Eastman Kodak Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in millions of dollars except per-share data. Prior-period segment figures were revised to reflect organizational and reporting changes, including the reclassification of Prosper into continuing operations.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $381 | $423 | $738 | $800 |
| Gross profit | $91 | $107 | $174 | $195 |
| Gross margin | 24% | 25% | 24% | 24% |
| Continuing-operations earnings (loss) | $7 | $9 | $14 | $(5) |
| Net earnings (loss) attributable to Kodak | $4 | $7 | $11 | $(11) |
| Basic EPS attributable to common shareholders | $(0.02) | $0.17 | $0.02 | $(0.26) |
| Operating cash flow | Not provided quarterly | $(74) | $(30) |
- Q2 operating income before interest, other items and taxes was $10, down from $32. The six-month result was $8, versus $42. Segment Operational EBITDA was $14 for Q2, versus $23, and $22 for the first half, versus $42.
- Q2 common-shareholder EPS was negative despite positive net earnings, reflecting Series A preferred cash and deemed dividends deducted in the EPS calculation.
- At June 30, cash and cash equivalents were $370; including restricted cash, cash-flow-statement cash totaled $389. Total debt was approximately $411 ($7 current and $404 long-term), and redeemable Series A preferred stock was $160. Shareholders’ deficit was $59.
- Current assets were $1,004 and current liabilities $396. Cash and cash equivalents declined $64 from year-end; inventories rose $42 to $313.
Material changes versus prior comparable periods
- Revenue fell 10% in Q2 and 8% in the first half. Management attributed the declines mainly to lower Print Systems pricing and volumes, weaker Consumer and Film volumes, and unfavorable currency effects. Flexographic Packaging provided a partial offset.
- Q2 gross profit decreased $16; Print Systems and Consumer and Film were the main drags. First-half gross profit fell $21, including $6 of restructuring-related inventory write-downs.
- Print Systems revenue declined 9% in Q2 and 8% in the first half; segment Operational EBITDA fell to $16 from $22 and $29 from $40, respectively. Management cited competitive pricing and volume pressure.
- Enterprise Inkjet revenue decreased, but segment Operational EBITDA improved to $1 from a $6 loss in Q2 and to $1 from a $10 loss for the first half, primarily due to lower spending and Prosper cost reductions.
- Flexographic Packaging revenue and segment earnings improved: Q2 revenue was $37 and Operational EBITDA $8; first-half amounts were $70 and $14. Consumer and Film weakened substantially, with Q2 Operational EBITDA at a $5 loss versus $10 income and first-half at an $8 loss versus $17 income.
Outlook, management commentary, risks and unusual items
- The filing provides no specific consolidated revenue or earnings guidance. Management expected approximately $16 of annual cash savings from first-half restructuring actions, with most savings expected to be in effect by the second half of 2017. The Prosper restructuring was expected to be substantially complete by the end of Q3 2017.
- Kodak retained the Prosper business in April 2017 after it no longer met held-for-sale criteria. Its results were reclassified to continuing operations for all periods presented. Kodak is focusing Prosper on next-generation Ultrastream technology and selected high-volume applications.
- Kodak reported a $36 gain in the first half from changes in fair value of the Series A preferred stock’s embedded conversion derivative ($14 in Q2). This non-operating item materially supported reported pretax earnings and cash-flow reconciliation.
- Management expected 2017 capital expenditures of $35–$40, including investment in expanded FLEXCEL NX plate capacity; the project was expected to cost approximately $16 in total. Forecast pension and postretirement contributions and benefit payments for the remainder of 2017 were approximately $12.
- Management said liquidity was adequate for operating and investing needs over the next year, but availability under the amended credit agreement was only $22 at June 30. The minimum-availability threshold was $18.75; falling below it could trigger a fixed-charge coverage test and cash dominion. Kodak reported covenant compliance at quarter-end. Its term-loan leverage covenant had limited headroom: covenant EBITDA exceeded the amount needed to satisfy the test by approximately $26.
- Cash held outside the U.S. included approximately $117 in China and may be restricted or costly to repatriate. Kodak also cited risks from cash-flow and profitability execution, debt service and covenant compliance, financing access, foreign exchange, competition, technology development, and suppliers.
- Brazilian legal and tax matters included approximately $213 of claims, with $13 accrued; the unreserved portion with at least a reasonable possibility of loss was approximately $52. Kodak disputed the matters. The filing also describes other litigation and contingencies, including environmental, employment and intellectual-property matters.
- After June 30, Kodak decided to cancel its copper-mesh touch-screen program. It expected a $9–$27 impairment in Q3 2017 on related long-lived assets; no impairment was recorded at June 30. A major Eastman Business Park tenant, representing about 30% of segment revenue, had said it did not plan to renew its lease when it expires in Q3 2018.
Important facts for investors to verify
- Whether revenue declines and margin pressure in Print Systems and Consumer and Film persist, and whether Flexographic Packaging and Prosper growth can offset them.
- Whether restructuring produces the stated savings and whether additional cash needs or charges emerge.
- Liquidity availability, covenant headroom and access to geographically restricted cash, especially if borrowing-base assets or letters of credit change.
- The expected Q3 copper-mesh impairment, the Eastman Business Park tenant’s lease decision, and developments in Brazilian litigation and tax assessments.
- The composition and repeatability of reported earnings, particularly the preferred-derivative fair-value gain and preferred-stock dividends affecting common-shareholder EPS.