ROCHESTER, N.Y.--Oct. 31, 2006 -- Eastman Kodak Company today reported a GAAP earnings improvement of $877 million for the third quarter of 2006, on sales of $3.204 billion, largely as the result of the recording of a tax valuation charge in the year-ago quarter of $778 million. The company also delivered a $98 million increase in digital earnings, driven by wider gross profit margins, from strong earnings performance in the Graphic Communications and Consumer Digital businesses, and the result of the company's global cost-reduction initiatives. Based on its third-quarter 2006 performance, the company is confident of achieving its 2006 cash and digital earnings goals, and expects digital revenue growth somewhat below its 10% target, as a result of the company's focus on margin expansion. This corresponds to a total revenue decline of approximately 6%. "Our business transformation is on track," said Antonio M. Perez, Chairman and Chief Executive Officer, Eastman Kodak Company. "I am encouraged by our third-quarter results, especially because they reinforce our confidence in our full-year performance, which is the basis on which I manage the company. "We measure our progress against three important metrics - cash generation, digital earnings, and digital revenue. Our year-over-year digital revenues were down slightly during the quarter, reflecting our strong focus on margin expansion and willingness to pursue more profitable sales, the universe of which expands as our cost structure improves. Our digital earnings were vastly improved this quarter and our cash balance continues to exceed $1 billion. While I am fully aware of the challenges to largely complete our restructuring by the end of next year, this performance represents clear progress toward our goals and gives us good momentum to carry into the fourth quarter and 2007." For the third quarter of 2006: -- Sales totaled $3.204 billion, a decrease of 10% from $3.553 billion in the third quarter of 2005, largely attributable to a 19% decline in traditional sales. Third-quarter traditional revenue totaled $1.402 billion, compared to $1.725 billion in the year-ago quarter, while digital revenue totaled $1.793 billion, as compared to $1.814 billion in the year-ago quarter. -- The company's earnings from continuing operations in the quarter, before interest, other income (charges), net, and income taxes, were $2 million, compared with a loss from operations of $123 million in the year-ago quarter. -- On the basis of generally accepted accounting principles in the U.S. (GAAP), the company reported a third-quarter net loss of $37 million, or $0.13 per share, which includes after-tax restructuring costs of $202 million, or $0.70 per share. By comparison, the third quarter 2005 GAAP net loss was $914 million, or $3.18 per share. The difference is largely driven by the inclusion in last year's third quarter of a $778 million, or $2.71 per share, non-cash charge to record a valuation allowance against the net deferred tax assets in the U.S. -- Digital earnings were $105 million, compared with $7 million in the year-ago quarter, marking the first time that the company's quarterly digital earnings growth exceeded the quarterly decline in traditional earnings. This performance was primarily due to operational improvements throughout the digital portfolio, the impact of a non-recurring licensing arrangement within the Consumer Digital Group, and strong results in the Graphic Communications Group. Other third-quarter 2006 details: -- For the quarter, net cash provided by operating activities on a GAAP basis was $329 million, compared with $370 million in the year-ago quarter. Investable cash flow for the quarter was $237 million, compared with $216 million in the year-ago quarter. -- Kodak held $1.102 billion in cash on its balance sheet as of September 30, 2006, compared with $610 million on September 30, 2005. This is consistent with the company's stated desire to maintain approximately $1.0 billion of cash on hand. -- Debt decreased $192 million from the second-quarter level, to $3.339 billion as of September 30, 2006, and was down $244 million from the December 31, 2005 level of $3.583 billion. The company intends to reduce debt by approximately $800 million in 2006. -- Gross Profit was 27.3% in the current quarter, up from 25.9% in the prior year quarter, primarily because of reductions in manufacturing costs and the favorable impact of the previously noted licensing arrangement, offset by volume declines in traditional product sales. -- Selling, General and Administrative expenses declined by $105 million in the third quarter, to $565 million, compared with $670 million for the prior-year quarter. As a percentage of sales, SG&A decreased from 18.9% in the prior-year quarter to 17.6% in the third quarter of 2006. Third-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 $880 million, compared with $886 million in the year-ago quarter. Strong digital revenue growth from digital plates, commercial inkjet, NexPress color and document scanners during the quarter was offset by expected declines in the traditional product portfolio. Earnings from operations were $31 million, compared with $7 million in the year-ago quarter. This improvement was largely driven by contributions from the group's core digital businesses and cost reductions from business integration activities. -- Consumer Digital Group sales totaled $640 million, down 3%. Earnings from operations increased by $85 million, from a loss of $61 million in the year-ago period, to earnings of $24 million in the current quarter. The earnings results reflect improvements across virtually the entire digital portfolio. -- Film and Photofinishing System sales were $1.074 billion, down from $1.353 billion in the year-ago quarter. Earnings from operations were $139 million, compared with $174 million in the year-ago quarter. This decrease was primarily driven by an expected decline in revenue and higher silver prices. During the third quarter of 2006, the group achieved a 12.9% operating margin, maintaining the performance from the year-ago quarter. -- Health Group sales were $597 million, down 6%. Earnings from operations for the segment were $68 million, compared with $96 million a year ago. This is primarily due to higher silver prices, and costs associated with the company's exploration of strategic alternatives for its Health Group. Despite these challenges, the Health Group maintained operating margins of 11.4%. -- All Other sales were $13 million, compared with $20 million in the year-ago quarter. For the third quarter, the loss from operations was $48 million, compared with a loss of $61 million in the year-ago quarter. The All Other category includes the Display & Components operation and other miscellaneous businesses. 2006 Goals Kodak continues to expect 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. Accordingly, the company expects a GAAP loss from continuing operations before interest, other income (charges), net, and income taxes for the full year of $400 million to $600 million, which includes approximately $1.0 billion in pre-tax restructuring charges. This corresponds to digital earnings from operations this year in a range of $350 million to $450 million. The company forecasts 2006 digital revenue growth somewhat below 10%, reflecting the company's focus on targeted participation in the consumer digital market. Total 2006 revenue is expected to be down approximately 6%.