Eastman Kodak Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Kodak manufactures products and provides services focused on commercial print and advanced materials and chemicals. Segment reporting changed in February 2023, combining Traditional Printing and Digital Printing into Print; prior periods were reclassified.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $269 million | $289 million | $842 million | $900 million |
| Gross profit / margin | $50 million / 19% | $43 million / 15% | $163 million / 19% | $127 million / 14% |
| Net earnings | $2 million | $2 million | $70 million | $19 million |
| Operating cash flow | Not provided separately for the quarter | Not provided separately for the quarter | $21 million | $(130) million |
| Capital expenditures | Not provided separately for the quarter | Not provided separately for the quarter | $15 million | $19 million |
Quarterly revenue fell 7%, principally from lower Print volume; nine-month revenue fell 6%. Print revenue declined 13% in Q3 and 12% year to date, while Advanced Materials and Chemicals revenue rose 10% and 14%, respectively. Gross margin improved as pricing and product mix and lower aluminum costs partly offset lower Print volumes and higher manufacturing costs. Q3 operating earnings before interest, pension income, debt-extinguishment loss, other charges and taxes were $2 million, versus a $7 million loss a year earlier.
Q3 net earnings were $2 million, but preferred-stock dividends meant earnings available to common shareholders were shown as zero; basic and diluted EPS were reported as “—”. Nine-month EPS was $0.68 basic and $0.64 diluted. Nine-month results include $122 million of pension income excluding service cost, a $27 million debt-extinguishment loss, and an $8 million income-tax provision. Pension accounting and other items materially affect reported earnings.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $246 million, versus $217 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $374 million; $128 million was restricted, including collateral for workers’ compensation, letters of credit and other obligations.
- Current assets were $712 million and current liabilities $271 million. Long-term debt was $451 million; total debt carrying value, including current debt, was $452 million, compared with $317 million at year-end 2022.
- Nine-month operating cash flow improved to $21 million from cash use of $130 million. Financing cash flow was $87 million, including refinancing proceeds; total cash, cash equivalents and restricted cash increased $88 million.
- In July, Kodak borrowed $450 million under a new term loan, receiving $435 million net. Proceeds refinanced the prior term loan, repaid convertible notes and the asset-based revolving facility, funded letter-of-credit collateral, and provided about $29 million for general purposes and working capital. The new loan bears 7.5% cash interest plus 5.0% payable in kind or cash, an aggregate 12.5% rate. Its stated maturity is the earlier of August 2028 or 91 days before specified preferred-stock maturity/redemption dates.
- The new term loan is secured by substantially all eligible company and subsidiary-guarantor assets and includes restrictive covenants and cash-flow/asset-sale prepayment requirements. It has no financial maintenance covenant. The separate letter-of-credit facility had $31 million of letters of credit and $32 million of cash collateral at quarter-end.
Material developments, outlook and risks
- Management says liquidity is adequate for operating and investing needs, while emphasizing that longer-term funding depends on positive operating cash flow, managing worldwide cash, and converting, redeeming or extending Series B and Series C preferred stock. Both preferred series have redemption provisions associated with May 2026; Series C holders may extend the redemption date by up to two years.
- Kodak expects 2023 capital expenditures of $20 million to $30 million. Restructuring actions are expected to generate about $7 million of annual cash savings, with most savings expected by the end of Q2 2024.
- Management’s cash-generation plans include pricing, working-capital and cost actions, operational simplification, investment in IT, asset monetization, licensing and reducing collateral needs. No specific consolidated revenue or earnings guidance is provided in the supplied filing text.
- Market pressures include inflation, higher labor, materials and distribution costs, supply constraints, and weaker Print plate demand. Kodak reported increased U.S. competition from low-priced imported plates and petitioned for trade relief; outcome and effectiveness are uncertain. Film demand is strong, but equipment limits and labor shortages constrain supply.
- During Q3, Kodak entered long-term brand-licensing arrangements and recorded about $57 million of deferred revenue. It received about $8 million in Q3 and expected further receipts of about $4 million in Q4 2023, $40 million in Q1 2024 and $5 million in 2025. Revenue will be recognized over contract terms of five to twenty years; some arrangement amounts were recorded against receivables or other assets rather than received in cash.
- The 2023 pension-plan remeasurement and amendment reduced the main U.S. plan’s funded status by $118 million; nine-month other comprehensive loss was $150 million, mostly pension-related. Kodak also reported $135 million of pension and postretirement plan obligation losses in comprehensive income for the nine-month period.
- Brazilian operations had approximately $122 million of tax and other claims, with about $2 million accrued; an additional $6 million of reasonably possible losses was unreserved. A historical environmental guarantee could require Kodak to pay 50% of amounts above $99 million, without a stated maximum; no liability was recorded for that guarantee.
- A federal shareholder derivative lawsuit related to the 2020 DFC loan announcement was dismissed with prejudice in September 2023; plaintiffs appealed in October. A separate New York State derivative case remains stayed, and the New York Attorney General has threatened a claim. Kodak says it intends to defend any claim and does not expect other ordinary-course proceedings, individually or collectively, to materially affect results, while noting litigation outcomes are uncertain.
- Kodak said a leased warehouse in Israel was destroyed, with no employee injuries; it had adapted operations to avoid material disruption at the time of filing. Kodak was winding down its Russian subsidiary, with no material Q3 consolidated impact reported.
Most important facts for investors to verify
- How much of reported cash is unrestricted and readily available in the U.S., given $128 million of restricted cash and limits on moving some overseas funds.
- Whether operating cash flow remains positive after the effects of brand-licensing advances, insurance reimbursements, tax refunds and working-capital movements.
- The effective cost and repayment burden of the 12.5% term loan, covenant compliance, and potential prepayments tied to excess cash flow or asset monetizations.
- The status and funding plan for Series B and Series C preferred stock redemption or extension, and the scheduled $20 million intercompany-loan installment due in November 2023, whose repayment could reduce U.S. liquidity.
- Whether Print volume and pricing stabilize, and whether growth businesses can offset ongoing cost, supply and competitive pressures.
- Developments in the derivative-lawsuit appeal, threatened New York claim, Brazilian disputes and unrecorded environmental guarantee exposure.