ROCHESTER, N.Y., Eastman Kodak Company reported second-quarter results that reflect continued momentum of the company's core digital growth businesses, increased raw material costs, continued investment in certain growth businesses, and cash performance which reflects the company's seasonal pattern.

Second-quarter sales were $1.485 billion, a 5% decrease from the year-ago quarter. Digital revenue was $1.089 billion, consistent with the year-ago quarter. Revenue from the company's core digital growth businesses – Consumer and Commercial Inkjet, Packaging Solutions, and Workflow Software & Services – increased 22%, fueled by a 48% revenue growth in Consumer Inkjet printers and ink. Revenue from the company's Consumer Digital Imaging Group decreased 8%, reflecting planned lower sales of digital cameras, as the company implements its previously announced strategy in this business to trade top-line growth for improved full-year profitability. Second-quarter revenue from the company's Film, Photofinishing and Entertainment Group declined by 14%.

On the basis of U.S. generally accepted accounting principles (GAAP), the company reported a second-quarter loss from continuing operations of $179 million, or $0.67 per share, compared with a loss from continuing operations on the same basis of $167 million, or $0.62 per share, in the year-ago period. The year-over-year earnings decline was largely the result of rising raw material costs, particularly silver and aluminum, as well as investments to drive digital growth initiatives, particularly in Commercial Inkjet. Non-operational items of net expense in the second quarter of 2011 totaled $12 million after tax, or $0.05 per share, primarily due to tax-related items, restructuring charges, and corporate components of pension and other post-employment benefit costs. Non-operational items of net expense in the second quarter of 2010 totaled $9 million after tax, or $0.03 per share, primarily due to legal contingencies, restructuring charges and corporate components of pension and other post-employment benefit costs. (Please refer to the attached Non-Operational Items table for more information.)

"We are enjoying success in our new growth businesses, as well as the challenges typical in the creation of new businesses based on revolutionary new technologies," said Antonio M. Perez, Chairman and Chief Executive Officer, Eastman Kodak Company. "We have ambitious goals for our growth businesses, and thus far have achieved impressive results against the industry. Revenue growth in these businesses is accelerating, with second-quarter 2011 growth more than double the year-ago period. We are also on track this year to once again double ink gross profit dollars in our Consumer Inkjet business, and we're enjoying strong customer demand for KODAK PROSPER Presses.

"We are investing in these growth businesses to create a new profitable, sustainable digital company by 2012," Perez said. "At the same time, we continue to fund legacy liabilities associated with the traditional businesses. This was especially evident in our cash usage during the second quarter, in which we typically use cash because of seasonal patterns. We have every expectation our cash flow pattern this year will mirror the pattern of previous years, with sizeable cash generation in the second half of the year, primarily in the fourth quarter. In summary, while we continue to face challenges, I remain confident in Kodak's future and in our ability to maintain the investments necessary to complete our transformation."

Other second-quarter 2011 details:

• On a GAAP basis, Gross Profit was 14.2% of sales, as compared to 19.5% of sales in the year-ago period. This decrease in margin was primarily driven by increased raw material costs, unfavorable price/mix, and continued investment in the company's strategic growth businesses.
• Operating expenses, on a GAAP basis, continue to decline as a result of company-wide cost reductions:
  •     Selling, General and Administrative (SG&A) expenses were $289 million, a $24 million decline from the prior-year quarter.
  •     Research and Development (R&D) expenses were $68 million, a $13 million decline from the prior-year quarter.
• Second-quarter 2011 cash usage, before restructuring payments, was $332 million, a $162 million increase from the year-ago quarter, reflecting the company's seasonal pattern, the timing of intellectual property transactions and previously disclosed U.K. pension contributions. This corresponds to net cash used in continuing operations from operating activities on a GAAP basis of $322 million in the second quarter, compared with net cash used in continuing operations from operating activities on a GAAP basis of $173 million in the second quarter of 2010.
• Kodak held $957 million in cash and cash equivalents as of June 30, 2011.

