After accounting for its underfunded retirement obligations, Eastman Kodak’s (EK) net market value is about -$3.50 per share. So it should be of no surprise that the Wall Street Journal reported the company is preparing to seek bankruptcy protection.
As I detailed on this site on March 22, 2011, EK’s management tried to delay their inevitable demise by using questionable pension accounting assumptions to overstate their earnings. Specifically, EK raised its assumption for the expected return on pension assets to 8.73%, higher than about 85% all 3000+ companies I cover. It also represents a sizable increase (over 20 basis points) from the prior year. Click here to see the page in EK’s 10-K that shows the pension plan assumptions. In fact, the company’s assumed return on plan assets is so high that it allowed EK to book income from its pension plan equal to 2.2% of its revenue in 2010.
Booking any income from a pension plan that is $2.6 billion under water seems a bit fishy.
Investors who have not yet sold their holdings in EK should get out while they still can.
Management must have known about the massive gap between the company’s assets and liabilities for some time, at least a year or more. Given that they have not, in this time, been able to monetize the company’s patent portfolio at a level that could save the company, it is fair to assume that the court-supervised auction dictated by Chapter 11 bankruptcy will not do much better.
Instead, we can expect a fight from the company’s employees for as much of the benefits promised them as possible. Given that they will likely have to accept a large hair cut on what was promised them, I doubt they will be very sympathetic to the equity holders.
In other words, EK equity holders should not expect any cash to be left over for them after the company addresses its $2.6 billion obligation to its employees and its $1.5 billion obligation to its debt holders.
Note the $2.6 billion pension deficit and the $1.5 billion debt load are based on most recent data available, the company’s 2010 10-K.
In more recent filings, I noted that the company mentions: “The remeasurement of the funded status of those plans increased the Company's recognized defined benefit and other postretirement benefit plan obligation by $9 million.” The “remeasurement” of obligations means that the underfunded deficit of $2.6 billon is likely to get larger, not smaller, as the previously questionable assumptions are rectified.
The company’s third quarter 10-Q shows that its reported debt has increased from about $1.6 billion from about $1.3 billion versus last year. The company does not provide an update on its off balance sheet debt for 2011, which was over $200 million at the end of 2010.
All together, the most recent data does not provide any signs of improvement over what was a bleak situation a year ago for EK.
Any active fund manager still holding this stock is either asleep at the wheel or not doing his homework. Either way, investors should take matters into their own hands and sell.
After some digging, I found only one fund allocates more than 1% to EK, Monteagle Funds: Monteagle Value Fund [MVRAX]. According to the most recent holdings data available, which is from 8/31/11, MVRAX allocates 1.3% of its value to EK.
MVRAX, along with the C and G shares for the fund, gets my “neutral” rating, which suggests the fund manager’s portfolio management skills are not too bad. To see all the funds that get my “very dangerous” or “dangerous” rating, check out my fund screener which provides my predictive ratings on 6000+ mutual funds and 400+ ETFs.
For details on my rating on MVRAX, here is today’s report.