Eastman Kodak(KODK) - 2020 Q4 - Annual Report

Part I Business Overview Eastman Kodak Company is a global technology firm specializing in print, advanced materials, and chemicals across four main segments - Kodak is a global technology company focused on print, advanced materials, and chemicals, providing hardware, software, consumables, and services[18] - The company's primary raw materials include lithographic aluminum, silver, and electronic components, facing supply risks from single or limited-source suppliers and potential U.S. tariffs[39] - As of the end of 2020, Kodak employed approximately 4,500 people globally, with around 1,900 in the U.S[47] Revenue Contribution by Segment (2020 vs. 2019) | Segment | 2020 Revenue % | 2019 Revenue % | | :--- | :--- | :--- | | Traditional Printing | 58% | 59% | | Digital Printing | 23% | 24% | | Advanced Materials and Chemicals | 15% | 14% | Traditional Printing Segment - This segment is Kodak's largest, accounting for 58% of total net revenue in 2020, providing digital offset plates and computer-to-plate (CTP) imaging solutions[21][26] - The business model relies on a recurring revenue stream from the sale of aluminum digital printing plates, with key competitors being Fuji and Agfa[23][24] - In September 2019, Kodak established a strategic relationship with Lucky HuaGuang Graphics Co. Ltd in China, involving a facility sale and supply agreement[27][28] Digital Printing Segment - This segment accounted for 23% of total net revenue in 2020, including Electrophotographic Printing, Prosper, Versamark, and Software solutions[30][31][32] - The segment's focus is on developing the next-generation Ultrastream platform for packaging and décor applications and expanding its production workflow software solutions[30][31] Advanced Materials and Chemicals Segment - This segment contributed 15% of 2020 revenue and includes industrial film, motion picture film, advanced materials, and functional printing[33][34][36] - Kodak Alaris is a significant customer, representing approximately 30% of the segment's revenue in 2020[33] - The company is organically expanding its production of key starting materials (KSMs) for pharmaceuticals[35] Brand Segment - The Brand segment generates revenue by licensing the Kodak brand to third parties for a range of products[37] - Kodak aims to grow its portfolio of brand licenses to generate ongoing royalty streams and upfront payments[37] Risk Factors The company faces significant business, financial, and stock-related risks, including operational challenges, substantial debt, and stock price volatility Risks Related to Kodak's Business - The company may not successfully implement its business plans or cost reduction strategies, which could negatively affect financial results and liquidity[50] - Kodak has not generated positive operating cash flows without monetization transactions in recent years, and its largest segment faces declining revenues[52] - The COVID-19 pandemic poses a significant risk, potentially impacting the printing industry, demand for products, and business operations[60] - The announcement of a potential $765 million DFC loan has led to congressional and SEC investigations and lawsuits, which could damage Kodak's reputation[128] Risks Related to Indebtedness and Capital Markets - A breach of covenants in its credit agreements could result in an event of default, making all outstanding obligations immediately due and payable[132][133] - The company's non-investment grade credit rating may adversely impact commercial operations and increase the cost of refinancing[135][136] - Availability under the ABL Credit Agreement is limited by the value of eligible assets, and a decline could require additional cash collateral[138][140] Risks Related to Common Stock - Conversion of preferred stock and convertible notes may dilute the value for current common stockholders, potentially issuing 22% of outstanding common stock[148] - The company has a duty to register the resale of a large portion of its outstanding securities, which could adversely affect the stock price[156] - The company's stock price has been and may continue to be highly volatile, particularly following the DFC Announcement and subsequent investigations[158] Properties Kodak owns and leases significant global properties for its operations and is actively monetizing excess capacity - Kodak owns 11 million sq. ft. and leases 4 million sq. ft. of facility space globally, with its headquarters in Rochester, NY[161] - Principal manufacturing facilities are located in the USA, Canada, Germany, Japan, and China[162] - The company is pursuing monetization of excess capacity by selling or leasing associated properties[165] Legal Proceedings The company is involved in multiple lawsuits and government investigations stemming from the 2020 DFC loan announcement - Following the DFC loan announcement, Kodak is defending against federal Securities Class Actions and a Fiduciary Class Action lawsuit[166][167] - The DFC announcement has also prompted investigations by several congressional committees, the SEC, and the New York Attorney General's office[168] - Kodak's Brazilian operations have accrued approximately $3 million for various litigation matters for claims totaling about $117 million[169] Executive Officers The executive team is led by Executive Chairman and CEO James V. Continenza, supported by key officers in finance and legal roles - James V. Continenza was appointed Executive Chairman in February 2019 and added the role of Chief Executive Officer in July 2020[175] Key Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | James V. Continenza | 58 | Executive Chairman and Chief Executive Officer | | David E. Bullwinkle | 46 | Chief Financial Officer and Senior Vice President | | Roger W. Byrd | 55 | General Counsel, Secretary and Senior Vice President | | Eric H. Samuels | 53 | Chief Accounting Officer and