Eastman Kodak Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are with 2018. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
Kodak is a global technology company focused on print, advanced materials and chemicals. Its largest business is Print Systems, including offset plates and commercial printing solutions. Kodak reported six segments in 2019; it reorganized segments effective January 2020. The Flexographic Packaging business was classified as discontinued operations and sold during 2019.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue from continuing operations | $1,242 | $1,320 |
| Gross profit / margin | $182 / 14.7% | $180 / 13.6% |
| Loss from continuing operations | $(91) | $(9) |
| Net earnings (loss), including discontinued operations | $116 | $(16) |
| Operating cash flow | $12 | $(62) |
| Investing cash flow | $311 | $(22) |
| Financing cash flow | $(298) | $(11) |
- Revenue fell $78 (6%); unfavorable currency reduced revenue by $27. Print Systems accounted for $836 of revenue. Segment Operational EBITDA was $41 for Print Systems, $(5) for Enterprise Inkjet, $2 for Kodak Software, $(13) for Brand, Film and Imaging, $(12) for Advanced Materials and 3D Printing Technology, and $(1) for Eastman Business Park.
- Net earnings included $207 of earnings from discontinued operations, principally reflecting the after-tax gain on the Flexographic Packaging sale. Continuing operations remained loss-making.
- Operating cash flow turned positive, but management attributed it to working-capital improvements and individual, non-recurring transactions; the filing cautions these sources are not expected to recur. Investing cash flow included substantial business-sale proceeds.
- Cash and cash equivalents were $233 at year-end; cash, restricted cash and cash in assets held for sale totaled $290. Cash held outside the U.S. may not be readily transferable. Current assets were $706 and current liabilities $368.
- Debt and finance lease carrying value was $111, versus $401 in 2018, following repayment of the first-lien term loans. This excludes the separately classified Series A preferred stock, carried at $182. The $100 face-value secured convertible notes mature initially in November 2021; the preferred stock is mandatorily redeemable in November 2021 if not converted.
- Under the ABL facility, $80 of letters of credit were outstanding and Excess Availability was $22 at year-end. Kodak had deposited $22 of restricted cash to support the availability threshold. The ABL commitment was reduced from $150 to $120 in January 2020.
- No common dividends were declared or paid in 2019 or 2018. Preferred dividends were in arrears for four payment periods as of February 1, 2020.
Changes versus 2018 and unusual items
- Continuing revenue declined across Print Systems, Enterprise Inkjet and Kodak Software; Brand, Film and Imaging revenue was nearly flat. Print Systems Operational EBITDA improved despite lower sales, helped by $13 of HuaGuang licensing revenue, cost reductions and lower aluminum costs.
- Gross profit increased $2 as cost savings, lower depreciation and HuaGuang licensing revenue offset lower print volumes, pricing pressure and inkjet inventory write-downs.
- Other charges rose to $46 from $17, including a $42 non-cash expense from changes in the fair value of embedded conversion derivatives. Interest expense increased to $16 from $9.
- Kodak sold Flexographic Packaging for $320 net cash consideration at closing, plus the assumption of certain liabilities; it recognized an after-tax gain of $212. Kodak also entered a China strategic relationship with HuaGuang, recognizing $13 of licensing revenue and receiving $30 of net cash consideration at closing, in addition to assumed liabilities.
- Impairment charges included $4 for the Kodak trade name and $2 for a building in 2019. Restructuring charges were $16; Kodak said the actions were expected to produce approximately $22 of annual cash savings, mostly in effect by the end of the third quarter of 2020.
Outlook, risks and contingencies
- The auditor’s report and management’s disclosures state that substantial doubt exists about Kodak’s ability to continue as a going concern. The concern reflects recent operating losses and weak cash generation, restrictions on cash availability, significant operating and other cash needs, and 2021 debt maturity and preferred redemption obligations. Kodak said it lacked committed refinancing and liquidity to meet those obligations on their current terms. It obtained a lender waiver on March 6, 2020 relating to the going-concern paragraph under the ABL reporting covenant.
- Management’s plans include profitable revenue growth, expense reductions, organizational simplification, asset sales and leases, and curtailing or delaying some product development. No specific revenue or earnings guidance is provided in the filing text.
- Kodak forecast 2020 capital expenditures of $15–$25 and pension/postretirement contributions and benefit payments of approximately $17. Restructuring actions were expected to deliver approximately $22 in annual cash savings.
- Risks include structural declines and pricing pressure in print and film markets, execution and commercialization risks for new products, dependence on suppliers and key components, currency and commodity volatility, and the ability to maintain ABL availability and refinance upcoming obligations.
- The filing describes COVID-19-related manufacturing and logistics disruptions already experienced at filing time and warns of potentially material effects if disruptions persist. The ultimate impact was uncertain.
- Brazilian litigation and tax assessments aggregated approximately $149, with approximately $3 accrued; the filing separately reports an unreserved portion of about $8 for contingencies with at least a reasonable possibility of loss. Kodak also disclosed an uncapped potential obligation to pay 50% of historical Eastman Business Park environmental liabilities exceeding $99; no liability was recorded for that guarantee.
Most important facts for investors to verify
- Whether Kodak can generate sustainable operating cash flow without one-time working-capital benefits or asset monetizations.
- Available U.S. liquidity, restrictions on overseas cash, ABL borrowing-base availability, collateral needs and covenant compliance.
- Plans and funding to repay, extend or refinance the convertible notes, ABL facility and preferred-stock redemption obligations due in 2021.
- Whether the expected restructuring savings materialize and offset continued revenue and pricing declines in core print businesses.
- The ongoing cash and earnings effects of the COVID-19 disruption, the HuaGuang arrangement and the Flexographic Packaging sale, including any earn-out proceeds.
- Potential dilution and governance implications of conversion of the notes and preferred stock, preferred dividend arrears, and the disclosed legal and environmental exposures.