Eastman Kodak the Last Several

Eastman Kodak

The last several years have been difficult for Eastman Kodak. The company's core film business has been all but eliminated by the digital camera and Eastman has had difficulty finding viable new niches for itself. The company's revenues have been falling steadily and the firm is in a full-blown contraction mode.

Eastman Kodak's balance sheet is a mixed bag. The company's liquidity ratios are decent, with a current ratio of 1.48, a quick ratio of 1.25 and a cash ratio of 0.69 (MSN Moneycentral, 2010). However, the company's level of long-term liabilities is high. The debt-to-equity ratio is 427.5, as the equity is worth just $18 million. The bulk of the company's long-term liabilities are its pensions. In 2005, the company had $3.5 billion in unfunded pension liabilities (Richard, 2005) and the majority of its current "other long-term liabilities" of $3.7 billion are in pension and health care benefits. The company's retirement plan is defined benefit, and the degree to which it is unfunded is reflective of a number of factors outside of the company's control, including the state of the economy (2009 Form 10-K).

The company's gross margin is 23.2%, little changed from five years ago. Given that Kodak has pursued high margin products in recent years, its inability to change this ratio is not a positive sign. The company has an operating loss but still managed to have a $115 million tax bill last year. The company has lost money in each of the past five years, as it cannot contain costs fast enough to account for the revenue declines.

Eastman Kodak is employing three main strategies to improve its financial position. The company has switched its focus on high margin products (RP News Wire, 2009). However, this switch in focus has not yet yielded higher margins. Nor has it yielded better sales. The second initiative is cost-cutting. Eastman Kodak has been reducing its overhead and the size of the company steadily in response to the changes in its industry. These moves, however, have not come quickly enough. S/G/a expenses were 19.6% of sales in 2005 and 17.1% of sales in 2009. It would take a further 16% reduction in the S/G/a expense just to break even at 2009 sales, so a cut of 20% or more in 2010 is needed to allow the company to break even in the face of steadily declining sales. One piece of goods news, however, is that the company's revenues improved quarter over quarter for Q4 2009 (MSN Moneycentral, 2010).

For the problem with the unfunded pension liabilities, Eastman Kodak has restructured its pension plans and expects to gain $18 million from that move. However, it also expects that its pension liability will increase by $30 million in 2010 (2009 Form 10-K). The company seems unable to make the necessary changes to reduce this expense. As such, Eastman Kodak is having a difficult time finding profitability. The company was having difficulty with its pensions when it was making money, and now Kodak has negative cash flow from operations, making the pension an even more difficult proposition.

Overall, Eastman Kodak has a difficult financial position. The company is faced with two significant problems in a massive pension liability and rapidly declining revenues. Although management has undertaken strategies to address each of these issues, those strategies do not appear to be sufficient in scope or intensity to adequately address either issue. As such, Eastman Kodak remains subject to deteriorating financial position. The company needs to continue to find ways to cut costs and simultaneously get out from under its pension liabilities in order to improve its finances.