Fitch Affirms Kodak's 'BBB-' Senior Unsecured Debt; Rating Outlook Negative.

NEW YORK -- Fitch Ratings has affirmed Eastman Kodak Company's (Kodak) 'BBB-' senior unsecured debt and the company's 'F3' commercial paper (CP) program. The Rating Outlook remains Negative. Approximately $2.7 billion of debt is affected by this action.

The ratings and Outlook consider Kodak's continued weak operating performance in core photographic businesses due to higher than expected decline in its traditional film business, heightened business risk as it transitions from its core silver halide based technologies business, to digital technologies, particularly when weighted against existing competitors, and continued pricing pressure and restructuring efforts. Fitch expects U.S. consumer film volumes will continue to decline, with volumes down 15% for each of the first two quarters of 2004 and 20% for the third quarter, a level which is anticipated to accelerate in the fourth quarter. It is expected that U.S. film industry volumes will weaken by 18-20% in 2004, with a worldwide decline of 10-12%. Kodak estimates that demand for consumer film industry wide will decrease approximately 20% in 2005, with U.S. demand decreasing as much as 30%, however, Fitch believes that U.S. film volumes could decline more significantly as the deterioration of this market was worse than expected in 2004, a trend which should continue in 2005. While Kodak is in the process of repositioning the company with its strategy to invest in digital technology businesses mainly through acquisitions, the long-term success of these investments remains uncertain and could involve integration risk with further restructuring.

The ratings also continue to reflect Kodak's well-recognized brand, leading market position in the U.S. consumer film market, strong market shares internationally, leading share in traditional paper and photo-processing services, as well as the geographic diversity of its sales. Fitch also recognizes the company's solid balance sheet, adequate financial flexibility and ongoing cost reductions that should provide some cushion for operational shortfalls. Fitch will continue to closely monitor the company's operating performance and financial flexibility, acquisition financing activity, and other industry and economic factors. While Fitch has incorporated current 2005 expectations regarding the pace of decline of Kodak's traditional business into its analysis, a more dramatic decline combined with limited gains from acquisitions and an inability to more profitably expand into the digital markets will negatively impact the ratings.

Kodak has implemented several significant restructuring programs over the past three years, closing certain photofinishing operations in the United States and internationally, and reducing both manufacturing capacity and administrative costs in its photographic operations and other areas of its business. The most recent restructuring program commenced January 2004 and is expected to go through 2006 with expected charges of $1.3-1.7 billion over the period, with approximately 50% of the charges anticipated to be in cash, and expected annual savings of approximately $800 million to $1 billion by 2007.

Debt financed acquisitions remain a key risk for the company as Kodak continues to rebalance its portfolio to transition into the digital space, which includes as much as $3 billion in investments and acquisitions ($1 billion has already been completed), with a goal of achieving $16 billion in revenues by 2007 from approximately $13.3 billion in 2003. Half of this growth is anticipated to come from acquisitions with a goal of 50% of its overall revenues derived from digital sources by 2005 from approximately 25% currently. Acquisitions are primarily expected to be in the health imaging and graphics communications areas. While no significant acquisitions have been made in 2004, acquisition activity in 2005 and 2006 could increase the company's debt levels and negatively affect its credit profile in the intermediate term.

Leverage, as defined by total debt to EBITDA, improved to 1.3 times (x) during the latest twelve months ended Sept. 30, 2004 from 1.8x during year-end 2003 primarily due to lower debt levels. During the third quarter, debt levels decreased by approximately $584 million to approximately $2.7 billion from year-end levels. EBITDA to interest declined slightly to 11.5x from 12.4x for the same period due to higher interest expense as the company has replaced its CP borrowings with long-term debt. It is anticipated that an additional $216 million of debt maturing in 2004 will be paid off in cash, making total debt repayment in 2004 approximately $800 million, maintaining stable credit protection measures in the near term. The company's debt maturity schedule is manageable, with approximately $406 million of debt coming due in 2005 and $500 million in 2006.

Adequate liquidity is supported by Kodak's $1.1 billion cash position as of Sept. 30, 2004, strong annual free cash flow generation of more than $800 million, and an undrawn $2.225 billion revolving credit facility composed of $1 billion 364-day commitment maturing in July 2005 and $1.225 billion 5-year credit facility maturing in July 2006, which has historically supported the company's CP program. Kodak has reduced its reliance on CP and somewhat lowered its liquidity position, and on September 30, 2004 had no outstanding CP balances. Additional liquidity is provided by the company's undrawn $200 million accounts receivable securitization program, which expires in March 2005. The securitization program contains a rating trigger that could make all of the program's secured borrowings immediately due and payable if Kodak's long-term ratings fall below the 'BB' level. Free cash flow is expected to be utilized for investments, cash restructuring charges, debt reduction, and dividends.