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Kodak Offloads Digital Camera Manufacturing

Rochester, N.Y. — Kodak will divest itself of its entire digital camera manufacturing operations, striking a deal with Singapore-based Flextronics International to handle the company’s manufacturing along with certain camera design and development functions.

The news came on the heals of Kodak’s second quarter earnings report, which showed a sales and revenue decline in the company’s struggling film and photofinishing systems group and the consumer digital imaging group. Kodak attributed its consumer digital losses to “changing market dynamics, as well as the company’s stated goal to emphasize margin expansion over revenue growth.”

To that end, the company shifted the burden of digital camera production to the electronics manufacturing services firm Flextronics, which will assume control of assembly, production, and testing of Kodak digital cameras, alongside the operations and logistics services. As part of the deal, Kodak will transfer 550 employees to Flextronics.

Along with retaining its intellectual property, Kodak said it would “continue to develop the high- level system design, product look and feel and user experience, and will conduct advanced research and development for its digital still cameras.” It will also keep its trade names, customers, customer information, feature specifications, camera designs and technologies.

Kodak VP John Blake Jr. positioned the move as a means for Kodak to free itself from the costly manufacturing end to focus on “advanced development and innovation” where he believes the company can “gain the greatest competitive differentiation and advantage.”

Upon the completion of the transaction – which the companies expect to close in Kodak’s third financial quarter of this year – Flextronics will acquire “a significant” portion of the Kodak Digital Product Center in Japan and the associated camera design functions and its employees. It will also acquire the digital camera manufacturing, assembly and warehousing requirements and related employees of the China-based Kodak Electronics Products.

Kodak reported that its consumer digital sales dropped 6 percent, to $628 million. Within the group, digital services revenue from Kodak’s online EasyShare Gallery was up 32 percent, its kiosk and related media business was up 13 percent, but home printing revenues were flat and digital capture revenue dropped 15 percent.

In a conference call this morning, Kodak Chairman/CEO Antonio Perez said the group’s performance was tied to the “emergence of an interesting dynamic” in the consumer digital imaging market. Specifically, consumers are printing less at home and worldwide unit sales of digital cameras will reach their peak this year, Perez said. Revenue from digital camera sales, in fact, peaked last year Perez said.

There has been what Perez termed a “surprisingly rapid deceleration” in home printing. While the snap shots photo printer market grew 100 percent in 2005, it will only edge up 25 percent this year. “The snapshot printer is now a camera accessory business and we will treat it as such,” Perez said.

The company’s film and photofinishing systems sales were $1.15 billion, down from $1.5 billion in the year-ago quarter.

Total sales for the company totaled $3.3 billion, a decrease of 9 percent from $3.7 billion in the second quarter of 2005 and a net loss for the quarter of $282 million. Kodak also revised down its digital revenue growth forecast for the year, from an original estimate of between 16 to 22-percent to approximately 10 percent.

“We are coming into the final stages of our digital transformation. By the end of next year the majority of the restructuring costs will be behind us and Kodak will be positioned for sustained success in digital markets,” Perez said.

That success will center on its CMOS image sensor business and its mobile imaging business. “We will focus on making cell phones true consumer digital cameras,” he said.