Eastman Kodak Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Kodak is a global commercial printing and imaging company. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $362 million | $411 million; down $49 million (11.9%) |
| Gross profit / margin | $86 million / approximately 24% | $83 million / approximately 20% |
| Continuing-operations pretax income (loss) | $2 million | $(32) million |
| Net loss attributable to Kodak | $(18) million; $(0.43) per share | $(58) million; $(1.38) per share |
| Operating cash flow | $(21) million | $(89) million |
| Cash and cash equivalents | $513 million | $546 million at December 31, 2015 |
| Total debt | $676 million | $677 million at December 31, 2015 |
| Total equity (deficit) | $(48) million | $103 million at December 31, 2015 |
Continuing-operations loss was $4 million, versus $37 million in Q1 2015; discontinued operations contributed an $11 million loss versus $17 million. The gross-margin improvement reflected cost reductions, particularly in Print Systems, despite lower revenue. The company reported a $6 million income-tax provision against $2 million of continuing pretax income.
Cash used in investing activities was $15 million, including $10 million added to restricted cash; cash used in financing was $1 million. Cash declined by $34 million during the quarter. The $21 million operating cash outflow improved year over year, supported by lower net loss, $10 million of DuPont litigation proceeds and working-capital movements.
At March 31, current assets were $1.304 billion and current liabilities $443 million. The ABL revolving facility had $24 million of net availability. Cash held outside the U.S. was $235 million, including approximately $141 million in China, and may be restricted or costly to repatriate.
Material changes and operating segments
- Revenue declined across most major businesses. Print Systems revenue fell $23 million, Consumer and Film $16 million, Software and Solutions $6 million, and Enterprise Inkjet Systems $3 million; Micro 3D Printing and Packaging declined $2 million. Eastman Business Park revenue increased $1 million.
- Print Systems Operational EBITDA rose to $18 million from $13 million, as lower aluminum costs, manufacturing efficiencies and SG&A savings more than offset pricing pressure.
- Consumer and Film Operational EBITDA fell to $7 million from $18 million, reflecting lower ink sales, reduced film-production volumes and related costs. Enterprise Inkjet Systems EBITDA declined to $5 million from $7 million.
- Total reportable-segment Operational EBITDA was $29 million versus $31 million. This non-GAAP segment measure excludes specified corporate, restructuring, financing and other items; Kodak changed its segment measure in Q1 2016.
- SG&A decreased $12 million to $40 million; R&D decreased $4 million to $9 million. Kodak attributed the reductions to cost actions and a narrower focus on materials-science projects.
Outlook, management commentary and risks
- Kodak reported discussions with prospective buyers regarding the KODAK PROSPER Enterprise Inkjet business, classified as discontinued operations and held for sale. The company said a sale could take up to a year. The business generated $14 million of Q1 revenue and a $10 million after-tax loss.
- Q1 restructuring actions are expected to generate approximately $5 million in annual cash savings, with most savings expected to be in effect by the second half of 2016. Kodak expects 2016 capital expenditures of $20–$25 million and approximately $14 million of pension and postretirement contributions or benefit payments for the rest of 2016.
- Kodak said it believes liquidity is adequate, but highlighted covenant compliance, refinancing and liquidity as risks. ABL excess availability was $39 million against a $30 million threshold; the company said it was in compliance at quarter-end. Term-loan covenant headroom was approximately $52 million of EBITDA under the agreement’s calculation. Future compliance could depend on asset monetization, refinancing, equity issuance or similar transactions.
- Defined-benefit plan remeasurement increased the recognized obligation by $142 million and contributed to a $146 million pension and postretirement-related other comprehensive loss. Total pension and other postretirement liabilities rose to $735 million from $619 million.
- Unusual Q1 items included $19 million of silver metal mesh asset impairments, a $5 million Kodak trade-name impairment and $10 million of DuPont litigation proceeds. Kodak is exiting silver metal mesh touch-screen development.
- Brazilian litigation and tax assessments include approximately $189 million of claims, with about $12 million accrued; approximately $52 million of contingencies were unreserved where loss was considered reasonably possible. Kodak disputes the matters. It also disclosed various other legal, environmental, employment and intellectual-property proceedings and an uncapped potential environmental guarantee under specified circumstances.
Most important facts for investors to verify
- Progress, timing and proceeds of a potential PROSPER business sale, and the effects of the discontinued-operations classification.
- Whether cash generation and operating performance can stabilize as revenue declines, especially in Consumer and Film and legacy inkjet operations.
- ABL availability, term-loan covenant headroom, access to geographically restricted cash, and any need for asset sales or financing to maintain compliance.
- Realization of the projected $5 million annual restructuring savings and the expected $20–$25 million 2016 capital spending.
- Future pension funding and liability changes, and developments in Brazilian tax disputes and other contingencies.