Eastman Kodak Company — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise stated, amounts are in millions of dollars. Kodak is a global technology company focused on print and advanced materials and chemicals. Management said COVID-19 materially reduced demand and that the duration and pace of recovery were uncertain.
Financial performance and liquidity
- Q2 revenue: $213, down $94 (31%) from $307 a year earlier. Sales were $163 and services $50. Six-month revenue was $480, down $118 (20%) from $598.
- Gross profit and margin: Q2 gross profit was $21, or 10% of revenue, versus $42 and 14% a year earlier. For the first half, gross profit was $57 (12%) versus $82 (14%). Lower volumes, pricing and product mix, and unfavorable manufacturing cost absorption were key pressures.
- Earnings: Q2 continuing-operations loss was $5, or $0.23 per share, compared with a $6 loss, or $0.25 per share, in Q2 2019. Q2 net loss was also $5; the prior-year quarter’s $201 net income included a $207 after-tax gain on the Flexographic Packaging business sale. First-half continuing-operations loss was $116, or $2.88 per share, versus $18, or $0.65 per share, in 2019. First-half net loss was $116 versus net income of $183 in 2019.
- Unusual tax item: First-half tax expense was $166, including a $167 provision to establish valuation allowances on deferred tax assets outside the U.S. This drove the reported first-half loss despite $50 of pre-tax continuing-operations income.
- Cash flow: First-half operating cash use was $64, compared with $13 in 2019. Investing cash use was $5 versus $297 provided in 2019, which included proceeds from the FPD sale. Financing cash use was $6 versus $294 in 2019. Cash, cash equivalents and restricted cash fell $78 during the first half to $212.
- Balance sheet at June 30: Cash and cash equivalents were $180, including $95 held in the U.S.; restricted cash was $32. Current assets were $589 and current liabilities $275. Debt was $115 in reported carrying amounts ($2 current and $113 long-term). Pension and other postretirement liabilities were $368. Shareholders’ deficit was $30, and Series A redeemable convertible preferred stock was $186.
- Credit and liquidity: The ABL facility’s stated availability was reduced to up to $110, subject to the borrowing base, and it had approximately $80 of letters of credit outstanding. Kodak reported approximately $17 of Excess Availability for June 30 compliance after a $5 cash funding on July 20; it separately had $9 of restricted cash supporting the threshold. The ABL requires minimum Excess Availability of $13.75. Kodak said its Fixed Charge Coverage Ratio was below 1.0, but the minimum ratio was not required because reported Excess Availability exceeded the threshold.
- Segments: Q2 Operational EBITDA was $1 for Traditional Printing, $(3) for Digital Printing, $(7) for Advanced Materials and Chemicals, and $2 for Brand. Traditional Printing’s revenue fell 34% and its EBITDA fell $8 year over year; other segments also faced lower demand, while cost reductions and selected pricing/mix gains partly offset pressures.
Material changes versus the prior comparable period
- Revenue contracted across the main operating businesses, led by Traditional Printing, as COVID-19 reduced customer activity and production volumes. Kodak also cited digital substitution and competitive pricing pressure in print and film markets.
- SG&A declined $20 in Q2 and $31 in the first half, mainly from lower selling and marketing, consulting and project costs. R&D declined $3 and $5, respectively. These cost reductions did not prevent lower gross profit.
- First-half restructuring charges were $8, and Kodak said actions initiated in the period were expected to generate about $9 of annual cash savings. The company recorded a $3 trade-name impairment in Q1; no additional trade-name or goodwill impairment was indicated at June 30.
- The 2019 comparison included the FPD divestiture gain and sale proceeds; Kodak had no discontinued-operations income in 2020.
- Kodak reorganized its reporting segments effective January 1, 2020. Prior-period segment figures were reclassified to the new structure.
Outlook, risks and notable events
- Going concern: Management stated that operating losses, low or negative operating cash flow, collateral requirements, COVID-19 uncertainty, the ABL maturity in 2021 and the Series A preferred-stock redemption date in 2021 raise substantial doubt about Kodak’s ability to continue as a going concern. The statements were prepared on a going-concern basis. Management’s plans include profitable revenue growth, expense reductions, asset sales or leases, lower investment in selected development programs and reducing U.S. collateral needs.
- COVID-19 response and outlook: Kodak reduced manufacturing volumes and used temporary furloughs and pay reductions; it estimated approximately $12 of employee cost reductions from these measures. It reported slower receivable collections and increased collection risk. No specific revenue or earnings guidance was provided. Kodak expected 2020 capital expenditures of about $15 and approximately $10 of pension and postretirement contributions or benefit payments for the balance of 2020.
- Debt and preferred stock maturities: The ABL facility matures in May 2021; the filing cites both May 21 and May 26 in different passages. Series A preferred stock, carrying a 5.5% cumulative dividend, must be redeemed November 15, 2021 if not converted. Kodak said it paid $11 of dividend arrears in July 2020.
- Subsequent note conversion and dilution: After quarter-end, holders converted $95 of principal of 5.00% Convertible Notes. Kodak issued 29,922,956 common shares on August 3, 2020 and paid $5.6 of accumulated interest in cash; $5 of principal remained. The filing reports 75,684,110 common shares outstanding as of August 3, compared with 43.7 million at June 30. Kodak also granted 2.4 million stock options in July; it warned these grants could result in material Q3 compensation expense.
- Potential DFC loan and investigations: On July 28, the U.S. International Development Finance Corporation announced a non-binding letter of interest for a potential $765 loan to support Kodak Pharmaceuticals. The loan remained subject to due diligence, and the filing gave no assurance it would be approved or funded. Congressional and SEC investigations were underway; the DFC said it would not proceed unless allegations were cleared. The filing highlights execution, regulatory, financing, reputational and market risks if the initiative proceeds or does not proceed.
- Other contingencies: Kodak reported Brazilian claims aggregating approximately $110, with about $3 accrued and approximately $5 of additional unreserved exposure for which loss was reasonably possible. It also disclosed a guarantee tied to historical environmental liabilities at Eastman Business Park, with no liability recorded, and noted litigation could adversely affect results or cash flows in a particular period.
Important facts for investors to verify
- Whether Kodak can maintain required ABL availability, manage collateral and secure refinancing or other liquidity before the 2021 facility maturity.
- How quickly operating cash flow can improve, particularly as pandemic-related demand and receivable collections recover; also assess cash restrictions and geographic availability.
- The impact of the $167 deferred-tax valuation allowance and whether future taxable income supports any deferred-tax assets not fully reserved.
- The final status and terms, if any, of the potential DFC loan and pharmaceutical initiative, including investigation outcomes and related governance disclosures.
- The post-conversion share count, potential resale of the 29.9 million conversion shares, remaining note balance, and compensation expense from July option grants.
- The timing and funding of the ABL and preferred-stock obligations, including the filing’s differing ABL maturity dates, and the preferred stock’s accumulated dividend and redemption terms.