Eastman Kodak Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Kodak emerged from Chapter 11 in September 2013 and applied fresh-start accounting; accordingly, 2014 successor results are not directly comparable with 2013 predecessor results.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue from continuing operations | $482 million | $594 million |
| Gross profit / gross margin | $86 million / 18% | $149 million / 25% |
| Loss from continuing operations | $53 million | Earnings of $324 million |
| Net income (loss) attributable to Kodak | $(36) million | $283 million |
| Basic and diluted EPS | $(0.86) | $1.04 |
| Operating cash flow | $(44) million | $(259) million |
- Revenue declined 19%. Management attributed the decline principally to lower Entertainment Imaging and Commercial Films demand, Consumer Inkjet sales, and lower intellectual-property licensing revenue.
- Gross margin fell 7 percentage points, reflecting weaker licensing revenue and higher manufacturing and other costs. SG&A declined 26% to $87 million; R&D increased 8% to $27 million.
- Both reportable segments recorded losses: Graphics, Entertainment and Commercial Films (GECF) lost $30 million versus earnings of $16 million; Digital Printing and Enterprise (DP&E) lost $25 million versus $18 million.
- Cash and cash equivalents were $809 million at quarter-end, down from $844 million at year-end. Investing activities provided $16 million and financing activities used $1 million; the net cash decrease was $35 million.
- Total debt was approximately $677 million, including $4 million current and $673 million long-term. Long-term debt fair value was reported at $702 million. ABL credit-facility net availability was $28 million.
- Current assets were $1.938 billion and current liabilities $839 million. Total assets were $3.082 billion and total liabilities $2.466 billion.
Changes, outlook and management commentary
- The large year-over-year earnings swing reflects unusual prior-period items and the post-bankruptcy accounting change, not solely underlying operations. Q1 2013 included $494 million of net other operating income, including a $535 million gain on sale of digital imaging patents, partly offset by a $77 million goodwill impairment and other items. Q1 2013 also included $120 million of reorganization costs versus $5 million in Q1 2014.
- Discontinued operations produced $19 million of earnings in Q1 2014 versus a $41 million loss in Q1 2013. The disposed Personalized and Document Imaging businesses generated $30 million revenue in Q1 2014 versus $247 million in Q1 2013. KPP purchasers agreed to pay $20 million additional consideration; $13 million was received in March, with the balance due within a year. Up to $35 million of the original purchase price may be repayable if specified EBITDA targets are not met.
- Q1 restructuring charges were $13 million, covering cost reductions including approximately 200 positions. Kodak estimated about $17 million of annual cash savings, with most expected to take effect by the second half of 2014. Q1 restructuring cash payments were approximately $14 million.
- Kodak expected approximately $40 million of capital expenditures for 2014 and forecast about $12 million of pension contributions/benefit payments and $8 million of postretirement benefit payments for the remainder of the year. Management considered liquidity adequate, while noting restrictions and potential tax costs on repatriating foreign cash; approximately $532 million of cash was held outside the U.S., including $249 million in China.
- Management described ongoing declines in film-related and consumer ink businesses and a strategy to manage those declines while growing commercial imaging. The filing provides no quantified revenue or earnings guidance.
Risks, contingencies and unusual items
- Environmental liabilities accrued were $80 million, with expenditures expected over as long as 30 years. The proposed $49 million Eastman Business Park trust settlement remained subject to required approvals and conditions; Kodak could owe 50% of historical liabilities exceeding $99 million under the agreement.
- Unreserved Brazilian tax contingencies with at least a reasonable possibility of loss were approximately $40 million. Kodak had posted $10 million cash and liens on Brazilian assets with net book value of approximately $104 million as security.
- Other posted support included $125 million of letters of credit under the ABL, $8 million of bank guarantees/letters of credit, $22 million of surety bonds and $107 million of cash deposits. Customer guarantees had a maximum potential payment of $13 million; guarantees for consolidated subsidiaries were $80 million.
- Kodak cited risks including sustaining profitability and cash forecasts, complying with credit covenants, obtaining financing if needed, funding investment and debt service, resolving claims, and exposure to currency, commodity and interest-rate changes. A 1% LIBOR increase above applicable floors would raise annual interest expense by approximately $7 million.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- How much of the reported revenue and margin decline reflects continuing underlying trends versus discontinued operations, licensing timing and fresh-start accounting.
- Whether the planned $17 million annual restructuring savings are achieved and whether continuing segment losses improve.
- Availability and practical accessibility of cash, including overseas restrictions, alongside the $28 million ABL net availability and debt covenant requirements.
- Final implementation and funding of the Eastman Business Park settlement, and developments in Brazilian tax and other litigation exposures.
- Whether the KPP deferred closings and EBITDA-linked purchase-price provisions result in further cash receipts or repayments.