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FEBRUARY 9, 2004
Kodak's Fuzzy Numbers The company has taken "one-time" charges every year for the past 12 When do exceptional charges become so routine that they're not exceptional anymore? If the company is Eastman Kodak Co. (EK ), apparently never. Kodak has taken one-time restructuring charges every year for the past 12, wiping out virtually half of its $11.4 billion operating earnings since 1992. And on Jan. 22, it said it would take about $1.5 billion more in such charges over the next three years. The write-offs are for layoffs and plant closings that have become a habit as the beleaguered photographic giant tries to morph into a digital player. So isn't it time these costs were counted as operating expenses? Kodak prefers to put a rosier spin on its numbers. When it made a forecast for 2004 recently, it highlighted operating earnings and downplayed net earnings calculated under generally accepted accounting principles, or GAAP, and required by the Securities & Exchange Commission. It's obvious why: Kodak pegged operating earnings at $2.25 to $2.55 a share before charges. That puts its price-earnings ratio at 13, cheap compared with the 18 average for the Standard & Poor's 500-stock index. But take out up to $400 million for restructuring, and Kodak's per-share earnings nosedive to 80 cents to $1.30, while its p-e soars as high as 38. "Investors are struggling to figure out exactly what the earnings-per-share number means," says analyst Shannon Cross at Cross Research. Kodak's longer-term forecasts are equally puzzling. In September, Chief Financial Officer Robert H. Brust predicted that the company would earn $3 a share in 2006, when it hopes its long transformation will be complete. Of course, that number doesn't include the latest round of restructuring, as analysts and investors at a Jan. 22 meeting in New York with management were none too pleased to learn. Erika G. Long, a managing director at hedge fund Maverick Capital, asked whether the $3 forecast was "intellectually honest." Brust argued that it was reasonable at the time because the company hadn't yet calculated the full impact of the latest restructuring program, which will cut as many as 15,000 workers, or 20% of the workforce. If anything, he added, the cuts will push operating earnings over $3, thanks to lower expenses for salaries, leases, and other operating costs. Added Chief Executive Daniel A. Carp: "We believe 2003 marks the bottom." Kodak may try to spirit the changes away in presentations, but investors should be leery. The restructuring charges aren't simply for selling old equipment and factories at a loss. Hard cash will be flying out the door -- up to $200 million a year, Brust says -- to pay severance and other real costs. Kodak is certainly following the letter of the law. SEC rules don't allow companies to eliminate charges that are likely to recur in the next two years or occurred in the last two. But that applies to quarterly filings with the SEC. In press releases and conference calls, companies are still free to underscore figures that show them in the best light -- as long as they reconcile them with GAAP numbers. Kodak is far from alone in taking annual charges and announcing operating earnings that vary widely from GAAP. In recent years, Motorola (MOT ), Baker Hughes (BHI ), and LSI Logic (LSI ) have often reported operating figures that were much higher than their GAAP numbers. Of course, operating earnings have their place. Many analysts prefer them because, stripped of the noise of truly one-time write-offs, they're a better snapshot of a company's underlying earnings power and future cash flow. "As long as a company discloses what their restructuring expenses are, there's not a problem," says Howard M. Schilit, founder of the Center for Financial Research & Analysis. Kodak says it has no plans to change the way it discusses results. Brust adds that in any case, the gulf between operating and GAAP numbers will largely disappear by 2007, when Kodak expects to wrap up its restructuring. Then, finally, its bottom line may really become the bottom line.  By Faith Arner With David Henry in New York
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