Business context and reporting period
Eastman Kodak Company’s Form 10-K reports the year ended December 31, 2018, compared with 2017; it is not a standalone fourth-quarter report, and the filing text does not provide clear Q4-only financial results. Kodak sells commercial printing and imaging products, software, services, film, specialty materials, and related offerings. Its six reported segments were Print Systems, Enterprise Inkjet Systems, Software and Solutions, Consumer and Film, Advanced Materials and 3D Printing Technology, and Eastman Business Park. The Flexographic Packaging business is classified as discontinued operations and held for sale.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1.325 billion | $1.386 billion |
| Gross profit / margin | $181 million / 14% | $211 million / 15% |
| Loss from continuing operations before tax | $13 million | $26 million |
| Continuing operations earnings (loss) | $(9) million | $93 million |
| Net earnings (loss) | $(16) million | $94 million |
| Net cash used in operating activities | $(62) million | $(67) million |
| Capital expenditures | $33 million | $38 million |
| Cash, cash equivalents and restricted cash | $267 million | $369 million |
Revenue fell 4.4%; favorable currency effects of $19 million partly offset lower volumes and pricing. Gross margin declined to approximately 13.7% from 15.2%. The company reported a $118 million loss from continuing operations before interest, pension income, other charges and taxes. Pension income excluding service cost was $131 million, versus $152 million in 2017. Interest expense was $9 million. Basic and diluted loss per share were both $0.84, compared with earnings per share of $1.76 in 2017. The 2017 results included a $120 million income-tax benefit, contributing to the year-over-year earnings reversal; 2018 included a $16 million net benefit related to a Korean withholding-tax refund and related payment to a licensee.
Operating cash use improved by $5 million, but Kodak continued to consume cash. Total cash, cash equivalents and restricted cash declined by $102 million during 2018. Cash and cash equivalents on the balance sheet were $246 million; $117 million was held in the U.S., while some foreign balances may be difficult or costly to transfer. Total debt and capital leases were approximately $401 million, including $396 million classified as current. The company had $395 million outstanding under its term loan, bearing an 8.84% weighted-average effective rate, and approximately $85 million of letters of credit under its asset-based revolving facility.
At year-end, ABL excess availability was approximately $19 million, only slightly above the $18.75 million threshold that can trigger cash dominion and fixed-charge coverage requirements. Equity was a $3 million deficit, and redeemable Series A preferred stock was carried at $173 million. No common dividends were declared or paid in 2018 or 2017; preferred dividends were not declared for the third and fourth quarters of 2018.
Material changes versus 2017
- Print Systems revenue decreased $47 million to $895 million and Operational EBITDA fell $22 million to $27 million, pressured by declining volume and pricing and higher aluminum costs, partly offset by manufacturing efficiencies and cost reductions.
- Enterprise Inkjet Systems revenue declined $8 million to $136 million, while Operational EBITDA improved $1 million to $4 million as cost controls offset weakness in legacy Versamark and Prosper components.
- Consumer and Film revenue declined $9 million to $189 million; its Operational EBITDA loss widened by $1 million to $19 million.
- Advanced Materials and 3D Printing Technology’s Operational EBITDA loss narrowed by $13 million to $14 million, mainly from lower investment.
- Gross profit decreased $30 million. SG&A fell $14 million and R&D fell $16 million, reflecting lower spending. Restructuring charges declined to $17 million from $38 million; 2018 restructuring actions eliminated approximately 285 positions.
- Kodak recorded a $13 million impairment of the Kodak trade name in 2018. In 2017, it recorded a $56 million goodwill impairment and other asset impairments, including charges tied to a cancelled touch-screen program.
- Flexographic Packaging revenue was $148 million in 2018, versus $145 million, but the business recorded a $7 million discontinued-operations loss, versus $3 million earnings in 2017.
Outlook, risks and unusual items
- Going concern and refinancing: Management and the auditor state that substantial doubt exists about Kodak’s ability to continue as a going concern. The $395 million term loan was due September 3, 2019; the ABL facility could terminate June 5, 2019 unless the term debt maturity was repaid, refinanced, extended, or the ABL agreement amended. Kodak said it lacked committed refinancing and sufficient liquidity to repay debt on its then-current terms.
- Mitigation plans remain uncertain: Kodak planned to use proceeds from the contracted Flexographic Packaging sale to reduce term debt and refinance or amend the remaining debt. The stated purchase price was $340 million, subject to adjustments; closing was expected in the second quarter of 2019. Neither the sale nor refinancing was assured. An ABL reporting-covenant waiver was obtained March 31, 2019, but it did not waive potential cross-defaults related to the term loan.
- Cash generation: Kodak said it had not generated positive operating cash flow in the prior five years. It warned that declining Print Systems revenue and earnings, restructuring payments, investment needs, preferred-stock obligations, and debt service could further constrain liquidity. Management planned additional cost actions and lower or delayed technology investment.
- Operating outlook: Kodak expects continued pressure on mature and declining businesses. Growth priorities include SONORA plates, Prosper and Ultrastream inkjet, software and services, advanced materials, and 3D printing. 2018 restructuring actions are expected to generate approximately $26 million in annual cash savings, most effective by the end of the second quarter of 2019. Planned 2019 capital expenditures were $15 million to $25 million.
- Other notable items and risks: Kodak received a $16 million net payment in 2018 from a Korean tax refund agreement. It received aluminum tariff exemptions in January 2019, but commodity and trade costs remain risks. A major Eastman Business Park tenant, representing approximately 20% of segment revenue, did not renew its lease after expiration in Q3 2018. Environmental liabilities above the $99 million threshold could expose Kodak to 50% of excess costs, without a stated maximum. Litigation, Brazilian tax disputes, pension assumptions, customer concentration at certain segments, and preferred-stock dilution and dividend arrears are additional items to monitor.
- Controls and audit: The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting, while adding a going-concern explanatory paragraph. Management also reported effective disclosure controls and internal controls at year-end.
Most important facts for investors to verify
- Whether the Flexographic Packaging sale closed on acceptable terms, the net proceeds available after adjustments, and how much debt was repaid.
- Whether Kodak refinanced, extended, or amended the term loan before the relevant maturity and ABL deadlines, and whether any covenant or cross-default issue arose.
- Actual U.S. liquidity, ABL excess availability, cash-dominion status, and the accessibility of cash held outside the U.S.
- Whether operating cash flow turns positive and whether forecast restructuring savings are realized as scheduled.
- Revenue, pricing, aluminum costs and profitability trends in Print Systems, and growth and cash contribution from the remaining businesses after the Flexographic Packaging divestiture.
- The status of Series A preferred dividends in arrears, the mandatory redemption obligation in 2021, and potential common-share dilution on conversion.
- Unresolved environmental and legal exposures, as well as the effect of lease changes and tenant departures at Eastman Business Park.