ROCHESTER, N.Y. -- Eastman Kodak Company reported second-quarter financial results essentially in line with the company’s expectations and the achievement of digital profitability two quarters ahead of last year’s pace. The company also reaffirmed its 2006 cash and digital earnings goals. On the basis of generally accepted accounting principles in the U.S. (GAAP), Kodak expects 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. In connection with its digital transformation, the company continues to incur significant restructuring charges, as expected. Accordingly, as previously announced, the company expects a GAAP loss from continuing operations before interest, other income (charges), net, and income taxes for the full year of $500 million to $850 million. This corresponds to digital earnings from operations this year in a range of $350 million to $450 million. Consistent with its previously announced emphasis on digital margin expansion, the company revised its 2006 digital revenue growth forecast from a range of 16% to 22% to approximately 10%, reflecting the company’s focus on pursuing profitable sales. Total 2006 revenue is expected to be down approximately 3%. The company reported a second-quarter GAAP net loss of $282 million, or $0.98 per share, largely stemming from restructuring charges ($214 million after taxes) and rising silver costs. The loss is consistent with the company’s plan, announced in 2004, to create a digital business model by restructuring its traditional businesses and the associated manufacturing. The company’s second-quarter 2006 GAAP pre-tax earnings were essentially unchanged from the previous year. “Our second-quarter results demonstrate continuing progress in the execution of our digital business strategy and the implementation of our digital business model,” said Antonio M. Perez, Chairman and Chief Executive Officer, Eastman Kodak Company. “We are coming into the final stages of our digital transformation. By the end of next year the majority of the restructuring costs will be behind us and Kodak will be positioned for sustained success in digital markets.” “We ended the quarter with more than $1 billion in cash on our balance sheet and we achieved positive digital earnings a full two quarters ahead of last year’s performance -- ahead of my own prediction that this would occur in the third quarter,” said Perez. “As I’ve said before, our primary focus this year is on cash and expanding our digital margins, and that explains our willingness to change our digital revenue outlook. I remain confident in our ability to achieve our 2006 performance targets for cash and digital earnings.” Evolution of Digital Camera Operating Model In a separate announcement, the company said that it has reached an agreement with Flextronics International Ltd. in order to streamline its digital camera operations. Under this agreement, Kodak will continue to manage high-level system design and advanced research and development for its digital still cameras, and will retain all of its intellectual property. Flextronics will manufacture and distribute Kodak consumer digital cameras on a global basis and will handle certain design and development functions. Flextronics will also manage the operations and logistics services for Kodak’s digital still cameras. This is consistent with Kodak’s effort to drive further improvements in the operating model of its Consumer Digital Imaging Group. Also under the agreement, approximately 550 Kodak personnel are expected to be transferred to Flextronics facilities. “This evolution in our digital capture operating model is consistent with our strategy and will enable us to compete in this business with greater flexibility, cost efficiency and predictability,” said Perez. “It will support our margin expansion efforts and enable us to better serve our customers and consumers by delivering Kodak’s innovative digital products through the world class operations of Flextronics.” For the second quarter of 2006: * Sales totaled $3.360 billion, a decrease of 9% from $3.686 billion in the second quarter of 2005. The decline in revenue was primarily in the Film and Photofinishing Systems Group and the Consumer Digital Imaging Group. The Film and Photofinishing Systems Group decline is in line with company expectations, and the decline in the Consumer Digital Imaging Group results from the changing market dynamics, as well as the company’s stated goal to emphasize margin expansion over revenue growth. Digital revenue totaled $1.829 billion, a 6% increase from $1.720 billion. Traditional revenue totaled $1.522 billion, a 22% decline from $1.950 billion. New Technologies contributed an additional $9 million in the second quarter, compared with $16 million in the year-ago quarter. * The company’s loss from continuing operations in the quarter, before interest, other income (charges), net, and income taxes, was $167 million, compared with a loss of $137 million in the year-ago quarter, largely as a result of increased depreciation expense because of the change in useful life assumptions implemented in the third quarter of 2005. * The GAAP net loss was $282 million, or $0.98 per share, compared with a GAAP net loss of $155 million, or $0.54 per share, in the year-ago period. * Digital earnings were $4 million, compared with a negative $25 million in the year-ago quarter, primarily because of a year-over-year improvement in the company’s Graphic