ROCHESTER, N.Y.--July 23, 2003-- Eastman Kodak Company today said that second-quarter net income, in accordance with Generally Accepted Accounting Principles (GAAP) in the U.S., totaled 39 cents per share and that sales were unchanged compared with the year-ago period. Excluding the impact of previously announced focused cost reductions and other non-operational items, earnings from continuing operations were 60 cents per share, higher than the forecast of 25 cents to 35 cents per share that the company issued on June 18. Relative to the June 18 forecast, the actual results primarily reflect a more favorable sales mix of health imaging and traditional consumer products and services. Better-than-expected performance from joint ventures and a lower-than-expected tax rate also contributed to the difference between actual and forecasted results. For the second quarter of 2003: Sales totaled $3.352 billion, unchanged from the second quarter of 2002. Excluding foreign exchange, sales declined 6%. The company reported net income of $112 million, or 39 cents per share, compared with net income of $284 million, or 97 cents per share, in the second quarter of 2002. ------ Net worldwide sales of graphic arts products to Kodak Polychrome Graphics ("KPG"), an unconsolidated joint venture affiliate in which the Company has a 50% ownership interest, decreased 16% in the current quarter as compared with the second quarter of 2002, primarily reflecting volume and price/mix declines 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 12 consecutive quarters and continued to contribute positively to Kodak's "Other Charges" during the second quarter of 2003. NexPress, the unconsolidated joint venture between Kodak and Heidelberg in which the Company has a 50% ownership interest, continues to increase unit placements of the NexPress 2100 Digital Production Color Press despite a weak printing market, with good customer acceptance and average monthly page volumes for these units running higher than planned. ------ Earnings from continuing operations, excluding the impact of focused cost reductions and other non-operational items, were $172 million, or 60 cents per share. The after-tax non-operational items include a charge of $36 million, or 13 cents per share, related to the previously announced focused cost reductions; a charge of $9 million, or 3 cents per share, in connection with the settlement of a patent infringement claim; a charge of $9 million, or 3 cents per share, in connection with a prior-year acquisition; and a charge of $6 million, or 2 cents per share, to write down certain assets held for sale following the acquisition of the Burrell companies. In the second quarter of 2002, earnings from continuing operations, excluding non-operational items, totaled $250 million, or 86 cents per share. The after-tax, non-operational items from the year-ago quarter include a one-time tax benefit totaling 15 cents per share resulting from the closure of a subsidiary, and a one-time write-down of assets associated with venture investments totaling 3 cents per share. "We are pleased to report quarterly earnings that are stronger than we had previously expected," said Kodak Chairman and Chief Executive Officer Daniel A. Carp. "Most of our businesses continue to perform well in a difficult economic environment. We are encouraged by the market's acceptance of the innovative products and services Kodak is creating - from our latest computed radiography systems and Vision2 motion-picture film, to the newest EasyShare consumer digital cameras and the well-received EasyShare Printer Dock." "Our traditional consumer film and processing operations continue to face challenges associated with the increasing popularity of digital photography as well as persistent economic weakness, continuing price pressure and an associated decline in travel and tourism," Carp said. "Consumer adoption of digital photography is growing at a more rapid pace than a year ago, and this is trimming demand for consumer film. At the same time, we are seeing evidence that more consumers want to print their digital photos at retail and at home. This trend presents a huge opportunity for Kodak to generate profitable sales of our market-leading Picture Maker kiosks and inkjet paper, which will help offset declining sales from traditional film. "Given these developments, we remain cautious about a material upturn in the traditional consumer products and services for the balance of 2003," Carp said. "In this environment, we remain committed to reducing costs aggressively, strengthening our balance sheet and bringing to market more innovative products for the benefit of our customers." Other second-quarter 2003 details from continuing operations: Kodak's operating cash flow was lower than the year-ago quarter, primarily reflecting lower net income from continuing operations, increased incentive compensation payments earned in 2002, including wage dividend, and a larger year-over-year increase in accounts receivable. For the quarter, operating cash flow was a negative $53 million, compared with a positive $302 million in the second quarter of 2002. The $53 million use of cash in the second quarter of 2003 included acquisitions of $34 million, while the year- ago quarter included no acquisitions. (Kodak defines operating cash flow as net cash provided by continuing operations, as determined under GAAP, plus proceeds from the sale of assets minus capital expenditures, acquisitions, investments in unconsolidated affiliates and dividends.) The company's debt totaled $2.990 billion at the end of the quarter, compared with $3.053 billion in the year-ago quarter. The company held $838 million in cash on its balance sheet at the end of the quarter, up from $524 million at the end of the second quarter of 2002. Gross profit on an operational basis was 33.6%, compared with 37.6% in the year-ago period. Selling, general and administrative expenses on an operational basis were 20.3% of sales, up from 19.4% in the year-ago quarter. The segment results from continuing operations for the second quarter of 2003 are as follows: Photography segment sales totaled $2.341 billion, down 2%. The segment had earnings from operations of $119 million on an operational and GAAP basis, compared with earnings from operations of $257 million a year ago. Highlights for the quarter included a 65% increase in consumer digital camera sales, and an 18% increase in sales of motion-picture origination and print film. Health Imaging segment sales were $607 million, up 7%. Earnings from operations on an operational and GAAP basis for the segment were $131 million, up from $112 million in the year-ago period. Highlights included higher-than-expected sales of digital radiography, computed radiography and Picture Archiving and Communications Systems (PACS). Commercial Imaging segment sales were $382 million, up 6%. Earnings from operations on an operational and GAAP basis were $40 million, compared with $53 million in the year-ago period. All Other sales were $22 million, down from $28 million. Losses from operations on an operational and GAAP basis totaled $22 million, compared with losses of $6 million in the year-ago period. The All Other category includes the Kodak Display business, as well as Sensors, Optics and miscellaneous businesses. Earnings Outlook: Given the extraordinary volatility of the current environment, reflecting global economic weakness, international conflict as well as the shifting mix of the portfolio of products sold, the company expects operational earnings of $0.85 to $1.15 per share, and GAAP earnings of $0.25 to $0.65 per share, for the second half of 2003. "As the results today indicate, our employees are succeeding in a marketplace where change is constant and rapid," Carp said. "For example, we expect that sales of our Digital & Applied Imaging products and services - which include inkjet paper, the Ofoto online photo service and EasyShare cameras and docks - will top more than $1 billion this year. Our Health Imaging segment continues to post strong results as digital products and services account for an increasing share of its sales." "The performance of these businesses point to a fundamental shift at Kodak," Carp said. "We are evolving from a historical film company into one that is aggressively pursuing the vast potential of digital imaging across all of our operations. We are extending the Kodak brand into the digital age so that we become known as the world's leading imaging company, building on our proud heritage as the world's leading picture company. And during this evolution, we will create new products and services with different business models but with a potential for growth that is far beyond that of our more mature operations. "We will do this in markets that are global and intensely competitive," Carp said. "They reward companies that increase productivity, reduce costs and move fast to take advantage of marketplace opportunities. Additionally, our historical consumer business is getting smaller, so it is vital that the cost structure of this business reflects that reality. We will continue to shape our company so that we remain competitive for a future in a digital world." Consistent with this business reality, Kodak plans to reduce its cost structure. The reductions will occur primarily in corporate administrative departments, manufacturing, and research and development. In addition, reductions will occur in the infrastructure and administration supporting the Consumer Imaging and Kodak Professional operations. Based on preliminary plans, Kodak expects to reduce employment by a range of 4,500 to 6,000, beginning later this year. This estimated reduction represents about 6% to 9% of the company's worldwide employment base of about 70,000 at the end of 2002. In keeping with past practice and consistent with requirements in various countries, the company will offer severance packages and outplacement services to those affected. The company will take charges during the next twelve months in the range of $350 million to $450 million to cover the costs associated with the new reductions. The company expects to generate annual savings of $300 million to $400 million from the new reductions, with $275 million to $325 million expected to be realized in 2004. "Being a global company means taking actions that maintain and extend our competitive position," Carp said. "While we can't know for certain when the economy will rebound, we do know that the market forces demanding lower costs, flexible manufacturing strategies and speed to market will not abate. We also are looking at a wide range of alternative cost reduction efforts, including health care, travel and general budget reductions. The combination of these actions will help Kodak become more profitable and more agile as we compete for a larger slice of the $385 billion infoimaging market that we serve." Operational items 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 operational items included in this press release to the most directly comparable GAAP financial measures can be found in the Financial Discussion Document attached to this press release. Segment Results: Photography Revenues: Net worldwide sales for the Photography segment were $2.341 billion for the second quarter of 2003 as compared with $2.378 billion for the second quarter of 2002, representing a decrease of $37 million, or 2% as reported, or 8% excluding the favorable impact of exchange. The decrease in