Oct 7, 2011
Three recent developments have raised questions about Kodak’s financial status. These are the announcement that Kodak plans on selling some intellectual property, the news of the hiring of the Jones Day law firm, and Kodak’s move to take advantage of its revolving loan. I spoke this week with Kodak President and Chief Operating Officer Phil Faraci to get some clarification. What I learned should help ease concerns about Kodak’s status.
Selling Kodak Intellectual Property
Kodak announced in July that it was “exploring strategic alternatives” in regard to some of its intellectual property (IP) assets. The IP in question was described as “fundamental digital imaging patent portfolios.” Faraci clarified that the patents in question amount to about 10% of Kodak’s total patents and are focused exclusively on the consumer market. These are digital capture and imaging patents that Faraci says are fundamental to consumer imaging including digital cameras, camera phones, tablet computers, and image sharing web sites. Licenses for these patents provide a significant revenue source for Kodak (in the range of $250 million to $300 million annually). Kodak believes that this figure would be even higher if it were not for unauthorized use of the patents. As an example of this, a U.S. International Trade Commission ruling earlier this year helps to support Kodak’s patent infringement claim against Apple Computer and Research In Motion (RIM).
There is no doubt that Kodak’s patent portfolio is a valuable asset but it is easy to see how one might jump to the conclusion that Kodak is simply selling off patents to raise cash. The fact of the matter is that Kodak already generates considerable revenue from these patents, and so the more relevant question is: What is the best way to monetize this asset? Kodak feels that ongoing litigation in this matter is counterproductive to its relationships with some key industry partners. In proposing a sale of this intellectual property Faraci notes that Kodak would not give up the rights to use these patents, but that it would be better able to leverage this core intellectual property that is a foundation of many of the digital imaging innovations taking place today.
Another important factor is that the market for IP related to mobile devices is very hot right now. In August Google acquired Motorola Mobility for about $12.5 billion, a premium of 63% to the closing price at the time. Back in July, Apple, Microsoft and other vendors formed a consortium that outbid Google and Intel for over 6,000 patent assets from Nortel. The consortium paid $4.5 billion in cash, significantly higher than the $900 million stalking-horse bid Google made in April. Kodak stands to gain a lot by licensing or selling some of its patents in this environment, while still retaining the opportunity to bring products to market in the future based on these patents.
Hiring Jones Day
Rumors and speculation about whether Kodak might file for bankruptcy got to the point where Kodak put out a press release denying any bankruptcy plans. The rumors apparently were linked to Kodak’s hiring of the legal firm Jones Day, which does have a division that specializes in bankruptcy. Jones Day, however, is a global law firm with locations all over the world and specialties in many areas, including intellectual property issues and related litigation. Kodak has used Jones Day services since 2003 and is currently using them in regard to the intellectual property litigation described above.
Drawing on a Revolving Loan
Kodak recently took advantage of a revolving loan and borrowed approximately $160 million. This led to speculation about the company’s financial status and gave apparent support to the bankruptcy rumors. Kodak says that the reason is much simpler: seasonality of cash flow. A revolving credit facility is part of its cash management strategy (as it is for many companies). Kodak notes that it typically uses cash in the first half of the year and generates cash in the second half (a large majority of which occurs in the fourth quarter). As a global company with the majority of its cash and revenues overseas Kodak needs to have cash in all of its jurisdictions. The revolving loan provides Kodak with that flexibility.
Faraci remains optimistic about Kodak’s future. He said that Kodak’s businesses are doing well and he closed the interview by repeating a comment recently made by Antonio Perez, Kodak’s Chairman and Chief Executive Officer: “There is nothing that is wrong with this company that cannot be overcome with what is right in this company.”
Kodak will announce its third quarter 2011 financial results on November 3rd. A positive picture on that day will go a long way toward easing the markets concerns about Kodak. Kodak’s second quarter picture certainly had positive aspects for digital components of Kodak’s business, yet second quarter sales were down compared to Q2 2010 and the company is forecasting a full-year loss from continuing operations in the range of $200 million to $400 million. According to Antonio Perez, Kodak’s goal is “to create a new profitable, sustainable digital company by 2012.” And though Kodak’s ability to deliver on that promise has come into question recently, it’s not fair to judge the company based on rumors or mistaken assumptions about the company’s moves. We should judge them solely on their ability to deliver financial results. Profitability in 2012 would be Kodak’s best possible response to doubts about its financial status.
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