Tuesday, October 27, 2009

Eastman Kodak Company (NYSE: EK): Third Quarter Earnings Preview 2009

Eastman Kodak Company (NYSE: EK), the photography pioneer, is scheduled to release its third quarter earnings before the market open on Thursday, October 29, 2009. Analysts, on average, currently expect the company to report a net loss of 19 cents a share on revenue of $1.89 billion. In the year ago quarter, the company reported earnings of 33 cents per share on revenue of $2.41 billion.

Eastman Kodak Company provides imaging technology products and services to the photographic and graphic communications markets worldwide. It operates in three business segments: Consumer Digital Imaging Group (CDG); Film, Photofinishing, and Entertainment Group (FPEG); and Graphic Communications Group (GCG).

In July, the company had posted its third straight quarterly loss as the global economic recession hurt sales of digital cameras, film and other photography products. The Rochester, New York-based company reported a net loss for the second quarter of $189 million or $0.70 per share, compared to net income of $495 million or $1.62 per share for the year-ago quarter. Loss from continuing operations for the second quarter was $191 million or $0.71 per share, compared to income from continuing operations of $200 million or $0.66 per share in the prior year quarter. Net sales for the second quarter plunged 29% to $1.77 billion from $2.49 billion in the same quarter last year. Analysts, on average, expected the company to report a loss of $0.37 per share on revenue of $1.83 billion for the second quarter. Gross margin for the second quarter fell to 18.5% from 23.6% a year ago, hurt by reduced volumes, along with the impact of negative price/mix, including lower intellectual property licensing royalties, and unfavorable foreign exchange.

On a segmental basis, second quarter revenue from Kodak's digital businesses fell 28% to $1.17 billion. Revenue from the company's traditional film business dropped 30% to $593 million in the second quarter, mainly due to industry-related softness and the negative impact on volumes related to the uncertainty over Hollywood labor talks, which have since been resolved. Consumer digital imaging group's sales fell 33% to $503 million in the second quarter, while graphic communications group's sales declined 24% to $670 million.

There were few pockets of strength as well. Consumer inkjet printer and ink revenues grew 44% compared to the second quarter of 2008, significantly outpacing a market that was declining.

Kodak ended the second quarter with $1.13 billion in cash and cash equivalents and $1.31 billion in debt.

The company forecast improved results for the second half of the year. Kodak said it expects digital revenue to grow 1% to 3% and total company revenue to decline 4% to 6% for the second half of the year.

For the full year 2009, the company still expects digital revenue to decline 6% to 12% and total revenue to decline of 12% to 18%. Kodak said in Jult that it expects 2009 GAAP loss from continuing operations to be at the low end of the $200 million to $400 million range provided in February.

For the third quarter, the company estimates total segment losses from continuing operations before interest expense, other income and income taxes will be between $50 million to $60 million, which does not include any new non-recurring intellectual property arrangements in the quarter.

The company has taken a number of steps to cut costs, improve liquidity, slash debt and strengthen its balance sheet. Kodak has slashed jobs, trimmed salaries and scrapped semiannual dividend in response to the global economic downturn. During the second quarter, the company managed to reduce its selling, general and administrative expenses by 26% or $144 million.

Last month, as part of an overall $700 million financing transaction the company closed its private placement of $400 million aggregate principal amount of Convertible Senior Notes due 2017 to qualified institutional buyers. It also completed the transaction with Kohlberg Kravis Roberts & Co. L.P., designed to strengthen the company's financial position. The Rochester, New York-based company said it has issued to KKR managed investment vehicles $300 million in aggregate principal amount of 10.50% senior secured notes due 2017 and warrants to purchase 40 million shares of Kodak common stock. In conjunction with the closing of the KKR transaction, Kodak's board has elected two KKR nominees to the board. The move is expected to free up capital for core investments, which in turn will reinforce its business.

The company's businesses are showing signs of stabilizing. The firm already began to see some positive indicators during the second quarter- stronger demand for digital plates in June; an increase in the number of quotation requests for commercial printing equipment; more optimism from retailers than expected for the holiday season plan-a-gram; a significant increase in the demand for Retail Systems Solutions’ Kiosk media in Europe and new account wins for Document Imaging.

In the second half of the year, the company anticipates improvement in the demand for Entertainment Imaging origination film. The signing of the Screen Actor’s Guild Contract and the first half growth in Global Box office receipts indicates that the Motion Picture industry continues to be healthy and validates the assumption that the second half demand for origination film will increase. The company also expects margin improvement within PrePress Solutions due to higher volume demand and improved commodity cost position. In July, CEO Antonio Perez said that he believes "Christmas will be much better than last Christmas." Perez also said that the retailers have told the company that Q2 "is the bottom" of the economic downturn and Perez expects Q3 to "be a little better."

Late last month, the photography products maker announced that chairman and chief executive, Antonio Perez, has agreed to remain at the helm of the company through 2013.

In terms of stock performance Kodak shares are down 46% since the beginning of the year. Shares of the company rose 4 cents or 0.81% to $3.74 in morning trade on Tuesday.

Full Disclosure: None.

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