net sales was comprised of: Volume: decreases in volume reduced second quarter sales by approximately 4.0 percentage points. Volume declines for traditional consumer products and services were partially offset by increases in volume for consumer digital and entertainment products and services. Price/Mix: declines in price/mix reduced second quarter sales by approximately 4.0 percentage points. Exchange: favorable exchange of approximately 6.0 percentage points offset the negative impacts of price/mix and volume. Photography segment net sales in the U.S. were $972 million for the current quarter as compared with $1.083 billion for the second quarter of 2002, representing a decrease of $111 million, or 10%. Photography segment net sales outside the U.S. were $1.369 billion for the second quarter of 2003 as compared with $1.295 billion for the prior year quarter, representing an increase of $74 million, or 6% as reported, or a decrease of 6% excluding the favorable impact of exchange. Consumer products and services revenues: Net worldwide sales of consumer film products, including 35mm film, Advantix film and one-time-use cameras (OTUC), decreased 6% in the second quarter of 2003 as compared with the second quarter of 2002, reflecting 13% volume declines, partially offset by positive 1% price/mix and 6% favorable exchange. Sales of the Company's consumer film products within the U.S. decreased 9%, reflecting 11% volume declines and positive 2% price/mix. Positive price/mix trends in the U.S. were the result of better than expected OTUC mix driven by the HQ, black and white and OTUC plus digital family of products, as well as new premium film products including High Definition and black and white films. It also reflects the initial retailer inventory build in support of the launch of this new family of premium OTUC and film products. Sales of the Company's consumer film products outside the U.S. decreased 2%, reflecting 14% volume declines, unchanged price mix, partially offset by 12% favorable exchange. U.S. consumer film industry volumes decreased approximately 7% in the second quarter of 2003 as compared with the prior year quarter. Year to date U.S. consumer film industry volumes decreased approximately 8% year over year. Early in 2003, the company predicted that full year 2003 U.S. consumer film industry would decline 4% to 6% and that digital transition would reduce industry growth by 4% to 5%. The most current U.S. market data trends indicate that for full year 2003, the U.S. film industry will contract in the 7% to 8% range and digital substitution will reduce industry growth by approximately 8% to 10% suggesting that digital transition accounts for the majority of the industry decline. The Company's blended U.S. consumer film share decreased approximately 1% on a volume basis relative to the second quarter of 2002. Management remains confident in maintaining full year, 2002 year-over-year U.S. market share as it has done for the past several consecutive years. Worldwide volumes of consumer color paper decreased low double digits in the second quarter of 2003 as compared with the second quarter of 2002, with U.S. volumes also declining low double digits and volumes outside the U.S. decreasing high single digits. Kodak will no longer report sales trends for color negative paper because paper and other products are typically bundled together as a "systems sell" for customer contracting purposes. Net worldwide photofinishing sales, including Qualex in the U.S. and Consumer Imaging Services ("CIS") outside the U.S., decreased 16% in the second quarter of 2003 as compared with the second quarter of 2002, reflecting lower volumes and price/mix, partially offset by favorable exchange. In the U.S., Qualex's sales decreased 22%, reflecting the effects of a continued weak consumer film industry and consumer's shifting preference to on-site processing. Net sales from the Company's consumer digital products and services, which include Picture Maker kiosks/media and retail consumer digital services revenue primarily from Picture CD and Retail.com, increased 1% in the second quarter of 2003 as compared with the second quarter of 2002, driven primarily by an increase in sales of kiosks and consumer digital services. The average penetration rate for the number of rolls scanned at Qualex wholesale labs averaged 7.4% in the second quarter of 2003, an increase from the 7.0% rate recorded in the second quarter of 2002. Growth was driven by continued consumer acceptance of Picture CD and Retail.com. However, the number of images scanned versus the second quarter of 2002 decreased 15% due to the negative photofinishing trends at Qualex resulting from a weak consumer film industry and consumer's changing preferences toward on-site processing. Net worldwide sales of consumer digital cameras increased 65% in the second quarter of 2003 as compared with the prior year quarter, primarily reflecting strong volume increases and favorable exchange partially offset by price declines. Sales continue to be driven by strong consumer acceptance of the EasyShare digital camera system. In addition, Kodak's new Printer Dock 6000, introduced to the market in March of this year, exceeded sales expectations during the second quarter. As in prior years, Kodak's U.S. consumer digital camera market share declined slightly during the second quarter of 2003 on a quarter sequential basis as the company refreshes its product portfolio and transitions to a new line of digital cameras becoming available throughout the third quarter. While complete data for second quarter consumer digital market share is not yet available, all indications are that Kodak continues to hold one of the top U.S. market share positions. On a year to date