updated 5/4/2006 3:02:22 PM ET 2006-05-04T19:02:22

Eastman Kodak Co., undergoing a rough transition to digital photography, said Thursday it was considering the sale of its fabled health-imaging business after reporting a $298 million loss in the first quarter — its sixth straight quarterly loss.

Created a year after the discovery of X-ray film in 1895, the unit accounts for nearly one-fifth of Kodak’s overall sales but its operating profit plunged 21 percent last year as margins tightened. A sale would wipe out most or all of Kodak’s $2.6 billion in debt, analysts noted.

“To some extent it is a survival tactic,” said Shannon Cross of Cross Research in Short Hills, N.J., who thinks the business might fetch $1.5 billion to $2 billion. “Nothing’s imminent, but they need to improve their capital structure.”

“It’s a fast way of restoring their credit rating,” echoed Ulysses Yannas, a broker with Buckman, Buckman & Reid in New York who thinks the unit “can bring at least $4 billion.”

Largely because of restructuring costs, Kodak lost the equivalent of $1.04 a share in the January-March quarter, compared with a loss of $146 million, or 51 cents a share, a year ago.

Sales rose 2 percent to $2.89 billion from $2.83 billion in last year’s first quarter.

Excluding one-time items, Kodak lost $99 million, or 34 cents a share. That compared with a consensus forecast of a 5-cent profit among analysts surveyed by Thomson Financial.

While stung again by the rapid slide in film sales, Kodak found some solace in its steady drive into the digital era. Its overall digital sales in the quarter surged 29 percent to $1.6 billion, while revenues from film, paper and other traditional, chemical-based businesses slumped 20 percent to $1.26 billion.

Last summer, the 126-year-old company disclosed plans to lay off 10,000 employees on top of 12,000 to 15,000 job cuts targeted in January 2004.

Kodak is looking at “strategic alternatives” for its Health Group that include a partnership, an outright sale and other options.

“We will explore them all and selling will be one of them — but it’s not the only one,” Chief Executive Antonio Perez said in a conference call with analysts.

“Industry dynamics are redefining the business model and the scale required for sustained success and leadership,” he said, emphasizing the importance of “creating a more valuable business with increased shareholder value.”

Kodak sped past a historic milestone last year by generating more annual sales from digital imaging than from film-based photography, but its ability to churn out digital profits is proving trickier. The company said in January it expects to post an overall operating loss of $500 million to $850 million in 2006.

“We intend to finish the restructuring during 2007, with 2006 being the year with the highest restructuring costs,” Perez said Thursday, adding that he expects digital profits to grow to $350 million to $450 million this year and digital sales to rise by 16 percent to 22 percent.

In 2003, Kodak acknowledged its analog 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 in acquisitions. But the shutdown of film and other manufacturing operations 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.

Inventory reductions by Wal-Mart Stores Inc. and falling prices for home printers hurt Kodak’s consumer digital sales, and its operating loss in the segment widened to $94 million from $58 million a year ago when Easter fell within the first quarter. Sales dropped 10 percent to $498 million.

Film and photofinishing sales slumped to $916 million from $1.27 billion a year ago while operating profits dropped to $29 million from $71 million.

Health imaging sales fell 7 percent to $585 million, and operating earnings dipped to $46 million from $78 million, mostly because of lower earnings from traditional radiography film and higher silver costs. That was partially offset by improved earnings in computed radiography, health-care information systems and digital radiography, but digital earnings fell to $17 million from $33 million a year ago.

In contrast, graphic communications sales jumped 136 percent to $870 million, driven by its $1.8 billion buyouts of Canada’s Creo Inc. and Sun Chemical Corp.’s 50 percent stake in Kodak Polychrome Graphics. Operating earnings reached $31 million, compared with a $34 million loss a year ago.

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