EASTMAN KODAK CO annual report, FY2016

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Eastman Kodak Company — 2016 Form 10-K

Business context and reporting period. This annual report covers the year ended December 31, 2016; fourth-quarter figures are included where noted. Kodak is a global commercial printing and imaging company, with seven reportable segments. Results are for continuing operations unless stated otherwise. Kodak’s post-bankruptcy financial statements use fresh-start accounting and are not comparable with pre-emergence periods.

Financial performance and liquidity

  • Revenue: $1.543 billion, down $166 million (9.7%) from 2015. Declines in Print Systems, Consumer and Film, and Software and Solutions were partly offset by Micro 3D Printing and Packaging. Revenue in 2015 had also fallen 16.5% from 2014.
  • Profit and margins: Gross profit was $383 million, or 24.8% of revenue, versus $378 million, or 22.1%, in 2015. Continuing-operations income before interest, debt-extinguishment loss, other charges, reorganization items and taxes was $140 million, compared with $91 million. Pretax continuing-operations income was $78 million; income-tax expense was $32 million; continuing-operations income was $46 million. Net income attributable to Kodak was $15 million, or $0.28 per diluted share, compared with a net loss of $80 million, or $1.91 per share, in 2015. Discontinued operations recorded a $30 million loss.
  • Fourth quarter: Continuing-operations revenue was $404 million and gross profit was $105 million. Kodak-attributable net income was $10 million.
  • Segment performance: Print Systems revenue was $1.018 billion and Operational EBITDA was $105 million; revenue fell $88 million, while EBITDA rose $6 million. Consumer and Film revenue fell to $216 million and Operational EBITDA dropped to $16 million from $52 million, mainly due to lower consumer ink sales and film demand. Micro 3D Printing and Packaging revenue was $132 million and EBITDA $12 million. Operational EBITDA is a company-defined segment measure, not GAAP operating income.
  • Cash flow: Operating activities used $13 million, an improvement from $95 million used in 2015. Investing activities used $21 million, including $41 million of capital expenditures; financing activities used $72 million. Cash and cash equivalents declined by $113 million to $433 million at year-end.
  • Liquidity: Working capital was $695 million. The asset-based revolving facility had $20 million of net availability at year-end, against approximately $116 million of letters of credit. Some overseas cash may not be readily transferable; approximately $138 million was held in China. Management said liquidity was adequate for operating and investing needs.
  • Debt and preferred stock: Year-end debt and capital leases had a carrying value of $407 million, including a $396 million term note maturing in 2019. Kodak issued $200 million of 5.50% convertible preferred stock in November and used proceeds, with cash on hand, to repay the $262 million second-lien loan. The preferred stock has cumulative cash dividends and is redeemable at $100 per share plus unpaid dividends if not converted before its fifth anniversary. It may convert into common stock and carries potential dilution and governance implications.

Material changes versus prior year

  • Revenue continued to contract, but lower costs helped lift gross margin and continuing-operations earnings. SG&A declined to $172 million from $204 million, and R&D to $40 million from $44 million.
  • Print Systems remained the largest business, with pricing pressure and lower volumes partly offset by manufacturing efficiencies and cost reductions. Consumer and Film earnings deteriorated sharply, chiefly from declining consumer ink sales.
  • Cash use from operations improved, but cash balances fell. Debt decreased after the second-lien repayment; the preferred financing replaced higher-cost debt but creates dividend and potential redemption obligations.
  • Kodak classified its PROSPER Enterprise Inkjet business as discontinued operations and held for sale. The business generated $94 million in 2016 revenue and a $28 million loss after tax. Kodak anticipated a sale by the end of the third quarter of 2017.
  • Net pension and other postretirement income was $147 million, contributing materially to results. Kodak changed its pension service- and interest-cost calculation method in 2016, reducing interest cost by approximately $35 million.

Outlook, risks and unusual items

  • Outlook: No formal numerical revenue or earnings guidance is provided in the filing. Management’s strategy emphasizes Sonora process-free plates, packaging, Micro 3D Printing, software and services, cost reductions, management of mature businesses, and monetization of assets. Kodak expected restructuring actions taken in 2016 to generate about $18 million in annual cash savings, mostly in effect by the end of 2017. It forecast 2017 capital expenditures of $30–$35 million and pension contributions and net benefit payments of approximately $15 million.
  • Key risks: Kodak warns that revenue declines, especially in its largest segment, may continue; growth businesses may not scale or generate enough cash to offset mature-business declines. Other material risks include tight liquidity and covenant headroom, secured debt obligations, variable interest rates, customer and supplier pressures, execution and sale risks for PROSPER, pension assumptions, litigation, environmental liabilities, and technology and competitive pressures. The company reported compliance with credit-facility covenants at year-end, but availability and covenant requirements depend on borrowing-base assets and future performance.
  • Unusual items: 2016 included a $15 million loss on deconsolidation of the RED utilities entity, $20 million of silver metal mesh-related impairment charges, a $5 million Kodak trade-name impairment, and $16 million of net legal-settlement proceeds and gains within other operating expense. No goodwill impairment was indicated in the 2016 annual test. Restructuring charges were $16 million; related cash payments were approximately $16 million.
  • Contingencies: Brazilian claims aggregated approximately $213 million, with about $13 million accrued; the filing also reports approximately $59 million of unreserved Brazilian contingencies for which loss was reasonably possible. Kodak disputes the matters. Historical Eastman Business Park environmental liabilities above $99 million could require Kodak to pay 50% of the excess, without a stated maximum.
  • Capital structure: Series A preferred holders had approximately 22% of voting power on an as-converted basis; conversion of all preferred shares would represent approximately 21% of common shares after conversion. Resales of registered securities could pressure the share price or affect control and tax attributes. No common dividends were paid in 2016.

Important facts for investors to verify

  1. Whether declining Print Systems and consumer ink revenues stabilize, and whether growth initiatives deliver the anticipated sales and margins.
  2. Whether operating cash flow turns positive and whether the $20 million of revolving-facility availability remains adequate as borrowing-base assets change, including any PROSPER sale.
  3. The terms, timing and proceeds of a PROSPER sale, including the announced 2017 restructuring charges and continuing investment needs.
  4. The effects of the 2019 term-debt maturity, preferred dividends and 2021 mandatory redemption on future liquidity and potential common-share dilution.
  5. Developments in Brazilian litigation and environmental obligations, pension funding and actuarial assumptions, and any changes to covenant compliance or restricted cash.