planned. Gross profit for the Commercial Imaging segment was $93 million for the third quarter of 2003 as compared with $109 million in the prior year quarter, representing a decrease of $16 million, or 15%. SG&A expenses for the Commercial Imaging segment remained unchanged at $49 million for the current quarter as compared with the third quarter of 2002, but decreased as a percentage of sales from 13.9% to 13.1%. Earnings from operations for the Commercial Imaging segment decreased $9 million, or 21%, from $42 million in the third quarter of 2002 to $33 million in the current quarter primarily as a result of declining margin contributions from traditional graphic arts products. Q&A 1. Positive impacts in the third quarter that are may or may not be reoccurring: SARS, currency exchange, and tax rates, and profitability of digital cameras. 2. One analyst asked if Kodak has reconsidered the $3 billion price tag given the backlash from Wall Street. Chairman Dan Carp responded that “I didn’t come up with the number in the middle of the night, and we have a disciplined approach to do the acquisitions over the next 3 years. We want to change from a one-trick pony to a more balanced company. I’m as confident about this strategy today as I was when I was working with the Board on it.” 3. Analysts commented that they are having trouble assigning value to the strategy. Kodak says they are looking to strengthen their Commercial Imaging Joint Ventures, where appropriate, and that also they have wonderful technology in the commercial printing space. When analysts asked specifically about investments in their current JV’s, Carp responded that “KPG/Sun Chemical and NexPress are both bullish about the commercial print segment and we share a vision and that’s about as far as we go. They are on board with the attractiveness of the space.” 4. Analysts wanted more information around the key decisions about how Kodak will reduce their manufacturing base and restructure the company since staff reduction benefits won’t be materializing until first quarter 2004. 5. When asked about a public roll-out of their strategy and analysis work, Carp responded that they will meet with investors in private meetings. “What was missed by investors,” stated Carp, “is the fact that managing a company more aggressively for cash doesn’t hold water in being more viable. Kodak wants to help their customers (i.e. retailers, healthcare, consumers, etc.) transform their businesses.” 6. Analysts want to know more about the strategy alternatives as it relates to the allocation of capital to be assured that the best strategy was chosen. Kodak says they will be holding a meeting on January 24th, 2003 to update investors and the public accordingly.