Eastman Kodak Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results; amounts are in millions except per-share data. Kodak operates in commercial printing, digital printing, advanced materials and chemicals, brand licensing, and related businesses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $287 | $252 | $843 | $732 |
| Gross profit (margin) | $43 (15%) | $31 (12%) | $131 (16%) | $88 (12%) |
| Operating loss before interest, pension income, and other listed items | $(9) | $(33) | $(19) | $(73) |
| Net income (loss) | $8 | $(445) | $30 | $(561) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(33) | $(48) |
- Q3 revenue rose 14%; nine-month revenue rose 15%. Sales revenue was $231 million for the quarter and $674 million year to date; service revenue was $56 million and $169 million, respectively.
- Net income benefited from pension income excluding service cost of $25 million in Q3 and $76 million year to date. The prior-year losses included large noncash charges from changes in fair value of embedded conversion-feature derivatives: $432 million in Q3 2020 and $387 million for the first nine months of 2020. Thus, the sharp year-over-year improvement in reported net income is not a like-for-like measure of operating progress.
- Segment Operational EBITDA was $6 million in Q3 2021 versus a loss of $1 million; year-to-date it was $19 million versus a loss of $16 million. This non-GAAP segment measure excludes various costs and income items, so it is not equivalent to consolidated operating profit or cash flow.
Liquidity, debt, and capital resources
- At September 30, cash and cash equivalents were $380 million, restricted cash was $64 million on the balance sheet plus $7 million in other current assets, and cash, cash equivalents and restricted cash totaled $451 million. The total increased from $256 million at year-end 2020; restricted funds and cash held outside the U.S. may not be freely available.
- Total debt and finance leases were $252 million, compared with $19 million at December 31, 2020. This included a $222 million term note carrying an effective interest rate of 13.86% and $14 million carrying value of convertible debt. The term loan has a five-year maturity, with 8.5% cash interest and 4.0% paid-in-kind interest elected by Kodak.
- Financing activities provided $240 million of cash in the first nine months, including net proceeds from a $225 million term loan, $25 million convertible notes, $100 million Series C preferred stock, and $10 million common stock issuance. Kodak also repurchased $100 million of Series A preferred stock. These financings substantially explain the increase in cash and debt.
- Operating activities used $33 million and investing activities used $9 million year to date. Capital expenditures were $10 million; management expected full-year 2021 capital expenditures of $15 million to $25 million, before possible investment of financing proceeds.
- Kodak reported $263 million of Minimum Liquidity against an $80 million requirement, and $39 million of Excess Availability against a threshold of 12.5% of ABL commitments. Falling below the Excess Availability threshold could trigger a fixed-charge coverage test and potentially cash dominion; falling below minimum liquidity could constitute a default.
- The amended asset-based revolving credit commitment was reduced from $110 million to $90 million and extended, subject to a springing maturity provision. Kodak had approximately $42 million of letters of credit under the ABL facility and $44 million under a separate facility, with approximately $45 million of cash collateral for the latter.
- Redeemable convertible preferred stock totaled $195 million at quarter-end: $94 million Series B and $101 million Series C. Series B carries a 4% cash dividend; Series C carries a 5% dividend payable in additional shares. Both have redemption obligations in 2026, subject to their terms.
Changes versus prior period and management commentary
- Revenue recovery was broad-based, with Q3 increases led by Traditional Printing and Advanced Materials and Chemicals. Management attributed much of the comparison to improved customer volumes after COVID-19 disruption in 2020.
- Traditional Printing revenue rose $20 million in Q3, but segment Operational EBITDA remained $5 million as higher aluminum costs and selling expenses offset volume, pricing, and manufacturing improvements. Advanced Materials and Chemicals revenue increased $11 million and segment EBITDA improved from a $6 million loss to break-even. Digital Printing revenue increased $2 million and its segment loss narrowed to $2 million.
- Year-to-date gross profit improved $43 million, reflecting better manufacturing cost absorption, higher volumes and lower workers’ compensation reserves, partly offset by higher aluminum costs. Q3 SG&A fell $13 million, largely because prior-year stock compensation expense was unusually high; year-to-date SG&A fell $7 million.
- Management described its objectives as profitable revenue growth, expense reduction, organizational simplification, asset sales or leases, and reducing cash-collateral needs to return to sustainable positive cash flow. Restructuring actions in the first nine months were expected to generate approximately $4 million in annual cash savings, mostly in effect by year-end.
Outlook, risks, and contingencies
- No specific full-year revenue or earnings guidance is provided in the filing. Management said the duration and effects of COVID-19 remain uncertain, including supply-chain disruption, material and labor shortages, and higher commodity, shipping, and distribution costs. Manufacturing facilities were operating close to normal capacity.
- Kodak is exploring pharmaceutical and healthcare materials opportunities, including expanding key starting-material production and pursuing required certifications. The previously announced potential $765 million DFC loan remains formally unterminated, but Kodak said it is proceeding on the basis that the loan as originally envisioned will not proceed. The company is exploring a smaller-scale approach using other capital.
- Litigation and investigations related to the 2020 DFC announcement include securities class actions, fiduciary and derivative matters, congressional and SEC investigations, and a threatened New York Attorney General claim. Kodak says it intends to defend itself; outcomes are uncertain.
- Brazilian operations had approximately $112 million of claims, including interest and penalties, with about $3 million accrued. Separately, the filing reports approximately $4 million of unreserved Brazilian contingencies for which loss was reasonably possible. Kodak also disclosed a guarantee related to historical environmental liabilities at Eastman Business Park: if liabilities exceed $99 million, Kodak may be responsible for 50% of the excess, with no stated maximum; no liability was recorded for this guarantee.
- Other key risks include Kodak’s ability to sustain cash flow and profitability, comply with credit covenants, service debt and preferred stock, maintain financing and letters-of-credit availability, secure supplies, and manage competition, currency and interest-rate exposure. The filing states disclosure controls were effective and reports no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth translates into sustainable operating profitability and positive operating cash flow, given continuing operating losses before pension and other items and negative year-to-date operating cash flow.
- Availability and usability of reported liquidity, including restricted cash, overseas cash, letter-of-credit collateral, and headroom under minimum-liquidity and Excess Availability requirements.
- Debt and preferred-stock servicing and redemption terms, including the term loan’s high effective interest rate, paid-in-kind interest, and 2026 obligations.
- Actual impacts of supply shortages, inflation and surcharges on volumes, margins, and customer demand, particularly in Traditional Printing and Advanced Materials and Chemicals.
- Developments in DFC-related litigation and investigations, Brazilian disputes, the environmental guarantee, and the feasibility and funding of pharmaceutical or healthcare initiatives.