E17.15. Stock Market Reactions to Earnings Announcements: Eastman Kodak and Intel (Medium) For its September quarter of 1998, Eastman Kodak, the imaging products manufacturer, re- portada net profit of $398 million, up 72 percent from one year earlier and in line with an- alysts' expectations. However, when it was also revealed that its sales had fallen 10 percent to $3.4 billion, its stock price dropped 13 percent. For the same quarter, Intel, the world's biggest computer chip manufacturer, reported that its net income of $1.6 billion was mach the same as a year earlier, but sales rose 9 per- cent to $6.7 billion. Its stock price increased by 8 percent after the announcement.

a. Calculate the changes in the net profit margins in the September 1999 quarter over the quarter for the year earlier for both firms. Why would the price reaction be so different to the two earnings announcements?

b. Below is the cash flow from operations section of Eastman Kodak's cash flow state- ments for the first three quarters of 1998 and 1997. Sales were $9.843 billion for the first three quarters of 1998 and $10.759 billion for the corresponding period for 1997. Do these statements provide any information about earnings quality? EASTMAN KODAK Partial Cash Flow Statements In millions of dollars) Cash flows from operating activities Net earnings Adjustments to reconcile above earnings to net cash provided by operating activities, excluding the effect of initial consolidation Three Quarters 1998 1997 1,118 749 of acquired companies Depreciation and amortization 619 Purchased research and development Deferred taxes (63) (Gain) loss on sale or retirement of businesses, investments, and properties (107) Increase in receivables (216) Increase in inventories (334) Decrease in liabilities excluding borrowings (553) Other items, net (26) Total adjustments (680) Net cash provided by operating activities 438 88868| (76) (57) (156) (295) (97)