Eastman Kodak Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012. Kodak and its U.S. subsidiaries remained debtors-in-possession under Chapter 11. The unaudited statements assume continued operation as a going concern, but management stated that substantial doubt exists about Kodak’s ability to continue as a going concern.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $849 million | $928 million |
| Gross profit / margin | $185 million / 22% | $60 million / 6% |
| Continuing-operations earnings (loss) | $295 million | $(310) million |
| Net earnings (loss) | $283 million | $(366) million |
| Operating cash flow | $(273) million | $(68) million |
| Cash and cash equivalents, March 31 | $1.174 billion | $1.361 billion |
- Revenue fell 9%, primarily from volume declines across segments. Price/mix partly offset the decline. Q1 2013 sales included approximately $31 million from a non-recurring intellectual-property licensing agreement; Q1 2012 licensing revenue included a $61 million reduction related to sharing a Korean withholding-tax refund.
- Reported earnings were substantially affected by unusual items. Other operating income included a $535 million gain on sale of digital imaging patents and a $34 million gain on sale of property in Mexico, partly offset by a $77 million goodwill impairment. Reorganization costs were $120 million, including a $62 million provision for expected allowed claims. Segment earnings before interest, other charges, reorganization items and taxes were $21 million in total.
- Gross margin improved to 22% from 6%, while SG&A declined 23% to $160 million and R&D declined 42% to $35 million, largely due to cost reductions. Interest expense was $30 million; the income-tax provision was $7 million, an effective rate of 2.3%.
- Operating cash outflow increased to $273 million, including $274 million used in continuing operations. Investing provided $526 million, principally from $534 million of asset-sale proceeds, including the patent transaction. Financing used $214 million, reflecting debt repayments. Cash increased $39 million during the quarter.
- At March 31, current assets were $2.553 billion and current liabilities $2.025 billion. Total liabilities were $7.417 billion, including $2.746 billion subject to compromise; total deficit was $3.321 billion. Reported debt comprised $862 million current, $370 million long-term and $683 million classified as liabilities subject to compromise.
Material changes and business performance
- Graphics, Entertainment and Commercial Films revenue rose 1% to $387 million and segment earnings improved to $38 million from a loss of $84 million, with better pricing/mix and lower costs.
- Digital Printing and Enterprise revenue fell 9% to $197 million; its loss narrowed to $8 million from $89 million. Personalized and Document Imaging revenue fell 20% to $265 million, while its segment loss remained $9 million.
- Kodak received approximately $530 million from the digital imaging patent sale and related licensing transaction in February. It used approximately $419 million to prepay the former senior DIP term loan and repaid the remaining term loan when new financing was arranged.
- On March 22, Kodak entered a $848 million Junior DIP facility, including approximately $473 million of new-money loans and $375 million of rolled-up second-lien debt. New-money proceeds were approximately $450 million. The new financing carries high interest rates and is generally due no later than September 30, 2013, subject to earlier events.
Liquidity, outlook and principal risks
- Kodak had $1.174 billion cash at quarter-end, but $769 million was held outside the U.S.; some overseas cash may be difficult to transfer. Approximately $250 million was held in China, where transfer limitations apply. U.S. cash was approximately $405 million. The senior DIP revolving facility had only about $29 million of borrowing availability, subject to borrowing-base limits, and $127 million of letters of credit outstanding.
- Kodak reported compliance with DIP covenants at March 31, 2013. The agreements require at least $100 million of U.S. liquidity, specified EBITDA levels and achievement of restructuring milestones. Failure to meet covenants or deadlines could accelerate debt and jeopardize operations.
- There was no quantified company-wide revenue or earnings guidance in the provided filing text. Management expected Q1 restructuring actions to generate approximately $20 million of annual cash savings, with most savings expected to be in place by the end of the first half of 2013.
- Emergence depended on Bankruptcy Court approval of a reorganization plan, adequate exit financing and asset-sale proceeds. Conversion of up to $654 million of Junior DIP loans into a five-year exit facility was conditional, including plan approval by September 15, 2013, an effective date by September 30, at least $200 million of new-money principal repayment, resolution of U.K. pension obligations and at least $600 million of qualifying asset-sale proceeds.
- Subsequent to quarter-end, Kodak and the U.K. Kodak Pension Plan parties entered a global settlement on April 26, 2013. It contemplated at least $120 million in payments by Kodak Limited and the KPP’s acquisition of the Personalized Imaging and Document Imaging businesses, with at least $445 million settled in cash (no more than $325 million from KPP assets, excluding the separate payments). Court approval and other closing conditions remained outstanding. Kodak withdrew its proposed Brother Document Imaging sale motion following the settlement.
- Other key exposures include the U.K. pension plan’s approximately $1.4 billion underfunding under U.S. GAAP and an asserted approximately $2.8 billion unsecured guarantee claim; approximately $21.5 billion of liquidated proofs of claim filed in the Chapter 11 cases; environmental and legal matters; and approximately $67 million of unreserved Brazilian tax contingencies for which loss was reasonably possible.
Important facts for investors to verify
- Whether the U.K. pension settlement and asset transfers receive all required court, regulatory and lender approvals and close on the stated terms.
- Whether Kodak meets DIP liquidity, EBITDA and reorganization milestones, and obtains sufficient exit financing before the September 2013 maturities.
- How much of reported earnings and improved gross margin is sustainable after excluding the patent and property gains, impairment and bankruptcy-related items.
- Whether operating cash burn improves and how much of reported cash is actually available to U.S. debtors, given overseas cash restrictions and DIP requirements.
- How creditor claims, disputed liabilities and the final reorganization plan affect debt recovery, existing equity and Kodak’s post-bankruptcy business structure. Kodak said distributions to existing equity were unlikely, and warned investment in its securities before an approved disclosure statement was highly speculative.