EASTMAN KODAK COMPANY 2006 ANNUAL REPORT and 2007 PROXY STATEMENT PROXY and 2007 REPORT 2006 ANNUAL COMPANY KODAK EASTMAN CC5-06/07 Eastman Kodak Company 343 State Street Rochester, NY 14650 Cat No. 8088148 Cat No. www.kodak.com This cover was produced using solutions from Kodak’s Graphic Communications Group including; Kodak Prinergy Connect Workfl ow System, Approval XP4 Digital Color Imaging System, Sword Excel Plates, and a Magnus 800 Platesetter. The cover represents artifact-free photographic fi delity in print reproduction made possible by 20 micron Kodak Staccato Screening. KK59093_cover.indd59093_cover.indd 1 33/19/07/19/07 22:48:07:48:07 PPMM newre.connect. reimagine. redesign. recharge. newre.connect. reimagine. redesign. recharge. Dear Fellow Investors: About Eastman Kodak Company In 2006, a new Kodak began to emerge. Kodak is the world’s foremost imaging innovator. With sales of $13.3 billion For the fi rst time in our history, the full-year growth of our digital earnings exceeded the decline in earnings from our traditional business. When you in 2006, the company is committed to a digitally oriented growth strategy consider where we were three years ago, with few digital prospects to speak focused on helping people better use meaningful images and information in of and the fi lm industry in rapid decline, this milestone speaks volumes about our determination to remake and renew Kodak in the digital age. their life and work. Consumers use Kodak’s system of digital and traditional Our record of innovation and corporate responsibility grew in leaps and products and services to take, print and share their pictures anytime, bounds. In 2006, we secured 688 new patents, putting us among the world’s anywhere; Businesses eff ectively communicate with customers worldwide top-ranked patent recipients, especially measured against dollars spent. We won dozens of awards for excellence and innovation in product design, using Kodak solutions for prepress, conventional and digital printing and service, and marketing. We were also recognized for our business ethics, corporate citizenship, diversity, and environmental stewardship. document imaging; Creative Professionals rely on Kodak technology Our eff orts to capitalize on our intellectual property accelerated in 2006. We to uniquely tell their story through moving or still images; and leading now have patent license agreements with more than 20 companies. In addition Healthcare organizations rely on Kodak’s innovative products, services and to generating cash and earnings, these agreements increase our ability to enter new digital markets and reach more people with cutting-edge technology. customized workfl ow solutions to help improve patient care and maximize We have met unprecedented challenges in the company’s history and we effi ciency and information sharing within and across their enterprise. are becoming a stronger company in the process. Moreover, we’re within sight of completing what will be one of the most remarkable turnarounds in corporate history. We have a lot of work ahead of us on many fronts—launching our new and More information about Kodak (NYSE: EK) is available at www.kodak.com. revolutionary consumer inkjet business, capitalizing on the creation of our graphic communications business, and completing our major restructuring, to name three. We approach this work with a confi dence reinforced by our strong position in numerous digital markets, and our proven ability to make the changes needed for success. KK59093_cover.indd59093_cover.indd 2 33/19/07/19/07 22:48:15:48:15 PPMM resolve. reemerge. “We’re within sight of completing what will be one of the most remarkable turnarounds in corporate history.” Antonio M. Perez Chairman and Chief Executive Offi cer Financial Review Business Review Since we began our transformation, we have measured our progress We can proudly point to examples of growth and revitalization in against three clear metrics: each of our business areas. • digital earnings • digital revenue Graphic Communications Group • cash generation A strategic pillar in Kodak’s future, in just three years our Graphic Communications Group (GCG) has gone from a passive Let’s take a look at our results for 2006. and very modest participation in the industry to a business with more than 100,000 customers worldwide and revenue of more than In digital earnings*, we delivered a result of $343 million, nearly fi ve $3.6 billion. To put our leadership position in perspective, consider times that of the prior year, representing a $271 million increase. this: Today, about 40 percent of the world’s commercially printed This was driven by healthier gross profi t margins, strong earnings pages are touched by Kodak technology. improvement in our graphic communications and consumer digital businesses, and global cost-reduction initiatives. charge. The second metric, digital revenue*, grew by $316 million, but was Just as acquisitions were key to our growth in 2005, our less