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Strong Q4 results could help Kodak as issues mount

Few quarterly reports come packed with as much baggage as Eastman Kodak Co.’s upcoming fourth-quarter and year-end announcement.
 
It is unrealistic to expect Kodak to resolve the myriad issues facing it-among them cash woes, reports of pending bankruptcy, potential stock delisting, the departure of a trio of directors and ongoing efforts to sell its digital patents.
 
But delivering a strong, cash-generating quarter could boost Kodak on several fronts: lifting its stock, providing some time and money to complete the patent portfolio sale, and at least temporarily dispersing the vultures circling overhead.
 
That said, analysts do not expect a gangbuster quarter, though they are forecasting a profit of 4 cents a share, compared with a loss of 37 cents a share a year ago. They also predict that revenue will edge up 1 percent to $1.95 billion. Kodak is slated to report its results on Thursday.
 
For the year, analysts expect the company to post a loss of $2.48 a share, compared with a per-share loss of 8 cents a year ago. Analysts think revenue will decline 13 percent to $6.2 billion. That is below Kodak’s guidance of $6.3 billion to $6.4 billion.
 
Some items that might provide a boost for Kodak are the announced sale of Eastman Gelatine Corp. on Dec. 22, the completed sale of its image sensor solutions businesses in November and the sale of 320 acres in Windsor, Colo.
 
A key factor for Kodak, beyond profit and loss, remains the amount of cash it needs for continuing operations.
 
Chairman and CEO Antonio Perez said in November that the company expected to finish the year with $1.3 billion to $1.4 billion in cash. Kodak finished the third quarter with $862 million in cash, including $230 million held in the United States.
 
Hitting that full-year cash forecast depended on the company executing its operational plans and assumes full-year sales of non-strategic assets totaling some $200 million and intellectual property licensing transactions of $250 million to $350 million, Perez said in November.
 
Ulysses Yannas, a longtime company watcher with Buckman, Buckman & Reid Inc. in New York City, said he believes Kodak has reached the level of cash it needed through sales.
 
Through Sept. 30, Kodak said, net cash used in continuing operations from operating activities was roughly $1 billion, $500 million more than the prior year.
 
The big question now, Yannas said, is whether Kodak will file for bankruptcy.
 
Yannas is skeptical that Kodak will do so because he does not see the company needing the cash immediately. He expects Kodak to have had a strong fourth quarter in commercial and consumer inkjet printing. In addition, the cost of aluminum and silver-key commodities that affect Kodak’s bottom line-decreased in the fourth quarter compared with a year ago.
 
"If they are going bankrupt, I don’t know why they would stage a conference call. If you are going bankrupt, earnings don’t matter," he said.
 
Still, Yannas acknowledged, it is puzzling that Kodak has not slated its annual meeting in early February with the financial community.
 
It could be that Kodak must enter bankruptcy to sell the patents, he said. If that occurs, he would expect the company to emerge from Chapter 11 by year’s end.
 
In addition to published reports that Kodak has been in talks with lawyers and banks regarding a bankruptcy filing as early as February, Moody’s Investors Service lowered all of its ratings on the company Jan. 5. The move affected $1 billion in debt securities.
 
The rating downgrade reflected a heightened probability of a bankruptcy over the near term as a result of a deteriorating liquidity outlook, "which we believe is posing additional challenges to consummating the sale or licensing agreements of Kodak’s key digital patents," Moody’s said in a release. "The negative outlook reflects Kodak’s eroding liquidity position and the higher probability of a bankruptcy filing."
 
The ratings service added that it believes Kodak’s ability to sell or license some of its key digital patents may be hurt by the possibility of a bankruptcy filing. The delay of a decision by the U.S. International Trade Commission in a patent battle between Kodak and smartphone makers Apple Inc. and Research In Motion Ltd. creates further challenges for Kodak.
 
"We project domestic cash could be depleted by mid-2012 absent material (intellectual property) licensing income and the successful execution of non-strategic assets sales," wrote Richard Lanem, Moody’s senior vice president.
 
Kodak also created some of the speculation with a statement in its third-quarter filing with the Securities and Exchange Commission. The company said its ability to continue operations over the next 12 months was "dependent upon the ability to monetize its digital imaging patent portfolio through a sale or licensing of the relevant patents, and/or the successful execution of the alternative actions, which could also include the issuance of additional debt. … There is uncertainty regarding whether the company can, and the company can provide no assurance that it will, successfully execute the actions listed above."
 
Chris Whitmore, analyst with Deutsche Bank Securities Inc. in San Francisco, painted a dismal picture for Kodak in his most recent research report, completed after Kodak’s third-quarter report.
 
"We view EK’s fundamental businesses as structurally challenged and dependent on its ability to realize good value for its IP portfolio to sustain future operations," he wrote. "Kodak remains highly dependent on successful IP sales to fund itself through 2012. The pressure will be particularly acute in (the first half)."
 
"Monetizing IP patents (asset sale/IP litigation)," he added, "is the single most important swing factor for the company."
 
Perez said in November that Kodak’s cash performance from its digital businesses will be much stronger in 2012.
 
Two of its biggest areas of investment are expected to be profitable by 2013: consumer inkjet printing, which is expected to start turning a profit in the fourth quarter; and commercial inkjet printing, which is expected to become profitable in 2012.
 
"Our growth initiatives will be further along the product life cycle curve and getting closer to profitability," he said. "I kept saying that by the end of 2012, we are going to get to this self-standing digital company. So we are ready for the fourth quarter, and we are ready for 2012."

1/20/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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