Eastman Kodak Company — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited; dollar amounts are in millions except per-share data.
Business context and operating results
Kodak was shifting from traditional film toward digital imaging and printing, with investment focused on consumer and commercial inkjet, workflow software, and packaging solutions. Revenue from these digital growth initiatives increased 19% in the first nine months of 2011, but required continued investment.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,462 | $1,756 | $4,269 | $5,225 |
| Gross profit / margin | $207 / 14% | $474 / 27% | $543 / 13% | $1,570 / 30% |
| Operating loss before interest, other items and taxes | $(174) | $58 | $(575) | $347 |
| Net loss | $(222) | $(43) | $(647) | $(92) |
| Loss per share | $(0.83) | $(0.16) | $(2.41) | $(0.34) |
| Cash used in operating activities | Not stated for quarter | Not stated for quarter | $(1,038) | $(504) |
Q3 sales fell 17% and nine-month sales fell 18%. Prior-year periods included non-recurring digital-imaging licensing revenue of about $210 million in Q3 and $760 million for the first nine months; there was none in the 2011 periods. Excluding the effect of those agreements, sales were also pressured by declining film-related volumes, digital-camera competition and pricing, and higher commodity costs, particularly silver.
Segments and material period changes
- Consumer Digital Imaging Group: Sales decreased 39% in Q3 to $408 million and 42% year to date to $1,142 million. Segment operating losses were $90 million and $350 million, respectively, versus profits in the comparable 2010 periods. The principal driver was the absence of prior-year licensing revenue. Consumer Inkjet revenue grew 39% in Q3 and 45% year to date.
- Graphic Communications Group: Sales rose 1% in Q3 to $665 million and 3% year to date to $1,975 million, but segment operating losses widened to $55 million and $171 million. Management cited Prosper commercialization/start-up costs, aluminum and distribution costs, and pricing pressure.
- Film, Photofinishing and Entertainment Group: Sales declined 10% in Q3 to $389 million and 13% year to date to $1,152 million. Segment operating income fell to $15 million in Q3 and $2 million year to date. Volume declines and higher silver costs weighed on results; pricing actions partly offset them.
Consolidated gross margin contracted sharply, largely reflecting the loss of high-margin licensing revenue and higher commodity costs. A $62 million gain on the sale of CMOS image-sensor patents supported nine-month results; an $8 million goodwill impairment was recorded in Q3 for the Commercial Printing reporting unit. Revised useful-life estimates reduced depreciation and increased continuing-operations earnings by $10 million in Q3 and $22 million year to date.
Financial position, debt and liquidity
- At September 30, cash and equivalents were $862 million, down from $1,624 million at year-end 2010. Total assets were $5,102 million; total liabilities were $6,751 million, leaving a shareholders’ deficit of $1,649 million.
- Debt was $1,566 million, including $210 million classified as current. Long-term debt was $1,356 million. The company issued $250 million of 10.625% secured notes due 2019 and drew $160 million on its asset-based revolving facility. It had $126 million available under that facility at quarter-end after borrowings, letters of credit and other collateral deductions.
- Nine-month operating cash outflow was $1,038 million, compared with $504 million in 2010. The deterioration reflected $426 million less cash from non-recurring licensing arrangements, as well as the timing of a $58 million U.K. pension contribution. Investing used $40 million; financing provided $301 million.
- Management said funding operations over the next 12 months depended on patent-portfolio monetization through sale or licensing and/or alternative actions, potentially including more debt, asset sales, or reduced investment. The filing states there is no assurance these actions will succeed. Kodak anticipated repaying about $50 million under the revolver in Q4 2011 to maintain availability above the facility threshold.
- Cash held outside the U.S. was generally needed for local operations; about $320 million was held in China, where restrictions affected transferability. Moody’s and S&P ratings were deeply speculative grade with negative outlooks; Moody’s downgraded ratings after the revolver draw.
Management outlook, risks and unusual items
- Management expected pricing actions to benefit FPEG results further in Q4 2011. No specific consolidated revenue or earnings guidance is provided in the supplied filing text.
- The company was exploring strategic alternatives, including a potential sale of its digital-imaging patent portfolios. A sale could provide cash but also reduce or end related licensing revenue; absent a sale at an appropriate price, Kodak said it would pursue further licensing.
- Management cited substantial liquidity uncertainty, operating losses, competitive pricing, secular declines in traditional film, investment needs in inkjet, restructuring costs, commodity exposure, and pension funding needs. Kodak said it could slow growth investments or sell cash-generating businesses if liquidity required.
- Restructuring charges were $18 million in Q3 and $89 million year to date; the first nine months included elimination of about 950 positions. Expected annual cash savings were about $16 million from Q3 actions and $83 million from actions in the first nine months, with most savings expected to be in effect by year-end 2011.
- Tax items included a $94 million Q3 benefit from a non-U.S. tax-authority settlement and a $50 million benefit from the nine-month U.S. federal audit settlement. Kodak also recorded a $35 million provision for potential withholding taxes on undistributed foreign earnings; a separate $373 million estimated deferred tax liability was fully offset by a U.S. valuation-allowance reduction.
- Environmental remediation accruals were $98 million. Kodak could not estimate its potential loss in the Passaic River matter; the overall cleanup could cost several billions of dollars. Unreserved Brazilian tax contingencies with at least a reasonable possibility of loss were about $70 million. The filing also describes ongoing intellectual-property disputes, including ITC proceedings involving Apple and Research in Motion.
- Kodak guaranteed U.K. pension-plan funding under an agreement requiring minimum contributions of $50 million annually in 2011–2014 and $90 million annually in 2015–2022, subject to stated adjustments and plan funding status.
Investor verification priorities
- Track cash balances, operating cash burn, revolver availability and the expected Q4 repayment; verify whether planned patent or asset monetization occurs on acceptable terms.
- Review the Apple/RIM patent litigation and its potential effects on licensing revenue, portfolio value and liquidity.
- Assess whether consumer and commercial inkjet growth can translate into improved margins and whether restructuring savings are realized as scheduled.
- Monitor covenant headroom, debt maturities and refinancing access, as well as ratings and borrowing costs.
- Review pension funding requirements, environmental and Brazilian tax exposures, and any changes in contingent-loss estimates.