than we would have liked. However, this shortfall was partly due performance in 2006 depended on our ability to successfully to deliberate action on our part as we chose and publicly announced integrate those acquisitions into Kodak. GCG has come together on January 30, 2006, to forego revenue and market share in certain well; our integration is ahead of plan, our investment in digital areas of the low-end digital capture category in the interest of technologies has begun to pay off , and we are on track to achieve our focusing on improving overall digital profi t margins. target business model. As for cash generation, we fi nished 2006 with nearly $1.5 billion We now off er the industry’s broadest range of prepress equipment, in cash. Our cash fl ow was exceptionally strong, even after paying workfl ow software, digital printing, variable data printing, and out $548 million in restructuring costs and reducing our debt by consumables. In 2006, we put our capabilities to good use, achieving $805 million, to $2.778 billion. We plan to further reduce our debt substantial recognition for our products and industry leadership: by another $1.15 billion in 2007, predicated upon the anticipated closing of the sale of our Health Group to Onex Corporation in the • NAPL (National Association for Printing Leadership) Industry Award; fi rst half of the year. • Flexographic Prepress Platemakers Association Innovator of the Year; • Stevie International Business Award for Service and Support; Our fi nancial results in 2006 refl ect our determination to become a • AIIM E-Doc Magazine’s Best of Show for the Kodak i1220 scanner; more profi table company. As we enter 2007 with solid momentum, • Numerous GATF (Graphic Arts Technical Foundation) awards; we will place a strong emphasis on developing a sustainable, • Prinergy Evo workfl ow system became the fastest-selling workfl ow profi table growth model, utilizing our talented people and our in the history of the industry; valuable resources to generate greater value for our shareholders. • First sales of Kodak NexPress 2100 and Kodak Versamark dual printing systems in Brazil; • 10th anniversary of our groundbreaking CTP Thermal technology. * Amounts used that are considered non-GAAP fi nancial measures are defi ned and reconciled to the most directly comparable GAAP measures on page 1 of this annual With recognition such as this, and a broad and deep portfolio, we report to shareholders. GAAP refers to accounting principles generally accepted in are uniquely positioned to serve customers in blended production the U.S. environments, with technologies and products that support both conventional off set and digital printing. Consequently, we believe our prospects for growth, both in revenue and earnings, are strong. Consumer Digital Imaging Group This past year was full of critical milestones for our Consumer Digital Imaging Group (CDG). We are pleased about our progress and feel confi dent that we will build on this momentum in 2007. As Kodak transforms we look to the consumer business to bring profi table digital revenue growth and further carry the Kodak brand and consumer value proposition. We continue to be a top market leader in the business segments where CDG competes, including digital cameras, snapshot printers, retail photo, kiosks, and online services. For the third year running, we received the J.D. Power and Associates award for Highest Customer Satisfaction with Digital Cameras—$200–$399. Kodak’s EasyShare photo printers also earned high honors from J.D. Power and Associates for the highest level of overall satisfaction, signifi cantly outpacing the other top six competitors. And, we earned numerous innovation and “best in show” awards. We have made substantial progress in installing our digital business model and largely have the necessary infrastructure to compete in the digital world. We saw some important proof points from this eff ort: improved inventory levels and cash fl ow; a rationalized regional go-to- market model; a streamlined design, manufacturing and supply chain model; and a new marketing architecture with product marketing and integrated team focus. We implemented this business model with new partnerships and new ways of working and we should see further benefi ts from leveraging this integration during the next year and beyond. All of this was achieved while we kept investing in key technologies and product development for the future. As we head into 2007, we are well positioned to launch new products and technologies in new markets, helping us to achieve profi table growth. We will also continue to exploit our current businesses— building on the scale that we gained during the past years. One of those new products is a revolutionary approach to inkjet printing. The innovative Kodak EasyShare all-in-one inkjet printers, featuring premium pigment-based inks at half the price of competing inks, off er customers quality, ease-of-use and value that’s unprecedented in the industry.