Eastman Kodak Company — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2017, compared with the periods ended September 30, 2016. Kodak is a commercial printing and imaging company, with seven reportable segments. Unless noted otherwise, amounts are in millions of dollars.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $379 | $411 | $1,117 | $1,211 |
| Gross profit / margin | $87 / 23% | $93 / 23% | $261 / 23% | $288 / 24% |
| Operating loss before interest, other items and taxes | $(54) | $32 | $(46) | $74 |
| Loss from continuing operations before tax | $(58) | $15 | $(37) | $23 |
| Net income (loss) attributable to Kodak | $(46) | $16 | $(35) | $5 |
| Basic and diluted EPS | $(1.20) | $0.38 basic; $0.37 diluted | $(1.15) | $0.12 |
| Segment Operational EBITDA | $15 | $22 | $37 | $64 |
Revenue fell 8% in both the quarter and year-to-date period. Gross margin held at 23% in Q3 but declined year to date. Print Systems remained the largest segment, contributing $232 million of Q3 revenue, but its Operational EBITDA fell to $13 million from $27 million. Enterprise Inkjet Systems generated $1 million of segment Operational EBITDA versus a loss of $8 million a year earlier; Flexographic Packaging earned $7 million in both quarters.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $(77) million versus $(32) million in 2016; investing cash flow was $(25) million versus $(16) million, and financing cash flow was $(19) million versus $(20) million. Cash, cash equivalents and restricted cash decreased $112 million to $366 million.
- At September 30, 2017, cash and cash equivalents were $342 million, restricted cash was $24 million, current assets were $988 million and current liabilities were $411 million.
- Debt totaled approximately $410 million: $8 million of short-term borrowings/current maturities and $402 million of long-term debt. Redeemable Series A preferred stock was carried at $162 million; it bears a 5.5% cumulative cash dividend and is mandatorily redeemable in 2021 if not converted.
- Shareholders’ deficit was $117 million. Pension and other postretirement liabilities were $544 million.
- Unused availability under the Amended Credit Agreement was $20 million. This was only $1.25 million above the $18.75 million threshold that triggers the minimum fixed-charge coverage test and potential cash dominion controls.
Material changes and unusual items
- Kodak recorded a $56 million goodwill impairment in Prepress Solutions after an interim test prompted by weaker financial projections and a lower market capitalization. Goodwill declined from $88 million at year-end 2016 to $32 million.
- Cancellation of the copper-mesh touch-screen program resulted in $20 million of Q3 asset impairment charges: $8 million for property, plant and equipment and $12 million for intangible assets.
- Other income included a $6 million Q3 gain and a $42 million nine-month gain from changes in the fair value of embedded conversion features of the Series A preferred stock.
- Kodak decided in April 2017 to retain the Prosper business; its results were reclassified from discontinued to continuing operations for all periods presented. The filing also recasts prior-period segment results for organizational and presentation changes.
- Q3 revenue was supported by a $6 million royalty payment following a brand-license modification. The payment satisfied annual minimum royalty commitments through 2023.
Outlook, management commentary and risks
- Kodak expects its 2017 restructuring actions to generate approximately $23 million of annual cash savings, with most savings expected to be in effect by year-end. It expects total 2017 capital expenditures of $30–$35 million, including investment in added FLEXCEL NX plate capacity in Oklahoma.
- Management stated that liquidity was adequate for operating and investing needs over the next year. However, it noted that future compliance with the secured leverage covenant may depend on asset monetization, refinancing, equity or similar transactions. Kodak reported covenant compliance at September 30, 2017.
- Management cited continued pricing and volume pressure in Print Systems, declines in mature businesses, and the need to improve sustainable profitability and cash flow. It expects SONORA products, FLEXCEL NX consumables and Prosper growth to help offset some pressures; Prosper cost-reduction actions are intended to focus investment on Ultrastream and selected applications. No numerical full-year revenue or earnings guidance is stated in the supplied filing text.
- A tenant representing approximately 30% of Eastman Business Park segment revenue notified Kodak it does not plan to renew its lease when it expires in Q3 2018.
- Brazilian legal and tax matters included approximately $210 million of claims; Kodak had accrued approximately $11 million and disclosed about $54 million of unreserved contingencies with at least a reasonable possibility of loss. Kodak said it would vigorously defend the matters. A separate Eastman Business Park environmental guarantee could require payment of 50% of qualifying costs above $99 million, with no stated cap; no liability was recorded.
- Other risks include limited credit availability and covenant headroom, dependence on cash held outside the U.S. (including restrictions affecting funds in China), foreign-exchange and variable-rate debt exposure, possible impairment of tax attributes following an ownership change, and the execution of restructuring and growth plans.
Important facts for investors to verify
- Whether revenue declines and Print Systems pricing and volume pressures persist, and whether segment Operational EBITDA stabilizes.
- Whether operating cash flow improves and the $20 million credit availability remains above the covenant threshold.
- Progress on the $23 million expected annual restructuring savings, Prosper cost reductions and the FLEXCEL NX capacity project.
- Whether the Eastman Business Park tenant departs in 2018 and the resulting effect on segment revenue and asset utilization.
- Developments in Brazilian contingencies, environmental guarantees, tax-attribute limitations and the Series A preferred stock’s dividends, conversion terms and 2021 redemption obligation.