Kodak's Failing Financials: How Long Can The Company Last?

| About: Eastman Kodak (KODK)
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Shares of Eastman Kodak (EK) had another wild ride on Thursday, falling more than 17.5% as Moody's reaffirmed its rating on the company but said that it doesn't think the struggling camera maker can avoid its cash shortfall likely coming in mid-2012.

Moody's stated that the new lawsuits against Apple (NASDAQ:AAPL) and HTC, along with a reorganization plan, and an acceleration of the digital transformation could help improve long term profitability for the firm, but liquidity is the main issue. Kodak is suing the two companies, saying that Apple's IPad and IPhone as well as HTC's Android based handsets violate patents in their camera equipment. Kodak was already suing Apple and fellow competitor Research in Motion (RIMM) for patent infringement. Moody's says the suits could help boost the company's liquidity, but time is running out.

Last week, the Wall Street Journal reported that Kodak would file for bankruptcy soon if patent sales did not materialize quickly. Kodak is in trouble financially, and the company is rushing to raise capital. Lawsuits potentially could bring $1 billion into the firm, according to management, but they are time consuming. Also, the company has $632 million stored in China, which would be hard to repatriate. Kodak is losing money and burning cash, and their problems could lead to bankruptcy, and sooner rather than later.

How bad is Kodak doing? Let's look at some numbers. First, let's look at profitability and the company's recent margins.

Margins 2008 2009 2010 2011*
Gross 23.04% 21.82% 24.11% 12.72%
Operating -8.72% -0.35% -4.15% -13.47%
Profit -4.69% -2.59% -8.49% -15.16%
*Through first nine months of year.

Kodak did have a bit of a rebound in 2009, and although it improved its gross margins in 2010, it's operating and profit margins have hit new lows. Kodak's revenues are expected to decline by 13% in 2011 and another 3% this year. The company is expected to lose almost $700 million in 2011, and another $400 million or so this year. Kodak has reported huge quarterly losses recently, and has missed expectations by wide margins.

However, the main problem with Kodak is its financial situation. The following table shows some financial ratios over the last few years. Working capital and shareholder equity are in millions.

Financials 12/31/08 12/31/09 12/31/10 9/30/11
Current Ratio 1.45 1.49 1.34 1.27
Debt Ratio 89.53% 100.46% 117.26% 132.36%
Working Capital $1,542 $1,407 $966 $633
Equity $961 ($35) ($1,077) ($1,651)

As you can see, liabilities have become greater than assets, and the numbers are getting worse by the month. Kodak is hoping that it can sell some assets to boost liquidity, but these numbers are only going to get worse when they report fourth quarter earnings.

Kodak shares were trading above $3 in September, but when financial fears rose, the stock plunged to below $1. It regained that level quickly, but has been declining since. The stock finally lost the $1 level on December 8th, and hit a new low of just $0.37 this week. The stock more than doubled to $0.85 by Wednesday, but Thursday's losses show that many fear the company will go under. Bankruptcy is a likely outcome if the company cannot sell some assets soon. The ongoing lawsuits have the potential to get some cash, but probably not in time.

My guess is that the company declares bankruptcy in the next 3-6 months. The assets will be put up for sale, and I'm guessing that some of the major players to acquire them will be some of the defendants in the patent suits, Apple, Research in Motion, and HTC. Kodak has a wide variety of patents, and they can be valuable to the right companies.

This stock is very volatile right now, with new news almost coming out by the hour. I wouldn't bet big on this name in either direction, but if I had to choose one, I would be on the short side. The equity in this name seems to be worthless right now. It's a shame to see such a historic company declare bankruptcy, but given the firm's current financial position, it just seems like a matter of time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.