basis, Kodak's U.S. consumer digital camera market share increased modestly year over year. Net worldwide sales of inkjet photo paper increased 51% in the current quarter as compared with the second quarter of 2002. The Company maintained its top two market share position in the United States quarter sequentially. The double-digit revenue growth and the maintenance of market share are primarily attributable to strong underlying market growth, successful merchandising efforts and the continued growth and acceptance of a new line of small format inkjet papers. The Company's Ofoto business increased its sales 56% in the second quarter of 2003 as compared with the prior year quarter. Ofoto now has more than 8 million members and continues to be the market leader in the online photo services space. Professional products and services revenues: Net worldwide sales of professional sensitized films, including color negative, color reversal and black and white films decreased 14% in the second quarter of 2003 as compared with the second quarter of 2002, primarily reflecting declines in volume and price/mix partially offset by favorable exchange. Net worldwide sales of professional sensitized output declined 3% in the second quarter of 2003 as compared with the prior year quarter reflecting declines in volume and price/mix partially offset by favorable exchange. Sales declines resulted primarily from the combined impacts of ongoing digital transition and continued economic weakness in markets worldwide. During the second quarter, worldwide sales increases were recorded for digital cameras, digital writers, Event Imaging solutions, digital systems and solutions, display materials and thermal equipment. Entertainment products and services revenues: Net worldwide sales of origination and print film to the entertainment industry increased 18%, primarily reflecting higher print film volumes due to a strong industry motion picture release schedule and favorable exchange. The new Vision 2 origination film continues to gain strong customer acceptance. Gross profit: Gross profit for the Photography segment was $757 million for the second quarter of 2003 as compared with $896 million for the prior year quarter, representing a decrease of $139 million or 16%. The gross profit margin was 32.3% in the current year quarter as compared with 37.7% in the prior year quarter. The 5.4 percentage point decline was primarily attributable to: Price/Mix: declines in price/mix reduced gross profit margins by approximately 4.0 percentage points. Productivity/Cost: manufacturing productivity/cost negatively impacted gross profit margins by approximately 2.0 percentage points. Exchange: favorably impacted gross profit margins by approximately 1.0 percentage point. SG&A: In the second quarter, SG&A expenses for the Photography segment increased $19 million, or 4%, from $507 million in the second quarter of 2002 to $526 million in the current quarter, and increased as a percentage of sales from 21.3% to 22.5%. The increase in SG&A is attributable to unfavorable exchange of $28 million, partially offset by cost reduction actions. R&D: Second quarter R&D costs for the Photography segment decreased $19 million, or 14%, from $132 million in the second quarter of 2002 to $113 million in the current quarter and decreased as a percentage of sales from 5.5% to 4.8%. The decrease in R&D was primarily attributable to cost savings realized from position eliminations associated with the prior year's cost reduction programs. EFO: Earnings from operations for the Photography segment decreased $138 million, from $257 million in the second quarter of 2002 to $119 million in the second quarter of 2003, primarily as a result of the factors described above. Health Imaging On July 21, 2003, Kodak Health Imaging announced its intention to acquire PracticeWorks, Inc., a leading provider of dental practice management software and digital radiographic imaging systems for approximately $500 million in cash. This acquisition is expected to contribute approximately $215 million in sales to the Health Imaging business during the first full year. It is anticipated that the transaction on an operating basis will be slightly dilutive through 2005 and accretive thereafter. This acquisition will enable Kodak to offer its customers a full spectrum of dental imaging products and services from traditional film to digital radiography and photography and is expected to move Health Imaging into the leading position in the dental practice management and dental digital radiographic markets. Revenues: Net worldwide sales for the Health Imaging segment were $607 million for the second quarter of 2003 as compared with $569 million for the prior year quarter, representing an increase of $38 million, or 7% as reported, an increase of 1% excluding the favorable impact of exchange. The increase in sales was comprised of: Volume: increases in volume contributed approximately 4.0 percentage points to second quarter sales, driven primarily by volumes increases in digital media, digital capture equipment and services. Price/Mix: declines in price/mix reduced second quarter sales by approximately 3.0 percentage points, primarily driven by digital media, laser printers and analog medical film. Exchange: favorable exchange impacted sales by approximately 6.0 percentage points. Net sales in the U.S. were $266 million for the current quarter as compared with $270 million for the second quarter of 2002, representing a decrease of $4 million, or 1%. Net sales outside the U.S. were $341 million for the second quarter of 2003 as compared with $299 million for the prior year quarter, representing an increase of $42 million, or 14% as reported, or 3% excluding the favorable impact of