Eastman Kodak Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unless otherwise stated, figures are in millions of dollars. Kodak operates in commercial printing and imaging, with reportable businesses including Print Systems, packaging and micro 3D printing, software, consumer and film, and enterprise inkjet.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $397 | $434 | $759 | $845 |
| Gross profit / margin | $100 / 25% | $84 / 19% | $186 / 25% | $167 / 20% |
| Continuing-operations income (loss), after tax | $16 | $(15) | $12 | $(52) |
| Net income (loss) attributable to Kodak | $7 | $(24) | $(11) | $(82) |
| Diluted EPS | $0.16 | $(0.57) | $(0.26) | $(1.96) |
| Interest expense | $16 | $15 | $32 | $30 |
- For the first half, operating cash flow was $(30), versus $(104) a year earlier. Investing activities provided $4 (prior year use: $19); financing activities used $8 (prior year use: $4). Cash decreased $32 to $515 in the cash-flow statement; the balance sheet reports $513 of cash and cash equivalents.
- At June 30, cash and cash equivalents were $513; restricted cash was $36. Reported debt was $676, comprising $4 current and $672 long-term. Total liabilities of $2,081 exceeded total assets of $2,042, leaving a $39 total equity deficit, including a $67 deficit attributable to Kodak shareholders.
- Current assets were $1,303 and current liabilities $444. The balance sheet includes $140 of current assets held for sale and $28 of current liabilities held for sale.
- The amended asset-based revolver has $150 of commitments and approximately $30 of excess availability after approximately $117 of letters of credit. Availability is borrowing-base dependent; the springing fixed-charge coverage test and potential cash dominion apply if availability falls below $18.75.
Material changes versus prior periods
- Revenue declined 8.5% in Q2 and 10.2% in the first half. Q2’s $37 decline primarily reflected Print Systems pricing and volume reductions, plus lower Consumer and Film and Software and Solutions sales. First-half declines were led by Consumer and Film, Print Systems and Software and Solutions.
- Gross margin improved to 25% from 19% in Q2 and to 25% from 20% for the first half. Lower production costs, expense reductions and pension-related effects more than offset pricing and volume pressures.
- SG&A and R&D combined fell $10 in Q2 and $26 in the first half, mainly from cost actions. Print Systems Operational EBITDA rose to $22 from $20 in Q2 and $40 from $33 for the first half; Consumer and Film’s first-half EBITDA fell to $17 from $26.
- Prosper Enterprise Inkjet was classified as discontinued operations. It generated $25 of Q2 revenue and a $7 after-tax loss; first-half revenue was $39 and the after-tax loss was $16. Kodak said a sale could take up to a year to complete.
- First-half other comprehensive loss was $139, principally reflecting pension and postretirement plan changes. Remeasurement of certain plans increased the recognized benefit obligation by $142.
Outlook, commentary, risks and unusual items
- Management reported no specific full-year revenue or earnings guidance in the provided filing text. It forecast 2016 capital expenditures of approximately $30–$35 and about $11 of remaining 2016 pension and postretirement contributions or benefit payments.
- First-half restructuring actions are expected to produce approximately $14 of annual cash savings, with most savings expected to be in place by year-end. Kodak recorded $13 of restructuring-related charges in the first half and paid approximately $10 in restructuring cash costs.
- Kodak described liquidity as adequate, but noted that some overseas cash may not be readily transferable; approximately $136 of cash was held in China. It also warned that future secured-leverage covenant compliance could depend on asset monetization, refinancing, equity or similar transactions. At June 30, it was in compliance and reported a $44 cushion above the EBITDA required for the term-loan covenant.
- The May 2016 amended revolver reduced commitments from $200 to $150 and extended maturity to the earlier of May 26, 2021 or 90 days before the earliest term-loan maturity, currently September 3, 2019. The facility is secured and includes customary covenants and default provisions.
- Unusual first-half items included $10 of DuPont litigation proceeds and a $7 gain on the sale of certain brand-protection assets for approximately $6 cash and a 19.9% equity interest. Kodak also recorded impairment charges related to silver metal mesh operations and the Kodak trade name.
- Brazilian tax and other proceedings had approximately $57 of unreserved exposure where a loss was reasonably possible; Kodak reported $13 of accruals against claims aggregating approximately $210. Kodak said it would vigorously defend these matters. Other litigation outcomes are uncertain and could adversely affect results or cash flows in a particular period.
- Key business risks include continuing price and demand declines in mature markets, execution and commercialization of growth initiatives, access to financing and revolver availability, covenant compliance, foreign-exchange and interest-rate exposure, and the successful sale or monetization of businesses and assets. Management said disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Whether the Prosper sale proceeds on the expected timetable and at terms that support the carrying value of assets held for sale.
- Whether operating cash flow improves enough to fund operations, investment, restructuring and pension obligations without reducing borrowing availability.
- Future covenant headroom, revolver excess availability, and the effect of cash restrictions and letters of credit on usable liquidity.
- Whether Print Systems cost savings and pricing resilience, and growth in Packaging and micro 3D printing, can offset declines in mature businesses.
- The development and potential resolution of Brazilian contingencies, pension obligations and other litigation exposures.