Eastman Kodak Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is with the three months ended March 31, 2017. Kodak is a global commercial printing and imaging company with seven reportable segments. Figures are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Revenue | $357 | $357 |
| Gross profit / gross margin | $54 / 15% | $62 / 17% |
| Loss from continuing operations before tax | $(18) | $10 income |
| Net loss / income | $(25) | $7 |
| Basic and diluted EPS | $(0.70) | $0.05 |
| Cash used in operating activities | $(27) | $(53) |
| Cash used in investing activities | $(10) | $(4) |
| Cash used in financing activities | $(4) | $(3) |
- Cash and cash equivalents were $313 at March 31, 2018, down from $344 at December 31, 2017. Cash, cash equivalents and restricted cash totaled $333, down from $369.
- Current assets were $936 and current liabilities $419. Total assets were $1,672; total liabilities were $1,474; shareholders’ equity was $32. Redeemable Series A preferred stock was reported separately at $166.
- Debt and capital leases totaled $403, including a $393 term note carrying a 7.34% weighted-average effective rate and maturing in 2019. The term loan bears variable interest. Outstanding letters of credit under the ABL facility were $79; reported excess availability was $36.
- Operating cash use improved by $26 year over year, with the filing attributing the change to lower inventory builds and less cash use to satisfy accounts payable and other liabilities. Capital additions were $10.
Changes versus the prior comparable period
- Revenue was flat despite a favorable $20 currency impact. Volume and pricing declines in several businesses largely offset currency and growth in Flexographic Packaging.
- Gross profit fell $8, and gross margin declined approximately 2 percentage points. Kodak cited higher aluminum costs and lower pricing in Print Systems, and lower volumes in Enterprise Inkjet and Consumer and Film; lower restructuring-related inventory write-offs and favorable currency partly offset these pressures.
- Net results shifted from $7 income to a $25 loss. Other charges were $16, compared with $20 of other income a year earlier, principally reflecting a $14 loss from remeasurement of embedded preferred-stock conversion features versus a $22 gain in Q1 2017.
- Segment Operational EBITDA was $1 in aggregate versus $6. Print Systems EBITDA fell to $4 from $12, primarily due to aluminum costs and pricing. Flexographic Packaging improved to $7 from $6; Consumer and Film’s loss widened to $6 from $4. Enterprise Inkjet and Software and Solutions were approximately break-even in both periods.
- SG&A declined $2 to $63 and R&D declined $5 to $15, including lower investment in Advanced Materials and 3D Printing. Restructuring costs declined to $2 from $7, and there was no Prosper asset remeasurement charge, versus $12 in Q1 2017.
Outlook, management commentary, and risks
- Management said liquidity was adequate for operating and investing needs over the next year, but stated Kodak intends to refinance its term loans before their September 3, 2019 maturity. The filing cautions that future covenant compliance may depend on actions such as cash management or repatriation, asset monetization, refinancing, or raising equity; there is no assurance these actions or refinancing will succeed.
- Kodak reported compliance with its credit covenants at March 31, 2018. ABL excess availability of $36 exceeded the $18.75 threshold that would trigger a minimum fixed-charge coverage test and potentially cash dominion. The company noted fixed charges would exceed EBITDA by approximately $7 if that test were required. Term-loan covenant EBITDA exceeded the required amount by approximately $25.
- Management expected 2018 capital expenditures of $30–$40 and pension and postretirement contributions or benefit payments of approximately $19 for the remainder of the year. The Weatherford, Oklahoma FLEXCEL NX expansion is expected to reach full production by mid-2019; the project’s expected total investment is approximately $15.
- Q1 restructuring actions were expected to generate approximately $3 of annual cash savings, mostly effective by the end of 2018. Kodak paid $4 of restructuring costs in the quarter.
- Kodak designated five subsidiaries as unrestricted subsidiaries in March to position assets for possible monetization and address underused properties. Together they had $23 of assets and approximately $2 of quarterly sales.
- A tenant representing about 30% of Eastman Business Park segment revenue notified Kodak it does not plan to renew its lease when it expires in Q3 2018.
- Brazilian tax and other claims remained under dispute. Kodak reported approximately $11 of accruals against claims totaling approximately $207, and a $24 unreserved portion of contingencies for which loss was at least reasonably possible. The filing also identifies ordinary-course litigation, including intellectual-property matters, and notes outcomes could affect results or cash flows in a period.
- Adoption of the new revenue standard reduced opening retained earnings by approximately $10, primarily for brand licensing arrangements; the reported Q1 revenue and net loss were each $1 higher than they would have been without adoption. Kodak was still evaluating aspects of the 2017 Tax Act, including GILTI; provisional tax impacts could change. The company expected lease-standard adoption to materially affect its balance sheet.
Important facts for investors to verify
- Progress on refinancing the $393 term note and the ABL facility, whose availability and effective maturity are linked to the term-loan maturity.
- Cash accessibility: approximately $171 of cash and equivalents was held outside the U.S., including approximately $106 in China, where transfer limitations may apply; the filing says foreign cash may also face tax costs or other restrictions.
- Whether operating performance and gross margins recover from higher materials costs, pricing pressure, and declining installed bases in mature businesses.
- Whether the Eastman Business Park tenant departs as planned and the resulting effect on revenue and facility utilization.
- Potential developments in Brazilian litigation and tax matters, and any changes to the provisional accounting for tax reform.