EASTMAN KODAK CO quarterly report, Q2 FY2013

Eastman Kodak Company — Q2 2013 Form 10-Q

Reporting period: Three and six months ended June 30, 2013. Dollar amounts are in millions unless stated otherwise. Kodak’s U.S. entities remained debtors-in-possession under Chapter 11; foreign subsidiaries were not included in the bankruptcy filing. Results are unaudited.

Financial performance and position

Metric	Q2 2013	Q2 2012	First half 2013	First half 2012
Continuing-operations sales	$583	$699	$1,177	$1,319
Gross profit	$133; 23% margin	$101; 14% margin	$282; 24% margin	$114; 9% margin
Continuing-operations income (loss), after tax	$(208)	$(297)	$116	$(595)
Net income (loss) attributable to Kodak	$(224)	$(299)	$59	$(665)

Q2 sales fell 17%, primarily from volume declines. In the first half, sales fell 11%; volume declines were partly offset by favorable price/mix.
Q2 continuing-operations loss narrowed year over year, while gross margin improved. SG&A and R&D fell 27% and 40%, respectively, in Q2, reflecting cost reductions.
First-half earnings included a $535 gain on the digital imaging patent portfolio sale, partly offset by a $77 goodwill impairment. The patent transaction generated approximately $530 in proceeds. First-half sales also included a one-time $31 licensing agreement; 2012 comparison included a $61 licensing revenue reduction for sharing a tax refund with licensees.
Discontinued operations reported $299 of Q2 revenue and a $16 net loss; first-half revenue was $557 with a $57 net loss. Personalized Imaging and Document Imaging were classified as discontinued operations in connection with their planned transfer to the U.K. pension plan.
Operating cash flow was $(418) for the first half, versus $(152) in 2012. Investing provided $516, mainly from asset-sale proceeds; financing used $218, including net DIP debt repayments. Cash declined $120 to $1,015.
At June 30, cash was $1,015, including $742 held outside the U.S.; Kodak cautioned that some foreign cash may not be readily transferable. The senior DIP revolver had approximately $21 available, subject to borrowing-base limits, and $128 of letters of credit outstanding.
Reported debt carrying amounts were $871 current, $370 long-term, and $683 classified as liabilities subject to compromise. Total liabilities were $6,968 and total shareholders’ deficit was $3,153.

Material changes and developments

Sales declined across continuing operations, but gross margins improved through pricing/mix and manufacturing-cost reductions. Both reportable segments remained loss-making in Q2: Graphics, Entertainment and Commercial Films lost $5 before interest and taxes; Digital Printing and Enterprise lost $13.
In Q2, a pension-plan remeasurement reduced retirement and postretirement obligations by $372. Pension-related other comprehensive income was a major contributor to first-half comprehensive income of $522, despite net income of $59.
Kodak recorded $48 of first-half restructuring charges and reported expected annual cash savings of approximately $46, with most savings expected to be in effect by year-end. The actions included manufacturing capacity reductions, winding down consumer inkjet printer production, and workforce reductions.

Outlook, restructuring and principal risks

Kodak stated that substantial doubt existed about its ability to continue as a going concern. Its prospects depended on compliance with DIP loan covenants, confirmation and implementation of the reorganization plan, asset sales, and ongoing liquidity and operating performance. Kodak was in compliance with DIP covenants at June 30.
The Bankruptcy Court approved the amended disclosure statement and voting procedures on June 26; solicitation began July 5. Confirmation was scheduled for August 20, 2013. The plan’s effectiveness was not assured, and failure to confirm or close financing could make DIP obligations due and jeopardize emergence.
The proposed plan included a $406 rights offering backstopped by creditors and new exit financing: $695 of term loans plus an asset-based revolver of up to $200. These transactions were subject to conditions and would become effective upon emergence. Kodak’s post-quarter disclosures reported term-loan syndication and allocation on August 1 and ABL allocation on August 6.
The U.K. pension settlement contemplated transfer of Personalized Imaging and Document Imaging assets and liabilities to the pension plan, with at least $445 of cash settlement. The transaction depended on plan consummation or acceptable assurances and other conditions; a sale was expected in Q3. The plan also contemplated cancellation of existing equity interests, so current shareholders faced substantial risk of losing their investment.
Known risks included continued cash burn, limited DIP availability and near-term maturities, restrictions on moving foreign cash, execution and financing conditions for emergence, contested or unresolved bankruptcy claims, and pension and environmental obligations. Approximately $22.5 billion of liquidated proofs of claim had been filed; the final amount and treatment of claims were unresolved.
Environmental accruals totaled $125. An amended Eastman Business Park settlement proposed a $49 trust contribution and potential additional Kodak liability if historical costs exceeded $99; court approval and other conditions remained outstanding.
Management provided no clear conventional revenue or earnings guidance in the filing. Its stated operating focus was commercial imaging, cost reduction and sustainable profitability.

Investor facts to verify

Whether the reorganization plan, rights offering, exit facilities and U.K. pension settlement closed on the disclosed terms, and how the plan treats existing common shareholders.
Actual liquidity available to the U.S. debtors, including restrictions on foreign cash, revolver availability, DIP maturity and compliance with financial covenants.
Completion and proceeds of the Personalized Imaging and Document Imaging transfer, and whether contingent settlement amounts or EBITDA conditions affect cash proceeds.
Operating trends in continuing businesses: sales volumes, segment profitability, margins, and realization of the projected $46 annual restructuring savings.
Final resolution of creditor claims, environmental obligations and other contingencies, which could materially change reported liabilities and recoveries.