Ugly Picture at Kodak

Another earnings debacle, another step in the restructuring effort.
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posted its latest earnings debacle and put its health care imaging business up on the block.

The Rochester, N.Y., picture company also set the latest reshuffling of its management ranks, saying three top leaders will retire.

Kodak lost $298 million, or $1.04 a share, for the quarter ended March 31, compared with a loss of $146 million, or 51 cents a share, a year earlier. The latest quarter was hit by $197 million in restructuring costs and higher silver and oil costs. Revenue rose 2% from a year ago to $2.89 billion. Analysts were looking for a 5-cent profit on sales of $3.06 billion.

Traditional revenue dropped 20% from a year ago to $1.26 billion, while digital revenue rose 29% to $1.62 billion. The digital operation's loss was $37 million in the latest quarter, against $51 million a year ago.

"Our first-quarter results continue to show the expected strong seasonality of our business. Our results are essentially on plan, with some units ahead and some behind," said CEO Antonio M. Perez. "My expectations for Kodak's financial performance this year are essentially unchanged. We expect to achieve our 2006 performance targets in the areas of digital earnings growth, digital revenue growth and cash generation."

For the quarter, net cash from operating activities was a negative $481 million, compared with a negative $223 million in the year-ago quarter. Investable cash flow for the quarter was negative $576 million, compared with negative $258 million in the year-ago quarter.

Gross profit was 23.5%, down from 24.4%, primarily because of the negative impact of foreign exchange and lower volumes and prices. Gross profit was also hurt by the increased depreciation charges due to the asset useful-life changes made in the third quarter of 2005.

Meanwhile, the company said it hired Goldman Sachs to explore strategic alternatives for its health group, with 2005 revenue of $2.7 billion in health imaging, including digital x-ray capture, medical printers and X-ray film.

"Our stated corporate goal is to be among the top three in each of the businesses in which we compete," Perez said. "While the Health Group is enjoying strong organic growth in elements of its digital portfolio, such as digital capture solutions and health care information solutions, we have been observing for some time consolidation in this industry. Given our valuable assets and the changing market landscape, we feel that now is the time to investigate strategic alternatives."

Kodak also said it would assign its manufacturing facilities to specific business units and streamline certain administrative functions. These moves will increase accountability among the businesses for product manufacturing and inventory, while also enabling further cost reductions. The changes, which are part of the company's broader digital transformation, were anticipated in the total employment reductions announced last year.

"Our goal has been to dedicate to our business units the resources they need to build on their success and operate in an autonomous manner," said Perez. "With the changes announced today, we will hold the businesses more directly accountable for their results. Kodak is now a digital company, and these actions are required to support our digital-business model."

Kodak said senior vice presidents Charles Brown and Daniel Meek and vice president Charles Barrentine will retire in connection with the restructuring.