Eastman Kodak Company — 2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed March 11, 2013. Unless stated otherwise, amounts are in U.S. dollars and millions. The filing is for Kodak as a debtor-in-possession: the company and its U.S. subsidiaries filed for Chapter 11 on January 19, 2012; foreign subsidiaries were not included in the filing.
Business context and strategy
Kodak said it was reshaping into a business-to-business company focused on commercial, packaging and functional printing, enterprise services, and entertainment imaging and commercial films. Its three reportable segments were Graphics, Entertainment and Commercial Films (GECF); Digital Printing and Enterprise (DP&E); and Personalized and Document Imaging (P&DI). Kodak was exiting digital capture and devices, shifting consumer inkjet to ink sales for its installed printer base, and pursuing sales of Personalized Imaging and Document Imaging.
Financial performance
| Metric ($ millions, except per-share data) | 2012 | 2011 |
|---|---|---|
| Continuing-operations net sales | 4,114 | 5,148 |
| Gross profit / margin | 591 / 14% | 798 / 16% |
| Loss before interest, other income/charges, reorganization items and taxes | (573) | (540) |
| Reorganization items, net | (843) | — |
| Loss from continuing operations | (1,303) | (707) |
| Loss from discontinued operations | (76) | (57) |
| Net loss attributable to Kodak | (1,379) | (764) |
| Basic and diluted net loss per share | (5.07) | (2.84) |
| Net cash used in operating activities | (262) | (998) |
| Capital additions | 69 | 128 |
Revenue declined 20%, driven primarily by lower volumes across all segments; foreign exchange also reduced sales. Gross margin fell 2 percentage points, with higher manufacturing and benefit costs and unfavorable P&DI price/mix partly offset by DP&E improvements. The reported 2012 licensing-and-royalties line was negative $48 million, including a $61 million reduction reflecting licensees’ share of a Korean withholding-tax refund; there were no significant non-recurring IP licensing agreements in 2012, compared with $82 million of such revenue in 2011.
Segment sales and segment earnings (loss) before interest, other income/charges, reorganization items and taxes were: GECF, $1,742 and $(33); DP&E, $940 and $(211); P&DI, $1,432 and $(56). Sales fell 23%, 14% and 20%, respectively. DP&E’s segment loss narrowed from $535 million in 2011, while GECF moved from profit to loss and P&DI moved from profit to loss.
Fourth quarter: Continuing-operations sales were $1,120 million and gross profit was $188 million. Continuing-operations loss was $400 million and net loss was $402 million, versus sales of $1,471 million, gross profit of $316 million and net loss of $118 million in Q4 2011. Q4 2012 included $539 million of reorganization items. Kodak also recorded a $35 million after-tax expense from changes in estimates of employee-benefit and compensation accruals, reducing quarterly results by $0.13 per share.
Cash, debt and liquidity
Cash and cash equivalents were $1,135 million at year-end, up from $861 million. Operating cash use improved to $262 million from $998 million, in part because pre-petition liabilities were not paid; restructuring and reorganization payments partly offset the improvement. Financing provided $508 million, including $686 million of DIP-loan proceeds; investing provided $25 million. Cash included $324 million in the U.S. and $811 million abroad; the filing cautions that some foreign cash may be restricted or costly to repatriate, including approximately $235 million held in China.
At December 31, reported debt comprised $699 million current, $740 million long-term and $683 million classified as liabilities subject to compromise. The DIP agreement provided up to $950 million in facilities; Kodak had borrowed $700 million of term loans and reported about $45 million of revolver availability at year-end, subject to borrowing-base limits. Kodak reported compliance with DIP covenants at December 31, 2012. The filing also reported $2,716 million of liabilities subject to compromise and a shareholders’ deficit of $3,679 million.
After year-end, Kodak received approximately $530 million net from the sale and licensing of digital imaging patents and used approximately $419 million to repay DIP term debt. The court approved a proposed Junior DIP Facility of up to $848 million on March 8, 2013; closing and potential conversion of up to $654 million into exit financing remained conditional. The Junior DIP arrangement included a condition for at least $600 million in cash proceeds from specified non-commercial-imaging asset dispositions.
Material changes, outlook and risks
- Kodak recorded $271 million of 2012 restructuring charges and made approximately $99 million of related cash payments. Management estimated future annual cash savings of approximately $286 million, with most expected to be in place by the end of 2013.
- A retiree settlement ended most U.S. retiree medical, dental, life-insurance and survivor-income benefits after December 31, 2012. The settlement reduced the postretirement obligation substantially; $843 million of net reorganization expense included a $856 million provision for expected allowed claims, partly offset by a $238 million gain on settlement of other postemployment liabilities.
- Kodak expected to emerge from Chapter 11 in mid-2013, but required creditor and court approval of a reorganization plan and adequate exit financing. The filing warned that a confirmed plan could materially change reported asset and liability amounts and classifications. Management’s financial statements assume continued operation as a going concern, while the auditor highlighted substantial doubt about Kodak’s ability to continue as a going concern.
- The U.K. Kodak Pension Plan was underfunded by approximately $1.5 billion on a U.S. GAAP basis. Its trustee asserted a claim of approximately $2.8 billion under Kodak’s guarantee. Kodak Limited had not paid its approximately $50 million 2012 contribution; the filing warned that enforcement could threaten the solvency of Kodak Limited and other non-U.S. subsidiaries.
- Other risks include the ability to maintain liquidity and meet DIP milestones and covenants, asset-sale proceeds and timing, declining traditional film and paper demand, execution of growth investments, pension obligations, supplier and customer relationships, and pending claims. Common stock had been delisted from the NYSE and traded over the counter; Kodak said a plan might make no distribution to existing shareholders.
Most important facts for investors to verify
- Whether the reorganization plan was filed, approved by creditors and confirmed by the court, and what it provides for existing common stock and pre-petition claims.
- Whether the Junior DIP Facility closed, its final terms and covenants, and whether the proposed exit-financing conversion conditions were met.
- Actual liquidity available to U.S. operations, access to overseas cash, DIP borrowing-base availability and covenant compliance.
- Final proceeds and required debt repayment from the patent transaction and planned business or asset sales, including whether the $600 million disposition condition was satisfied.
- Resolution and funding of the KPP guarantee and other pension and postretirement obligations, plus any material changes to the going-concern assessment.
- Whether restructuring savings were achieved and whether commercial-imaging sales, gross margin and cash generation improved after 2012.