NEW YORK – Eastman Kodak Co. (KE) on Wednesday said it would cut up to 9 percent of its work force and posted a 60 percent drop in second-quarter profits, hurt by weakness in camera and film sales, especially in China.
Despite the soft results, shares rose as much as 8 percent on views Kodak has come to grips with some of its problems, and a belief Kodak may not cut its dividend, which at about 7 percent has the highest yield among blue chip stocks.
Rochester, New York-based Kodak, the leading maker of photographic film, which has been scrambling for alternative markets film demand shrinks, said it would cut 4,500 to 6,000 jobs, or between 6 percent and 9 percent of its global work force. The cuts will be made primarily in corporate administrative departments, manufacturing and research and development, the company said.
"I think reality has hit them in the face," said analyst Shannon Cross of Cross Research. "The economy did not come back like they had hoped and they had said that if it did not come back they would look at cutting costs."
Kodak's film and paper business faces a long-term threat from digital photography, where users record snapshots onto a memory chip and delete unwanted pictures. Analysts say Kodak must shrink its size and fund profitable growth areas such as medical imaging, which makes X-ray products for hospitals.
Toward that end, Kodak on Monday said it would buy PracticeWorks Inc. (PRWK), a maker of software for dental practices and medical imaging systems, for about $466 million.
"Our traditional consumer film and processing operations continue to face challenges associated with the increasing popularity of digital photography as well as persistent economic weakness ... price pressure and an associated decline in travel and tourism," said Dan Carp, Kodak chief executive.
China Sales Hurt by SARS
Sales in China, its second biggest market, were particularly hard hit. They fell 19 percent amid a slump related to the SARS (search) outbreak. However, Carp said that growth areas performed well in the period, with digital camera sales up 65 percent and health imaging earnings up about 17 percent.
Kodak's second quarter net income declined to $112 million, or 39 cents a share, compared with $284 million, or 97 cents a share in the comparable quarter a year ago.
The company's figures were above the forecast it made in June, when it slashed its expectations to between 5 cents and 25 cents. Prior to that warning, its outlook was for a profit of 60 cents to 80 cents a share. Excluding the costs for one-time items, earnings from continuing operations were 60 cents per share, the company said.
Sales rose slightly to $3.35 billion from $3.34 billion. Excluding the benefit of foreign exchange, sales declined 6 percent, the company said. Worldwide sales for the Photography segment, its biggest, fell 2 percent to $2.34 billion.
Over the next twelve months, its cost reduction actions will result in charges totaling $350 million to $450 million. It expects to save $300 million to $400 million on an annual basis, with $275 million to $325 million expected to be realized in 2004.
"We do not need the kind of infrastructure to run the business going forward that was necessary in the model of a high margin business with high barriers to entry ... of the past," Carp told analysts on the conference call. "The model of the company we're driving to does not need the kind of infrastructure we have."
Dividends Policy 'Unchanged'
The company also predicted its profit in the second half of the year would total 25 cents to 65 cents per share. The company also said that it expects a profit of 85 cents to $1.15 per share on an operational basis. Analyst on average had predicted a profit of $1.03 a share, according to Reuters Research, a unit of Reuters Group Plc.
Analysts said that results showed that Kodak would likely have enough cash to comfortably pay for its dividend this year, a fact that was called into question when Kodak announced the PracticeWorks pact.
Chief financial officer Bob Brust told analysts the dividend policy "remains unchanged," and said the company would next discuss the payout in September.
"He is saying that if things go to pot (by then), they will cut it," said Ulysses Yannas, an analyst at brokerage Buckman, Buckman & Reid. "It looks as if they don't need to cut it."
Kodak shares, among the most active and top percentage gainers, rose 7.8 percent, or $1.91 a share, to $26.50 at midday Wednesday on the New York Stock Exchange after it closed Tuesday at $24.59, its lowest level in more than 20 years.