Eastman Kodak Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. Kodak describes itself as a global commercial printing and imaging company, with Print Systems its core recurring-revenue business. Figures below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $446 million | $568 million | $1,331 million | $1,584 million |
| Gross profit / margin | $99 million / 22% | $156 million / 27% | $262 million / 20% | $347 million / 22% |
| Operating income before interest, other charges, reorganization items and taxes | $21 million | $58 million | $4 million | $(9) million |
| Net income (loss) attributable to Kodak | $(22) million | $17 million | $(104) million | $(81) million |
| Basic loss per share | $(0.53) | $0.41 earnings | $(2.48) | $(1.94) |
| Operating cash flow | Not stated separately | Not stated separately | $(143) million | $(136) million |
Cash and cash equivalents were $521 million at September 30, down from $712 million at December 31, 2014. Total debt carrying value was approximately $674 million ($4 million current and $670 million long-term), versus $677 million at year-end 2014. Current assets were $1.325 billion and current liabilities $502 million. The ABL facility had $26 million of net availability. Cash-flow information is reported year to date: investing cash outflow was $29 million, financing cash outflow $5 million, and capital expenditures $25 million.
Changes versus comparable periods
- Revenue fell 21.5% in Q3 and 16.0% year to date. Management attributed the Q3 decline mainly to $52 million less non-recurring intellectual-property licensing revenue, $41 million of unfavorable foreign exchange, and $24 million of Consumer and Film volume declines. Year-to-date drivers also included $59 million of Consumer and Film volume declines and $25 million of unfavorable Print Systems price/mix.
- Gross profit declined $57 million in Q3 and $85 million year to date. Lower licensing revenue, currency effects, lower volumes and Print Systems pricing pressure were partly offset by cost reductions.
- Q3 operating expenses included lower SG&A ($59 million versus $67 million) and R&D ($15 million versus $20 million). Year-to-date, SG&A was $179 million versus $239 million and R&D was $50 million versus $73 million.
- Q3 continuing operations moved to a $13 million loss from $31 million income; the nine-month continuing-operations loss widened to $90 million from $82 million. The Q3 income-tax provision was $15 million on $2 million of pretax income; management cites unrecognized tax benefits on losses and foreign withholding taxes among the causes.
Segments and management commentary
- Print Systems: Q3 revenue decreased 13% to $278 million; Operational EBITDA was $28 million versus $31 million. Pricing pressure and currency effects were partly offset by cost savings and manufacturing efficiency. SONORA process-free plates are intended to support premium pricing and customer cost savings.
- Enterprise Inkjet Systems: Revenue declined 9% to $39 million, while Operational EBITDA improved to a $4 million loss from a $12 million loss. Prosper portfolio revenue increased 27% in Q3; management expects the legacy Versamark business to continue declining as Prosper scales.
- Micro 3D Printing and Packaging: Revenue was flat at $32 million; Operational EBITDA was $5 million versus $1 million. Flexcel NX plate volume rose 32% in Q3. Kodak is developing copper-mesh touch-sensor technology independently following the end of its Unipixel partnership.
- Software and Solutions: Revenue rose 11% to $30 million and Operational EBITDA was $2 million versus $1 million, supported by government-contract activity.
- Consumer and Film: Revenue declined 30% to $64 million and Operational EBITDA fell to $12 million from $24 million. Management expects revenues to continue declining.
- Intellectual Property Solutions: Q3 and nine-month revenue was zero, versus $52 million and $70 million, respectively, in 2014, when non-recurring licensing arrangements were recognized.
Outlook, risks and unusual items
- Kodak reported no formal revenue or earnings guidance. It expects 2015 capital expenditures of approximately $38 million, versus $25 million spent in the first nine months. Restructuring actions taken in that period are expected to yield approximately $40 million in annual cash savings, with most expected to be in effect by year-end.
- Management said liquidity was adequate for operating and investing needs, subject to no acceleration of debt obligations. The company was compliant with credit covenants at quarter-end, but its EBITDA exceeded the amount needed to satisfy covenant ratios by only approximately $18 million. The maximum permitted secured leverage ratio tightened to 3.25:1 in June 2015 and was scheduled to tighten to 2.75:1 on December 31, 2015. Kodak warned that future compliance, particularly in Q1 2016, may depend on an asset monetization, refinancing, equity raise or similar transaction; failure to comply could make debt immediately payable.
- Of the $521 million cash balance, $255 million was held outside the U.S.; management cautioned that foreign cash may not be readily transferable. Approximately $119 million was held in China, where local restrictions may affect availability.
- Q3 included a $3 million gain for assets received for no monetary consideration in connection with the Unipixel termination. Discontinued operations recorded an $8 million after-tax loss in Q3, including $5 million of pretax costs related to the final deferred closing of the Personalized and Document Imaging divestiture.
- Brazilian tax and other disputes included approximately $161 million of claims, with about $11 million accrued; the unreserved portion with at least a reasonable possibility of loss was approximately $43 million. Kodak also disclosed an environmental guarantee with no recorded liability that could expose it to 50% of costs above $99 million for specified Eastman Business Park historical liabilities, without a stated maximum.
- Other risks include foreign-exchange exposure, declining legacy and film markets, execution of growth initiatives, and litigation. Kodak said it did not consider existing litigation outcomes probable to cause a material adverse effect, while noting that litigation remains unpredictable. Disclosure controls were reported effective.
Key facts for investors to verify
- Whether operating cash burn and declining cash stabilize, and how much reported cash is accessible for general corporate use.
- Progress toward the $40 million restructuring savings target and the associated remaining charges and cash payments.
- Headroom under secured leverage covenants after the scheduled December 2015 tightening, including whether non-operational transactions are needed.
- Whether Prosper, Packaging, Software and Solutions growth can offset declines in Consumer and Film, Print Systems pricing pressure, and the loss of non-recurring IP licensing revenue.
- Developments in Brazilian disputes, environmental obligations, and the contingent earn-out or repayment provisions associated with prior business disposals.