Eastman Kodak Co spooked investors on Thursday by warning it may need to raise new debt or complete a multibillion-dollar patent sale to survive the next 12 months, sinking shares by as much as 11.7 percent. The photography company also posted dismal third-quarter results, with cash holdings down 10 percent from the second quarter, and it projected deeper losses this year as its new printers and digital cameras failed to gain traction. Speculation that Kodak was on the verge of filing for bankruptcy flared at the end of September after the company said that Jones Day, a law firm known for working on restructuring cases, was one of its advisers. Kodak has denied that it plans to file for bankruptcy, but gave a stark warning on Thursday about its liquidity over the next 12 months.
“The Company's ability to continue its operations … is 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 include the issuance of additional debt, listed above,” Kodak said in a filing with the U.S. Securities and Exchange Commission. Antonio Perez, the longtime CEO, downplayed the company's warnings in the SEC filing on a conference call with analysts. He said the SEC requires all companies to identify potential risks and that it does not imply the company or its patent sale is in danger. “These requirement statements should not be misunderstood in any way as dampening the optimism or ability to complete the sale of our digital imaging patent portfolio, which is very high,” he said. Kodak hired investment bank Lazard in July to help it sell more than 1,100 digital imaging patents, which analysts have estimated could be worth as much as $2 billion to $3 billion. It is not clear what interest there is in the patents or if they would fetch as much money as Kodak hopes, but the public cash woes may hurt the bargaining process, analysts said.
Still not doing too well
“They are trying to get market value but everyone knows they need to sell,” said Brean Murray analyst Ananda Baruah. Kodak declined to provide a timeline for the sale or offer investors any details on the process. But it said it was “pleased with the progress and level of interest in the portfolios.” Kodak, whose roots date back to 1888, was once synonymous with photography. In recent years, Kodak has relied on licensing revenue from its patents, as well as sales of commercial and consumer printing systems. It has failed to turn an annual profit since 2007. Kodak cut its cash outlook and projected wider losses for the year. It expects to end the year with $1.3 billion to $1.4 billion in cash, down from a previous forecast of $1.6 billion to $1.7 billion. It projected losses from continuing operations in the range of $400 million to $600 million, compared with a previous forecast for a loss of $200 million to $400 million.
Kodak said in the filing it was exploring the possibility of raising an additional $500 million in first lien financing, which means lenders would be first in line to get paid if there is a default. At least one analyst was skeptical on Thursday that Kodak could secure new financing. “It's tough for me to envision someone providing them rescue financing based solely on the strength of their business strategy, excluding the intellectual property,” said the Brean Murray analyst Baruah.
On Thursday, Kodak's five-year credit default swaps were quoted at distressed levels, reflecting an 87 percent chance of default on its debt in the next five years. Kodak listed several commitments it would not be able to meet without the patent sale or debt financing, including its ability to fund working capital, capital investments, make scheduled interest and debt payments and contribute to employee benefit plans. As of Sept. 30, the company said it held $862 million in cash, down from $957 million on June 30. In the third quarter, Kodak's loss from continuing operations widened to $222 million or 83 cents per share. Analysts on average were expecting a loss of 44 cents per share, according to Thomson-Reuters I/B/E/S. Revenue fell 17 percent to $1.46 billion, short of the $1.65 billion analysts were expecting.
The company's consumer digital imaging group, which includes consumer inkjet printing, commercial printing and digital cameras, posted a net loss of $90 million, compared with a loss of $67 million a year earlier. The company's traditional film business sales fell 10 percent to $389 million, as silver costs hurt the segment. In addition to Jones Day, restructuring firm FTI Consulting also advises Kodak. FTI also counts bankrupt MF Global as a client. Kodak shares were down 8.3 percent at $1.10 shortly before the close of trading on Thursday, off an earlier low at $1.06. The shares had already lost about 80 percent so far this year.