S&P cuts Eastman Kodak

Standard & Poor's downgraded Eastman Kodak Co. including cutting its senior unsecured debt to BBB- from BBB. The outlook is stable.

The downgrades reflect concern about Kodak's earnings and business profile due to declining prospects for its core conventional imaging businesses as these markets transition to digital technologies; doubts about the profit potential of digital imaging relative to conventional photography; and the need to reduce debt which remains elevated given Kodak's rising business risk and investment strategies, S&P said.

The stable outlook reflects S&P's expectation that Kodak's 72% dividend cut will support its credit profile by enabling it to meaningfully reduce gross debt over the near term while still investing for growth in existing and new imaging businesses.

Results for Kodak's photography segment, which represents about 70% of sales, have been under pressure since 1999 due to soft economic and travel conditions, intense competition and digital substitution, S&P said.

Numerous restructuring actions over this time have been inadequate and photography unit's EBITDA (before restructuring, impairment, and other charges) dropped 41% from 1999 to 2002, S&P added.

Kodak recently acknowledged that digital substitution is accelerating in consumer imaging markets in developed countries and is happening sooner than anticipated. This is likely to continue as digital camera household penetration grows and the convenience of digital image printing improves. Kodak recently announced additional restructuring costs to significantly reduce related overhead and infrastructure costs, and further reductions will be needed over time to adjust costs to gradually eroding conventional imaging sales.

Stabilizing the cash flow from these businesses quickly, while continuing to increase sales and profits from health imaging and from conventional imaging in emerging markets is critical for Kodak's credit profile, S&P said. In addition, Kodak's consumer digital imaging businesses will need to continue to demonstrate strong growth and reach profitability in the near term.

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