Eastman Kodak Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 9, 2023. Kodak is a global manufacturer focused on commercial print and advanced materials and chemicals. In February 2023, it combined its Traditional Printing and Digital Printing segments into Print; prior-period segment figures were reclassified.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $278 million | $290 million |
| Gross profit / gross margin | $50 million / 18% | $33 million / 11% |
| Operating income (loss), before interest, pension income, other items and taxes | $5 million | $(19) million |
| Net earnings (loss) | $33 million | $(3) million |
| Basic / diluted EPS | $0.33 / $0.30 | $(0.08) / $(0.08) |
| Cash provided by (used in) operating activities | $14 million | $(43) million |
- Revenue fell 4%. Print revenue declined $19 million to $209 million; Advanced Materials and Chemicals revenue rose $7 million to $61 million. Brand and All Other each reported $4 million.
- Gross profit increased $17 million, primarily from improved pricing and product mix. Reported net earnings also benefited from $40 million of pension income excluding service cost and $7 million of other income, net.
- Cash, cash equivalents and restricted cash totaled $294 million at quarter-end, including $225 million of unrestricted cash and $69 million of restricted cash. Cash and cash equivalents alone increased from $217 million at December 31, 2022 to $225 million.
- Total debt on the balance sheet was $321 million: $1 million current and $320 million long-term. Redeemable convertible preferred stock was $205 million. Quarterly cash preferred dividends were paid when due.
- Current assets were $687 million and current liabilities $295 million. The ABL facility’s excess availability was $21 million; quarterly minimum liquidity was $143 million against an $80 million requirement, and daily liquidity exceeded the $50 million minimum.
- Capital expenditures were $5 million. Kodak expects 2023 capital expenditures of approximately $30–$40 million.
Changes, outlook and management commentary
- Print’s Operational EBITDA improved to $6 million from a $7 million loss, despite lower volume; pricing gains were partly offset by higher manufacturing costs. Advanced Materials and Chemicals improved to break-even from a $3 million loss.
- Currency reduced year-over-year revenue by $10 million. Kodak cited lower Print volume, inflation, supply constraints and weaker demand for plates. SONORA Process Free Plate volume declined 14% year over year, or 12% including volume under a royalty-based licensing agreement.
- Operating cash flow improved by $57 million year over year. Management attributed the change partly to improved earnings, insurance reimbursements, a governmental refund, lower inventory investment and lower receivables. Kodak received $15 million of insurance proceeds relating to previously paid legal costs and a $9 million governmental refund during the quarter; these items are not necessarily recurring.
- Kodak recorded $1 million of restructuring charges, net, and made $3 million of restructuring cash payments. The actions are expected to generate approximately $3 million of annual cash savings, mostly effective by the end of Q2 2023.
- Management believes liquidity is adequate for operating and investing needs over the next 12 months. Longer-term liquidity depends in part on extending, refinancing or replacing credit facilities, generating operating cash flow, and managing global cash and collateral requirements. The filing does not provide earnings or revenue guidance.
- Amended ABL and letter-of-credit facilities mature no later than June 12, 2024, and may mature earlier based on other debt or preferred-stock maturities. ABL commitments are scheduled to decline from $90 million to $81 million on February 26, 2024. Kodak must maintain required liquidity and availability covenants.
Risks, contingencies and unusual items
- Risks include customer demand and digital substitution, inflation and pricing effects, supply-chain constraints, higher materials, labor and distribution costs, foreign exchange, the war in Ukraine, and access to financing and covenant compliance. Kodak is winding down direct operations in Russia; it reported no material Q1 financial impact.
- Brazilian operations had approximately $118 million of tax and other claims, with approximately $2 million accrued; an additional approximately $6 million of reasonably possible losses was unreserved. Restricted cash and liens on Brazilian assets provide security for some disputes.
- A separate New York securities class action relating to the 2020 DFC announcement was dismissed with prejudice and the appeal was withdrawn. Derivative litigation remains pending, and the New York Attorney General has threatened a claim; Kodak says it intends to defend itself if brought.
- A guarantee associated with historical environmental liabilities at Eastman Business Park could require Kodak to pay 50% of amounts above $99 million, with no stated maximum; no liability was recorded for this guarantee.
- The New York State Workers’ Compensation Board could require up to $38 million of additional collateral as early as December 2023, depending on a possible financial-contingency requirement. Kodak also described potential future collateral needs for certain surety bonds.
Investor verification priorities
- Assess the sustainability of improved earnings and operating cash flow, including the impact of pension income, insurance proceeds, the governmental refund and pricing actions.
- Track Print volumes and margins, especially plate demand, and whether Advanced Materials and Chemicals can meet demand amid equipment and labor constraints.
- Monitor minimum liquidity, excess availability and collateral requirements, as well as refinancing or extension plans for facilities maturing by June 2024.
- Review the timing and outcome of Brazilian claims, derivative litigation, the threatened New York claim, and possible workers’ compensation or environmental-related cash requirements.
- Confirm delivery of planned restructuring savings and the expected $30–$40 million of 2023 capital expenditures.