Eastman Kodak Co., struggling against poor profit and high debt, Tuesday took a big step in its corporate restructuring, announcing that it will divest Eastman Chemical Co. and in one fell swoop wipe out $2 billion of debt.
Such a spinoff would not have occurred just a few years ago, analysts said, and the move signals that Chief Executive Kay R. Whitmore is responding to new, tougher markets and stockholder pressure to improve financial results quickly.
"They are now recognizing that they are not a growth company, that they must go through this downsizing," analyst Eugene Glazer of Dean Witter Reynolds said in an interview on CNBC.
Kodak said the Eastman Chemical spinoff to shareholders is part of an ongoing restructuring and will be completed by year's end.
Kodak's shares, up sharply Monday in anticipation of the announcement, ended down $1.375 to $52.375 on the New York Stock Exchange.
Whitmore declined to say whether another of Kodak's big businesses will be divested, but he promised details of a plan to boost financial performance by September.
However, some analysts speculated that Kodak's Sterling pharmaceuticals group might be sold.
"I'm not ruling out anything," Whitmore said when asked about any other sales, spinoffs or partial equity offerings. "I'm not including (anything) either."
Whitmore said he plans to announce Kodak's view of the markets it will serve, as well as new operating and financial plans.
In addition, Whitmore said the company intends to reveal "a portfolio description to address the strategic fit of the various pieces which will comprise Kodak--and the adjustments to be made to improve company performance."
The changes will improve cash flows to "substantially exceed anything we have talked about in the past," Whitmore said.
"We also expect to generate cash from much better management of our balance sheet and from the disposition of some assets," he said.
The chemical business was created in 1920 by George Eastman, Kodak's founder. It initially derived 100% of its business from Kodak, but now Kodak accounts for less than 10% of Eastman's business, the company said.
The new entity, to be called Eastman Chemical Co. Inc., will be independent and publicly owned, and Kodak will have no equity in or control of the Kingsport, Tenn., business.
Earnest Deavenport will stay on as head of Eastman Chemical.
Whitmore said the spinoff will benefit both the parent and Eastman Chemical. Kodak will transfer $2 billion of debt to the new company, he said, and Eastman Chemical will become more efficient and profitable by tying employee compensation to the chemicals business.
"Kodak will remain a company that offers top-tier, branded, specialty products--with heavy emphasis on consumables," Whitmore said.
"We determined that there was little strategic reason related to our core imaging and health business for Kodak to continue to own Eastman," Whitmore said at a news conference.
Kodak, best known for photography products but also a major pharmaceutical and chemicals group, has endured slow growth for years. Its photography business has been hit by changing demographics, foreign rivals and new technologies such as camcorders. Whitmore said Kodak sales, especially in photography and imaging, were weak.
Criticism over poor financial performance from Wall Street analysts and big shareholders reached a crescendo this spring when Christopher Steffen, an outsider with a reputation for cost-cutting, quit as chief financial officer after just three months on the job.
The outcry was so fierce that some speculated Whitmore himself might be ousted.
Whitmore said Tuesday that Kodak's directors would keep him in his job only if his restructuring produced results. The directors were also increasingly involved in Kodak's ongoing review of its businesses, he said.
"They are saying, 'We support management as long as they deliver.' And I emphasize that last part. I think that's reasonable from their point of view," Whitmore told reporters.
Costs will be reduced elsewhere in the company, Whitmore said. Other executives also have said Kodak will cut spending on research and development of new products.
Whitmore said Eastman Chemical, with $3.9 billion in sales last year, represented about 20% of Kodak's revenues, and its shares when issued on a pro rata basis would pay about 20% of Kodak's $2-a-year common stock dividend.
Kodak's payout will be reduced by 20%, he said.
In the first quarter of 1993, Kodak reported losses of $1.88 billion, or $5.75 per share, largely because of accounting changes. The changes were due to a new federal requirement to account for the projected cost of health care benefits for current and future retirees.
Without the charge, earnings would have been $149 million, or 46 cents per share, up 3% from the previous year, a figure Whitmore called satisfactory.
Kodak also reported first-quarter sales of $4.44 billion, up 1% over sales of $4.41 billion a year earlier.