Kodak drops on hedge after earnings miss; Arris down in line on earnings; Horizon Lines up

By Rebecca Melvin

New York, April 28 - Eastman Kodak Co. came in at least a point on a hedged basis Thursday as its shares dropped after the digital imaging company swung to a first-quarter loss that was worse than analysts had expected.

Arris Group Inc.'s convertibles dropped in line with their underlying shares after the broadband communications company missed analysts' earnings expectations and said its second-quarter results would be weaker, citing higher start-up costs for new products.

But Horizon Lines Inc. was moving in the opposite direction, popping up in early trade in follow through from the previous session. There was talk that the government was reducing a fine being imposed on the company related to antitrust charges.

That talk was confirmed Thursday afternoon, when the company announced that the government has reduced its fine to $15 million from $45 million and Horizon Lines no longer faces the prospect of a May 21 default under its convertibles indenture.

Meanwhile, the Interpublic Group of Cos. had at least one of its convertible bonds lower outright in active trade Thursday after the New York advertising firm beat estimates with a smaller first-quarter loss, but its common stock still took a hit.

After the market close, a headline caught traders' attention that French company Total SA has agreed to take a majority stake in SunPower Corp.

Total plans to launch a tender for up to 60% each of SunPower's outstanding class A and class B common shares for $23.25 per share. Shares were zooming higher in after-hours trade.

"Some of these things have gone up; some have gone down. It's like trying to catch a greased pig," a New York-based sellside trader said of the overall convertibles market.

Kodak drops on earnings miss

Market players reported that Kodak's 7% convertibles due 2017 traded at 85.5 versus a share price of $2.85 on Thursday and also at 86.68 versus a share price of $2.97, which compared to 89 bid, 89.29 offered versus a share price of $3.16 on Wednesday.

One trader said that Kodak's convertibles were coming down heavy on a 100% delta on Thursday, compared to a 40% delta the day before.

A second sellsider said: "It's a name that people have different views on," and he didn't necessarily agree with the 100% delta.

Shares of the Rochester, N.Y.-based digital imaging company tanked, ending the day at their lows, down 32 cents, or 10%, at $2.85.

"They came in at least a point from what I saw," a trader said, using the day's earlier 86.68 price as a reference.

The company said its first quarter was a loss maker, putting the company another $246 million in the red on weaker sales of digital cameras and film, and missing analysts' expectations. But sales of inkjet printers were strong.

Excluding items, Kodak said its latest quarterly loss was $1.13 per share, which was much worse than analysts' forecasts of a loss of 48 cents a share, and it compared with net income of $119 million, or 40 cents per share, a year earlier.

The year-earlier results were boosted by $550 million in one-time patent litigation gains.

The most recent quarter's revenue dropped 31% to $1.32 billion from $1.9 billion a year ago. Analysts expected revenue of $1.41 billion.

Arris lower in line

Arris' 2% convertibles due 2026 traded down to 105.625 bid, 105.75 offered versus an underlying share price of $12.00, and then slipped lower to 104.756, compared to 108.25 bid, 108.313 offered outright with the stock around $13.00 on Wednesday.

Shares fell $1.29, or nearly 10%, to $11.70 in heavy volume.

The Suwanee, Ga.-based communications technology company, which provides products for high-speed data and video traffic, earned $11.9 million, or 9 cents a share, compared with $18.9 million, or 15 cents per share, a year earlier.

Excluding items, Arris earned 16 cents per share on revenue of $267.4 million, which was lower than analysts' estimates of 17 cents per share on revenue of $269.5 million.

Falling gross margins and higher operating expenses were cited for the shortfall, although net sales grew somewhat.

The usual delta is a 40% to 45% on the 2% convertibles, a New York-based sellside trader said, "and the premium on the print is 34%."

Meanwhile, the company said that second-quarter earnings are expected to be 16 cents per share to 20 cents per share on revenue of $260 million to $280 million. Analysts had been expecting earnings of 20 cents a share on revenue of $285.1 million.

Horizon gains on fine relief

Horizon Lines' 4.25% convertibles due 2012 traded up to 88.75 Thursday, which was up 2.75 points outright, according to market sources. But by day's end, pricing had come back in.

"It was up late yesterday and early today, and then it came back in. It's not up today at the end of the day," a Connecticut-based sellside trader said.

Nevertheless, the company's news was very good. It said that a federal court had granted a request by the U.S. Department of Justice to reduce the company's fine related to federal antitrust violations in the Puerto Rico trade lane to $15 million from $45 million.

As a result, Horizon is no longer facing the prospect of a default later this month on the 4.25% convertibles.

The company had been working on a consent solicitation for its $330 million of 4.25% convertible senior notes.

Horizon Lines is a Charlotte, N.C.-based domestic ocean shipping and integrated logistics company.

"We are greatly appreciative of this action by the Department of Justice, which also allows the company to proceed with settlement of the class action litigation in Puerto Rico," said Michael T. Avara, Arris executive vice president and chief financial officer, in a news release.

"The fine reduction will preserve our company's financial flexibility, and we are confident that it will facilitate our efforts to secure new long-term financing. We remain in constructive discussions as we continue to move forward with our refinancing efforts."

The reduced fine of $15 million is payable over five years without interest, with $1 million payable within 30 days of March 24, 2011 (which has been paid), $1 million on or before the first anniversary, $2 million on the second anniversary, $3 million on the third anniversary, and $4 million annually on the fourth and fifth anniversaries.

Mentioned in this article:

Arris Group Inc. Nasdaq: ARRS

Eastman Kodak Co. NYSE: EK

Horizon Lines Inc. NYSE: HRZ

Interpublic Group of Cos. NYSE: IPG

SunPower Corp. Nasdaq: SPWRA

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