Eastman Kodak Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2020 periods.
Business context
Kodak is a global technology company focused on print, advanced materials and chemicals. Its reportable segments are Traditional Printing, Digital Printing, Advanced Materials and Chemicals, and Brand; All Other primarily comprises Eastman Business Park. Management said customer demand and volumes had recovered substantially from the prior-year pandemic-affected periods, while some markets remained below pre-pandemic levels.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $291 | $213 | $556 | $480 |
| Gross profit | $48 | $21 | $88 | $57 |
| Gross margin | 16% | 10% | 16% | 12% |
| Income (loss) before income taxes | $19 | $(4) | $26 | $50 |
| Net income (loss) | $16 | $(5) | $22 | $(116) |
| Net income (loss) per diluted share | $0.16 | $(0.23) | $0.32 | $(2.88) |
| Net cash used in operating activities | Not presented separately | Not presented separately | $(21) | $(64) |
Q2 revenue rose 37%; first-half revenue rose 16%. Management attributed the increases primarily to higher volumes, pandemic-related weakness in 2020, and favorable currency. First-half net income improved from a loss largely because 2020 included a $167 million tax provision related to valuation allowances on foreign deferred tax assets. Reported earnings also benefited from pension income excluding the service-cost component: $26 million in Q2 and $51 million in the first half of 2021. Q2 restructuring expense was nil; first-half expense was $1 million.
Q2 segment Operational EBITDA was $6 million for Traditional Printing, zero for Digital Printing, $1 million for Advanced Materials and Chemicals, and $3 million for Brand. First-half amounts were $11 million, zero, $(3) million and $5 million, respectively. Traditional Printing was the largest segment by revenue, at $169 million in Q2.
Cash, liquidity and capital structure
- At June 30, cash and cash equivalents were $395 million; restricted cash was $74 million, making total cash, cash equivalents and restricted cash $469 million, versus $256 million at December 31, 2020.
- First-half operating cash use was $21 million, investing cash use was $5 million, and financing cash provided was $241 million. Financing included proceeds from new term debt, convertible notes, Series C preferred stock and common stock, partly offset by the Series A preferred-stock repurchase and other payments.
- Total debt and finance leases were $251 million, versus $19 million at year-end 2020; long-term debt was $249 million. The new five-year term loan had $225 million principal and a $219 million carrying value at quarter-end. Its interest is 8.5% cash plus 4.0% paid-in-kind, at Kodak’s election for the latter component.
- The amended ABL facility has $90 million of commitments and matures in 2024, subject to a springing maturity provision. Kodak had about $42 million of letters of credit outstanding under it and $39 million of Excess Availability. A separate letter-of-credit facility had about $45 million outstanding, backed by approximately $46 million of restricted cash.
- Minimum Liquidity under the credit facilities was $274 million, above the required $80 million. The ABL also requires Excess Availability above 12.5% of commitments; Kodak reported $39 million against a $11.25 million threshold.
- Redeemable convertible preferred stock totaled $193 million at quarter-end. Shareholders’ equity was $130 million; accumulated deficit was $598 million.
Changes, outlook and risks
- Gross profit improved by $27 million in Q2 and $31 million year to date, primarily due to higher production volumes and better manufacturing cost absorption. Higher aluminum costs partly offset the gains. Q2 also benefited by about $3 million from a reduction in workers’ compensation reserves.
- SG&A increased $8 million in Q2, including higher sales and marketing activity and consulting/project costs associated with investigations. Management identified supply-chain disruptions, material and labor shortages, and higher commodity and distribution costs as ongoing pressures.
- Management gave no specific revenue or earnings guidance in the provided filing text. It expected 2021 capital expenditures of approximately $20 million to $30 million, before investments funded with first-quarter financing proceeds. First-half restructuring actions were expected to produce about $3 million in annual cash savings, mostly effective by year-end.
- Kodak said it was pursuing a return to sustainable positive cash flow through profitable revenue growth, cost reductions, organizational simplification, asset sales or leases, and lower cash-collateral needs. It was exploring pharmaceutical and healthcare-material opportunities at Eastman Business Park, but the previously announced potential $765 million DFC loan was being treated as unlikely to proceed.
- Risks cited include continuing COVID-19 effects, uncertain demand recovery, supply-chain and inflationary pressures, credit-facility covenant compliance, financing and debt-service needs, foreign-exchange and interest-rate movements, and the ability to execute growth plans.
- Legal matters remain significant: securities and derivative litigation and government investigations related to the DFC announcement are ongoing, and the New York Attorney General has threatened a claim. Kodak said it intends to defend itself and cooperate with investigations. Brazilian operations had approximately $123 million of claims, including interest and penalties, with about $3 million accrued; the filing described an additional unreserved amount of approximately $4 million for matters with at least a reasonable possibility of loss.
Important facts for investors to verify
- Whether revenue recovery and improved manufacturing utilization can be sustained, and whether price increases can offset aluminum and other cost inflation.
- Cash generation after the first-half $21 million operating cash outflow, including whether cash held overseas or restricted is practically available for U.S. needs.
- Compliance headroom under the $80 million minimum-liquidity covenant and the ABL Excess Availability threshold, alongside the higher debt burden and financing costs.
- Terms, conversion or redemption implications of the Series B and Series C preferred stock and convertible notes, including potential dilution and future cash obligations.
- Developments in the DFC-related litigation and investigations, the New York Attorney General matter, Brazilian contingencies, and any potential effect on cash flows or reputation.
- Progress on the stated $3 million annual restructuring savings, projected 2021 capital spending, and pharmaceutical-related investment plans now that the DFC financing is not expected to proceed as originally envisioned.