Kodak worried that slow U.S. economic growth will diminish its profits

Eastman Kodak Co. warned Wednesday that signs of slowing U.S. economic growth will crimp its digital-photography profits this year, forcing it to build fewer digital cameras and home printers for the end-of-year holiday season.

Even though its overall digital sales in 2005 are expected to grow by more than 36 percent, a target set in January, Kodak said operating profit will fall short of a projected range of $275 million (Ђ228 million) to $325 million (Ђ270 million) because of a sluggish economy and shortfalls in its health-imaging business.

"We have reduced the number of digital cameras and the numbers of home printers we're going to build for the fourth quarter," Kodak's chief executive, Antonio Perez, said at an investors' meeting in New York.

Because of uncertainty about "the economic environment of the country," Perez said, "the prudent thing to do was expect somehow an impact on the disposable income of consumers. ... We don't want to end up with a large inventory of products that, as you know, lose value very quickly."

Kodak is already battling a steep drop in demand for photographic film and paper as it navigates a tough transition to digital photography. In July, it disclosed plans to lay off 10,000 employees on top of 12,000 to 15,000 job cuts targeted in January 2004.

At a meeting with investors two years ago, Kodak acknowledged that its chemical-based businesses were in irreversible decline and outlined an ambitious strategy to become a digital heavyweight in photography, medical imaging and commercial printing by 2007.

The transition triggered nearly $3 billion (Ђ2.5 billion) in acquisitions but has carried a high cost. The shutdown of film and other manufacturing operations around the world looks likely to drop its global work force below 50,000, down from 75,100 in 2001 and a peak of 145,300 in 1988.

Sales of conventional silver-halide film, Kodak's cash cow for the last century, look set to drop by 30 percent in the United States this year.

While film revenue "is going away faster than we thought," Perez said, "we need the cash obviously from that business in the next two years because of the cost of restructuring.

"After two years, I won't say that I don't care, but we don't need it any more," he said. "This company will be a self-standing digital company ... that will be able to produce the earnings and the cash necessary to be a growth company.

Between 2005 and 2007, Kodak expects earnings from consumer digital products and services to improve, driven by rising sales of digital media and an improved cost structure. It plans to separate its consumer digital portfolio from the film systems portfolio at the start of 2006.

T.E.