On June 18, Standard & Poor's Ratings Services placed its 'BBB+' long-term and 'A-2' short-term ratings on photographic-products concern Eastman Kodak (EK) on CreditWatch with negative implications. Kodak is headquartered in Rochester, N.Y., and had $2.7 billion in debt on March 31, 2003.
The CreditWatch placement follows Kodak's announcement that its second-quarter operating income before restructuring and nonrecurring items could be less than half of its previous forecast due to consumer film and paper sales that were significantly lower in Asia as a result of severe acute respiratory syndrome (SARS), and moderately lower in the U.S. and Europe due to ongoing economic weakness, pricing pressure, and digital substitution. Reduced film and paper sales volumes will reduce profits and margins because of reduced overhead absorption. To address these issues, Kodak will explore additional cost-reduction actions.
Although the SARS epidemic appears to be stabilizing, Standard & Poor's is concerned that economic, competitive, and leisure travel pressures will continue to impair Kodak's sales and earnings. In addition, the continued transition of Kodak's businesses to digital imaging will likely hurt profitability by reducing high-margin film sales.
Significant doubt about the profit potential of digital photography relative to conventional imaging represents another key risk consideration. Ongoing digital migration may require Kodak to take additional restructuring actions to adapt its operations to evolving market conditions. These factors may restrict the company's cash flow and slow its efforts to further reduce debt.
Resolution of the CreditWatch listing will include an updated assessment of the company's near- and intermediate-term profit and cash flow potential in light of the difficult operating environment, competition, and increasing digital sales. The evaluation will also consider the significant burden of Kodak's unfunded postretirement benefit obligations on its financial profile.