Kodak profit falls on higher costs, stock drops

By Franklin Paul

NEW YORK (Reuters) - Eastman Kodak Co (EK.N) posted lower-than-expected quarterly results on Thursday as higher raw material and development costs trimmed margins, overshadowing improved sales of digital cameras and picture frames and sending its shares down more than 6 percent.

Kodak, which has completed major elements of an expensive transformation into a smaller company that focuses on digital devices and printing services, also said it sees 2008 earnings at the lower end of its previous forecast.

The company posted a second-quarter profit of $495 million, or $1.62 cents a share. That compares with a profit of $575 million, or $2.00 a share, a year-earlier.

Excluding special items related to restructuring costs, a tax refund and other one-time events, the company posted a loss of 13 cents a share.

Analysts had expected a profit of 16 cents a share, according to Reuters Estimates.

Gross margins fell to 23.5 percent from 26.1 percent, hurt by higher manufacturing and materials costs, including increased costs of silver, paper, and petroleum-based goods. The raw materials are used in the making of Kodak products such as traditional film and plates for commercial printers.

"Gross margins were weaker than we expected, on commodity costs and volume declines in film," said analyst Shannon Cross of Cross Research. "It's costing Kodak more to generate revenue that anticipated."

The company said in May it would combat higher materials costs by passing on the costs to customers and raising prices on some products by as much as 20 percent. Kodak said the increases would take effect by July 1.

Before today's stock decline, Kodak shares had dropped 27 percent so far this year amid worries that after more than 4 years of restructuring, investors will have to wait even longer to see sustained profits from the Rochester, New York, company.

The depressed share price may reflect investors frustration with Kodak since it launched an effort late in 2003 to focus on digital devices, hoping to outpace the drop in demand for film, historically its main revenue source.

By some accounts, the decision came too late, since consumers had already begun to stop using film. More recently, Kodak's fortune has been dampened by the restructuring that ran on longer than originally expected, and now rising prices have begun to hurt the company's bottom line.

Revenue in the second quarter rose slightly to $2.49 billion, up from $2.47 billion, but outpaced estimates of $2.438 billion.

Kodak's consumer digital imaging group, a key growth area, posted a 17 percent jump in sales. But it recorded a loss from operations of $49 million, as it boosted spending on development of new products such as consumer inkjet printers.

Kodak sees 2008 earnings from operations in the low-end of a range of $400 million to $500 million. It reiterated its view that revenue growth will range from nil to 2 percent.

Kodak's stock fell 77 cents to $15 on Wednesday morning on the New York Stock Exchange, after earlier hitting a session low of $14.71.

(Reporting by Franklin Paul; Editing by Derek Caney)