Markets & Finance

Profit Picture Brightens at Kodak


Shares gained Wednesday after the photography giant's quarterly results swung into the black thanks to cost-cutting

Eastman Kodak (EK) finally posted a profit on Jan. 31. That's something of a victory for CEO Antonio Perez -- when he had insisted in August that the photography giant would soon see better days, dubious investors sold Kodak's stock anyway. In the past two years the Rochester (N.Y.) company has lost money, laid off staff, and shut down factories. But now Kodak's cost-cutting has brought it into the black, as it continues struggling to make it in the brave new world of digital imaging.

Kodak earned a net $16 million during the three months ended Dec. 31, compared to a loss of $46 million during the same period of 2005. "I am extremely pleased with our performance in 2006 and our progress in implementing our digital business model," CEO Perez said in a press release Jan. 31.

Kodak has been fighting to remain a giant in photography as its old consumer film business continues to flail. The company's total sales amounted to $3.8 billion during the fourth quarter, 9% less compared to the same period of 2005.

To revive Kodak, Perez has been trying to establish a stronger footprint in digital photography. On Aug. 1, for example, Kodak announced plans to have Flextronics International (FLEX) manufacture and distribute its digital cameras.

Despite such efforts, Kodak's digital sales fell 5% year over year to $2.4 billion during the fourth quarter. The company is up against cut-throat competition. In the digital camera market, Kodak trails behind Sony (SNE) and Canon (CAJ). In the photo printer market, Lexmark (LXK) and Hewlett-Packard (HPQ) rule the roost, according to Morningstar. "Kodak is rapidly turning itself into a purveyor of low-margin consumer electronics, which is not an attractive long-run business model and will certainly not result in the high returns on capital associated with traditional photo printing," Morningstar analyst Irina Logovinsky said in a research note Oct. 11.

With sales down and $2.8 billion of debt looming, Kodak has had to use hardball tactics to come up with cash. Kodak saved hundreds of millions by closing factories and plans to lay off up to 27,000 employees, after having already handed out pink slips to more than 20,000 since 2004. CEO Perez has also been selling assets. For example, in January Kodak announced plans to sell its health group to the Toronto firm Onex for up to $2.55 billion. Thanks to such efforts, Kodak managed to shave off $561 million of its debt in the fourth quarter.

After the impact such cost cuts have had on Kodak's bottom line, investors bought shares more than 1% to $25.78 per share in midday trading on the New York Stock Exchange Jan. 31. That's an improvement from previous times. On Aug. 1, the already depressed stock had plunged some 14%, to $19.20, after the company reported that it lost nearly double the amount in the second quarter 2006 that it had in the same period of 2005 (see BusinessWeek.com, 8/2/06, "Kodak: Is This the Darkest Hour?"). By Aug 7, Kodak shares were at their low of the year at $18.93 per share.

CEO Perez drove the point home on Jan. 31 that he's kept his promises. "We delivered on every important goal that we set, with the exception of digital revenue growth, where we made a specific decision to focus on overall digital profit margins," Perez said in the press release.

Now that Perez has managed to post his first profit, he can focus on another pressing matter: getting sales growing again.

William C. Symonds and David Henry in New York contributed to this report


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