January 22, 2004 12:24 PM PST

Facing digital realities, Kodak to trim staff

Eastman Kodak announced plans Thursday to cut roughly 20 percent of its work force, as it moves further away from its traditional film and camera business and tightens its focus on digital markets.

Kodak first detailed its intention to more sharply concentrate on digital products in September, and it said earlier this month that it would no longer offer traditional film cameras in the United States, Canada and Western Europe. As the market for digital photography has grown, the company has seen its long-standing sources of revenue falter and is looking to burgeoning markets such as medical-imaging systems and production printing to bolster sales.

Under the new restructuring plan, the Rochester, N.Y.-based company plans to lay off between 12,000 and 15,000 of its 70,000 employees worldwide. The staff reduction will largely affect workers in Kodak's film and camera operations, including manufacturing and administrative staff, according to a company statement. Kodak also plans to reduce the total square footage of its facilities by about one-third, with some operations undergoing consolidation and others being shuttered completely.

The layoffs and facility closures will be carried out over a three-year period and will incur cash and noncash charges totaling approximately $1.3 billion to $1.7 billion. Kodak said some $700 million to $900 million of that total will be attributable to employee severance packages, with another $600 million to $800 million going toward the disposal of buildings and equipment.

Kodak executives called the downsizing a necessity of changes to the company's business model and pointed to a brighter future for the photography veteran, when it has decreased its dependence on traditional film products.

"These plans are the consequence of market realities, and they will help us to fund a future for Kodak of sustainable, profitable growth," Antonio Perez, president of the company, said in a statement. "They are absolutely required for Kodak to succeed in traditional markets as well as the digital markets, to which our businesses are rapidly shifting. To succeed, we must make our business model more competitive with what the markets and our customers demand."

Industry watchers seemed unsurprised by the announcement and lauded Kodak's decision to increase its emphasis on digital products, but at least one expert observed that the strategy shift does not guarantee the company's future success. Ron Glaz, an analyst at Framingham, Mass.-based IDC, said it is encouraging to see Kodak's leaders actively moving to change the company's makeup rather than merely talking about it.

"I think they're moving in the right direction," said Glaz. "But you have to wonder if it is too late for them to enter some areas of the market, where competition is already robust, and whether Kodak has the technologies it will need to support all of its financial demands in moving into those markets."

Glaz believes that Kodak's best chance to succeed will be in the digital-photo processing and printing sector, where the company's Ofoto online photofinishing subsidiary already has an established presence. However, he believes that it may be hard for the company to compete in the home-printing market, which is already packed with well-known competitors such as Hewlett-Packard.

Regarding the layoffs, Glaz said the results of such a drastic move are always hard to predict.

"You're talking about a lot of people here," he said. "We saw a lot of companies go through this kind of major downsizing in the 1980s, and it didn't always prove beneficial. It will be interesting to see if there are more layoffs in the near future; that wouldn't be a very good sign."

Decline in income
In related news, Kodak reported fourth-quarter 2003 earnings that featured a sharp drop-off in net income. Its net income fell to $19 million, or 7 cents per share, compared with $113 million, or 39 cents per share, in the same period the previous year. Those returns fell well below an average estimate of 51 cents per share from analysts polled by Thompson First Call.

In contrast, Kodak's fourth-quarter revenue reached $3.7 billion, an increase of about 10 percent on the $3.4 billion taken in the same period last year. However, excluding foreign exchange-related gains, the company's sales increased by only 4 percent.

Kodak also announced that it has made a tender offer, through its Japanese subsidiary, to purchase all the common shares of digital camera maker Chinon Industries that its subsidiary doesn't already own. If successful, the buyout will cost Kodak roughly $35 million and should bring in additional digital camera research and development resources. Kodak's Japanese subsidiary said it was already Chinon's largest customer.

 

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