Kodak swings to Q3 profit


ROCHESTER, N.Y. -- Eastman Kodak Co., rounding the final bend in a four-year digital overhaul, swung to a $37 million profit in the third quarter Thursday as digital revenue almost tripled and wider profit margins overshadowed a slight drop in overall sales.

The photography products maker earned the equivalent of 13 cents a share in the July-September quarter, mirroring a loss of $37 million, or 13 cents a share, a year earlier when it also took hefty charges.

Sales eased to $2.58 billion from $2.60 billion in last year's fourth quarter.

Excluding one-time restructuring costs of $96 million, or 33 cents a share, operating profits came to $128 million, or 46 cents a share. On average, analysts surveyed by Thomson Financial forecast a profit of 27 cents a share on sales of $2.49 billion. The earnings estimates typically exclude one-time items.

Kodak shares fell 69 cents, or 2.4%, to $27.97 in afternoon trading Thursday.

Digital profits surged to $82 million from $28 million as sales rose 1% to $1.123 billion. In contrast, earnings from film, paper and other traditional, chemical-based products slumped from $110 million to $91 million as sales plunged 16% to $986 million.

Kodak said gross profit margin rose to 26.4% for the quarter, compared with 25.1% a year earlier. It also reported a lower debt level of $1.63 billion at the end of the quarter versus $2.78 billion at the end of 2006.

"In my view, all the pieces are coming together," Kodak's chief executive, Antonio Perez, said in a conference call with analysts. "We have created with all this work a much more cost-effective business model .... from which I believe we can launch and sustain profitable growth."

Ulysses Yannas, a broker with Buckman, Buckman & Reid in New York, thinks Kodak's transformation is "coming to a successful end" with increasingly profitable digital businesses "now taking over from film. They've survived the restructuring not as a second-rate company but as a first-rate company. That's the important part."

But analyst Shannon Cross of Cross Research in Short Hills, N.J., cautioned that operating profits in the quarter were driven by "leveraging cost-cutting in the film business" and one-time royalty payments from digital-camera technology.

"It's still difficult to determine what the long-term, core operating profit of this company will be because ... we're not going to really know for a couple of years the scope of the investments they're making right now in things like inkjet printers and CMOS (image sensors in digital cameras)."

The company reiterated its guidance for 2007 operating earnings of $300 million to $400 million.

In 2003, Kodak acknowledged its analog businesses were sliding irreversibly and outlined a strategy to become a digital front runner in photography and commercial printing by 2008. It embarked on a nearly $3 billion shopping spree but also began closing film, paper and other raw-materials plants around the world.

Shifting from a shrinking film business into the highly competitive digital arena has proved costly. Kodak has piled up nearly $3.3 billion in restructuring charges and accumulated $2.1 billion in net losses over the last 12 quarters -- nine of which ended in deficits.

In February, the photography pioneer said it was eliminating 3,000 more jobs, raising its planned tally of layoffs to 28,000 to 30,000 since 2004. But the company said Thursday that the layoff count will actually end up between 27,000 and 28,000.

By year-end, its work force could slip to around 34,000, less than half what it was at the end of 2002.

Revenues from consumer digital imaging products rose 1% in the quarter to $1.23 billion, helped by a 16% jump in sales of cameras, retail kiosks and other digital products but offset by its costly foray into a high-margin inkjet-printer market dominated by Hewlett Packard Co. Kodak is aiming to sell a half-million inkjet printers this year and reach $1 billion in sales by 2010.

Graphic communications revenues rose 5% to $928 million, driven by improved sales of digital plates and software.

In the first nine months of the year, Kodak earned $461 million, or $1.60 a share, compared with a loss of $617 million, or $2.15 a share, in the first three quarters of 2006. But sales fell to $7.2 billion from $7.57 billion -- reflecting the $2.35 billion sale in April of its 110-year-old health-imaging business.