exchange. Digital products and services revenues: Net worldwide sales of digital products, which include laser printers (DryView imagers and wet laser printers), digital media (DryView and wet laser media), digital capture equipment (computed radiography capture equipment and digital radiography equipment), services and Picture Archiving and Communications Systems ("PACS"), increased 11% in the second quarter of 2003 as compared with the prior year quarter. The increase in digital product sales was primarily attributable to higher volumes of digital capture equipment, digital media and services. Service revenues increased due to an increase in digital equipment service contracts during the current quarter. Traditional products and services revenues: Net worldwide sales of traditional products, including analog film, equipment, chemistry and services, increased 2% in the second quarter of 2003 as compared with the second quarter of 2002 driven primarily by favorable exchange and higher specialty film volumes. Traditional analog film products (excluding specialty films) decreased 3% due to lower price/mix only partially offset by higher volumes and favorable exchange. Gross profit: Gross profit for the Health Imaging segment was $263 million for the second quarter of 2003 as compared with $236 million in the prior year quarter, representing an increase of $27 million, or 11%. The gross profit margin was 43.3% in the current quarter as compared with 41.5% in the second quarter of 2002. The increase in the gross profit margin of 1.8 percentage points was principally attributable to: Price/Mix: declines in price/mix negatively impacted gross profit margins by approximately 1.7 percentage points. Productivity/Cost: manufacturing productivity/cost increased gross profit margins by approximately 2.2 percentage points. Exchange: favorable exchange added approximately 1.3 percentage points to the gross profit rate. SG&A: SG&A expenses for the Health Imaging segment increased $7 million, or 8%, from $87 million in the second quarter of 2002 to $94 million for the current quarter, and increased as a percentage of sales from 15.3% to 15.5%. The increase in SG&A expenses is primarily attributable to unfavorable exchange of $4 million and increased investment to drive growth. R&D: Second quarter R&D costs increased slightly from $37 million in the prior year quarter to $38 million in the current year quarter, but decreased as a percentage of sales from 6.5% for the second quarter of 2002 to 6.3% for the current quarter. EFO: Earnings from operations for the Health Imaging segment increased $19 million, or 17%, from $112 million for the prior year quarter to $131 million for the second quarter of 2003 while the operating earnings margin rate increased 1.9 percentage points to 21.6% from 19.7% for the prior year quarter. The increase in operating earnings reflects gross profit margin improvements. Commercial Imaging Revenues: Net worldwide sales for the Commercial Imaging segment were $382 million for the second quarter of 2003 as compared with $361 million for the prior year quarter, representing an increase of $21 million, or 6% as reported, an increase of 3% excluding the favorable impact of exchange. The increase in net sales was primarily comprised of: Volume: increases in volume contributed approximately 3.0 percentage points to second quarter sales driven by Imaging Services and document scanners. Price/Mix: price/mix remained essentially unchanged. Exchange: favorable exchange contributed approximately 3.0 percentage points to second quarter sales. Net sales in the U.S. were $221 million for the current year quarter as compared with $204 million for the prior year quarter, representing an increase of $17 million, or 8%. Net sales outside the U.S. were $161 million in the second quarter of 2003 as compared with $157 million for the prior year quarter, representing an increase of $4 million or 3% as reported, a decrease of 5% excluding the favorable impact of exchange. Gross profit: Gross profit for the Commercial Imaging segment was $105 million for the second quarter of 2003 as compared with $115 million in the prior year quarter, representing a decrease of $10 million, or 9%. The gross profit margin was 27.5% in the current quarter as compared with 31.9% in the prior year quarter. The decrease in the gross profit margin of 4.4 percentage points was primarily attributable to: Price/Mix: declines in price/mix reduced gross profit margins by approximately 1.0 percentage point. Productivity/Cost: manufacturing productivity/cost reduced gross profit margins by approximately 3.0 percentage points. SG&A: SG&A expenses for the Commercial Imaging segment increased $2 million, or 4%, from $48 million for the second quarter of 2002 to $50 million for the current quarter, but decreased as a percentage of sales from 13.3% to 13.1%. Unfavorable exchange of $2 million in the second quarter of 2003 accounted for the SG&A increase. R&D: Second quarter R&D costs for the Commercial Imaging segment increased $1 million, or 7%, from $14 million in the second quarter of 2002 to $15 million for the current quarter, but remained unchanged as a percentage of sales at 3.9%. EFO: Earnings from operations for the Commercial Imaging segment decreased $13 million, or 25%, from $53 million in the second quarter of 2002 to $40 million in the current quarter primarily as a result of declining margin contributions from traditional graphic arts products. All Other Revenues: Net worldwide sales for All Other were $22 million for the second quarter of 2003 as compared with $28 million for the second quarter of 2002, representing a decrease of $6 million, or 21%. SK Display Corporation, the OLED manufacturing joint venture between Ko