Eastman Kodak Company — 2010 Form 10-K
Business context and reporting period
Annual report for the year ended December 31, 2010; it also presents unaudited fourth-quarter results. Kodak operates Consumer Digital Imaging (CDG), Graphic Communications (GCG), and Film, Photofinishing and Entertainment (FPEG). The company was shifting from traditional film toward digital businesses. Management reported digital products were 75% of revenue and identified consumer inkjet, commercial inkjet, workflow software and services, and packaging solutions as its growth initiatives.
Financial results and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $7.187 billion | $7.606 billion |
| Gross profit / margin | $1.951 billion / 27.1% | $1.768 billion / 23.2% |
| Operating loss before interest, other items and taxes | $336 million | $28 million |
| Loss from continuing operations | $675 million | $232 million |
| Net loss attributable to Kodak / diluted loss per share | $687 million / $2.56 | $210 million / $0.78 |
| Cash used in operating activities | $219 million | $136 million |
| Capital expenditures | $149 million | $152 million |
| Cash and cash equivalents at year-end | $1.624 billion | $2.024 billion |
- Revenue declined 5.5% year over year, mainly reflecting lower FPEG volumes. Kodak recognized $838 million from significant intellectual-property licensing arrangements in 2010, versus $435 million in 2009; licensing and royalties totaled $904 million of reported revenue.
- Gross margin improved 3.9 percentage points, primarily from manufacturing cost reductions and CDG licensing revenue. This improvement did not prevent a larger operating loss, in part because of a $626 million FPEG goodwill impairment.
- Segment sales and operating results: CDG revenue was $2.739 billion and segment earnings were $331 million; GCG revenue was $2.681 billion and segment loss was $26 million; FPEG revenue was $1.767 billion and segment earnings were $64 million. These segment results are before corporate and other reconciling items.
- Operating cash outflow increased by $83 million. After $149 million of capital expenditures, operating cash flow less capital expenditures was negative $368 million, before asset-sale proceeds and other adjustments. Cash declined by $400 million during the year.
- Year-end current assets were $3.799 billion and current liabilities $2.833 billion; working capital was $966 million. Total debt carrying value was $1.245 billion, including $50 million current and $1.195 billion long term. Contractual principal maturities totaled $1.363 billion. Total liabilities of $7.314 billion exceeded assets of $6.239 billion, leaving a $1.075 billion shareholders’ deficit.
- The asset-based revolving facility had $192 million available to borrow after borrowing-base deductions and letters of credit; no borrowed-money balance was outstanding under it. The facility expires March 31, 2012. Kodak reported compliance with its covenants at year-end. The company suspended common dividends in 2009; none were paid in 2010.
Material changes and unusual items
- FPEG’s continuing business declines and higher commodity costs led to a fourth-quarter $626 million goodwill impairment, eliminating its remaining goodwill. Silver prices rose 39% between September 30 and December 31, 2010, to $30.63 per troy ounce.
- Kodak’s fourth-quarter 2010 net loss was $595 million; revenue was $1.927 billion and gross profit was $377 million. The quarterly loss included the FPEG impairment. The company also recorded an approximately $27 million after-tax benefit from changes in employee benefit and compensation estimates, or $0.10 per share.
- A $154 million tax benefit was recorded after Kodak released valuation allowances on certain non-U.S. deferred tax assets. The 2010 tax provision was $114 million despite a pretax loss, reflecting, among other items, the impairment’s limited tax deductibility and the geographic mix of earnings.
- Kodak issued $500 million of 9.75% senior secured notes due 2018 to refinance debt. A $102 million net loss on early debt extinguishment contributed to 2010 results. The company also reported $149 million of interest expense.
- 2010 restructuring charges were $78 million, with approximately $62 million in anticipated annual cash savings. Kodak paid about $88 million in restructuring costs during 2010 and expected to use most of the year-end restructuring accrual in 2011.
Outlook, management commentary and risks
Management’s 2011 priorities were to grow revenue in its four digital initiatives and generate positive cash before restructuring payments, as defined by the company. Management said available cash, operating cash flows, borrowing capacity and potential asset sales should meet anticipated 2011 needs, including debt service, restructuring and employee-benefit payments, but acknowledged an uncertain business environment and considered additional financing alternatives.
- Management cited competitive pricing and rising commodity costs as pressures, and noted the continuing secular decline in film and photofinishing. It said growth-initiative revenue increased 18% in 2010, while printer unit shipments in consumer inkjet rose 45%.
- Key uncertainties include whether Kodak can generate recurring operating cash, grow its digital businesses profitably, obtain additional licensing revenue, manage substantial debt and pension obligations, and meet funding needs without relying on asset sales or new financing. S&P placed Kodak’s B- rating on CreditWatch with negative implications in January 2011; Moody’s corporate rating was B3 with a stable outlook.
- Intellectual-property disputes with Apple and Research In Motion (RIM) created uncertainty around potential licensing revenue. Kodak’s ITC case had an adverse initial determination under review; a final Commission determination was expected by May 23, 2011. RIM-related federal litigation was scheduled for trial in August 2011.
- Other material exposures include underfunded pension plans and postretirement obligations, environmental remediation, and litigation. Kodak accrued $103 million for environmental remediation, but stated it could not determine the likelihood or reasonably estimate a loss range for the Passaic River matter. The company also disclosed $69 million of unreserved Brazilian tax contingencies for which loss was reasonably possible.
- Kodak expected 2011 contributions of approximately $110 million to defined-benefit plans and $133 million for other postretirement benefits. It projected lower U.S. pension income and higher non-U.S. pension expense in 2011. A revised useful-life estimate for certain FPEG assets was expected to reduce 2011 depreciation by $38 million and increase diluted EPS by an estimated $0.12.
Important facts for investors to verify
- Whether the $838 million of 2010 licensing revenue is repeatable, and the timing, cash receipts and profitability of future licensing agreements.
- Operating cash generation, cash levels and available borrowing capacity, including compliance with facility availability and minimum-cash covenants.
- Debt maturities, interest burden, refinancing options and the effect of Kodak’s credit ratings and secured borrowing structure.
- FPEG performance after the goodwill impairment, including commodity-cost exposure and the assumptions underlying forecasts and revised asset lives.
- Outcomes and potential financial effects of the Apple/RIM intellectual-property disputes, Passaic River litigation, pension funding requirements and tax contingencies.
- Whether reported growth in digital initiatives translates into sustained revenue growth, improved margins and positive cash generation.