Eastman Kodak Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in millions of U.S. dollars except per-share data. Kodak is a global technology company focused on print, advanced materials and chemicals.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $267 | $291 |
| Gross profit / margin | $36 / 13% | $40 / 14% |
| Loss from continuing operations | $(111) | $(12) |
| Net loss | $(111) | $(18) |
| Basic and diluted loss per share | $(2.66) | $(0.54) |
| Net cash used in operating activities | $(41) | $(12) |
| Cash and cash equivalents at quarter-end | $209 | $233 at Dec. 31, 2019 |
| Total cash, cash equivalents and restricted cash | $241 | $290 at Dec. 31, 2019 |
| Debt: current and long-term | $2 current; $111 long-term | $2 current; $109 long-term at Dec. 31, 2019 |
| Total liabilities / shareholders’ equity (deficit) | $1,061 / $(25) | $1,134 / $99 at Dec. 31, 2019 |
Operating cash outflow increased by $29 year over year, primarily reflecting increased cash spending on inventory and a smaller build in accounts payable. Capital expenditures were $4; Kodak expected full-year 2020 capital expenditures of $10–$15. Cash and cash equivalents included $62 held in the U.S. and $147 outside the U.S.; foreign cash may be restricted or costly to repatriate. Approximately $88 of cash was held in China at quarter-end.
ABL Credit Agreement availability was approximately $17 at March 31, versus $22 at year-end, with about $80 of letters of credit outstanding. The minimum Excess Availability threshold was $13.75, leaving limited headroom. Restricted cash totaled $32. Kodak reported that fixed charges exceeded credit-agreement EBITDA by approximately $14; it was not required to meet the minimum fixed-charge coverage ratio because availability remained above the threshold.
Changes versus the prior comparable period
- Revenue fell $24, or 8%, with volume declines and unfavorable pricing in Traditional Printing, and volume declines in Digital Printing and Advanced Materials and Chemicals; currency reduced revenue by $3.
- Gross profit declined $4, and gross margin decreased about one percentage point. SG&A fell $11 and R&D fell $2, partly offsetting lower gross profit.
- Traditional Printing revenue declined $12 and Operational EBITDA fell to $1 from $6. Digital Printing revenue declined $7 and Operational EBITDA was $(2), versus $(1). Advanced Materials and Chemicals revenue fell $6, while its Operational EBITDA loss narrowed to $(9) from $(11). Brand revenue was $3 in both periods.
- Pre-tax continuing-operations income was $54 versus a loss of $9, primarily reflecting a $53 noncash gain from changes in fair value of embedded conversion derivatives. The $165 tax provision, including a $167 valuation allowance on foreign deferred tax assets, resulted in a continuing-operations net loss of $111.
- Q1 2019 included a $6 loss from discontinued operations related to the Flexographic Packaging business, sold in 2019.
Outlook, management commentary and key risks
- Going concern: Management stated that operating losses, recent negative operating cash flow, collateral requirements, restrictions on moving cash from China, COVID-19 uncertainty, and the 2021 debt maturity and preferred-stock redemption raise substantial doubt about Kodak’s ability to continue as a going concern. The statements nevertheless use the going-concern basis of accounting.
- COVID-19: Management said the pandemic had not materially affected Q1 sales, but expected lower sales volumes and slower receivable collections in Q2. The duration and pace of recovery were uncertain. Kodak was reducing manufacturing volumes, using temporary furloughs and pay reductions, and delaying some product-development spending.
- Financing and maturities: The $100 principal amount of 5.00% secured convertible notes is due November 1, 2021 if not converted; the 5.50% Series A preferred stock must be redeemed November 15, 2021 if not converted. Preferred dividends were four quarters in arrears as disclosed; Q1 2020 dividends were declared and paid. ABL amendments reduced lending commitments and raised borrowing rates.
- Management’s cash-flow plans: Kodak cited profitable revenue growth, cost reductions, organizational simplification, asset sales or leases, reduced technology investment, and efforts to reduce U.S. collateral needs and access cash held in China. No specific revenue or earnings guidance was provided.
- Other unusual items: Kodak recorded $7 of restructuring costs and said the actions were expected to generate approximately $8 of annual cash savings, mostly in SG&A. It recorded a $3 impairment of the Kodak trade name; no goodwill impairment was indicated. A March property sale generated an $8 gain.
- Subsequent events and contingencies: On May 12, 2020, a Chinese subsidiary transferred approximately $70 to a U.S. subsidiary in anticipation of an intercompany transaction. Kodak Alaris, a significant customer for still photographic film, advised in April it would defer payment of undisputed invoices; Kodak issued default and contract-termination notices in May. Brazilian matters included approximately $118 of claims and about $3 of accruals; Kodak reported a further approximately $6 of unreserved contingencies with at least a reasonable possibility of loss.
Important facts for investors to verify
- Whether Kodak can restore positive operating cash flow and maintain ABL Excess Availability above the $13.75 minimum amid anticipated COVID-19 demand and collection impacts.
- How much reported liquidity is practically accessible, particularly cash held in China and other foreign jurisdictions, and the status and use of the May 12 $70 transfer.
- Plans and funding sources for the November 2021 convertible-note maturity and preferred-stock redemption, including accumulated preferred dividends.
- The assumptions behind the $167 deferred-tax valuation allowance and the sensitivity of future asset valuations to COVID-19-related forecasts.
- The outcome of the Kodak Alaris payment and film-supply dispute, and developments in Brazilian tax and other litigation contingencies.