EASTMAN KODAK CO quarterly report, Q3 FY2019

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Eastman Kodak Company — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019. Amounts are in millions of dollars, except per-share data. Kodak is a global commercial printing and imaging company. Segment results reflect a reorganization effective January 2019; prior-year segment figures were revised for comparability.

Financial performance and liquidity

  • Q3 revenue: $315, down 4% from $329 in Q3 2018. Gross profit was $53 versus $50; gross margin improved to approximately 17% from 15%.
  • Q3 earnings: Continuing-operations loss was $10, compared with income of $20 a year earlier. Net loss was $5, or $0.23 per share, versus net income of $19, or $0.33 per share.
  • Nine-month results: Revenue was $913, down 7% from $979. Gross profit was $135 versus $133, with gross margin of approximately 15% versus 14%. Continuing-operations loss was $28 versus $2; net income was $178 versus a $2 loss, largely reflecting the divestiture gain.
  • Cash flow: Operating activities used $4 in the first nine months, improved from $79 used in 2018. Investing provided $315, mainly from business-sale proceeds; financing used $295, primarily for debt repayment. Cash, cash equivalents and restricted cash totaled $279 at period end, compared with $267 at year-end 2018, including $225 of unrestricted cash and $54 of restricted cash.
  • Debt and liquidity: Debt and finance leases totaled $108, down from $401 at December 31, 2018. Kodak repaid the $395 Term Credit Agreement balance, using divestiture proceeds and $98 of cash proceeds from $100 principal amount of secured convertible notes due initially November 1, 2021. ABL excess availability was $20, only $1.25 above the $18.75 threshold that can trigger a fixed-charge coverage test and cash dominion. The reported fixed-charge coverage ratio was below 1.0, but the test was not then required.
  • Balance sheet: Total assets were $1,409 and total liabilities $1,058. Series A redeemable convertible preferred stock was $180. Pension and postretirement liabilities were $352.
  • Segment trends: Q3 Print Systems revenue was $213 (down $4), with Operational EBITDA of $20 (up $9). Enterprise Inkjet revenue fell $10 to $29 and EBITDA declined to a $3 loss. Kodak Software revenue was $14 and EBITDA $2. Brand, Film and Imaging revenue rose to $56, with EBITDA loss improving to $1.

Material changes and unusual items

  • Kodak completed the sale of its Flexographic Packaging business (FPD) in 2019 and reported it as discontinued operations. The sale generated a $212 after-tax gain in the first nine months; discontinued-operations income was $206. This gain materially explains the year-to-date net income and is not indicative of continuing operating earnings.
  • In September, Kodak completed a China strategic transaction with HuaGuang, receiving $30 cash plus promissory notes and transferring certain liabilities. It recognized $13 of licensing revenue; the quarter also included a $12 loss on sale of the China business shares.
  • Q3 revenue declines reflected lower volume and pricing, especially in Print Systems and Enterprise Inkjet, and $5 of unfavorable currency impact. The HuaGuang license revenue partly offset the decline. Print Systems’ reported improvement in EBITDA also benefited from this licensing item.
  • Restructuring charges were $8 for the first nine months, with approximately 100 positions eliminated. Kodak expects about $10 of annual savings, with most expected to be in place by the end of Q1 2020.
  • Kodak adopted the new lease standard in 2019, recording operating lease right-of-use assets and liabilities. In October 2019, it decided to discontinue Kodakit.

Outlook, risks and contingencies

  • Going concern: Management states that operating losses, negative operating cash flow, cash requirements and uncertainty about returning to positive cash flow raise substantial doubt about Kodak’s ability to continue as a going concern. The statements nevertheless use the going-concern basis.
  • Management’s stated plans include profitable revenue growth, expense and organizational reductions, monetizing or leasing underused assets, and reducing or delaying some technology development investment. The filing provides no overall revenue or earnings guidance.
  • Kodak expects 2019 capital expenditures of approximately $15–$20. It forecast approximately $6 of remaining 2019 pension and postretirement contributions or benefit payments, following $15 paid in the first nine months.
  • Cash held outside the U.S. may be constrained by local operating needs, tax costs or repatriation restrictions; approximately $71 was held in China. Some cash is pledged or otherwise restricted. The ABL borrowing base, $80 of letters of credit, and limited excess availability constrain liquidity.
  • The $100 convertible notes accrue 5% interest, payable at maturity or, at the company’s option, on conversion; conversion could substantially dilute existing shareholders. The note purchasers also held preferred and common shares, and the filing describes significant combined voting power assuming conversion.
  • Series A preferred dividends are cumulative at 5.5%; several quarterly dividends had not been declared before Q3 2019. The preferred stock is subject to mandatory redemption in November 2021 unless converted or otherwise addressed.
  • Brazilian tax and other disputes include approximately $145 of claims, with about $3 accrued; approximately $8 of contingencies was described as reasonably possible and unreserved. Kodak also disclosed a potential environmental guarantee above a $99 threshold, with no liability recorded, plus other ordinary-course litigation and claims.

Most important facts for investors to verify

  • Whether Kodak can sustain liquidity and restore positive operating cash flow, given management’s explicit substantial-doubt going-concern disclosure and limited ABL availability.
  • How much reported earnings and cash generation depend on asset sales, licensing proceeds, customer prepayments and other nonrecurring items versus continuing operations.
  • Progress against the $10 annual restructuring savings target and whether volume, pricing and currency pressures persist in Print Systems and Enterprise Inkjet.
  • The availability and location of cash, restricted-cash requirements, ABL borrowing-base headroom, covenant thresholds and future debt or preferred-stock obligations.
  • Potential dilution and control effects of the convertible notes and Series A preferred stock, including their conversion, dividend and redemption terms.
  • Developments in Brazilian litigation, environmental obligations, and the remaining FPD earn-out opportunity; the 2018 earn-out target was not achieved.