Kodak Takes Another Shot at Restructuring : The Company Hopes to Recapture Its Blue-Chip Status With Film, but Even That Business Is Troubled

Eastman Kodak Co. is still trustee of one of America’s most recognized products,wrapped in those familiar yellow-and-red boxes that beckon consumers to snap another “Kodak moment.” But a premier company? It’s been years since Kodak has worn that title.

Kodak certainly has tried to regain its role as a blue-chip corporation, in the form of countless restructurings during the last decade. Yet they did little to boost returns for the Rochester, N.Y.-based photography giant or its stockholders.

Nonetheless, Kodak is trying again. Taking a page from the dramatic overhauls now under way at other behemoths like International Business Machines and General Motors, Kodak’s board a year ago lured former Motorola boss George M. C. Fisher to be chief executive and get the company growing again.

Fisher’s first big change: Unwinding Kodak’s ill-fated diversification of the 1980s. In the last five months he has announced the sale of $7.9 billion of health-care and household-products assets--which accounted for about a quarter of Kodak’s $20 billion in sales last year--so that Kodak can focus on its venerable film and imaging lines.

The asset sales will give Kodak a big financial lift by enabling the company to pay down its massive $7-billion debt.

But Fisher, 53, still faces a daunting task. Even though Kodak dominates the U.S. film market, that market has shown little or no growth for several years. Conditions also are poor for Kodak’s other remaining core business, its high-speed office copiers.

Indeed, last week Kodak said that in the first nine months of this year, earnings from continuing operations fell 19% from a year earlier, to $633 million, on a modest 6% sales gain to $9.7 billion. The earnings included results from its film and copier lines but excluded assets being sold and special restructuring costs.

Moreover, rivals have been chipping away at Kodak’s dominance in film. The competitors, led by Fuji Photo Film Co. of Japan and various private-label brands that try to undercut Kodak on price, have dropped Kodak’s market share to 70% today from 80% only five years ago, according to the research firm Strategic Marketing Analyst in New York.

“There are a lot of challenges that still face this company,” said Albert E. Turner, an analyst at the credit-trading firm Duff & Phelps.

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Despite its failed restructurings of the past, Kodak vows that this time will be different. “We’re going to face these problems head-on and deal with them immediately,” Wilbur J. Prezzano, a Kodak executive vice president, said in a telephone interview.

He said Kodak is devising a coherent plan for competing in the electronic imaging markets of the future that are expected to supplant conventional film. That’s one reason Kodak’s board tapped Fisher, because he won high praise for turning Motorola into a cellular-telephone and technology powerhouse while he was chief executive there from 1988 to 1993.

Prezzano also said Kodak is gaining footholds in such developing nations as China and Indonesia, which should provide “substantial growth” for film sales.

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Trouble is, a significant market for those new foreign sales or for Kodak’s new imaging technologies are years away. Fisher’s priority today is to get Kodak’s results in its core U.S. market growing again.

But how?

To hear some analysts tell it, Fisher can’t raise film prices because that would drive consumers to Kodak’s lower-cost competitors, giving them more market share. Historically, Kodak could raise prices 2% a year on average, but “that’s no longer available to them,” said Eugene Glazer, an analyst at Dean Witter Discover & Co.

Fisher also can’t cut prices to grab more market share because that would reduce what profits it does earn from its enormous film business. Besides, film profits already are under price-cutting pressure from others. Kodak’s U.S. consumer film business had a 12% sales gain in the first nine months of this year, but its operating profit fell 5%.

That leaves one option: Cut operating costs.

Kodak already is paring its work force by about 8,000 people this year to save money under a program started in 1993 by Fisher’s predecessor, Kay R. Whitmore. Those cuts, together with 18,500 jobs departing with the divisions being sold, will drop Kodak’s worldwide work force to about 83,900 by year’s end.

Fisher also has frozen hiring, curbed travel and entertainment expenses, reduced office supplies purchases and cut research-and-development spending.

But that’s not nearly enough. Fisher, in announcing Kodak’s third-quarter results last week, said yet another restructuring program is possible. Kodak declined to elaborate.

Fisher will continue to “gradually nibble away” at Kodak’s costs, but “the cost-cutting is going to take a lot longer than Wall Street expects,” said B. Alex Henderson, an analyst at Prudential Securities.

Wringing costs from Kodak’s overall operating structure will also be the main tonic for the “commercial imaging” group--or what Henderson bluntly terms its “subscale $2-billion copier business.”

That group, under intense competition from the likes of Xerox and Canon, has only 9% of the U.S. market for mid- and high-speed copiers, according to the research firm Dataquest in San Jose.

Overall, Kodak certainly has some advantages. Most companies would gladly take a 70% share of any market, as Kodak has in film, or its brand recognition.

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In a survey earlier this year of U.S. consumers’ satisfaction with major brand names, Kodak film was third behind only Disney World and Disneyland, according to Total Research Corp. in Princeton, N.J.

But reputation alone doesn’t boost earnings, as Kodak’s stockholders have loudly noted in recent years.

In 1993, Kodak’s profit--excluding one-time gains and charges--was $2.02 a share. (The results include those of Kodak’s chemical business, which was spun off to stockholders at year-end 1993.) Yet nine years ago, well before the company diversified into health care and other areas, Kodak earned $2.54 a share on only $10.6 billion in sales (adjusted for stock splits since then).

Kodak also earned 8.7 cents per dollar of sales in 1984, a profit margin eclipsed only once since, according to the market researcher Value Line Investment Survey.

As a result, investors who bought Kodak’s stock at its 1989 peak of $52 a share and held it remain under water, with Kodak closing at $48.625 (down 25 cents) in New York Stock Exchange trading Friday. The loss is even more pronounced when inflation is factored in.

They hope to do better by Fisher. But he has his skeptics.

“Prior management promised time and time again” to boost Kodak’s results with cost-cutting strategies, said Dean Witter’s Glazer. Each time, “within a relatively short period of time, its cost structure was right back up again.”

KODAK’S CHANGING PICTURE

Eastman Kodak, renouncing its diversification effort of the 1980s, is undergoing a massive sale of assets unrelated to its traditional film and imaging lines.

ASSET SALES

May 3, 1994: New Chief Executive George Fisher announces plans to divest most Sterling Winthrop health divisions and other non-core units in order to reduce Kodak’s massive debt.

August 29: The company agrees to sell its over-the-counter medicine business to SmithKline Beecham for $2.9 billion.

Sept. 6: Kodak agrees to sell its medical-diagnostics line to Johnson & Johnson for $1 billion.

Sept. 26: Reckitt & Coleman agrees to buy the household products part of its L&F; Products division to for $1.6 billion.

Oct. 1: Kodak completes the sale of its pharmaceuticals business to Sanofi for $1.7 billion.

Oct. 14: Forstmann Little & Co. agrees to buy Kodak’s L&F; Products line of paints, stains and sealants for $700 million.

IMAGING GROUP REVENUE

Annual sales for Kodak’s imaging group, which includes film and related products, billions of dollars:

(Year: Sales)

1993: $7.26

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STOCK PRICE

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Sources: Eastman Kodak Co.; TradeLine