Eastman Kodak Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Kodak manufactures products and provides services focused primarily on commercial printing and advanced materials and chemicals. Amounts below are in millions of dollars, except per-share data.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $290 | $265 |
| Gross profit / margin | $33 / 11% | $40 / 15% |
| Operating loss before interest, pension income, other charges and taxes | $(19) | $(14) |
| Net income (loss) | $(3) | $6 |
| Basic and diluted EPS | $(0.08) | $0.17 basic / $0.16 diluted |
| Cash used in operating activities | $(43) | $(16) |
| Cash and cash equivalents at period end | $309 | $362 at Dec. 31, 2021 |
| Total debt carrying value | $257 | $254 at Dec. 31, 2021 |
Revenue grew 9%, but cost of revenues rose faster, reducing gross margin. Cash, cash equivalents and restricted cash totaled $374 at quarter-end, down $49 from year-end 2021. Investing activities used $5, principally for capital expenditures; financing activities used $1. Kodak reported total current assets of $790 and current liabilities of $334. Restricted cash included $45 of collateral for the letter-of-credit facility.
Material changes versus the prior-year quarter
- Revenue increased $25, reflecting improved Traditional Printing pricing and volume and higher Advanced Materials and Chemicals volume; unfavorable currency effects reduced revenue by $10.
- Traditional Printing revenue rose $24 to $172, while Digital Printing revenue fell $8 to $56. Advanced Materials and Chemicals revenue increased $8 to $54.
- Traditional Printing Operational EBITDA fell to a loss of $2 from income of $5; Digital Printing moved to a loss of $5 from break-even. Advanced Materials and Chemicals improved to a loss of $3 from a loss of $4, and Brand EBITDA increased to $3 from $2.
- Gross profit declined $7, primarily due to higher aluminum and other manufacturing costs. Kodak cited $15 of higher aluminum costs and $14 of higher Traditional Printing manufacturing costs, partly offset by pricing and volume gains. A $4 reduction in workers’ compensation reserves benefited results.
- Interest expense increased to $9 from $4. Pension income excluding service cost increased to $30 from $25. The quarter also included $3 of other charges, mainly from changes in the fair value of embedded conversion-feature derivatives.
Outlook, management commentary and risks
- Kodak expects 2022 capital expenditures of approximately $45–$60, mainly for growth initiatives and back-office automation. It forecast approximately $11 of pension and postretirement contributions or benefit payments for the remainder of 2022.
- Management said cash, expected operating cash flow, borrowing capacity and other liquidity measures should be sufficient for short- and long-term requirements. The company is pursuing profitable revenue growth, cost reductions, asset sales or leases, and lower cash-collateral needs to return to sustainable positive cash flow.
- Liquidity covenants require at least $80 of minimum liquidity; reported minimum liquidity was $210 at March 31. Excess Availability was $31 against a $11.25 threshold. Kodak reported that fixed charges exceeded EBITDA by about $48; it was not then required to meet the 1.0-to-1.0 fixed-charge coverage test because Excess Availability remained above its trigger.
- COVID-19, the war in Ukraine and other events were disrupting supply chains and increasing material, labor, energy and distribution costs. Kodak said pricing actions and other mitigation measures were in place, but the ability to secure inputs and offset costs remained uncertain. Its Shanghai manufacturing facility closed in April 2022 due to a government lockdown.
- Kodak said operations of its Russian subsidiary were disrupted, but represented less than 1% of 2021 consolidated revenue and had no material consolidated impact through Q1. It warned of possible further input-cost increases and manufacturing or shipping delays.
- On April 22, 2022, after quarter-end, the DFC informed Kodak that it could no longer consider the proposed pharmaceutical-project loan and had closed the application. Kodak had previously been operating on the basis that the proposed $765 loan would not proceed.
Contingencies and unusual items
- Brazilian operations had approximately $131 of tax and other claims, with about $3 accrued; the unreserved portion for claims with at least a reasonable possibility of loss was approximately $5. Kodak had posted $6 of cash security and liens on Brazilian assets with a net book value of approximately $46.
- Kodak disclosed securities class actions, fiduciary and derivative litigation, and a threatened New York Attorney General claim relating to the 2020 DFC announcement. The company said it intended to defend the matters; discussions with the NYAG were preliminary. The filing does not provide a clear estimate of potential total exposure for these proceedings.
- A separate environmental guarantee could require Kodak to pay 50% of historical liabilities above $99, with no maximum cap; no liability was recorded for this guarantee.
- Kodak attributed a $4 decrease in workers’ compensation reserves to changes in discount rates, benefiting gross profit and SG&A by approximately $3 and $1, respectively.
Important facts for investors to verify
- Whether pricing and volume gains can offset inflation, supply constraints and currency impacts, particularly in Traditional Printing.
- Cash burn, the usability of cash held outside the U.S., borrowing availability and compliance headroom under liquidity and ABL covenants.
- The status and potential financial impact of the DFC-related litigation, NYAG matter, Brazilian claims and environmental guarantee.
- Whether planned capital spending and growth initiatives can improve operating cash flow and profitability; the filing gives no specific full-year revenue or earnings guidance.
- The effects of the Shanghai shutdown, Ukraine-related disruptions and continuing supply-chain pressures on production, costs and customer demand.