Earlier this week, venerable photography specialist Eastman Kodak (NYSE:EK) reported earnings -- sorry, losses -- for Q1 2006. The $1.04 loss per diluted share blindsided even the most pessimistic of the five analysts who follow the company nowadays. On average, Kodak was expected to produce a small profit.
The disappointing results stem mostly from the continued drop in traditional-film sales, higher interest expense, and a wider loss on digital-imaging products despite higher sales. The acquisitions of two new digital business units contributed both to the higher interest costs (the new units were bought with borrowed funds) and the increased digital sales, to the point where the digital segment would have posted a 10% sales decline without the new blood.
Not a single business unit reported organic growth, and with a credit rating of B, Kodak won't be able to keep buying new earnings much longer. The digital photography revolution has hurt this company badly, despite a stated focus on the new medium stretching back to 2003.
Facing tough competitors such as Sony (NYSE:SNE), Fuji Photo (NASDAQ:FUJIY), and Canon (NYSE:CAJ), Kodak has had a difficult time figuring out the wants and needs of its customers and has been slow to accept the increasing irrelevance of traditional film.
Buying your revenues is a tough way to make money, unless the fresh technologies and lines of business bring better margins or some sort of defensible business advantage. Developing your own business is often a healthier way to go, but Kodak actually decreased R&D spending by 7% year over year. And despite the layoffs and restructuring efforts, SG&A costs keep creeping up.
Something needs to change here. Kodak plans to shore up its balance sheet by selling all or part of its health imaging operations, which could bring in some cash and a better credit rating. If the hope is to use that improved financial situation to continue buying other companies rather than focusing on the existing business, the projected acquisitions had better be mighty impressive, or another company with a storied past might be marching toward the edge of a cliff.
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Fool contributor Anders Bylund do esn't own stock in any of the companies mentioned, but he loves his Japanese-designed digital cameras. Disclosure is a snap, and it looks great on you, too.
