Eastman Kodak Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts are in millions of dollars, except per-share data. Kodak describes itself as a global commercial printing and imaging company; Print Systems is its core business, alongside developing technology businesses and declining consumer inkjet and film operations.
Financial performance and position
- Revenue: Q2 revenue was $458, down 13% from $528; first-half revenue was $885, down 13% from $1,016. Management attributed most of the decline to foreign exchange: approximately $44 in Q2 and $78 in the first half.
- Profit and margins: Q2 gross profit was $86 (19% margin), versus $102 (19%); first-half gross profit was $163 (18%), versus $191 (19%). Q2 loss attributable to Kodak was $24, or $0.57 per share, compared with $62, or $1.49 per share. First-half loss attributable to Kodak was $82, or $1.96 per share, versus $98, or $2.35 per share. Continuing-operations pretax loss improved to $14 in Q2 from $52, and to $64 for the first half from $112.
- Operating costs: Q2 SG&A fell 27% to $62 and R&D fell 38% to $16. For the first half, SG&A fell 30% to $120 and R&D fell 34% to $35. Gross profit dollars nevertheless declined with revenue.
- Cash flow: First-half operating cash use was $104, compared with $132 in 2014. Investing used $19, versus $63 provided in 2014; financing used $4. Cash and cash equivalents declined $136 during the half to $576.
- Liquidity and debt: June 30 cash was $576, down from $712 at year-end; total debt was $675 ($4 current and $671 long-term), broadly unchanged from $677. ABL net availability was $28. Cash included $304 held outside the U.S.; Kodak said some overseas balances may be restricted or costly to repatriate, including $122 in China. Current assets were $1,400 and current liabilities $527. Equity was $227.
- Segments: Q2 Operational EBITDA was $20 for Print Systems, $(5) for Enterprise Inkjet, $4 for Micro 3D Printing and Packaging, $1 for Software and Solutions, and $8 for Consumer and Film; Intellectual Property Solutions recorded $(7). Total reportable-segment Operational EBITDA was $23 versus $24. For the first half, it was $35 versus $31. This is Kodak’s adjusted segment measure, not consolidated net income.
Material changes and management commentary
- Kodak reorganized into seven reportable segments effective January 1, 2015 and changed its segment profit measure to Operational EBITDA; prior-period segment figures were revised for comparability.
- Revenue weakness reflected currency, Consumer and Film volume declines, Print Systems pricing pressure, and the absence of prior-year non-recurring intellectual-property licensing revenue. Micro 3D Printing and Packaging revenue grew 3% in Q2 and 5% in the first half, supported by packaging volumes; Software and Solutions was flat in Q2 and up 8% year to date.
- Prosper portfolio revenue increased 23% in both Q2 and the first half. Kodak said its legacy Versamark business is expected to decline as Prosper scales. Consumer inkjet and film revenues are expected to continue declining.
- First-half restructuring actions are expected to produce approximately $37 of annual cash savings, with most savings expected to be in place by year-end. Kodak expects approximately $45 of 2015 capital expenditures and approximately $10 of pension and postretirement contributions/benefit payments during the remainder of 2015. Management stated that liquidity was adequate for operating and investing needs.
Outlook, risks, contingencies, and unusual items
- Kodak did not provide a specific revenue or earnings forecast in the provided filing text. Its outlook relies on cost reductions, growth in developing businesses, and commercialization of new technologies; these outcomes are uncertain.
- Key stated risks include sustaining profitability and cash forecasts, complying with credit-facility covenants, obtaining financing if needed, funding investment and restructuring, foreign exchange and interest-rate movements, and developing and selling new products.
- Brazilian tax and other contingencies included approximately $57 of unreserved exposure for which loss was at least reasonably possible. Separately, Kodak reported approximately $14 of accruals for claims aggregating approximately $208. The filing says it intends to defend these matters; outcomes remain uncertain.
- Kodak reported $119 of letters of credit under its ABL facility, in addition to other guarantees, bonds, and restricted cash/deposits. A separate environmental guarantee could require Kodak to pay 50% of costs above $99 at Eastman Business Park, with no stated maximum; no liability was recorded for that guarantee.
- A $6 goodwill impairment was recorded in Q1 for Functional Printing following delayed commercialization. An environmental agreement reduced liabilities and produced a $5 gain in Q1. Q2 included $8 of restructuring charges, including $2 of accelerated depreciation; the first half included $28 of charges.
- Management said ordinary-course litigation was not expected to have a probable material adverse effect, while cautioning that litigation outcomes could affect results or cash flow in a particular period. An ERISA case was proceeding after a motion to dismiss was denied.
Important facts for investors to verify
- Whether operating cash use, cash balances, and the limited $28 of ABL availability remain adequate as restructuring and investment needs continue.
- Progress toward the projected $37 in annual savings, and whether those savings offset ongoing revenue and gross-profit declines.
- Revenue, profitability, and cash generation in the growing businesses, especially Prosper, Packaging, Software and Solutions, and Micro 3D Printing.
- Foreign-currency exposure and the availability of overseas cash, including funds held in China; confirm any applicable credit covenants and borrowing terms.
- Developments in Brazilian claims, environmental obligations, and other litigation or guarantees that could create cash costs beyond recorded accruals.