EASTMAN KODAK CO quarterly report, Q2 FY2012

Eastman Kodak Company — Q2 2012 Form 10-Q

Reporting period: Three and six months ended June 30, 2012. Kodak and its U.S. subsidiaries were operating as debtors-in-possession after filing for Chapter 11 on January 19, 2012; foreign subsidiaries were not debtors in the cases.

Financial results and liquidity

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Net sales	$1.077 billion	$1.485 billion	$2.042 billion	$2.807 billion
Gross profit / margin	$175 million / 16%	$211 million / 14%	$213 million / 10%	$336 million / 12%
Net loss	$299 million	$179 million	$665 million	$425 million
Loss per share	$1.10	$0.67	$2.45	$1.58

Cash flow: First-half operating cash outflow was $152 million, compared with $847 million in 2011. The improvement primarily reflected non-payment of pre-petition claims, partly offset by about $100 million of restructuring and reorganization payments. Investing activities provided $2 million; financing activities provided $553 million, including $686 million of DIP loan proceeds and $41 million from a sale-leaseback.
Cash and liquidity: Cash and equivalents were $1.257 billion at June 30, up from $861 million at year-end. Only about $495 million was held in the U.S.; management noted much foreign cash supports local operations or is difficult to transfer. Approximately $355 million was held in China. DIP revolver availability was about $68 million, subject to borrowing-base limits; $114 million of letters of credit were outstanding.
Debt and balance sheet: Reported current debt was $42 million and long-term debt $1.434 billion; a further $683 million of debt was classified as liabilities subject to compromise. Total liabilities subject to compromise were $2.968 billion. Total liabilities were $7.573 billion against assets of $4.618 billion, leaving a $2.955 billion deficit. The company reported compliance with DIP covenants at quarter-end.
Other metrics: SG&A was $216 million in Q2 and $443 million for the half, down 25% and 26%, respectively. First-half restructuring costs were $113 million on the income statement, with $116 million in total charges including amounts in cost of sales. The company recorded a first-half income tax benefit of $111 million.

Changes versus the prior comparable period

Revenue declined 27% both for Q2 and the first half. Kodak attributed the reductions chiefly to lower volumes, including the planned exit from dedicated digital capture devices, secular photofinishing declines, and fewer movie releases affecting entertainment imaging. Foreign exchange also reduced sales.
Consumer Segment revenue fell 37% in Q2 and 40% for the half; Commercial Segment revenue fell 21% and 19%, respectively. Segment operating losses before interest, other income and taxes improved, but remained losses: $53 million in Q2 versus $135 million, and $281 million for the half versus $389 million.
Q2 gross margin improved to 16% from 14%, principally from favorable consumer inkjet and photofinishing price/mix. First-half gross margin fell to 10% from 12%, with the $61 million licensing revenue reduction and capture-device exit weighing on results.
Net loss increased despite lower SG&A and R&D. Q2 included $160 million of reorganization items; first-half reorganization items were $248 million, including professional fees, DIP financing costs and provisions for expected allowed claims.

Outlook, risks and unusual items

Management said available cash, operating cash, asset-sale proceeds, intellectual-property monetization and DIP financing were expected to fund anticipated needs through the next 12 months, but warned there was no assurance funds would be sufficient or covenants would remain satisfied. The filing states that substantial doubt exists about Kodak’s ability to continue as a going concern.
The DIP facility provides up to $950 million and must be repaid by the earliest specified termination events, including July 20, 2013. It imposes liquidity, EBITDA and other milestones; minimum U.S. liquidity requirements were $150 million through September 2012 and $100 million thereafter, subject to the agreement’s terms.
Kodak expected approximately $164 million of annual savings from first-half restructuring actions, with most expected to be in effect by year-end 2012. It planned to exit dedicated capture devices and the remaining Kodak Gallery operations in Q3 2012. Management also described balancing investment in growth businesses against the need to improve liquidity.
The bankruptcy plan remained unresolved. The company’s exclusive period to file a plan was extended through October 15, 2012; DIP milestones called for a draft plan by January 15, 2013 and filing an acceptable plan and disclosure statement by February 15, 2013. A sale of all or part of the business remained a possible alternative.
Kodak was pursuing an auction of its digital capture and imaging systems and services patent portfolios, with successful bidder designation scheduled by August 13, 2012. Net proceeds from digital imaging patent sales must be applied to the DIP facility; second-lien holders also have negotiated rights to certain proceeds.
As of August 2, creditors had filed approximately 5,900 proofs of claim totaling about $20.5 billion in liquidated claims. Kodak was reconciling claims; their ultimate amount and treatment were undetermined and could materially adjust the financial statements. The reported $2.968 billion of liabilities subject to compromise is the company’s estimate, not a final allowed-claims total.
Other material exposures include the U.K. Kodak Pension Plan guarantee, for which the trustee asserted an unsecured claim of approximately $2.8 billion; a Passaic River environmental matter with alleged damages ranging from hundreds of millions to several billion dollars, not reasonably estimable by Kodak; and $63 million of unreserved Brazilian tax contingencies for which loss was reasonably possible.
The company received a $123 million Korean withholding-tax refund; under agreements with licensees, their $61 million share reduced licensing revenue. Kodak also deferred recognition of an approximately $35 million gain on a Mexico sale-leaseback.

Important facts for investors to verify

Progress and court approval of a reorganization plan, the treatment of existing equity and debt, and whether exit financing can be secured.
DIP facility availability, covenant compliance and liquidity, particularly the availability and transferability of cash held outside the U.S.
Outcome and proceeds of the patent-portfolio auction, and the portion of proceeds available to Kodak after DIP and second-lien claims.
Resolution of creditor proofs of claim and the potential difference between filed claims and liabilities recorded subject to compromise.
Whether revenue declines stabilize and planned restructuring savings materialize without undermining investment in growth businesses.
Developments in pension-plan obligations, the Passaic River matter and other bankruptcy-related litigation and contingencies.