Eastman Kodak Company — 2014 Form 10-K
Reporting period: Year ended December 31, 2014. The filing also reports fourth-quarter results. Kodak emerged from Chapter 11 in September 2013 and adopted fresh-start accounting; therefore, post-emergence results are not directly comparable with pre-emergence periods. Annual comparisons below use the filing’s combined 2013 figures where available.
Business context and reporting period
Kodak is a commercial imaging and printing technology company. Its 2014 reportable segments were Graphics, Entertainment and Commercial Films (GECF), and Digital Printing and Enterprise (DP&E). The company focused investment on commercial inkjet, packaging, functional printing and enterprise services. Effective January 1, 2015, it reorganized into smaller, market-focused divisions.
Financial results and liquidity
| Metric | 2014 | Prior comparable information |
|---|---|---|
| Net sales | $2.102 billion | Down 10.5% from combined 2013 sales of $2.349 billion |
| Gross profit / margin | $456 million / 22% | Combined 2013 margin was 21% |
| Continuing operations loss | $122 million | Combined 2013 results are heavily affected by Chapter 11 and fresh-start accounting |
| Net loss attributable to Kodak | $123 million; $2.95 loss per share | Combined 2013 attributable earnings were approximately $1.985 billion, substantially affected by reorganization gains |
| Cash from operating activities | Used $128 million | Used $667 million in combined 2013 periods; improvement of $539 million |
| Cash and cash equivalents | $712 million at year-end | $844 million at year-end 2013 |
| Debt | $677 million carrying value, including $5 million current | $678 million carrying value at year-end 2013 |
| Working capital | $951 million | $1.086 billion at year-end 2013 |
Investing activities provided $41 million; financing activities used $7 million. Capital expenditures were $43 million. The company reported $29 million of net availability under its asset-based revolving credit facility. Cash held outside the U.S. was $498 million, including approximately $241 million in China, and may not be readily transferable. Reported cash therefore does not all represent freely available liquidity.
Debt is primarily variable-rate term debt: the first-lien term loan carries a 7.54% effective rate and the second-lien loan an 11.01% effective rate. Kodak reported compliance with its credit agreement covenants at year-end. The agreements include collateral, leverage/liquidity requirements and restrictions on dividends and other actions.
Material changes versus the prior period
- Sales declined 11%, mainly from lower motion-picture and commercial-film demand, the shrinking consumer inkjet printer base, and lower digital printing volumes; foreign exchange also weighed on results.
- GECF sales were $1.434 billion, down 5%; segment earnings were $31 million. Graphics remained roughly half of company revenue. DP&E sales were $668 million, down 17%, and the segment loss was $77 million.
- Non-recurring intellectual-property licensing contributed approximately $70 million of 2014 revenue, versus $40 million in 2013.
- Revenue from Entertainment Imaging and Commercial Films and Consumer Inkjet Systems together fell to 16% of company sales, from 21% in 2013 and 26% in 2012.
- Cash used in operations improved substantially, but operations still consumed cash. Cash declined by $132 million during 2014.
- Kodak recorded $61 million of restructuring charges and paid approximately $52 million of restructuring costs in cash. It expects the 2014 actions to generate approximately $77 million in annual cash savings, mostly effective by the end of 2015.
Fourth quarter: Net sales were $529 million, gross profit was $109 million, and the loss from continuing operations was $40 million. Kodak’s net loss attributable to the company was $42 million. The quarter included a $9 million impairment of in-process research and development and a $16 million foreign-exchange charge related to Venezuela.
Outlook, commentary, risks and contingencies
- Outlook: Kodak provided no specific consolidated revenue or earnings guidance in the supplied filing text. It expected approximately $45 million of capital expenditures in 2015 and approximately $77 million of annual savings from 2014 restructuring actions. Management said liquidity was adequate for operating and investing needs, while acknowledging continuing negative operating cash flow.
- Strategy and execution: Management emphasized investment in commercial inkjet, packaging, software and solutions, and commercialization of functional and micro-3D printing. These initiatives require further investment and may not succeed or reach scale. Kodak identified successful product commercialization, cost reduction and partnerships as important to its plans.
- Demand and competition: Digital substitution pressures film and motion-picture products; consumer inkjet revenue is declining with the installed base. Kodak also faces pricing pressure, technology shifts and competition from larger, better-financed companies.
- Financing and liquidity: The company disclosed that it continued to generate net negative operating cash flow. It warned that cash generation, access to financing, covenant compliance, collateral requirements and debt service could constrain operations and investment. A 1 percentage-point LIBOR increase above the contractual floors would add approximately $7 million of annual interest expense, based on year-end debt.
- Restructuring and film: Kodak expected to phase out production at its Leeds plate facility from mid-to-late 2015 and complete the exit by the second quarter of 2016. In January 2015, it finalized film-supply agreements with major Hollywood studios, supporting continued motion-picture film manufacturing despite declining volumes.
- Environmental exposure: Kodak funded a $49 million Eastman Business Park remediation trust. New York State is responsible for costs up to a further $50 million; if historical liabilities exceed $99 million, Kodak is responsible for 50% of the excess, with no stated cap. Kodak reported $28 million of accrued environmental liabilities at year-end, excluding the settled Eastman Business Park trust arrangement.
- Legal and tax matters: Brazilian proceedings included claims aggregating approximately $233 million, for which Kodak reported accruals of approximately $16 million; the filing separately identifies approximately $50 million of unreserved contingencies with at least a reasonable possibility of loss. A consolidated ERISA class action continued after a motion to dismiss was denied. Management said other pending matters were not considered probable to have a material adverse effect, but litigation outcomes are inherently uncertain.
- Accounting and pensions: Kodak’s net deferred tax assets were $42 million after a $1.127 billion valuation allowance. Major defined-benefit pension plans were underfunded by approximately $406 million in aggregate at year-end, and pension assumptions and market performance could affect future costs and funding needs.
Important facts for investors to verify
- Whether operating cash flow turns positive and whether the $77 million of projected restructuring savings is achieved without disrupting sales or execution.
- The composition and transferability of cash, availability under the ABL facility, and ongoing compliance with debt covenants and liquidity tests.
- Underlying segment sales, margins and cash generation excluding non-recurring intellectual-property licensing and accounting effects from fresh-start accounting.
- Commercial adoption, partner performance, investment needs and profitability prospects for commercial inkjet, packaging and functional printing initiatives.
- Potential outcomes and cash requirements from Brazilian litigation, environmental obligations, pension plans and other contingencies.