Kodak’s Apple Problem is Apple’s Kodak Problem

• George Eastman was attacking apples before Steve Jobs was born. 
• However, George grew up in apple country (I don’t mean Cupertino) and must have had an appreciation for NY State’s delicious varietals. 
• There’s a very good argument that Kodak was the Apple of its day.

So, why is today’s American technology behemoth trying so hard to beat the tar out of yesterday’s?  The longer answer has to do with competition, technology, and imaging, but in the end only the short answer matters: money.  Both Kodak and Apple think they own the same very lucrative idea and they want the matter settled so that they can continue (or in Kodak’s case, start again at) making money.

Yesterday, Judge Allan Gropper ruled that he would not “unfreeze” the lawsuit Apple has brought against Kodak over patent infringement.  Since Apple thinks it owns one of those patents, it would prefer to get a court ruling saying so before the patents get sold as it will be more difficult for Apple to regain the rights to that patent if they get sold to a third party.  Yesterday made that a whole lot harder.

How does this matter to Rochester?  The patent sale is an enormous factor in Kodak’s ability to fund its pension, the Kodak Retirement Income Plan or KRIP.  Let’s look at some numbers:

KRIP is funded at either 86% (PBGC) or 90.5% (Kodak’s 10-K), depending on who you want to believe.  That leaves the dollar amount of the underfunding at either 700 million or 500 million.  Let’s split the difference and call it 600 million.  Estimates of the value of the patent portfolio Kodak wants to sell range from 2.2 billion – 2.6 billion.  Before Kodak can make up the funding gap, it has to pay back the DIP loan it got to get it through the first part of bankruptcy: 950 million.  Still waiting after DIP and the pension are 2.6 billion in bondholder debt and a pile of unpaid vendors and some environmental remediation.  But what will Kodak have left to pay them?

$2,000,000,000 (Patents) – $950,000,000 (DIP) – $600,000,000 (Pension) = $450,000,000. 

That’s 450 million left over to pay back 2.6 billion + of debt and have enough money to keep operating a business!

Now, bankruptcy is going to reduce the bondholder, vendor and environmental debt (and reduce retiree benefits outside of KRIP) to some degree and Kodak has other valuable assets to try to sell (profitable business lines, real estate).  But if you take a moment and think about how much worse a situation Kodak will be in if they don’t sell those patents – that is, if that 2 billion dollars is not available to pay off the DIP, pension and some other debts – you will understand just how critical the patent sale is to Kodak and to Kodak’s retirees.

Yesterday’s decision takes Kodak a step closer to being able to sell those patents.  Hopefully, this is a pattern that continues.

Chris Cromwell

WSJ on the Topic: http://on.wsj.com/yNB8w8

What Goes Around

Last October an Ohio company, Collins Ink, made local headlines by halting shipments of its product to Kodak, citing concern about the impact to Collins of a Kodak bankruptcy. After a quick trip to Federal court, Collins and Kodak agreed to resume their relationship and Collins dropped from the headlines.  Fast forward to January 19 and we were reading the Collins name again, this time listed as one of Kodak’s 50 biggest creditors (find them here, page 18) owed just under $2 million. As it now stands, Collins is unlikely to see much of that money – the very outcome Collins said it feared when it attempted to cancel its relationship with Kodak.

Collins Ink is a small company, $12 million in sales compared with Kodak’s $6 billion. And I can’t help thinking that in their court fight, Kodak got the justice it could afford. But Kodak has bigger legal issues, with bigger adversaries.  A critical case, one in which Kodak has supposedly prevailed, is a patent dispute with Apple and Research in Motion (RIMM). The International Trade Commission (ITC) first ruled for Apple/RIMM, then reversed itself and awarded Kodak $1 billion in damages. But curiously, the ITC has been delaying, and delaying again, a final order in the matter. That delay is an urgent matter for Kodak, which had been hoping for the cash to help it avoid bankruptcy.  With bankruptcy a fact, now the money could help Kodak emerge healthier down the road. But Apple is not giving up the fight, asking the bankruptcy court for permission to sue Kodak for infringement.

In this new reordered scenario, Kodak is the small fry, facing a much larger adversary in court.  One wonders if Apple will get the justice it can afford. We will see what comes around.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).