Eastman Kodak Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Figures are unaudited and in millions of dollars except per-share data. Kodak is a commercial printing and imaging company; its seven reportable segments include Print Systems, Micro 3D Printing and Packaging, Software and Solutions, Consumer and Film, and Enterprise Inkjet Systems.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $380 | $425 | $1,139 | $1,270 |
| Gross profit / margin | $92 / 24% | $94 / 22% | $278 / 24% | $261 / 21% |
| Continuing operations, pretax | $26 | $8 | $50 | $(31) |
| Continuing operations, net | $22 | $(6) | $34 | $(58) |
| Net earnings (loss) attributable to Kodak | $16 | $(22) | $5 | $(104) |
| Net cash used in operating activities | Not stated for quarter | Not stated for quarter | $(32) | $(143) |
- Q3 basic and diluted EPS were $0.38 and $0.37; nine-month basic and diluted EPS were each $0.12. Q3 continuing-operations EPS was $0.62 basic and $0.60 diluted; nine-month continuing-operations EPS was $0.81 basic and $0.80 diluted.
- Q3 revenue declined 10.6%; nine-month revenue declined 10.3%. Despite lower sales, gross margin improved, reflecting cost reductions and lower depreciation, particularly in Print Systems.
- SG&A was $43 in Q3 and $133 year to date, down $9 and $29, respectively. R&D was $11 in Q3 and $30 year to date; nine-month R&D decreased $6.
- Q3 Other operating income included a $6 legal-reserve release. Nine-month results included $10 of DuPont litigation proceeds and a $7 gain on the sale of brand-protection assets.
Balance sheet, debt and liquidity
- At September 30, 2016, cash and cash equivalents were $489, versus $546 at December 31, 2015. Debt was $672, including $8 current and $664 long-term. Total liabilities were $2,004; total equity was a deficit of $23.
- Nine-month cash decreased $57 to $490 in the cash-flow statement, which includes $1 classified as held for sale. Operating cash use was $32, investing cash use $7, and financing cash use $20. Capital expenditures were $26.
- The amended asset-based revolving facility has $150 of commitments and approximately $28 of excess availability; approximately $118 of letters of credit were outstanding. Availability is borrowing-base-dependent. Kodak reported covenant compliance at quarter end. If availability falls below $18.75, cash dominion and a minimum 1.00 fixed-charge coverage ratio may apply.
- The term-loan secured-leverage covenant required a ratio no greater than 2.75 to 1. Kodak said covenant compliance in future periods could depend on asset monetization, refinancing, equity issuance, or similar actions.
- Cash balances outside the U.S. totaled approximately $230, including $123 in China, where restrictions may limit transferability. Kodak stated that it believed liquidity was adequate for operating and investing needs for the next year.
Changes versus the prior comparable period
- Revenue fell primarily on lower volume and pricing in Print Systems, and lower sales in Consumer and Film and Software and Solutions. Print Systems revenue was down $28 in Q3 and $76 year to date; Software and Solutions was down $10 and $22; Consumer and Film was down $10 and $31.
- Print Systems’ nine-month Operational EBITDA rose to $67 from $62, with manufacturing savings offsetting competitive price declines. Consumer and Film’s Operational EBITDA fell to $1 from $12 in Q3 and to $18 from $38 year to date. Segment Operational EBITDA is a non-GAAP measure defined by Kodak.
- Cash used in operations improved by $111 year over year for the first nine months, supported by improved earnings and working-capital movements. Cash nevertheless declined $57 during the period.
- Kodak reclassified its Prosper enterprise inkjet business as discontinued operations in all periods presented and changed its segment profit measure in 2016. These changes affect comparability.
- Remeasurement of certain retirement plans increased the recognized defined-benefit obligation by $146. Nine-month other comprehensive loss attributable to Kodak was $139, primarily reflecting pension and postretirement plan changes.
Outlook, commentary and material risks
- Kodak expected the Prosper business sale to close in the first half of 2017. Prosper reported Q3 revenue of $29 and a net loss of $10; it had $139 of assets and $33 of liabilities classified as held for sale at September 30.
- Management forecast approximately $15 of annual cash savings from 2016 restructuring actions, with most savings expected to be in effect by year-end. Kodak expected 2016 capital expenditures of $60–$65, including approximately $30 at RED, its utilities variable-interest entity.
- The RED boiler and steam-equipment upgrade, including a natural-gas pipeline, was estimated to cost more than $90 and was expected to be completed in Q4 2017. Kodak may be required to deconsolidate RED as its unaffiliated parent contributes capital.
- After quarter end, Kodak entered an agreement to issue $200 gross proceeds of 5.50% Series A convertible preferred stock to investment funds managed by Southeastern Asset Management; closing was expected in November 2016. Kodak intended to use the proceeds and cash on hand to prepay $262 of second-lien term loans. The preferred stock is senior to common stock, carries cumulative cash dividends, and is convertible into common shares subject to stated terms and limits. Shareholder written consents approving specified transaction matters were obtained.
- Key risks include sustaining profitability and cash flow amid declining legacy businesses, covenant compliance and debt service, refinancing or raising additional capital, and completing the Prosper sale. Other risks include foreign-exchange, interest-rate and commodity exposure; competition; execution of new-product commercialization; and the ability to monetize assets.
- Brazilian litigation and tax matters remain contested. Kodak disclosed approximately $13.5 of accruals for claims aggregating approximately $210; separately, it reported $56 of unreserved contingencies for which loss was at least reasonably possible. Environmental obligations at Eastman Business Park could require Kodak to pay 50% of remediation costs above $99, with no stated cap; no liability was recorded for that guarantee.
- Kodak disclosed no material adverse outcome as probable for its other litigation based on information then available, but cautioned that judgments or settlements could affect results or cash flows. Controls and procedures were reported effective.
Important facts for investors to verify
- Whether the preferred-stock issuance closed as expected, and the actual proceeds, dividends, conversion terms, and use of funds for debt repayment.
- Progress and final economics of the proposed Prosper sale, including treatment of related intercompany liabilities and continued discontinued-operation losses.
- Future borrowing-base availability, covenant headroom, and the secured-leverage ratio, especially if operating results or asset monetization fall short.
- Realization of restructuring savings and the costs, funding, and schedule for RED’s upgrade.
- Developments in Brazilian tax and litigation matters and the potential exposure from environmental remediation above the $99 threshold.
- Whether revenue declines in Print Systems, Consumer and Film, and Software and Solutions continue, and whether cost savings can preserve margins and cash flow.