Eastman Kodak Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. Amounts are in millions of dollars except per-share data.
Business context
Kodak is a global commercial printing and imaging company, reporting seven segments. Print Systems generated about 60% of revenue in both the quarter and year-to-date period. Management’s strategy emphasizes selected growth platforms, managing mature and declining businesses, cost reduction, and monetizing assets.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $366 | $379 | $1,095 | $1,117 |
| Gross profit / margin | $65 / 18% | $64 / 17% | $179 / 16% | $196 / 18% |
| Continuing operations earnings (loss) before tax | $24 | $(58) | $11 | $(37) |
| Net earnings (loss) | $19 | $(46) | $(2) | $(35) |
| Net earnings (loss) per share, basic and diluted | $0.33 | $(1.20) | $(0.40) | $(1.15) |
Q3 segment Operational EBITDA was $20, versus $13 a year earlier; nine-month segment Operational EBITDA was $30, versus $31. This is a non-GAAP segment measure. Interest expense was $9 for Q3 and $26 year to date. Pension income excluding service cost was $35 and $99, respectively.
For the first nine months, operating cash flow was negative $79 (prior year: negative $77); investing cash flow was negative $16 (negative $25); and financing cash flow was negative $10 (negative $19). Cash, cash equivalents and restricted cash declined $113 to $256. Cash and cash equivalents alone were $238 at quarter-end.
At September 30, cash and cash equivalents were $238; current assets were $844 and current liabilities $779. Debt carrying value was $401, including $396 classified as current. The company reported $395 of outstanding First Lien Term Credit Agreement indebtedness, with a 7.35% weighted-average effective rate and September 3, 2019 maturity. Shareholders’ equity was $18; redeemable Series A preferred stock was $171.
Material changes versus the prior comparable period
- Q3 revenue fell $13 (3%); nine-month revenue fell $22 (2%). Q3 declines included Print Systems volume, a prior-year brand-licensing royalty payment, and unfavorable currency. Year-to-date declines in Print Systems and Consumer and Film were partly offset by favorable currency.
- Q3 gross profit increased $1, but nine-month gross profit declined $17. Year-to-date pressure included Print Systems pricing and volume declines and $22 of higher aluminum costs.
- Q3 net income improved by $65 from the prior-year loss, benefiting in part from the absence of the prior-year $56 goodwill impairment and $20 of other operating expense, as well as a $10 other operating gain in Q3 2018. The Q3 2018 gain included asset-sale gains and legal reserve changes; results also benefited from a $6 workers’ compensation reserve reduction.
- Print Systems revenue declined $15 in Q3 and $21 year to date; its year-to-date Operational EBITDA fell $15, mainly reflecting aluminum costs and lower pricing/volume. Flexographic Packaging revenue and EBITDA increased year to date, while Enterprise Inkjet EBITDA improved despite slightly lower revenue.
- Cash and cash equivalents fell $106 from December 31, 2017; total debt carrying value was broadly stable, but $396 was classified as current at quarter-end versus $4 at year-end, reflecting the approaching maturity of the term loan.
Outlook, risks and unusual items
- Going concern: Kodak states that substantial doubt exists about its ability to continue as a going concern. It had debt due within 12 months and lacked committed financing or available liquidity to meet obligations under current terms. It also cited negative cash flow and uncertainty about meeting U.S. commitments as due.
- Refinancing and asset sale: In October 2018, after quarter-end, Kodak entered a non-binding work letter to negotiate a proposed term loan refinancing; no binding commitment was assured, and exclusive negotiations were set to expire November 12, 2018. Kodak was also negotiating exclusively to sell Flexographic Packaging, with proceeds intended to reduce term debt. Neither transaction was assured; a sale could adversely affect covenant EBITDA.
- The ABL facility had $24 of Excess Availability, only modestly above the $18.75 threshold that could trigger a fixed-charge coverage test and cash dominion. Kodak reported covenant compliance at September 30, but future compliance could depend on asset monetization, refinancing, cash management, or other transactions.
- Management’s cash-flow plans include debt reduction using asset-sale proceeds, further restructuring, and reducing or partnering on technology investment. No formal revenue or earnings guidance is provided in the filing.
- Restructuring charges were $9 in Q3 and $13 year to date; actions are expected to generate about $17 of annual cash savings, mostly in place by the end of Q1 2019. Q3 actions eliminated approximately 100 positions.
- In October 2018, Kodak reached a tax authority agreement on Korean withholding taxes. The $32 refund was to be shared equally with a licensee; Kodak received $16 in Q4, with a stated net income benefit of $16 expected in Q4.
- No Series A preferred dividend was declared in Q3 2018. The shares carry cumulative 5.5% dividends; six missed dividend periods can give holders additional director-election rights. The preferred stock has a mandatory redemption date of November 15, 2021 if not converted.
- Key operating risks include continued Print Systems declines, aluminum and tariff costs, foreign exchange, execution and commercialization of growth products, restricted availability of overseas cash, and litigation. Brazilian legal matters included approximately $151 of claims with about $4 accrued; the filing cited a further $10 of unreserved contingencies for which loss was reasonably possible.
Most important facts for investors to verify
- Whether Kodak secured binding refinancing, completed the Flexographic Packaging sale, and met the June 2019 ABL-related and September 2019 term-loan deadlines.
- Whether liquidity, operating cash flow, and ABL Excess Availability improved, and whether covenant headroom remained adequate.
- Whether the expected $17 annual restructuring savings materialized without impairing revenue or product development.
- Whether Print Systems margins and aluminum costs, and growth in Enterprise Inkjet and Flexographic Packaging, developed as management expected.
- The final accounting and cash effects of the Korean tax refund, preferred dividends, and material legal or environmental contingencies.