Business context and reporting period
Eastman Kodak Company’s unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the same quarter of 2014. Kodak describes itself as a technology company focused on commercial imaging and printing. Effective January 1, 2015, it reorganized reporting into seven segments and adopted Operational EBITDA as its segment profit measure; prior-period segment data was revised for comparison.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 or prior period |
|---|---|---|
| Revenue | $427 million | $488 million; down 13% |
| Gross profit / margin | $77 million / 18% | $89 million / 18% |
| Loss from continuing operations before tax | $50 million | $60 million |
| Loss from continuing operations | $54 million | $53 million |
| Net loss attributable to Kodak | $58 million; $1.38 per diluted share | $36 million; $0.86 per diluted share |
| Cash from operating activities | Used $89 million | Used $44 million |
| Cash and cash equivalents | $609 million | $712 million at December 31, 2014 |
| Total debt | $677 million | $677 million at December 31, 2014 |
Sales were $337 million and services revenue was $90 million. The reported net loss attributable to Kodak worsened year over year partly because Q1 2014 included $19 million of earnings from discontinued operations; Q1 2015 reported none. Gross margin held at 18%. SG&A fell 33% to $58 million and R&D fell 30% to $19 million. The loss before interest, other charges, reorganization items and taxes narrowed to $20 million from $38 million.
Cash declined $103 million during the quarter. Investing activities used $6 million and financing activities used $1 million; exchange-rate effects reduced cash by $7 million. The balance sheet showed $1.411 billion of current assets and $515 million of current liabilities. Kodak reported $17 million of net availability under its asset-based revolving credit agreement. Of its $609 million cash balance, $333 million was held outside the U.S.; management cautioned that some foreign cash may not be readily transferable. Long-term debt was $671 million and current debt was $6 million. Pension and other postretirement liabilities totaled $609 million.
Material changes and segment performance
Management attributed approximately $35 million, or 7 percentage points, of the $61 million revenue decline to unfavorable foreign currency. Other drivers included Print Systems pricing pressure, lower Consumer and Film volumes, and no current-quarter non-recurring intellectual-property licensing revenue. Operating cost reductions helped offset the revenue decline.
- Print Systems: Revenue fell 12% to $254 million; Operational EBITDA rose to $13 million from $12 million, with lower allocated SG&A offsetting pricing and margin pressure.
- Enterprise Inkjet Systems: Revenue fell 19% to $39 million; Operational EBITDA loss widened to $13 million from $12 million. Prosper portfolio revenue increased 23%, while legacy business declines and currency weighed on results.
- Micro 3D Printing and Packaging: Revenue rose 7% to $31 million and Operational EBITDA improved to breakeven from a $2 million loss. Flexcel NX plate volume increased 27%.
- Software and Solutions: Revenue rose 17% to $28 million; Operational EBITDA improved to $2 million from a $1 million loss.
- Consumer and Film: Revenue fell 16% to $72 million, while Operational EBITDA increased to $18 million from $10 million, mainly on improved inventory management and production efficiency in Entertainment Imaging and Commercial Films.
Operational EBITDA is Kodak’s segment measure and is not a consolidated GAAP earnings measure. The report records $12 million of total reportable-segment Operational EBITDA, compared with $7 million in Q1 2014, before the listed corporate and other reconciling items.
Outlook, management commentary, risks and unusual items
- Kodak expects restructuring actions initiated in Q1 to generate approximately $29 million of annual cash savings, with most savings expected to be in effect by the second half of 2015. The actions included about 325 position eliminations. Kodak recorded $20 million of Q1 restructuring charges and expects total Leeds facility exit charges of $20–$30 million; production is expected to phase out in mid-to-late 2015, with the facility exit expected by Q2 2016.
- Management expects Consumer and Film revenue to continue declining, primarily because of the shrinking installed base of consumer inkjet printers. It expects Prosper products to account for most Enterprise Inkjet Systems revenue by year-end 2015 and sees growth potential in Packaging and Software and Solutions. These are expectations, not formal consolidated financial guidance.
- Kodak recorded a $6 million goodwill impairment in Functional Printing, citing delayed commercialization of new technologies and a change in reporting units. A separate environmental agreement reduced environmental liabilities by approximately $5 million and generated a Q1 gain of the same amount.
- Other charges, net included a $10 million net gain in the income statement; Kodak separately disclosed a $10 million foreign-exchange transaction loss and $18 million of gains on non-designated foreign-exchange derivatives. Foreign-exchange effects and the underlying exposures should be considered together.
- Brazilian litigation contingencies included approximately $41 million of unreserved exposure for which a loss was reasonably possible. Separately, Kodak reported approximately $13 million accrued against Brazilian claims aggregating approximately $194 million. The filing says outcomes of other litigation are inherently unpredictable, though management did not believe those matters were probable to have a material adverse effect in aggregate.
- Up to $35 million of sale consideration for the Personalized Imaging and Document Imaging businesses may be repayable if specified adjusted EBITDA targets are not met over the four years ending December 31, 2018. Some deferred asset and liability transfers remained outstanding.
- Management stated that liquidity was adequate for operating and investing needs. Key risks it identified include achieving forecasts and profitability, complying with credit-facility covenants, obtaining financing if needed, funding investment and restructuring, foreign-exchange and interest-rate changes, and developing and commercializing products. If LIBOR exceeds applicable floors, Kodak estimated interest expense would rise by about $7 million for each 1 percentage-point increase.
Most important facts for investors to verify
- Whether the $29 million annual restructuring savings are realized on schedule and translate into improved operating cash flow.
- How much of reported cash is accessible for debt service and operations, particularly the $333 million held outside the U.S., and whether the $17 million of ABL availability is sufficient.
- Whether revenue and segment trends improve, including the effects of currency, Print Systems pricing, Consumer and Film declines, and growth in Prosper, Packaging and Software and Solutions.
- The status and potential cash impact of Brazilian contingencies, environmental obligations, and the possible $35 million repayment tied to the divested businesses.
- Debt-facility covenant compliance, refinancing or financing needs, variable-rate exposure, and the effect of continuing operating cash outflows.