Eastman Kodak Company — 2013 Form 10-K
Business context and reporting period. Kodak reported for the year ended December 31, 2013. It emerged from Chapter 11 on September 3, 2013 and adopted fresh-start accounting effective September 1. Accordingly, the filing presents a four-month Successor period and an eight-month Predecessor period; they are not directly comparable. Kodak’s continuing business focused on commercial imaging, principally Graphics, Entertainment and Commercial Films (GECF) and Digital Printing and Enterprise (DP&E). Personalized Imaging and Document Imaging were classified as discontinued operations.
Financial performance and position
| Metric | Reported amount and context |
|---|---|
| Continuing-operations sales | $805 million, successor four months; $1.542 billion, predecessor eight months. Combined 2013 sales were $2.347 billion, down 14% from 2012’s $2.719 billion. Calendar fourth-quarter sales were $607 million. |
| Gross profit and margin | $118 million and approximately 15% in the successor four months; $368 million and approximately 24% in the predecessor eight months. Combined gross profit was $486 million, approximately 21% of combined sales, versus 11% in 2012. |
| Net income (loss) | Successor four-month net loss attributable to Kodak was $81 million; predecessor eight-month net earnings attributable to Kodak were $2.066 billion. The predecessor result included a $2.026 billion net reorganization gain. The figures should not be read as a recurring full-year profit. |
| Cash flow | Operating cash used: $98 million in the successor period and $565 million in the predecessor period. Investing cash provided: $81 million and $679 million, respectively, largely reflecting asset-sale proceeds in the predecessor period. Financing cash used: $42 million and $328 million, respectively. |
| Year-end liquidity and balance sheet | Cash and equivalents were $844 million; working capital was $1.086 billion. Total assets were $3.200 billion, liabilities $2.552 billion and equity $648 million. Kodak reported $49 million of net availability under its asset-based revolver. |
| Debt and interest | Year-end debt carrying value was $678 million ($4 million current and $674 million long-term); contractual maturity value was $693 million. The emergence term loans totaled $695 million principal, with a separate $200 million revolving facility. Combined 2013 interest expense across the two reporting periods was $128 million. |
Segment sales for the combined 2013 periods were $1.506 billion for GECF and $803 million for DP&E. Both segments recorded losses in the successor four-month period: $37 million for GECF and $59 million for DP&E. For the predecessor eight months, GECF reported $5 million of earnings and DP&E a $37 million loss. No dividends were paid in 2013.
Material changes versus prior periods
- Combined continuing-operations sales fell 14% from 2012, primarily because of lower volumes across segments. GECF sales declined 10% and DP&E sales 14% versus 2012.
- Combined gross margin improved to 21% from 11% in 2012. Management attributed the increase to favorable price/mix, lower pension and postretirement costs, and cost improvements, partly offset by fresh-start inventory revaluation costs.
- SG&A and R&D expenses declined, reflecting cost reductions. Consumer inkjet printer production was discontinued, with the business focused on selling ink to its installed base.
- Kodak sold its digital imaging patent portfolio and related rights for approximately $530 million in February 2013. It sold certain Personalized Imaging and Document Imaging assets to the U.K. Kodak Pension Plan for net cash consideration of $325 million, alongside assumption of certain liabilities and settlement of the U.K. pension claim.
- Predecessor common shares were canceled at emergence and new shares issued. The new stock began trading on the NYSE as KODK on November 1, 2013.
Outlook, risks and unusual items
- Management emphasized improving profitability through equipment placements and recurring consumables in digital printing, packaging, enterprise services and Graphics. It expected functional printing solutions to enter commercial production in 2014; this is an expectation, not a quantified revenue forecast.
- 2013 restructuring actions were expected to generate approximately $69 million of annual cash savings, with most expected to be in effect by the second half of 2014. Kodak forecast approximately $50 million of 2014 capital expenditures and $26 million of 2014 contributions and benefit payments for major pension and postretirement plans.
- Liquidity risks include continued operating cash use, restricted or difficult-to-repatriate overseas cash, substantial debt service, variable-rate borrowing, credit-facility covenants and dependence on achieving operating improvements. Approximately $537 million of year-end cash was outside the U.S., including about $254 million in China; management noted that some overseas funds may not be readily transferable.
- Other material risks include declining demand for traditional products, intense price and technology competition, execution and commercialization risk in growth businesses, supplier and component constraints, pension assumption and funding volatility, and potential impairment of assets valued under fresh-start accounting.
- The Eastman Business Park environmental settlement contemplated a $49 million remediation trust. Kodak could owe 50% of costs above $99 million; the agreement remained subject to conditions, including EPA-related approval, with an implementation deadline of May 15, 2014.
- Kodak disclosed $38 million of unreserved Brazilian tax contingencies for which loss was reasonably possible, as well as customer financing guarantees with a maximum potential payment of $14 million. It stated that known litigation exposures were not believed probable to materially harm consolidated results, while noting litigation outcomes are unpredictable.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2013.
Important facts for investors to verify
- Separate predecessor and successor results carefully: fresh-start accounting makes the periods non-comparable, and the large predecessor reorganization gain drove reported earnings.
- Reconcile the $844 million cash balance with the $49 million revolver availability, foreign-cash transfer restrictions and upcoming debt service.
- Track operating cash generation, sales trends and whether the planned $69 million annual restructuring savings are realized.
- Review the status and final economics of deferred closings and contingent payments related to the Personalized Imaging and Document Imaging sale.
- Monitor the Eastman Business Park settlement’s effectiveness and potential remediation exposure above the trust threshold.
- Assess whether commercial inkjet, packaging, functional printing and enterprise services achieve the scale and profitability management expects.