Segment sales and earnings from continuing operations before interest, taxes, and other income and charges (segment earnings from operations), are as follows:

• Graphic Communications Group second-quarter 2011 sales were $685 million, a 4% increase over the prior-year period, largely attributable to favorable foreign exchange. This increase also reflects growth in Commercial Inkjet, Workflow Software & Systems, and Packaging Solutions, which grew revenue by a combined 13%. Second-quarter loss from operations for the segment was $45 million, compared with a loss of $17 million in the year-ago quarter.  This earnings decline is primarily driven by start-up costs to support growth opportunities in Commercial Inkjet, and increased raw material costs.
• Consumer Digital Imaging Group second-quarter sales were $404 million, compared with $438 million in the prior-year quarter. This reflects a revenue decline in Digital Capture & Devices, as the company executes its previously announced strategy to trade top-line growth for improved profitability, offset by growth in Consumer Inkjet and Retail Systems Solutions. Second-quarter loss from operations for the segment was $92 million, compared with a loss of $123 million in the prior-year quarter. This $31 million earnings improvement reflects the continued growth of printer ink gross profit within Consumer Inkjet, the success of the company's ongoing strategy to improve profitability in Digital Capture & Devices, as well as improved performance in Retail Systems Solutions.
• Film, Photofinishing and Entertainment Group second-quarter sales were $396 million, a 14% decline from the year-ago quarter, driven by continuing industry-related volume declines. Second-quarter earnings from operations for the segment were $2 million, compared with earnings of $36 million in the year-ago period. This decrease in earnings was primarily driven by significantly increased raw material costs, particularly silver, and industry-related declines in volumes, partially offset by cost reductions and price actions across the segment.

Update on Intellectual Property Activities

As the company has previously discussed, Kodak's intellectual property strategy strives to achieve three goals: providing the company with design freedom to develop and introduce innovative new products; providing Kodak with access to new markets and new partnerships; and income and cash generation.

In recent years, the company has benefitted from cash from intellectual property licensing transactions as a way to fund its digital transformation. Given the recent trends in the IP marketplace, and a heightened demand for premier intellectual property portfolios, the company previously announced its intention to explore strategic alternatives for approximately 1,100 U.S. digital imaging patents, representing approximately 10% of its patent portfolio.

The company's updated outlook, detailed below, does not include any revenue or cash flow from the potential alternatives for its digital imaging patent portfolios, nor does it include any potential outcomes from intellectual property litigation currently before the U.S. International Trade Commission. The company remains confident that it will ultimately prevail in its current litigation involving Apple and Research in Motion.

2011 Outlook

Kodak today provided an updated outlook regarding its targets for 2011 performance, in light of rising raw material costs and a heightened competitive pricing environment in Consumer Inkjet, both of which the company is addressing, and higher than planned start-up costs associated with Commercial Inkjet, which the company expects have been largely contained to the first half of 2011.     

• For the full year, the company continues to forecast total revenue of between $6.4 billion to $6.7 billion.
• Kodak continues to build the scale of its digital growth businesses – Consumer and Commercial Inkjet, Workflow Software & Services, and Packaging Solutions – and now expects to achieve 2011 full-year aggregate revenue growth from these businesses in the range of 30% to 40%. Previously, the company forecasted aggregate full-year revenue growth of greater than 40%.
• Kodak now expects 2011 segment losses of $100 million to $300 million. Previously, the company forecasted segment results of breakeven to a loss of $200 million. On a GAAP basis, the company now expects earnings from continuing operations before interest expense, other income (charges), net, and income taxes in the range of $50 million to negative $150 million. Previously, the company forecasted GAAP earnings in the range of $150 million to negative $50 million.
• Kodak is now targeting 2011 loss from continuing operations in the range of $200 million to $400 million. Previously, the company forecasted a loss in the range of $100 million to $300 million.
• For full-year 2011, the company now expects a year-end cash balance of $1.6 billion to $1.7 billion, after taking into account all cash actions. Previously, the company forecasted a year-end cash balance of $1.7 billion to $1.8 billion. The company continues to expect $250 million to $350 million in cash this year from intellectual property licensing transactions, as well as proceeds from sales of non-core assets totaling $300 million to $400 million. As noted above, this forecast does not include any revenue or cash flow from the previously announced exploration of strategic alternatives for its digital imaging patent portfolios, nor does it include any potential outcomes from intellectual property litigation currently before the U.S. International Trade Commission.