Eastman Kodak Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Figures are in millions of dollars, except per-share data. Kodak is a global commercial printing and imaging company. In January 2019, it reorganized its reporting segments; comparative segment results were revised to reflect the new structure.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $291 | $318; down $27, or 8% |
| Gross profit / margin | $40 / 14% | $38 / 12% |
| Loss from continuing operations | $(12) | $(25) |
| Loss from discontinued operations | $(6) | — |
| Net loss / diluted loss per share | $(18) / $(0.54) | $(25) / $(0.70) |
| Operating cash flow | $(12) | $(27) |
| Capital expenditures | $3 | $10 |
| Cash and cash equivalents | $240 | $246 at December 31, 2018 |
| Total debt carrying value | $414 | $401 at December 31, 2018 |
| Current assets / current liabilities | $859 / $795 | $878 / $778 at December 31, 2018 |
Cash, restricted cash and cash included in assets held for sale totaled $257 at quarter-end, down $10 during the quarter. Kodak had $21 of ABL Excess Availability and $85 of outstanding letters of credit. Shareholders’ deficit was $16; redeemable Series A preferred stock was carried at $175.
Material changes and operating results
- Revenue declined mainly because of Print Systems volume and pricing pressure and $11 of unfavorable currency effects. Print Systems revenue fell $24 to $192, while its Operational EBITDA improved to $5 from $3, helped by aluminum tariff refunds and cost improvements.
- Gross profit increased $2 despite lower sales, reflecting tariff refunds and cost improvements, partly offset by currency. Other charges fell to $1 from $16, largely because the prior-year period included a larger change in fair value of preferred-stock conversion features. These factors helped narrow the continuing-operations loss.
- Growth-engine revenue increased to $84 from $76; strategic-other-business revenue fell to $184 from $213, and planned-declining-business revenue fell to $23 from $29.
- Segment Operational EBITDA was $5 for Print Systems; approximately break-even for Enterprise Inkjet; $(1) for Kodak Software; $(7) for Brand, Film and Imaging; $(2) for Advanced Materials and 3D Printing Technology; and $(1) for Eastman Business Park.
- Operating cash use improved by $15 year over year, primarily due to lower cash spending on inventory and accounts payable, partly offset by greater use of cash to settle other current liabilities. Financing activities provided $3, including $14 of borrowing proceeds, offset in part by a $10 contingent-consideration payment.
Outlook, liquidity, risks and unusual items
- Going concern: Management stated that conditions raise substantial doubt about Kodak’s ability to continue as a going concern. At issuance, Kodak had debt due within 12 months and lacked committed financing or available liquidity sufficient to meet the obligations under their then-current terms. Refinancing was not solely within Kodak’s control, and the company gave no assurance it would be completed or sufficient.
- Debt and facility deadlines: At March 31, the Term Credit Agreement had approximately $395 of principal outstanding, maturing September 3, 2019. Kodak disclosed that the ABL Credit Agreement could terminate June 5, 2019 absent repayment, refinancing, extension, or amendment of the term debt; termination would make ABL obligations due and require replacement collateral or cash collateral for letters of credit. A reporting-covenant waiver from ABL lenders did not waive potential cross-default under the term facility.
- Subsequent asset sale: Kodak completed the Flexographic Packaging business sale on April 8 for $320 net cash consideration at closing, with $7.5 payable at a deferred closing for China assets. On April 12, Kodak used approximately $312 of proceeds to prepay term loans, leaving approximately $83. The company said it was negotiating to refinance the remainder. The sale is expected to reduce segment earnings and cash flow. Earn-out consideration could total up to $35, contingent on EBITDA targets; the 2018 target was not achieved. The buyer also paid Kodak $15 on April 16 as a prepayment for future services and products.
- Kodak reported $21 of ABL availability against the $18.75 threshold for additional fixed-charge coverage requirements and possible cash dominion. Availability is subject to borrowing-base changes. Cash held outside the U.S. may not be readily transferable; approximately $88 was held in China at quarter-end.
- Management’s cash-flow plans included debt reduction using asset-sale proceeds, further restructuring, and reducing or partnering on technology-development investment. First-quarter restructuring charges were $2 for approximately 40 positions; Kodak estimated approximately $3 of annual cash savings, with most expected by the end of Q3 2019. Expected 2019 capital expenditures were $15–$25. No full-year revenue or earnings guidance was provided in the supplied filing text.
- Brazilian matters included approximately $152 of claims, against which Kodak maintained accruals of approximately $4; approximately $10 of contingencies was unreserved where a loss was reasonably possible. Kodak also described ordinary-course litigation and environmental matters, including a potential uncapped obligation to bear 50% of historical Eastman Business Park liabilities above $99; no liability was recorded for that guarantee.
- No quarterly Series A preferred dividend was declared in Q1 2019. The preferred stock carries cumulative 5.5% dividends; unpaid dividends may affect holders’ director-election rights if arrears reach six dividend periods.
Important facts for investors to verify
- Whether Kodak completed refinancing or other arrangements for the remaining approximately $83 of term debt, and the status of the ABL facility and its deadlines.
- Cash availability in the U.S., borrowing-base headroom, letters of credit, and compliance with credit-agreement covenants after the FPD sale and subsequent debt repayment.
- Actual proceeds and completion timing for the deferred China asset sale, and whether FPD meets the 2019–2020 earn-out targets.
- Whether revenue declines, especially in Print Systems, and the loss of FPD earnings and cash flow are offset by cost reductions and growth businesses.
- Cash-flow performance, restructuring savings, capital spending, and any updates to the company’s explicit going-concern warning.