Eastman Kodak Company — 2011 Form 10-K
Business context and reporting period: Fiscal year ended December 31, 2011, with unaudited quarterly data. Kodak reported Consumer Digital Imaging (CDG), Graphic Communications (GCG), and Film, Photofinishing and Entertainment (FPEG). It planned to reorganize these into Commercial and Consumer groups in 2012. On January 19, 2012, Kodak and its U.S. subsidiaries filed for Chapter 11; foreign subsidiaries were not filing entities.
Financial results and liquidity
| Metric | 2011 | 2010 / comparison |
|---|---|---|
| Net sales | $6.022 billion | $7.167 billion; down 16% |
| Gross profit / margin | $887 million / 15% | $1.946 billion / 27% |
| Operating loss before interest, other items and taxes | $600 million | $336 million loss |
| Net loss | $764 million; $2.84 per share | $687 million; $2.56 per share |
| Operating cash flow | $998 million used | $219 million used |
| Cash and equivalents at year-end | $861 million | $1.624 billion |
| Debt on balance sheet | $1.515 billion | $1.245 billion |
| Working capital / shareholders’ deficit | $553 million / $2.350 billion | $966 million / $1.075 billion deficit |
Capital expenditures were $128 million; operating cash use plus capital expenditures totaled approximately $1.126 billion. Debt principal due under pre-petition obligations was $1.618 billion, including $402 million scheduled for 2013. Current assets were $2.703 billion and current liabilities $2.150 billion. Pension and other postretirement liabilities totaled $3.053 billion.
By segment, CDG sales fell 36% to $1.739 billion and its reported operating measure swung to a $349 million loss from $278 million income. GCG sales rose 2% to $2.736 billion, but its loss widened to $191 million from $95 million. FPEG sales fell 12% to $1.547 billion and income declined to $34 million from $91 million.
Material changes and notable items
- The sales and margin deterioration primarily reflected a sharp decline in non-recurring intellectual-property licensing: $82 million in 2011 versus $838 million in 2010. Kodak attributed lower revenue also to traditional-market volume declines, competitive pricing, and camera participation choices.
- FPEG faced higher silver and other commodity costs. GCG margins were pressured by PROSPER commercial-printing start-up and stabilization costs.
- Restructuring charges were $133 million, with approximately $71 million of restructuring cash payments; actions were expected to generate $114 million in annual cash savings, mostly by the second half of 2012.
- Kodak recorded a $62 million gain on the sale of CMOS image-sensor patents and an $8 million goodwill impairment. A 2011 change in estimated useful lives reduced depreciation expense by $38 million and increased continuing-operations earnings by $32 million.
- Fourth-quarter 2011 sales were $1.753 billion, gross profit $344 million, continuing-operations loss $117 million, and loss per share $0.43. A $43 million reduction in employee-benefit and compensation accrual estimates benefited the quarter by about $0.16 per share.
Outlook, restructuring and principal risks
- Management said it expected cash, foreign-subsidiary operating earnings, DIP financing, asset-sale proceeds, and intellectual-property monetization to fund anticipated needs through the end of 2012. This was expressly uncertain and depended on operations, asset sales, financing availability, and bankruptcy-court and creditor actions.
- The post-petition DIP facility authorized up to $950 million: a $700 million term loan and a $250 million asset-based revolver. Kodak borrowed the full $700 million term loan by February 2012; the revolver was also subject to borrowing-base limits. The company paid about $36 million in facility fees.
- The filing states substantial doubt about Kodak’s ability to continue as a going concern. Emergence depended on a court-approved reorganization plan, compliance with DIP covenants and milestones, and obtaining exit financing. Kodak also said a sale of some or all assets could be considered.
- Chapter 11 could materially change reported asset and liability values and classifications. The financial statements were prepared on a going-concern basis and did not reflect such potential adjustments.
- Kodak announced plans to phase out dedicated digital cameras, pocket video cameras, and picture frames in the first half of 2012. It continued to invest in consumer and commercial inkjet, packaging, and workflow businesses while traditional film markets declined.
- Material exposures include underfunded pension and retiree-benefit plans, uncertain Passaic River remediation liability that Kodak could not estimate, patent litigation and licensing uncertainty, commodity and currency volatility, customer and supplier confidence, and DIP minimum-liquidity and adjusted-EBITDA covenants. Kodak also reported approximately $70 million of unreserved Brazilian tax contingencies with at least a reasonable possibility of loss.
Most important facts for investors to verify
- Current bankruptcy-court status, proposed plan treatment of existing equity and debt, creditor negotiations, and prospects for exit financing or an asset sale.
- Actual liquidity, availability under DIP borrowing bases, covenant compliance, cash location and transferability, and cash burn relative to the stated 2012 funding expectation.
- Whether patent-portfolio monetization produces sufficient proceeds, how proceeds are allocated under the second-lien agreement, and the effect of a sale on future licensing revenue.
- Progress on restructuring savings and the camera-business phase-out, alongside profitability and cash requirements of the digital growth businesses.
- Updated pension funding needs and the outcome or estimate of the Passaic River matter and other contingencies.