Eastman Kodak Company — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts are in millions of dollars except per-share data. Kodak emerged from bankruptcy in September 2013 and adopted fresh-start accounting; 2014 successor results are therefore not directly comparable with 2013 predecessor results.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $525 | $583 | $1,009 | $1,177 |
| Gross profit / margin | $102 / 19% | $133 / 23% | $191 / 19% | $282 / 24% |
| Continuing-operations loss | $(60) | $(208) | $(112) | Income of $116 |
| Net loss attributable to Kodak | $(62) | $(224) | $(98) | Income of $59 |
| Basic and diluted EPS | $(1.49) | $(0.82) | $(2.35) | $0.22 |
- Quarterly revenue declined 10%; first-half revenue declined 14%. Management attributed the decreases mainly to lower volumes in Entertainment Imaging and Commercial Films and Consumer Inkjet Systems. Gross margin fell four percentage points in Q2 and five points year to date.
- Q2 operating loss before interest, other charges, reorganization items and taxes was $29, versus $35 a year earlier. Interest expense declined to $16 from $47, and reorganization costs fell to $5 from $72. The reported Q2 net loss improved, but remains a loss; comparisons also reflect fresh-start accounting and a much smaller post-emergence share count.
- Segment revenue and earnings: Graphics, Entertainment and Commercial Films generated Q2 revenue of $357, down 4%, and a segment loss of $8. Digital Printing and Enterprise generated $168, down 15%, and a segment loss of $27. First-half segment losses were $35 and $52, respectively.
- Six-month operating cash use was $132, versus $402 in the prior-year period. Investing provided $63, compared with $524, primarily reflecting the prior-year patent-sale proceeds; financing used $2. Cash and equivalents were $768 at June 30, down from $844 at year-end.
- At June 30, current assets were $1,762 and current liabilities $745. Long-term debt was $673, with $4 current; total debt carrying value was therefore $677. Long-term debt fair value was $703. Total liabilities were $2,305 and equity $548.
- The ABL revolving facility had $33 of net availability. Management said liquidity was adequate, while noting that cash held abroad may be constrained: $576 was outside the U.S., including approximately $258 in China. Capital expenditures were $13 in the first half; Kodak expected approximately $40 for 2014.
Changes, outlook and notable items
- SG&A decreased 26% in both the quarter and first half, reflecting cost reductions and lower pension costs. R&D increased 4% in Q2 and 6% year to date as new products moved closer to commercialization.
- Management cited continued demand pressure from digital substitution in motion-picture and commercial films and a shrinking installed base of consumer inkjet printers. Packaging and Functional Printing revenue benefited from Flexcel NX plate sales. The filing gives no specific consolidated revenue or earnings forecast.
- First-half restructuring charges were $33, including $20 in Q2. Actions included workforce and manufacturing reductions and the planned Leeds, U.K. plate-facility exit. Kodak projected about $37 of annual cash savings from first-half actions, with most expected in effect by year-end. The Leeds exit was expected to incur total charges of $30–$40 and be completed by Q2 2016.
- Kodak announced U.S. defined-benefit pension-plan amendments effective January 1, 2015, expected to reduce the plan’s projected benefit obligation by approximately $55.
- The sale of Personalized Imaging and Document Imaging was substantially completed, but deferred closings remained; related discontinued operations produced Q2 revenue of $29 and a net loss of $2. Up to $35 of sale consideration may be repayable if specified EBITDA targets are not met.
- The Eastman Business Park environmental settlement became effective in May. Kodak funded a $49 trust; it may owe 50% of historical liabilities exceeding $99, with no stated cap. Environmental liabilities accrued at June 30 were $31. Brazilian tax contingencies with at least a reasonable possibility of loss had an unreserved amount of approximately $51.
- Currency controls in Venezuela create uncertainty over conversion of approximately $17 of cash. Kodak used the official exchange rate; using the stated SICAD 1 or SICAD 2 rates would have produced estimated quarterly pre-tax translation losses of $8 or $16, respectively.
- Other risks include variable-rate debt, foreign-exchange exposure, litigation and patent claims, restructuring execution, and the ability to sustain profitability and comply with credit-facility covenants. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Review the effects of fresh-start accounting and discontinued-operations presentation before interpreting year-over-year trends.
- Verify liquidity actually available for operations, including ABL borrowing capacity, cash-location restrictions and operating cash burn.
- Track revenue, gross margins and segment losses, particularly in legacy film and consumer inkjet businesses, against the stated strategic growth areas.
- Monitor delivery of the projected restructuring savings, total Leeds exit costs and cash payments, alongside planned capital expenditures.
- Assess debt covenant compliance, variable-rate exposure and the capacity to fund debt service, restructuring and pension obligations.
- Follow the environmental settlement’s potential exposure above the $99 threshold, Brazilian tax proceedings, and Venezuela’s exchangeability and valuation assumptions.