Eastman Kodak Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Amounts are in U.S. dollars, millions, except per-share data. The interim statements are unaudited.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Revenue | $357 | $377; down $20 (5%) |
| Gross profit / margin | $83 / 23% | $88 / 23% |
| Operating result before interest, other items and taxes | Loss of $2 | Earnings of $10 |
| Income from continuing operations | $7 | Loss of $14 |
| Net income attributable to Kodak | $7; $0.05 per basic and diluted share | Loss of $18; loss of $0.43 per share |
| Cash from operations | Use of $53 | Use of $21 |
| Capital expenditures | $7 | $5 |
| Cash, cash equivalents and restricted cash | $422 | $478 at December 31, 2016 |
| Debt | $410: $6 current and $404 long-term | $411 at December 31, 2016 |
| Shareholders’ deficit | $58 | $73 at December 31, 2016 |
Revenue pressure was concentrated in Print Systems and Consumer and Film. Gross margin held at 23%, but SG&A rose $8 million to $53 million. The $7 million net income included a $22 million non-cash gain from remeasuring the embedded conversion-feature derivative liability; without that gain, the reported pretax result would have been materially weaker. Kodak’s $7 million reported net income also included preferred-stock cash and deemed dividends of $3 million and $2 million, respectively, in calculating earnings available to common shareholders.
Operating cash use worsened by $32 million year over year, mainly reflecting inventory growth, other working-capital use and lower cash earnings; the prior-year period included $10 million of DuPont litigation proceeds. Inventory increased to $308 million from $271 million at year-end, while cash and cash equivalents declined to $378 million from $434 million. Restricted cash was $44 million at March 31.
Segment results and changes
| Segment | Revenue, Q1 2017 vs. Q1 2016 | Operational EBITDA, Q1 2017 vs. Q1 2016 |
|---|---|---|
| Print Systems | $213m vs. $231m | $13m vs. $18m |
| Flexographic Packaging | $33m vs. $29m | $6m vs. $4m |
| Enterprise Inkjet Systems | $37m vs. $34m | $(1)m vs. $(5)m |
| Software and Solutions | $21m vs. $22m | $1m vs. $2m |
| Consumer and Film | $49m vs. $57m | $(3)m vs. $7m |
| Advanced Materials and 3D Printing Technology | No reported revenue in either period | $(8)m vs. $(7)m |
| Eastman Business Park | $4m vs. $4m | Break-even in both periods |
Management attributed Print Systems’ decline largely to competitive pricing and lower volumes. Flexographic Packaging grew with FLEXCEL NX consumables; Enterprise Inkjet Systems improved on Prosper sales and used Versamark equipment placements. Consumer and Film weakened mainly because of declining consumer inkjet sales and lower motion-picture film demand. Segment EBITDA is a company-defined measure, not a GAAP operating-profit measure.
Effective January 1, 2017, Kodak changed its segment structure, moving Micro 3D Printing into Advanced Materials and 3D Printing Technology and making Flexographic Packaging a separate segment. Comparative segment information was reclassified. Kodak also changed its segment profitability measure to exclude internal costs of corporate strategic initiatives and include certain incremental idle-building costs.
Liquidity, debt and outlook
Kodak reported $23 million of net availability under its amended asset-based credit facility at March 31. The facility’s 12.5% excess-availability threshold was $18.75 million, leaving a $4.25 million cushion; falling below the threshold could trigger a fixed-charge coverage test and cash dominion. Kodak stated it was compliant with its covenants. Under its term-loan covenant, calculated EBITDA exceeded the amount needed to satisfy the ratio by approximately $31 million. Management cautioned that future compliance may depend on asset monetization, refinancing, equity or similar transactions.
Management said liquidity was adequate for operating and investing needs over the next year, while noting that cash held outside the U.S. may be restricted or costly to repatriate. Approximately $131 million of cash and cash equivalents was held in China. Kodak forecast 2017 capital expenditures of $35–$40 million and pension/postretirement contributions and benefit payments of about $14 million for the rest of 2017. It expected approximately $10 million in annual savings from Q1 restructuring actions, with most savings expected to be in place in the second half of 2017. No consolidated revenue or earnings guidance was provided in the filing.
Kodak plans to expand FLEXCEL NX plate capacity in Oklahoma: approximately $13 million of investment was expected in 2017, within an estimated $15 million total project cost; full production was expected by early 2019. The company also described plans to grow Flexographic Packaging, Prosper and selected advanced-materials businesses, while managing declining mature businesses and pursuing asset and intellectual-property monetization.
Risks, contingencies and unusual items
- In April 2017, Kodak decided to retain the Prosper business after it no longer met held-for-sale criteria at March 31. Prosper was reclassified to continuing operations for all periods presented. Kodak recorded a $12 million Q1 charge to restore Prosper assets to the carrying amount that would have applied had they remained held and used; the prior-year comparative included $14 million of Prosper revenue.
- Kodak recorded $13 million of Q1 restructuring charges, including $6 million of inventory write-downs in cost of revenues. The Prosper cost-reduction program was expected to result in total restructuring and related charges of $13–$17 million. The broader Q1 actions were expected to generate about $10 million in annual savings.
- Brazilian litigation and tax assessments are a key contingency. The filing reports approximately $55 million of unreserved exposure for matters with at least a reasonable possibility of loss; separately, it reports $13.5 million of accruals against claims aggregating approximately $222 million, including interest and penalties where applicable. These figures describe related disclosures and should be reconciled when assessing exposure.
- Other commitments include $116 million of letters of credit under the amended credit agreement, plus bank guarantees and letters of credit of $4 million and surety bonds of $18 million. A guarantee tied to historical Eastman Business Park environmental liabilities could require Kodak to pay 50% of amounts above $99 million, with no stated maximum; no liability was recorded for this guarantee.
- Series A preferred stock had a $158 million carrying value and a $100-per-share liquidation preference. It bears a 5.5% cumulative cash dividend; unconverted shares are redeemable at the fifth anniversary. Kodak recognized a derivative liability associated with embedded conversion features, valued at $21 million at quarter-end versus $43 million at year-end.
- Kodak identified risks including covenant headroom, liquidity and refinancing needs, ability to sustain cash flow and profitability, market and pricing pressure, foreign exchange, commodity and interest-rate exposure, and litigation. It noted that a 1% rise in LIBOR above the loan’s 1% floor would increase annual interest expense by approximately $4 million.
Key facts for investors to verify
- Whether the operating cash outflow and inventory build reverse as management expects, and how cash availability evolves relative to the credit-facility threshold.
- Whether Kodak sustains term-loan covenant compliance without relying on asset sales, refinancing, new equity or other non-operational transactions.
- Progress in Print Systems pricing and volumes, Consumer and Film stabilization, and the profitability and scale-up of Prosper and Flexographic Packaging.
- Actual restructuring costs and realization of the projected $10 million annual savings; also the timing and returns of the Oklahoma capacity expansion.
- Developments in Brazilian tax and other litigation, the environmental guarantee, preferred-stock dividends and redemption obligations, and any further changes to Prosper’s status or carrying value.