Corporate Controller | Part II Market for Common Equity and Related Matters Kodak's common stock trades on the NYSE under "KODK", with dividend payments currently restricted by credit agreements - The company's common stock is listed on the NYSE under the symbol "KODK"[200] - No dividends were paid on common stock in 2020 or 2019, as payments are restricted by various credit agreements and preferred stock terms[201][202] Management's Discussion and Analysis (MD&A) Revenue declined 17% in 2020 due to COVID-19, leading to a significant net loss driven by non-cash charges and operational challenges - The COVID-19 pandemic had a material impact on 2020 revenues and earnings, mitigated by $25 million in cost reductions and $8 million in government assistance[264] - The significant increase in loss from continuing operations was primarily driven by a $386 million charge for the change in fair value of embedded derivatives[269][272] Consolidated Financial Highlights (2020 vs. 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | $1,029 | $1,242 | ($213) | | Gross Profit | $135 | $182 | ($47) | | Loss from Continuing Operations | ($544) | ($91) | ($453) | | Net (Loss) Earnings | ($541) | $116 | ($657) | Critical Accounting Policies and Estimates - Goodwill was tested for impairment multiple times in 2020 due to COVID-19 and market conditions, with no impairment found[212][221][222] - An impairment charge of $3 million was recorded for the Kodak trade name in Q1 2020 due to the expected negative impact of COVID-19[228] - A valuation allowance of $1.112 billion was recorded against net deferred tax assets of $1.081 billion as of Dec 31, 2020[236][237] - Embedded conversion features in the Series A Preferred Stock and Convertible Notes were bifurcated and accounted for as derivatives at fair value[232] Results of Operations by Segment - Traditional Printing revenue decreased by $135 million (19%) due to volume and pricing declines from the COVID-19 pandemic, causing Operational EBITDA to fall by $27 million[281][282][283] - Digital Printing revenue decreased by $52 million (18%) due to volume declines, though cost reductions mitigated the impact on Operational EBITDA[284][285][287] - Advanced Materials and Chemicals revenue fell by $28 million (14%), but Operational EBITDA improved by $11 million due to favorable pricing and cost reductions[288][289][290] Segment Operational EBITDA (2020 vs. 2019) | Segment (in millions) | 2020 Op. EBITDA | 2019 Op. EBITDA | | :--- | :--- | :--- | | Traditional Printing | $21 | $48 | | Digital Printing | ($10) | ($9) | | Advanced Materials and Chemicals | ($23) | ($34) | | Brand | $11 | $8 | Liquidity and Capital Resources - As of Dec 31, 2020, Kodak held $196 million in cash and cash equivalents, with $99 million in the U.S. and $97 million held internationally[301] - In February 2021, the company completed major financing transactions, raising net proceeds of approximately $235 million, which alleviated substantial doubt about its ability to continue as a going concern[315][316][370] - The non-binding letter of interest from the DFC for a potential $765 million loan is on hold and not expected to proceed as originally envisioned[322] Cash Flow Summary (2020 vs. 2019) | Cash Flow Activity (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($35) | $12 | | Net cash (used in) provided by investing activities | ($13) | $311 | | Net cash provided by (used in) financing activities | $10 | ($298) | Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2020 and 2019, including the independent auditor's report Report of Independent Registered Public Accounting Firm - The auditor, Ernst & Young LLP, issued an opinion that the financial statements present fairly the financial position of the company as of December 31, 2020[328] - Critical Audit Matters identified were the Income Taxes Valuation Allowance and the Accounting for Conversion of Convertible Notes due to their complexity and materiality[332][333][336] Consolidated Financial Statements Consolidated Statement of Operations Summary | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total net revenues | $1,029 | $1,242 | | Gross profit | $135 | $182 | | Loss from continuing operations | ($544) | ($91) | | Earnings from discontinued operations | $3 | $207 | | NET (LOSS) EARNINGS | ($541) | $116 | Consolidated Statement of Financial Position Summary | (in millions) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total current assets | $627 | $706 | | TOTAL ASSETS | $1,248 | $1,415 | | Total current liabilities | $296 | $368 | | Total liabilities | $980 | $1,134 | | Total equity | $77 | $99 | | TOTAL LIABILITIES & EQUITY | $1,248 | $1,415 | Notes to Financial Statements - Note 1 (Going Concern): Financing transactions in February 2021 raising $235 million alleviated substantial doubt about Kodak's ability to continue as a going concern[366][367][370] - Note 9 (Debt): In 2020, all $100 million of the 5% Secured Convertible Notes were converted into common stock[446][447][450] - Note 27 (Segment Information): Effective January 1, 2020, Kodak changed its organizational and reporting structure to four new segments[628] - Note 29 (Discontinued Operations): The 2019 sale of the Flexographic Packaging business resulted in $207 million in earnings from discontinued operations[644][646][650] Controls and Procedures Management concluded disclosure controls were effective as of year-end 2020, having remediated a previously identified control deficiency - Management concluded that the company's disclosure controls and procedures and its internal control over financial reporting were effective as of December 31, 2020[654][658] - A control deficiency was identified in Q3 2020 related to the unauthorized exercise of forfeited stock options by former employees[659] - The company remediated the control deficiencies as of December 31, 2020 by strengthening controls for equity grants[660]