Eastman Kodak Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing covers Kodak and its consolidated subsidiaries; U.S. entities were operating as debtors-in-possession after filing for Chapter 11 on January 19, 2012, while foreign subsidiaries were not included in the filing.
Financial performance and position
Amounts are in millions of dollars, except per-share figures and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,018 | $1,261 | $2,994 | $3,677 |
| Gross profit | $160 | $180 | $404 | $483 |
| Gross margin | 16% | 14% | 14% | 13% |
| Loss from continuing operations | $(308) | $(214) | $(903) | $(590) |
| Net loss attributable to Kodak | $(312) | $(222) | $(977) | $(647) |
| Net loss per share | $(1.15) | $(0.83) | $(3.60) | $(2.41) |
- Sales and earnings: Sales fell 19% in both the quarter and year-to-date periods, primarily on lower volumes across all segments. Q3 gross margin improved to 16%, but gross profit dollars declined. The year-to-date loss includes a $61 million reduction in licensing revenue reflecting Kodak’s share of a Korean withholding-tax refund shared with licensees.
- Operating costs and unusual items: Q3 restructuring costs and other were $117 million, versus $17 million a year earlier; nine-month costs were $206 million versus $77 million. Reorganization items were $56 million for Q3 and $304 million year to date, including professional fees, DIP financing costs and expected allowed claims. Interest expense was $41 million for Q3 and $117 million year to date. The nine-month tax benefit was $84 million.
- Segments: Q3 sales were $406 million in Graphics, Entertainment and Commercial Films (down 26%), $230 million in Digital Printing and Enterprise (down 14%), and $382 million in Personalized and Document Imaging (down 14%). Segment operating results before interest and specified other items were losses of $4 million and $43 million, respectively, for the first two segments, and income of $10 million for Personalized and Document Imaging.
- Cash flow: Net cash used in operating activities was $261 million for the first nine months, compared with $1.038 billion used in 2011. Continuing operations used $291 million. Investing activities provided $17 million and financing activities provided $512 million, including $686 million of DIP loan proceeds. Cash increased by $271 million to $1.132 billion.
- Liquidity and debt: At September 30, cash and cash equivalents were $1.132 billion, compared with $861 million at year-end 2011. About $300 million was held in the U.S.; approximately $830 million was held outside the U.S., including about $330 million in China, where transfer restrictions apply. Kodak said some foreign cash may not be readily available elsewhere. The company reported $1.4 billion of long-term debt, $40 million of current debt and $2.947 billion of liabilities subject to compromise. DIP debt outstanding was reported as approximately $667 million in the liquidity discussion; the debt table shows a $661 million carrying value for the DIP facility. About $70 million remained available under its revolving facility, subject to borrowing-base limits.
- Balance sheet: Total assets were $4.403 billion and total liabilities were $7.634 billion, leaving a $3.231 billion deficit. Pension and other postretirement liabilities were $1.451 billion, apart from pension and postretirement obligations included in liabilities subject to compromise.
Material changes and management commentary
- Kodak exited its digital capture and devices business and Kodak Gallery, both of which ceased operations in Q3. It received approximately $23.8 million from the Kodak Gallery asset sale; about 75% of net proceeds were applied to DIP debt.
- The company initiated sale processes for Personalized Imaging and Document Imaging. Its digital imaging patent portfolio sale process remained unresolved; Kodak said it might instead retain and license the assets. The DIP agreement requires specified portions, and in some cases all, of asset-sale proceeds to repay DIP obligations.
- Beginning in 2013, Kodak planned to focus Consumer Inkjet on selling ink to its installed printer base. Restructuring actions announced in the first nine months were expected to generate approximately $251 million in annual cash savings, with most savings expected to be in place by the end of the first half of 2013.
- Kodak reported substantial doubt about its ability to continue as a going concern. Its ability to do so depends on, among other things, compliance with DIP covenants, court approval of a reorganization plan, successful implementation and obtaining exit financing. The financial statements do not reflect potential adjustments that could result from the bankruptcy process.
- The company had received approximately 6,000 proofs of claim totaling about $20.5 billion in liquidated claims. Claims were still being reconciled and disputed; the ultimate amount and treatment were not determinable. The $20.5 billion is claims filed, not an amount established as allowed or payable.
- Kodak was in compliance with DIP covenants at September 30. The facility requires minimum U.S. liquidity and adjusted EBITDA levels, and its stated maturity is July 20, 2013, subject to earlier repayment triggers. Management’s plan schedule required an acceptable draft plan by January 15, 2013 and filing of a plan and disclosure statement by February 15, 2013.
- A proposed retiree-benefits settlement, subject to court approval, would end specified retiree health and insurance benefits after December 31, 2012 and provide for a trust funded with $7.5 million cash, a $15 million administrative claim and a $635 million unsecured claim. The filing said the proposal would improve liquidity.
Risks, contingencies and other items
- Key risks include failure to obtain plan approval or exit financing, DIP covenant or milestone breaches, insufficient liquidity, delays or inadequate proceeds from asset sales or IP monetization, continuing declines in traditional film markets, price competition and execution risk in restructuring and growth businesses.
- Retirement obligations are significant. The filing reports an approximately $1.1 billion underfunded U.K. Kodak Pension Plan obligation associated with a non-debtor entity, and a trustee claim of approximately $2.8 billion under Kodak’s guarantee; ultimate treatment was unresolved.
- Environmental liabilities accrued were $91 million. Kodak could not estimate a loss range for the Passaic River matter, where alleged damages in related litigation were described as ranging from hundreds of millions to several billion dollars.
- Other disclosed exposures included approximately $65 million of unreserved Brazilian tax contingencies for which loss was reasonably possible, and $114 million of DIP letters of credit. The filing also describes patent disputes, including litigation involving Apple, RIM and HTC.
- Management reported effective disclosure controls and procedures and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress toward bankruptcy-court approval of a reorganization plan, creditor treatment, exclusivity extension and exit financing, including whether the stated DIP milestones were met.
- Available liquidity in practice, including cash accessibility by jurisdiction, DIP borrowing-base availability, covenant headroom and near-term obligations.
- Actual proceeds and timing from patent and business sales, and the share of proceeds required to repay DIP debt.
- Whether restructuring savings materialize as planned and whether operating losses and cash use improve as sales continue to decline.
- Resolution of filed creditor claims, pension and retiree-benefit matters, and material environmental, tax and intellectual-property contingencies.