EASTMAN KODAK CO annual report, FY2015

Eastman Kodak Company — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015, compared primarily with the year ended December 31, 2014. Kodak emerged from Chapter 11 in September 2013 and adopted fresh-start accounting; periods before and after September 1, 2013 are not directly comparable. Kodak operates in commercial printing and imaging, including print systems, commercial inkjet, packaging, software and services, film, intellectual property licensing, and Eastman Business Park.

Financial performance

Metric	2015	2014
Revenue	$1.798 billion	$2.116 billion
Gross profit / margin	$381 million / 21%	$456 million / 22%
Operating earnings before interest and specified items	$54 million	$(16) million
Loss from continuing operations	$(67) million	$(122) million
Net loss attributable to Eastman Kodak Company	$(80) million	$(123) million
Net cash used in operating activities	$(95) million	$(128) million
Cash and cash equivalents at year-end	$547 million	$712 million
Debt carrying value	$680 million	$677 million

Revenue fell 15.0%. The main drivers were adverse foreign exchange of about $150 million, reduced non-recurring intellectual-property and brand-licensing revenue of about $62 million, and Consumer and Film volume declines of about $82 million. Lower costs partly offset the revenue and gross-profit declines. R&D expense decreased to $61 million from $94 million, while SG&A fell to $226 million from $310 million. Interest expense was $63 million.

Segment Operational EBITDA, Kodak’s adjusted segment measure, was $122 million across reportable segments, down from $158 million. Print Systems generated $98 million; Consumer and Film $52 million; Micro 3D Printing and Packaging $9 million; Software and Solutions $9 million; and Eastman Business Park $2 million. Enterprise Inkjet Systems lost $26 million and Intellectual Property Solutions lost $22 million. These segment figures exclude specified corporate and other items and are not consolidated operating income.

Liquidity, debt, and cash flow

• Working capital was $819 million, down from $951 million. Total assets were $2.138 billion; total liabilities were $2.035 billion; total equity was $103 million.
• Operating cash outflow improved by $33 million year over year, but operations continued to consume cash. Capital expenditures were $43 million. Cash decreased by $165 million during 2015.
• Cash included $302 million in the U.S. and $245 million outside the U.S.; overseas balances may be restricted or costly to repatriate. About $134 million was held in China. Restricted cash was $43 million.
• ABL availability was $16 million at year-end, with $118 million of letters of credit outstanding. Excess Availability was $31 million, only slightly above the $30 million threshold that can trigger additional covenant and cash-control requirements. Kodak reported compliance with its credit covenants at year-end.
• Term debt is variable-rate and secured. The first-lien term loan matures in 2019 and the second-lien loan in 2020; contractual debt maturities total $690 million, with $397 million due in 2019 and $276 million in 2020. Kodak’s credit ratings were below investment grade.

Changes, outlook, and material items

• Print Systems revenue declined $151 million, substantially reflecting currency effects; its Operational EBITDA rose $5 million to $98 million through cost reductions and efficiency gains despite pricing pressure.
• Consumer and Film revenue fell $87 million and Operational EBITDA fell $14 million. Management expects this mature segment’s revenue to continue declining.
• Prosper portfolio revenue increased 35%, but Enterprise Inkjet remained loss-making. Kodak was discussing offers with prospective buyers for the Prosper business.
• Packaging plate volume increased 26%; Micro 3D Printing and Packaging returned to positive Operational EBITDA. Kodak decided to exit silver metal-mesh development and focus touch-sensor development on copper mesh.
• 2015 restructuring charges were $46 million, including accelerated depreciation. The actions were expected to yield approximately $55 million in annual cash savings, mostly in effect by the end of 2016. The Leeds plate-facility exit was expected to be completed by the second quarter of 2016.
• Kodak recorded $8 million of goodwill impairments in 2015. At year-end, the Kodak trade name’s estimated fair value exceeded carrying value by only 3%; management expected an impairment related to a possible Prosper sale. Kodak also expected a first-quarter 2016 impairment relating to silver metal-mesh assets.
• No specific consolidated revenue or earnings guidance was provided in the supplied filing text. Management said liquidity was adequate for operating and investing needs, while emphasizing ongoing negative operating cash flow and the need to maintain covenant compliance. Planned 2016 capital expenditures were $20–$25 million; pension and postretirement contributions and benefit payments were forecast at about $19 million.

Key risks and contingencies

• Cash generation, leverage covenants, borrowing-base availability, restricted cash, below-investment-grade credit, and refinancing access are significant risks. Future covenant compliance may depend on asset monetization, refinancing, or raising capital.
• Foreign exchange, pricing pressure, declining film and consumer-ink demand, product commercialization, and competition could further pressure revenue, margins, and cash flow. Growth initiatives require investment and may not achieve scale.
• Kodak has significant pension obligations; major defined-benefit plans were underfunded by $378 million at year-end ($306 million U.S. and $72 million non-U.S.). Results are sensitive to discount rates, asset returns, and other actuarial assumptions.
• Environmental obligations at Eastman Business Park are supported by a $49 million trust and up to $50 million of additional New York State payments; above $99 million of historical liabilities, Kodak is responsible for 50% of the excess. The filing says the amount and timing of remediation costs are uncertain.
• Brazilian litigation and tax assessments included approximately $176 million in claims with about $11 million accrued; a further approximately $49 million of contingencies was described as reasonably possible but unreserved. ERISA litigation and other commercial, environmental, employment, and intellectual-property matters also remain.

Important facts for investors to verify

• Whether operating cash flow turns positive and whether the reported $55 million annual restructuring savings are realized.
• Current ABL availability, covenant headroom, required restricted cash, and the company’s ability to meet debt maturities and interest obligations.
• Progress and financial consequences of any Prosper sale, including potential trade-name impairment and changes to Enterprise Inkjet performance.
• Whether Consumer and Film declines, currency effects, and print pricing pressure continue, and whether Packaging and Software and Solutions can offset them.
• Updates to pension funding, environmental exposure, Brazilian disputes, and other material contingencies.