Eastman Kodak Company — Form 10-Q summary
Reporting period: Quarter ended September 30, 2013. Kodak emerged from Chapter 11 on September 3 and applied fresh-start accounting effective September 1. Accordingly, the quarter comprises two months of predecessor results and one month of successor results; comparisons and combined figures should be treated cautiously because the accounting basis and share structure changed.
Key financial metrics
| Metric | 2013 period | Comparable period / context |
|---|---|---|
| Q3 continuing-operations net sales | $563 million combined | Down 15% from $660 million in Q3 2012 |
| Q3 gross profit and margin | $107 million; 19% | $75 million; 11% in Q3 2012 |
| Q3 net earnings | About $1.986 billion combined | Q3 2012 net loss of $312 million; 2013 earnings were dominated by a non-cash Chapter 11 reorganization gain |
| Nine-month continuing-operations sales | $1.740 billion combined | Down 12% from $1.980 billion |
| Nine-month gross margin | 22% | 10% in the comparable 2012 period |
| Nine-month operating cash flow | $592 million used | Combined eight-month predecessor and one-month successor; $263 million used in the 2012 nine-month period |
| Cash and restricted cash at September 30 | $839 million and $102 million | Cash was $1.135 billion at December 31, 2012 |
| Debt at September 30 | $679 million carrying value; $695 million principal | New emergence financing; $4 million current and $675 million long-term carrying value |
| Balance sheet | $3.410 billion assets; $2.794 billion liabilities; $616 million equity | Fresh-start balances are not directly comparable with predecessor balances |
The combined Q3 net earnings figure sums the reported two-month predecessor earnings of $2.007 billion and one-month successor loss of $21 million. It is not a like-for-like operating measure: the predecessor period included a $2.217 billion net reorganization gain. Combined Q3 continuing-operations pretax earnings were about $2.152 billion, also reflecting reorganization accounting.
Business trends and changes
- Kodak recast itself as a technology company focused on business imaging, including graphic communications, commercial printing, packaging, functional printing, enterprise services, entertainment imaging and commercial films. Personalized Imaging and Document Imaging were reported as discontinued operations.
- Q3 sales declined across the continuing segments. Graphics, Entertainment and Commercial Films sales fell 13%; Digital Printing and Enterprise sales fell 14%. Kodak cited volume declines, including weaker demand for digital plates, movie-industry products and consumer inkjet printers and ink.
- Despite lower sales, gross margin improved. Management attributed the change to favorable price and product mix, cost reductions and productivity; fresh-start inventory revaluation partly offset the improvement. For the nine-month period, price/mix included a nonrecurring $31 million licensing agreement.
- SG&A and R&D expenses fell year over year, reflecting cost reductions and narrower development priorities. Nine-month restructuring actions generated $56 million of charges and approximately $86 million of cash payments.
Emergence, liquidity and outlook
- The confirmed reorganization plan cancelled predecessor equity and substantially restructured prepetition obligations. Kodak raised $406 million through rights offerings and obtained $695 million of term loans, plus a $200 million asset-based revolving facility. The term loans mature in 2019 and 2020; the revolver matures in 2018.
- At quarter-end, approximately $49 million was available under the ABL facility after borrowing-base limitations; about $123 million of letters of credit had been issued. Kodak reported compliance with its credit covenants. The company said liquidity was adequate, while noting that some overseas cash may not be readily transferable: $553 million was held outside the U.S., including approximately $221 million in China.
- Management expected restructuring actions to produce about $57 million in annual savings, with most expected to be in effect by the second half of 2014. Kodak estimated approximately $25 million of capital expenditures for the final four months of 2013 and $42 million of 2013 pension contributions and benefit payments. No consolidated revenue or earnings guidance is provided in the supplied filing text.
- Cash flow was affected by emergence-related payments and debt repayment. Investing cash flow included proceeds from asset sales, including the approximately $530 million digital-imaging patent transaction and proceeds associated with the KPP business sale. Cash declined to $839 million during the nine months.
Material transactions, risks and contingencies
- Kodak sold certain Personalized Imaging and Document Imaging assets to KPP-related buyers for $325 million net cash consideration, with additional liabilities assumed. Up to $35 million of consideration may be repayable if specified EBITDA targets are not met; certain jurisdictional closings and related true-up payments remained outstanding. Kodak recorded an approximately $163 million pretax sale loss, including recognition of pension losses.
- The Eastman Business Park environmental settlement would establish a $49 million remediation trust, but remained subject to conditions, including an EPA covenant not to sue. Kodak could bear 50% of historical liabilities above $99 million.
- Environmental remediation accruals were $82 million. Kodak also disclosed $49 million of unreserved Brazilian tax contingencies with at least a reasonable possibility of loss, alongside ordinary-course litigation and intellectual-property claims. Management did not expect known exposures to exceed accruals materially overall, but warned that costs could be material in a particular period.
- Principal risks include achieving sustained profitability and cash forecasts, meeting debt covenants and debt service, limited or restricted access to overseas cash, execution of restructuring and growth plans, competitive and technology pressures, pension obligations, customer financing and supplier dependence. Kodak also noted that sales are typically concentrated in the final four months of the year.
Important facts for investors to verify
- Separate predecessor and successor results and identify the effects of the $2.217 billion reorganization gain and fresh-start accounting before assessing operating performance.
- Track continuing-segment sales, margins and cash generation against management’s cost-saving and profitability plans.
- Confirm usable liquidity, ABL borrowing-base availability, cash-transfer restrictions and compliance with credit-facility covenants.
- Monitor completion and economics of KPP deferred closings, true-ups and the contingent consideration tied to EBITDA targets.
- Check the status and funding of the Eastman Business Park settlement, Brazilian tax matters and pension cash requirements.