Eastman Kodak Company — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are in millions of dollars except per-share data. Kodak manufactures products and provides services focused on commercial printing, advanced materials and chemicals.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $289 | $287 | $900 | $843 |
| Gross profit | $43 | $43 | $127 | $131 |
| Gross margin | 14.9% | 15.0% | 14.1% | 15.5% |
| Net income | $2 | $8 | $19 | $30 |
| Basic EPS attributable to common shareholders | $(0.01) | $0.06 | $0.11 | $0.40 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(130) | $(33) |
Q3 operating results included $10 of interest expense and $20 of pension income excluding service cost; pretax income was $3. For the nine-month period, these items were $29 and $77, respectively, and pretax income was $21. Cash provided by financing was $45 and cash used in investing was $44 in the first nine months of 2022.
- Cash and liquidity: At September 30, cash and cash equivalents were $216, versus $362 at December 31, 2021. Including restricted cash, the cash-flow statement total was $280, down from $423. Working capital was pressured by inventory, which rose to $273 from $219.
- Debt and preferred stock: Debt and finance leases totaled $313 carrying value ($1 current, $312 non-current), up from $254 at year-end. Term loans carry a 12.5% stated rate: 8.5% payable quarterly in cash and 4.0% elected as paid-in-kind. Redeemable convertible preferred stock was $201. Term loans and convertible notes mature in 2026.
- ABL measures: Excess Availability was $30, above the $11.25 minimum threshold; Minimum Liquidity was $143, above the required $80. The ABL facility matures February 26, 2024, subject to an earlier-maturity provision linked to other financing. Kodak reported that fixed charges exceeded EBITDA by about $76; the fixed-charge coverage test was not triggered while Excess Availability remained above its threshold.
Changes versus prior comparable periods
- Revenue rose 1% in Q3 and 7% year to date. Favorable pricing was partly offset by foreign exchange, which reduced revenue by $22 in Q3 and $51 year to date.
- Q3 gross profit was flat, but year-to-date gross profit declined $4 and gross margin fell 1.4 percentage points. Pricing helped offset higher aluminum and manufacturing costs, lower volumes and unfavorable currency.
- Traditional Printing revenue increased to $169 in Q3 and $535 year to date; its Operational EBITDA was $7 and $15, respectively. Digital Printing revenue fell to $55 and $169, while Operational EBITDA weakened to $(6) and $(15). Advanced Materials and Chemicals revenue increased to $58 and $173, with Operational EBITDA of $3 and $1. Segment Operational EBITDA is a company-defined adjusted measure.
- Net income fell to $2 in Q3 and $19 year to date, from $8 and $30. Common-shareholder EPS was negative in Q3 despite reported net income, reflecting preferred-stock dividends and other allocation items.
- Operating cash use increased by $97 year over year for the first nine months, primarily reflecting inventory investment, increased receivables and lower cash earnings. Total cash, cash equivalents and restricted cash declined $143 during the period.
Outlook, commentary, risks and unusual items
- Management said liquidity was adequate for operating and investing needs over the next 12 months. Longer-term funding depends on positive operating cash flow, managing global cash, and amending, refinancing or extending the ABL facility or replacing its letter-of-credit collateral.
- Kodak reported supply disruptions, material and labor shortages, inflation, higher distribution and energy costs, unfavorable exchange rates and slower demand. Pricing actions and surcharges have been used to offset costs, but management cautioned that cost recovery and customer demand remain uncertain. Traditional Printing’s SONORA plate volume declined 10% in Q3 year over year; Advanced Materials and Chemicals faced backlogs constrained by equipment capacity and labor.
- The company expects 2022 capital expenditures of $25–$35 and approximately $6 of pension and postretirement benefit payments for the remainder of 2022. 2022 restructuring actions are expected to yield about $7 of annual cash savings, mostly in effect by year-end.
- On July 13, Kodak invested $25 in Wildcat Discovery Technologies, a battery-materials company, and agreed to provide coating and engineering services. The investment was funded from the $50 delayed-draw term loan, drawn in June.
- A pension-plan remeasurement in May increased the U.S. plan’s funded status by $109, largely from a higher discount rate, and contributed to $112 of year-to-date pension and postretirement benefit OCI. Management revised expected 2022 pension income down by $25 to approximately $88.
- Cash-flow pressure, debt service, covenant thresholds, the 2024 ABL maturity, and restrictions on moving cash internationally are key liquidity risks. An $89 intercompany loan routed from a Chinese subsidiary through Hong Kong matured November 16, 2022; the filing says Chinese regulators objected to the extension and approval or refinancing was not assured. Kodak had obtained advance waivers for potential cross-defaults under the term loan and convertible notes.
- The DFC closed Kodak’s application for the previously discussed potential $765 loan on April 22, 2022; the company had already been operating on the assumption that the project would not proceed. A securities class action was dismissed with prejudice on September 28, but plaintiffs appealed October 27. Derivative litigation and a threatened New York Attorney General claim remain; the filing also describes Brazilian tax and other disputes.
- Kodak reported Brazilian litigation and tax assessments aggregating approximately $116, with about $2 accrued and a further approximately $5 of reasonably possible unreserved loss. The filing states that other matters are not believed likely to have a material adverse effect, while noting litigation outcomes are unpredictable.
Important facts for investors to verify
- Whether operating cash use and inventory levels improve, and whether pricing offsets aluminum, labor, energy and distribution costs without further weakening demand.
- Whether Kodak maintains ABL Excess Availability and Minimum Liquidity above required thresholds, and how it addresses the February 2024 ABL maturity and letter-of-credit collateral.
- Whether the $89 intercompany loan is extended, refinanced or repaid, and whether funds held outside the U.S. can be transferred when needed.
- Progress, capital requirements and commercial prospects for Wildcat and other growth initiatives, alongside Digital Printing’s operating losses and equipment-constrained materials demand.
- Developments in the securities appeal, derivative matters, threatened New York claim and Brazilian contingencies, including any change in estimated exposure.