Eastman Kodak Company — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 15, 2018. The filing also reports fourth-quarter results, but the annual figures are the primary basis for comparison. Kodak is a commercial printing and imaging company operating through seven reportable segments. Unless stated otherwise, amounts are U.S. dollars in millions.
Financial performance and key metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Net revenue | $1,531 | $1,643 |
| Gross profit / gross margin | $355 / 23% | $403 / 25% |
| Continuing-operations result before interest, debt extinguishment, other items, reorganization items and taxes | $(18) | $113 |
| Continuing-operations pretax result | $(13) | $51 |
| Continuing-operations earnings | $96 | $18 |
| Net earnings attributable to Eastman Kodak Company | $94 | $15 |
| Basic and diluted EPS | $1.76 | $0.28 |
| Net cash used in operating activities | $(67) | $(15) |
| Cash, cash equivalents and restricted cash | $369 | $478 |
| Debt carrying value | $403 | $411 |
| Working capital | $539 | $622 |
- Cash and cash equivalents were $344 million at year-end; restricted cash was $25 million. Cash held outside the U.S. was subject to operating, tax and transfer limitations.
- Current assets were $958 million and current liabilities $419 million. Total assets were $1,707 million; total liabilities were $1,486 million. Year-end equity was $57 million, alongside $164 million of redeemable Series A preferred stock.
- Gross margin was approximately 23.2% in 2017 versus 24.5% in 2016. Research and development expense was $53 million, down from $60 million.
- The $94 million net income included a $110 million income tax benefit. The filing cites, among other items, a $101 million release of a foreign deferred-tax valuation allowance and a $47 million gain from revaluing the preferred-stock embedded conversion derivative. These items mean reported earnings were not representative of operating cash generation.
- Fourth-quarter 2017 revenue was $414 million versus $432 million in the prior-year quarter; gross profit was $94 million versus $115 million. Fourth-quarter continuing-operations earnings were $128 million, including significant tax and other unusual effects.
Material changes versus prior periods
- Revenue declined $112 million, or 6.8%, from 2016, following a $160 million decline in 2016. Print Systems remained the largest segment, at $942 million of revenue, and accounted for about 62% of 2017 company revenue.
- Print Systems revenue fell $76 million and Operational EBITDA fell $48 million to $58 million, reflecting pricing pressure and lower volumes; manufacturing efficiencies were offset by higher aluminum costs.
- Enterprise Inkjet revenue declined $22 million to $144 million, while Operational EBITDA improved by $21 million to $5 million, primarily through lower spending and restructuring.
- Flexographic Packaging revenue rose $13 million to $145 million and Operational EBITDA increased to $31 million, led by FLEXCEL NX consumables.
- Consumer and Film revenue fell $23 million to $198 million; Operational EBITDA swung to a $16 million loss from $16 million of earnings. Kodak cited declining consumer inkjet volumes, higher film manufacturing costs and increased selling and marketing expense.
- Cash used in operating activities increased to $67 million from $15 million, primarily due to higher working-capital usage and lower cash earnings. Total cash, cash equivalents and restricted cash declined by $109 million during 2017.
- Debt declined modestly to $403 million from $411 million. Pension and other postretirement liabilities declined to $466 million from $603 million, while working capital fell by $83 million.
Outlook, risks and unusual items
- Management plans: Kodak expects the 2017 restructuring actions to generate approximately $40 million of annual cash savings, with most savings expected by the end of the first half of 2018. The actions included approximately 475 eliminated positions and $38 million of charges, including inventory write-downs.
- Investment and capital spending: 2018 capital expenditures were forecast at $30 million to $40 million. Kodak expected approximately $22 million of 2018 pension and postretirement contributions or net benefit payments. Its Weatherford, Oklahoma, FLEXCEL NX capacity expansion was expected to enter full production by mid-2019; total project investment was estimated at approximately $16 million.
- Product development: Kodak was shipping evaluation kits for its Ultrastream inkjet platform, with commercialization expected in 2019. The filing emphasizes that commercialization and returns on growth-business investments are uncertain.
- Liquidity and refinancing: The First Lien Term Credit Agreement had a September 3, 2019 maturity, and Kodak stated it intended to refinance before then. The company reported compliance with credit covenants at year-end, but future compliance could depend on asset monetization, cash management, subsidiary designations, refinancing or raising capital. ABL Excess Availability was $20 million, only slightly above the $18.75 million threshold associated with additional requirements; approximately $96 million of letters of credit were outstanding.
- Preferred stock obligations and dilution: The 2 million Series A preferred shares carry a 5.50% cumulative cash dividend and are subject to mandatory redemption on November 15, 2021 at $100 per share plus accrued unpaid dividends if not converted. Full conversion could represent approximately 21% of common shares after conversion, based on the filing’s stated capitalization.
- Business and market risks: Kodak reports ongoing price and volume pressure in its largest business, negative operating cash flow in each of the prior four years, reliance on successful restructuring and growth initiatives, and exposure to commodity prices, foreign exchange, suppliers and pension assumptions. Management’s liquidity assessment is subject to these risks.
- Contingencies: Brazilian litigation and tax claims aggregated approximately $209 million, with about $11 million accrued; the filing also reports approximately $24 million of unreserved Brazilian contingencies with at least a reasonable possibility of loss. For historical Eastman Business Park environmental liabilities, New York State’s additional responsibility is capped at $50 million above the initial $49 million trust; Kodak bears 50% of amounts above $99 million, without a stated maximum.
- Tax and asset charges: The 2017 Tax Act accounting was provisional and could change as analysis and guidance developed. Kodak recorded a $56 million goodwill impairment for Prepress Solutions and a $2 million trade-name impairment; it also impaired assets related to the canceled copper touch-screen program.
- WENN / cryptocurrency licensing: Kodak reported a three-year brand license involving $750,000 cash, WENN shares and potential cryptocurrency tokens; the filing states Kodak was not the platform operator or cryptocurrency issuer and would receive no proceeds from WENN’s initial coin offering. Kodak also warned that its share price had been affected by blockchain and cryptocurrency market volatility.
- Audit and controls: PwC issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal financial controls were effective at year-end.
Important facts for investors to verify
- Whether Kodak converts its operating-cash-flow deficit and declining revenue into sustained positive cash generation, excluding tax benefits and derivative revaluations.
- Progress on the 2018 cost savings, and whether Print Systems’ pricing and volume declines continue to pressure segment earnings.
- Availability under the ABL facility, covenant headroom and the plan to refinance or repay the $395 million term-loan maturity in 2019.
- Cash actually available for U.S. needs, given restricted cash and limitations on transferring foreign balances.
- Final tax effects of the 2017 Tax Act, realization of deferred-tax assets and potential Section 382 limits on tax attributes.
- Whether the Series A preferred stock is converted or redeemed in 2021, including cumulative dividends and potential common-stock dilution.
- Actual outcomes and cash exposure from Brazilian matters, environmental obligations and the contingent PI/DI sale-price adjustments.
- Commercial adoption and economics of Ultrastream and other growth investments, and the value or obligations associated with the WENN license arrangement.