Communications Group. Other second-quarter 2006 details: * For the quarter, net cash provided by operating activities on a GAAP basis was $80 million, compared with a negative $207 million in the year-ago quarter. Investable cash flow for the quarter was $15 million, compared with negative $297 million in the year-ago quarter. * Kodak held $1.055 billion in cash on its balance sheet as of June 30, compared with $1.077 billion on March 31, 2006, and $1.665 billion on December 31, 2005. This is consistent with the company’s stated desire to maintain approximately $1 billion of cash on hand. * Debt decreased $34 million from the first-quarter level, to $3.531 billion as of June 30, 2006, and was down $52 million from the December 31, 2005 level of $3.583 billion. * Gross Profit was 24.1%, down from 28.2%, primarily because of the negative impact of rising silver prices and higher depreciation costs from changes in the useful lives of certain assets implemented in the third quarter of 2005. * Selling, General and Administrative expenses were $620 million, compared with $650 million for the prior year quarter. SG&A, as a percentage of sales, remained unchanged at 18% in the second quarter of 2006 versus the second quarter of 2005. On an absolute dollar basis, SG&A expenses decreased by $30 million, driven by cost reduction activities within the Film and Photofinishing segment, partially offset by acquisition related SG&A costs of $33 million, and $8 million in costs related to the company’s exploration of strategic alternatives for its Health Group, which was announced on May 4, 2006. Second 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 $908 million, up 14%, reflecting the acquisitions of KPG and Creo. Earnings from operations increased by $64 million, from a loss of $42 million in the year-ago period to earnings of $22 million in the second quarter of 2006. This improvement was largely driven by contributions from acquired businesses and cost reductions from business integration activities, which positively impacted profit margins, as well as positive price/mix. Digital earnings increased by $65 million, from a loss of $26 million in the year-ago period to earnings of $39 million in the second quarter of 2006. * Consumer Digital sales totaled $628 million, down 6%. The loss from operations for the segment was $79 million, compared with a year-ago loss of $52 million. This primarily reflects lower volumes and negative price/ mix for consumer digital capture products. The company continues to realign its portfolio and cost structure to focus on expanding its digital margins. * Film and Photofinishing Systems sales were $1.153 billion, down from $1.503 billion in the year-ago quarter. Earnings from operations were $113 million, compared with $244 million in the year-ago quarter. This decrease was primarily attributable to an expected decline in revenue; non-cash charges for depreciation because of the asset useful life changes made in the third quarter of 2005; and higher silver prices. During the second quarter of 2006, the group achieved a 10% operating margin, in line with the company’s expectations. * Health Group sales were $655 million, down 6%. Earnings from operations for the segment were $78 million, compared with $109 million a year ago. This is primarily due to declines in price/mix, higher silver costs, higher depreciation as a result of asset useful life changes made in the third quarter of 2005, and costs associated with the company’s exploration of strategic alternatives for its Health Group. This was partially offset by revenue and earnings growth in digital capture, digital dental and healthcare information solutions and service and manufacturing productivity gains. Digital earnings were $42 million in the second quarter of 2006, compared with $53 million in the year-ago quarter. Health Group operating margins returned to 12% for the second quarter of 2006, in line with the company’s expectations. * All Other sales were $16 million, compared with $24 million for the second quarter of 2005. The loss from operations totaled $51 million, compared with a loss of $57 million a year ago. The digital earnings for this segment were $2 million, compared with no earnings in the year-ago quarter. The All Other category primarily includes investments in consumer inkjet and displays. Restructuring Update Kodak continues to implement its restructuring program to support the company’s goal of building a business model to achieve sustained success in digital markets. This program was first announced in January 2004 and updated in July 2005, and included the elimination of an estimated 25,000 positions and charges totaling $3.0 billion. During the second quarter of 2006, the company eliminated approximately 1,630 positions, bringing the program’s total to-date to more than 20,500 positions relative to the estimated 25,000. Based on the restructuring actions completed to date, and an understanding of the estimated remaining actions to conclude the restructuring, the company expects that employment reductions and total charges will now be within the range of 25,000 to 27,000 positions and $3.0 billion to $3.4 billion, respectively. The company continues to expect that these actions will be essentially complete by the end of 2007. Kodak plans to provide a more detailed update on its transformation during its Annual Strategy Review meeting scheduled for November 15, 2006 in New York City.