Oct. 4, 2011 at 7:30 AM ET
Eastman Kodak appears to be staying clear of bankruptcy proceedings for now, but time is clearly running out for the 130-year old industrial icon to reinvent itself for a digital century.
Kodak stock, which had fallen into penny-stock territory Friday on published reports of an imminent Chapter 11 filing, rebounded Monday to close at $1.34, a gain of 90 percent on the day after the company strongly denied the stories.
“Kodak is committed to meeting all of its obligations and has no intention of filing for bankruptcy," the company said in a statement after news that it had hired legal advisers in connection with a possible restructuring.
“It is not unusual for a company in transformation to explore all options and to engage a variety of outside advisers, including financial and legal advisers," the company said in its statement.
In any case, with Kodak teetering on the precipice, there is wide consensus the imaging company which has been around since President James A. Garfield needs to reinvent itself to survive.
Kodak, of course, grew into a global colossus on the strength of its film business, popularizing the technology beginning in 1900 with its Brownie camera, which sold for a dollar (film was 15 cents). A few decades later Americans' love affair with pictures grew deeper with the launch of Kodachrome color film. Kodak also expanded into TV and movie film products as well as medical imaging, but for generations of Americans, the name Kodak was synonymous with snapshots of milestone moments and memories.
Ironically Kodak also pioneered the digital camera that was the beginning of its undoing.
In 1975, engineers developed a bulky camera that used a cassette recorder as a kind of proto-memory card and required 16 batteries to operate. Its inventors dubbed it "film-less photography" and guessed that the contraption wouldn't have a market for the next 15 to 20 years. When the digital revolution took off, Kodak increasingly was left behind due to its reluctance to cannibalize its lucrative film and paper lines.
"I moved away from the stock a couple of years ago because I believed [digital technology] didn't get the proper investment and it didn't win the turf battles inside the company," says Joan Lappin, founder and CEO of Gramercy Capital Management Corp.
One challenge is that cheaper, nimbler competitors have taken off with the consumer camera business. Kodak's digital camera unit typically gives the company a fourth-quarter revenue bump due to holiday spending, but it's a boost of diminishing returns because the competition is so cutthroat. Company execs have realized this, however belatedly, and are reducing their focus on this product line. Unfortunately, they're doing so at just about the worst possible time for the company to lose a big chunk of revenue.
"In recent years, Kodak has (partially) redeemed three unprofitable quarters with a strong fourth quarter built on a high-volume holiday season," James Kelleher, director of research and senior analyst at Argus Research, wrote in a recent research note. "But given its mix shift away from consumer digital and toward less seasonal growth businesses such as commercial imaging, we believe that the company as currently constituted can no longer count on a strong cash-flow finish to the year."
"Ultimately, I think they should exit the camera business itself," says Mark Kaufman, special situations analyst at Rafferty Capital Markets. CEO Antonio Perez, a Hewlett-Packard veteran, has put the focus on the company's inkjet and commercial printer divisions. But there's intense competition here, too, Citigroup analyst Richard Gardner pointed out in his most recent research note.
Kodak is pinning its short-term hopes on selling a cache of 1,100 patents that have already borne fruit for it; the company has extracted nearly $2 billion over the past few years in licensing fees from companies in the smartphone business and is in litigation with Apple and BlackBerry maker Research in Motion over another $1 billion in licensing fees. A buyer could use the patents or earn additional royalties on them from manufacturers of multifunction devices that are replacing standalone digital cameras.
But analysts question whether milking a collection of a patents is a viable business strategy. Some drew a comparison with Nortel, a telecommunications company, that generated a lot of cache by selling patents.
"[V]iewing the Nortel patent sale as a template for Kodak's salvation contains one salient fact that is often overlooked: no one stepped in to buy the Nortel patents until after Nortel went bankrupt," Argus's Kelleher wrote in his research note. "Kodak may thus be racing the clock amid a growing cash burn that threatens its solvency."
Still, Kodak has believers.
"The company is not going bankrupt," says Ulysses Yannas, broker at Buckman, Buckman & Reid. When Kodak recently drew down $160 million from a line of credit, the market reacted negatively, but Yannas argues that the move actually helped the company save money. Most of Kodak's cash is overseas, so bringing it back would mean paying taxes on it that would cost more than the interest the company is paying to borrow those funds.
Provided Kodak can avoid running out of money in the near future, the company might see its fortunes reverse once again, as the cheap digital camera manufacturers that have been eating its lunch for the past decade are edged out by the growing ubiquity of smartphones, tablets and other devices that have cameras built into the hardware. "People want to communicate not just with voice and data, but pictures as well," says Kaufman. "It's fortuitous."
Gardner and others aren't convinced Kodak's intellectual property is a silver bullet. The company has relied on settlements and one-time licensing payments to stay afloat, so even if it can sell the patent portfolio it's shopping around now for top dollar, it's going to have to come up with a sustainable source of income in the future. "If IP licensing and asset sales do not come through as expected," Gardner says, "[O]ur model suggests that Kodak could run dangerously low on cash."