Eastman Kodak Company — Q1 2011 Form 10-Q
Period: Three months ended March 31, 2011; comparisons are with Q1 2010. Amounts are in millions of dollars except per-share data. Interim results are unaudited.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $1,322 | $1,914 |
| Gross profit / margin | $125 / 9.5% | $793 / 41.4% |
| Continuing-operations loss / earnings | $(249) | $119 |
| Net loss / earnings attributable to Kodak | $(246) | $119 |
| Basic and diluted EPS | $(0.91) | $0.44 basic; $0.40 diluted |
| Operating cash flow | $(525) | $(471) |
| Cash and cash equivalents, period-end | $1,300 | $1,624 at Dec. 31, 2010 |
Cost of sales rose 7% to $1,197 despite sales falling 31%. The effective tax rate was 8.8%, and Kodak recorded a $24 tax benefit on its continuing-operations loss. A change in estimated useful lives reduced Q1 depreciation expense by $9, including a $3 benefit to continuing-operations earnings; the reported diluted loss per share was reduced by $0.01.
Balance sheet, debt and liquidity
- At March 31, cash was $1,300, current assets $3,395 and current liabilities $2,441. Total debt carrying value was $1,446, comprising $50 current and $1,396 long-term; total liabilities were $7,156. Shareholders’ deficit was $1,276 and total deficit $1,274.
- Cash declined $324 during the quarter. Operating cash use of $525 was partly offset by $191 of net financing inflows; investing cash flow was approximately neutral. Cash use included $17 of restructuring payments; asset and business-sale proceeds were $72.
- Kodak issued $250 principal of 10.625% secured notes due 2019, receiving approximately $247 net, and used $50 to repurchase 2013 notes. The new notes carry substantial interest cost and are secured by second-priority liens; $250 principal of 2013 notes remained outstanding.
- At March 31, borrowing availability under the then-current asset-based facility was $182 after specified deductions, with no borrowings outstanding under it. Kodak reported covenant compliance. On April 26, after quarter-end, it entered a $400 revolving facility, subject to borrowing-base availability and covenants.
- Management said existing cash, operating cash flows, asset-sale proceeds and financing arrangements should meet anticipated needs. It also noted liquidity could require additional debt. Credit ratings had been downgraded, with negative outlooks from Moody’s and S&P.
Material changes and segment results
- The sharp year-over-year sales and margin decline was primarily a comparison against a non-recurring Q1 2010 intellectual-property license that contributed about $550 to both revenue and gross profit. Q1 2011 had no comparable licensing agreement; future licensing timing and amounts are uncertain.
- Consumer Digital Imaging Group sales fell 63% to $330 and segment operating results swung to a $168 loss from $401 earnings, primarily reflecting the absence of the prior-year license. Consumer inkjet revenue grew 54%.
- Graphic Communications Group sales increased 4% to $625, but its segment operating loss widened to $71 from $40. Start-up costs for commercial inkjet placements and higher prepress distribution and aluminum costs pressured margins.
- Film, Photofinishing and Entertainment Group sales fell 14% to $367 and segment results moved to a $15 loss from $22 earnings. Secular volume declines, competitive pricing and higher silver costs weighed on results.
- Q1 2011 included a $62 net gain on the sale of CMOS image-sensor patents for $65. Q1 2010 included a $102 loss on early debt extinguishment. Kodak also recorded a $5 bargain-purchase gain in other income from its $27 acquisition of a relief-plates business.
Outlook, risks and contingencies
- Kodak’s stated 2011 priorities were growing digital-growth businesses and generating positive cash before restructuring payments. Those businesses’ revenue grew 23% in Q1; management said they remained in an investment phase. The filing provides no clear quantitative full-year revenue or earnings guidance.
- First-quarter restructuring charges were $35 and covered approximately 475 positions. Kodak estimated about $43 in annual cash savings, with most expected to be in effect by the end of Q2 2011. Savings are expectations, not guaranteed outcomes.
- Management cited rising commodity costs, aggressive price competition, uncertain licensing activity and an uncertain economic environment. About 5% of 2010 revenue came from Japan; the earthquake and tsunami had no material Q1 impact, but possible supply-chain, customer and supplier effects remained under assessment.
- Patent disputes with Apple and Research in Motion could affect licensing prospects. The ITC was reviewing an initial determination adverse to Kodak in its case against Apple and RIM; the filing noted an expected final determination by June 23, 2011.
- Environmental liabilities accrued were $104, with expected expenditures for most sites over 25–30 years. Kodak could not estimate the likelihood or range of loss for the Passaic River matter, where total cleanup costs for all parties could reach several billion dollars. Brazilian tax contingencies had an unreserved portion of approximately $73.
- Employee-benefit funding is a substantial cash commitment: Kodak expected approximately $100 of pension contributions and benefit payments and $106 of postretirement benefits for the remainder of 2011. The UK pension funding arrangement specifies minimum contributions of $50 annually for 2011–2014 and $90 annually for 2015–2022, subject to stated conditions.
Most important facts for investors to verify
- Whether Kodak can sustain liquidity and meet debt, pension, postretirement and restructuring cash needs, including the availability and terms of its post-quarter credit facility.
- How much future revenue and cash flow comes from intellectual-property licensing, and the outcome and timing of the Apple/RIM litigation.
- Whether digital-growth businesses can convert reported revenue growth into improving margins and cash generation, while legacy film volumes and commodity costs remain challenging.
- Whether the expected $43 of annual restructuring savings are realized, and whether environmental, tax and other legal contingencies change materially.