Eastman Kodak Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial figures are in millions unless otherwise stated. Kodak operates in print and advanced materials and chemicals. Results were materially affected by COVID-19-related demand weakness and by a large non-cash charge from changes in the fair value of embedded conversion derivatives.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $252 | $315 | $732 | $913 |
| Gross profit | $31 | $53 | $88 | $135 |
| Gross margin | 12% | 17% | 12% | 15% |
| Net income (loss) | $(445) | $(5) | $(561) | $178 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(48) | $(4) |
- Q3 revenue fell 20% year over year. Traditional Printing revenue declined 22% to $146; Digital Printing fell 20% to $56; Advanced Materials and Chemicals fell 17% to $44. Brand revenue was $3.
- Q3 operating results included $432 of other charges, primarily a $431 fair-value charge on embedded conversion features. The nine-month charge was $387. These charges drove much of the reported loss; the cash flow statement adds back $382 for the nine-month fair-value change.
- The nine-month income tax provision was $167, including a $167 valuation allowance on deferred tax assets outside the U.S. due to reduced profitability expectations.
- Segment Operational EBITDA in Q3: Traditional Printing $5 (prior year $21); Digital Printing $(3) (unchanged); Advanced Materials and Chemicals $(6) (unchanged); Brand $3 (prior year $2).
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $193, with $48 of restricted cash; combined cash, cash equivalents and restricted cash were $241, down from $290 at year-end 2019. Cash outside the U.S. may not be readily transferable. The filing reports $108 of cash in the U.S. and $85 outside the U.S.
- Total debt and finance leases were $19, compared with $111 at December 31, 2019. All $100 principal of the 5% Convertible Notes was converted into common shares during Q3, eliminating the associated lien. The Series A preferred stock remains outstanding at a $189 carrying value and is redeemable November 15, 2021 if not converted.
- The ABL facility matures May 26, 2021. Commitments were reduced to $110; Kodak had $87 of letters of credit outstanding and approximately $20 of excess availability against a $13.75 minimum threshold. $21 of cash was restricted to support that threshold. The facility’s interest-rate spread increased in a March amendment.
- Kodak reported that it was below a 1.0-to-1.0 fixed-charge coverage ratio, but was not required to meet that test because excess availability remained above the threshold. If availability falls below the threshold, covenant and cash-dominion requirements may apply.
- Cash used in investing was $9 for the first nine months, including $13 of capital expenditures; management expected full-year 2020 capital expenditures of approximately $15. Financing provided $10 for the period.
Changes, outlook and material risks
- Revenue declined $63 in Q3 and $181 year to date. Kodak attributed the falls mainly to lower volumes during the pandemic, with pricing pressure in Traditional Printing. Prior-year comparisons also included $13 of HuaGuang intellectual-property licensing revenue. The 2019 nine-month result included $206 of income from discontinued operations, principally the Flexographic Packaging sale gain.
- Management cited substantial doubt about Kodak’s ability to continue as a going concern, based on operating losses, negative operating cash flow, collateral needs, uncertainty about returning to positive cash flow, and the 2021 ABL maturity and preferred-stock redemption. Management’s plans include profitable revenue growth, expense reductions, asset sales or leases, reduced investment where appropriate, and lower collateral requirements. COVID-19 demand recovery remains uncertain.
- Cost actions included temporary furloughs and pay reductions, which management said reduced costs by approximately $20 during 2020 to date. Restructuring actions were expected to produce approximately $13 of annual cash savings, with most savings expected by year-end.
- The potential $765 DFC loan for Kodak Pharmaceuticals was only covered by a non-binding letter of interest. The DFC said it would not proceed unless allegations were cleared; congressional and SEC investigations and securities class actions followed the announcement. Approval or funding was not assured, and the proposed initiative carries development, regulatory, construction, financing and market risks.
- Disclosure controls were deemed ineffective because of a material weakness in controls over equity-award records and authorization. Previously forfeited options were exercised by former officers and employees; Kodak reported efforts to strengthen controls and expected remediation by December 31, 2020. The filing also describes investigations and litigation relating to the pharmaceutical announcement.
- Other exposures include Brazilian tax and litigation matters: approximately $107 of claims were reported with about $2 accrued, and approximately $5 of contingencies were described as unreserved where loss was reasonably possible. Outcomes are uncertain.
Most important facts for investors to verify
- Whether operating cash flow and liquidity improved, and whether ABL availability remains above the required threshold through its May 2021 maturity.
- How Kodak will address the November 2021 Series A preferred-stock redemption if the stock is not converted.
- Whether the $431 Q3 derivative charge is fully understood as a fair-value, largely non-cash item, and how remaining preferred-stock derivative valuations could affect results.
- Whether pandemic-related demand recovers and Kodak delivers the expected $13 in annual restructuring savings.
- Developments in the DFC proposal, investigations, related lawsuits, and the equity-control material weakness; confirm whether the expected control remediation was completed.
- Potential cash, earnings or collateral impacts from Brazilian matters and other contingencies.