Eastman Kodak Company — Q2 2018 Form 10-Q
Business context and reporting period
Kodak is a global commercial printing and imaging company. This unaudited filing covers the quarter and six months ended June 30, 2018; dollar amounts are in millions unless otherwise stated. The company reports seven segments, with Print Systems the largest, representing about 61% of revenue.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $372 | $381 | $729 | $738 |
| Gross profit / margin | $60 / 16% | $70 / 18% | $114 / 16% | $132 / 18% |
| Continuing-operations earnings (loss), before tax | $5 | $11 | $(13) | $21 |
| Net earnings (loss) | $4 | $4 | $(21) | $11 |
| Net earnings (loss) per common share | $(0.02) | $(0.02) | $(0.73) | $0.02 |
Net income in Q2 was $4 million, but after preferred-stock cash and deemed dividends, the loss available to common shareholders was $1 million. The first-half loss available to common shareholders was $31 million. Operating costs include substantial pension income; Q2 pension income excluding service cost was $32 million, versus $37 million a year earlier.
Six-month operating cash use was $49 million, compared with $74 million in 2017; investing cash use was $16 million and financing cash use was $8 million. Cash, cash equivalents and restricted cash were $293 million at June 30, down from $369 million at year-end; unrestricted cash and equivalents were $275 million. The cash-flow statement reports a $76 million decrease in cash, cash equivalents and restricted cash, while the MD&A table reports $75 million, a difference to reconcile.
Total debt and capital leases had a carrying value of $401 million, including a $393 million term note carrying value; the term loan principal outstanding was approximately $395 million. Long-term debt was $398 million and current debt $3 million. The term loan bears interest at LIBOR plus 6.25% (with a 1% floor) and matures September 3, 2019. Kodak reported $29 million of excess availability under its $150 million asset-based facility, with $79 million of letters of credit outstanding. Shareholders’ equity was $12 million; redeemable Series A preferred stock was $168 million.
Material changes versus prior comparable periods
- Revenue declined 2% in Q2 and 1% in the first half. Favorable currency effects partly offset lower volume and pricing, particularly in Print Systems; higher aluminum costs further pressured gross profit.
- Print Systems Operational EBITDA fell to $8 million in Q2 from $15 million and to $12 million for the half from $27 million. Flexographic Packaging improved to $9 million and $16 million, respectively; Enterprise Inkjet EBITDA was flat at $1 million in both comparison periods.
- SG&A and R&D spending declined, as did restructuring charges. Six-month restructuring charges were $4 million versus $18 million in the prior year period. Kodak expects approximately $6 million of annual savings from 2018 restructuring actions, mostly in effect by year-end.
- Cash use from operations improved year over year, but cash balances fell. Inventories increased to $301 million from $276 million at December 31, 2017.
Outlook, management commentary, risks and contingencies
Going concern: Management states that substantial doubt exists about Kodak’s ability to continue as a going concern. Kodak says it lacks committed financing or available liquidity to meet debt obligations if due under current terms and faces uncertainty about meeting U.S. commitments because of negative cash flow. A non-binding letter of intent with a significant term-loan lender would refinance the first-lien loans with an 18-month maturity from closing; Kodak is also pursuing a sale of Flexographic Packaging, with net proceeds intended for debt reduction. Neither transaction is within Kodak’s sole control, and the company gives no assurance they will occur or be sufficient.
The first-lien debt matures September 3, 2019. If it is not repaid, refinanced or extended before June 5, 2019, the asset-based facility is scheduled to terminate unless amended; associated obligations would become due and alternate collateral would be needed for letters of credit. Kodak was in compliance with credit covenants at June 30, but future compliance may depend on asset monetizations, cash management, refinancing or other non-operational actions. Excess availability of $29 million was only $10.25 million above the $18.75 million threshold that can trigger additional requirements, including a fixed-charge coverage test and possible cash dominion.
Management’s stated priorities include lowering debt and interest expense through asset sales, further cost restructuring, and reducing or partnering on new-technology investment. Kodak expects 2018 capital expenditures of $25–$35 million; the Weatherford, Oklahoma FLEXCEL NX expansion is expected to reach full production by mid-2019. No consolidated revenue or earnings guidance is provided in the supplied filing text. A major Eastman Business Park tenant, representing about 30% of segment revenue, notified Kodak it does not plan to renew its lease after its third-quarter 2018 expiration.
Other notable risks include declining Print Systems demand and margins, competition and pricing pressure, aluminum and other input-cost volatility, foreign-exchange and interest-rate exposure, restricted or costly repatriation of overseas cash, pension funding needs, and dependence on successful product development and asset-sale/refinancing plans. Kodak estimates approximately $20 million of unreserved Brazilian contingencies with at least a reasonable possibility of loss; it had about $10 million accrued against Brazilian claims aggregating approximately $180 million. The filing says other litigation outcomes are not considered probable to have a material adverse effect, while noting litigation remains unpredictable. Kodak also has an uncapped potential guarantee for 50% of historical Eastman Business Park environmental liabilities above $99 million; no liability was recorded for that guarantee.
Important facts for investors to verify
- Whether the proposed refinancing becomes a binding, completed transaction, and whether its terms provide enough time and liquidity to address the 2019 maturities.
- Whether the Flexographic Packaging sale proceeds, if any, are sufficient to reduce debt and improve liquidity; confirm progress and timing.
- Available cash by jurisdiction, restrictions on repatriation, ABL excess availability, letters of credit, covenant headroom and any change in cash-dominion or collateral requirements.
- Underlying operating cash generation and the sustainability of cost savings, particularly given Print Systems’ revenue and EBITDA declines and aluminum-cost pressure.
- The cash-flow decrease discrepancy ($76 million in the cash-flow statement versus $75 million in MD&A), and the distinction between reported net income and earnings available to common shareholders after preferred dividends.
- Lease-renewal exposure at Eastman Business Park, Brazilian legal exposure, environmental obligations, and the preferred stock’s 5.5% cash dividend and November 2021 mandatory redemption terms.