Eastman Kodak Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless noted. Kodak is a global technology company focused on print, advanced materials and chemicals, serving commercial print, packaging, publishing, manufacturing and entertainment markets.
Financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $265 million | $267 million |
| Gross profit / gross margin | $40 million / 15% | $36 million / 13% |
| Operating loss before interest, pension income, other income and taxes | $14 million loss | $21 million loss |
| Income (loss) before income taxes | $7 million | $54 million |
| Income tax provision | $1 million | $165 million |
| Net income (loss) | $6 million | $111 million loss |
| Basic / diluted EPS attributable to common shareholders | $0.17 / $0.16 | $(2.66) / $(2.66) |
| Cash used in operating activities | $16 million | $41 million |
| Cash used in investing activities | $1 million | $1 million |
Revenue declined $2 million, or 1%, including a favorable $9 million currency impact. Gross profit rose $4 million, reflecting improved costs, lower depreciation and favorable Advanced Materials and Chemicals pricing and mix, partly offset by lower volumes and unfavorable pricing or mix in printing.
- Segments: Traditional Printing revenue fell $6 million to $148 million, while Operational EBITDA improved to $5 million from $1 million. Digital Printing revenue fell $1 million to $64 million, and Operational EBITDA improved to breakeven from a $2 million loss. Advanced Materials and Chemicals revenue rose $4 million to $46 million, and its Operational EBITDA loss narrowed to $4 million from $9 million. Brand revenue and Operational EBITDA were unchanged at $3 million and $2 million, respectively.
- Prior-year unusual items: Q1 2020 included a $167 million deferred-tax valuation allowance provision and a $53 million gain in other income from changes in the fair value of embedded conversion features. These items materially affect the year-over-year net income comparison.
- Cash and liquidity at March 31, 2021: Cash and cash equivalents were $401 million; total cash, cash equivalents and restricted cash were $477 million, including $76 million restricted cash. Cash from operations remained negative at $16 million. Management reported $284 million of Minimum Liquidity against an $80 million requirement and $41 million of Excess Availability against a $11.25 million threshold.
- Debt and financing: Debt and finance leases had a $248 million carrying value, compared with $19 million at year-end 2020. The February financing included a $225 million term loan (net proceeds $215 million), $25 million principal of convertible notes, $100 million gross Series C preferred stock proceeds, and $10 million from common-stock issuance. Financing cash flow was $242 million. The term loan bears 8.5% cash interest plus 4.0% paid-in-kind or cash interest, at the company’s option, and matures in 2026. The 5% convertible notes mature in 2026.
- Equity structure: Kodak repurchased $100 million of Series A preferred stock and exchanged the remaining Series A shares for Series B preferred stock. At quarter-end, redeemable convertible preferred stock totaled $192 million. Series B carries a 4% cash dividend; Series C carries a 5% in-kind dividend. Both are convertible and redeemable under their terms.
Management commentary, outlook and risks
- Management said customer demand and volumes improved in some businesses from late 2020 and continued to improve in Q1, but the effects and duration of COVID-19 remain uncertain. Manufacturing facilities generally operated below normal capacity; supply-chain disruption, travel restrictions and slower receivables collections remained concerns.
- Kodak announced plate surcharges effective in Q2 2021 in response to higher aluminum, energy and packaging costs. It expects restructuring actions begun in Q1 to produce approximately $2 million in annual cash savings, with most savings expected to be in place by the end of Q3 2021.
- Management expects 2021 capital expenditures of approximately $15 million to $25 million, before investments funded from the Q1 financing. It described plans to pursue profitable revenue growth, expense reductions, asset sales or leases, and lower cash-collateral needs. The filing provides no specific revenue or earnings guidance.
- Kodak is exploring expansion of chemical manufacturing for healthcare applications, including key starting materials and potentially regulated ingredients, using its assets and technology. The prior potential $765 million DFC loan for a pharmaceutical project remained uncommitted; management said it was operating on the basis that the loan as originally envisioned would not proceed.
- The amended asset-based revolving facility has $90 million of commitments and matures in 2024, subject to a springing maturity provision. A separate letter-of-credit facility has up to $50 million of commitments and requires cash collateral of at least 103% of issued letters of credit. The term loan is secured by substantial assets and has restrictive covenants; it has no financial maintenance covenant.
- Risks include compliance with liquidity and credit-facility covenants, servicing debt and preferred-stock obligations, access to financing and letters of credit, COVID-19 and supply-chain effects, and the ability to achieve cash-flow and business-plan targets. Securities and fiduciary lawsuits and government investigations related to the 2020 DFC announcement remained ongoing. Kodak also disclosed Brazilian tax and other litigation; the unreserved portion with at least a reasonable possibility of loss was approximately $4 million. Other proceedings and contingencies could affect results or cash flows.
Important facts for investors to verify
- Whether operating cash flow can turn positive and liquidity remains above the $80 million minimum and the ABL availability threshold.
- The cash cost and effective burden of the new term loan, convertible notes, and Series B and C preferred dividends, conversions and redemption provisions.
- Whether printing demand, cost savings and announced plate surcharges offset declining volumes, pricing pressure and higher input costs.
- Progress, funding needs and returns from healthcare-related chemical manufacturing plans, given that the contemplated DFC loan is not expected to proceed as originally envisioned.
- Developments in the DFC-related litigation and investigations, Brazilian contingencies, and any related financial or governance effects.