Eastman Kodak(KODK) - 2022 Q4 - Annual Report

Part I Business Eastman Kodak Company is a global manufacturer specializing in commercial print, advanced materials, and chemicals, structured into four key segments - Kodak is a global manufacturer focused on commercial print and advanced materials and chemicals, operating through four reportable segments[18][20] Revenue Contribution by Segment (2020-2022) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Traditional Printing | 59% | 57% | 58% | | Digital Printing | 19% | 22% | 23% | | Industrial Film and Chemicals | 15% | 14% | 13% | - As of January 1, 2023, Kodak employed approximately 4,200 employees across 35 countries[49] - The company's business experiences seasonality, with printing equipment and plate unit sales typically higher in the fourth quarter[41] Traditional Printing The largest segment, Traditional Printing, focuses on Prepress Solutions, including digital offset plates and CTP imaging, generating recurring revenue - The Traditional Printing segment's core business is Prepress Solutions, including digital offset plates and CTP imaging solutions, generating recurring revenue from plate sales[21][23] - A key product, KODAK SONORA Process Free Plates, offers environmental and efficiency benefits by eliminating chemical processing steps[25] - This segment faces challenges from higher raw material costs, digital substitution, and competitive pricing pressures[22] Digital Printing The Digital Printing segment offers inkjet systems and workflow software, with a focus on recurring revenue from consumables, despite ceasing some printer manufacturing - The segment offers PROSPER inkjet presses, PRINERGY workflow software, and Electrophotographic Printing Solutions (NEXFINITY, ASCEND)[28][29][35] - Kodak ceased manufacturing NEXFINITY and ASCEND electrophotographic printers in December 2022 but continues to provide consumables and service for the installed base[35] - The business focuses on developing its next-generation inkjet platform, Ultrastream, for packaging and décor applications[29] Advanced Materials and Chemicals This segment encompasses Industrial Film and Chemicals, Motion Picture, and Advanced Materials, focusing on specialty chemicals and growth initiatives like EV battery materials - The segment's lines of business include Industrial Film and Chemicals, Motion Picture, and Advanced Materials and Functional Printing[32] - Kodak Alaris is a major customer, representing about 32% of the segment's revenues in 2022[32] - Growth initiatives include producing KSMs for pharmaceuticals, specialty materials for EV batteries, light-blocking particles for textiles, and printed transparent antennas[39] Brand The Brand segment generates revenue by licensing the Kodak brand to third parties for various consumer products, aiming for ongoing royalty streams - This segment's revenue is derived from licensing the Kodak brand to third parties for use on a range of consumer products[39] Risk Factors The company identifies numerous risks across business operations, indebtedness, legal compliance, and common stock, which could materially affect its financial condition Risks Related to Business and Operations Kodak faces significant operational risks from global economic conditions, supply chain disruptions, cyber-attacks, and reliance on third-party suppliers, impacting cash flow and new product commercialization - Global economic conditions, including the COVID-19 pandemic, the war in Ukraine, inflation, and rising interest rates, adversely affect Kodak's business through increased costs and supply chain disruptions[59][67][70] - Generating positive operating cash flow is critical for business continuity, as recent operations have relied on financing and monetization transactions[59][71][72] - Cyber-attacks and data security incidents pose significant risks, potentially disrupting operations, compromising confidential information, and leading to costly litigation[59][89] - Kodak relies on third-party suppliers, facing risks of supply shortages, price increases, and logistical disruptions, especially for single-source components[64][114][115] Risks Related to Indebtedness and Access to Capital Markets Substantial debt obligations and a non-investment grade credit rating limit Kodak's capital access and investment capacity, with ABL availability tied to declining asset levels - The company has substantial obligations under its Term Loan, ABL Credit Agreement, and other facilities, requiring significant cash flow for servicing and potentially hindering operations funding[61][121][122] - Borrowing availability under the ABL Credit Agreement is limited by eligible asset values, and declining asset levels could restrict access[61][123][125] - Kodak's non-investment grade credit rating may adversely impact commercial operations, increase liquidity requirements, and raise refinancing costs[61][133][134] Legal, Regulatory and Compliance Risks Kodak faces significant legal and regulatory risks from DFC-related investigations, non-compliance with global laws, and potential future pension obligations - Legal proceedings and investigations related to the July 2020 DFC loan announcement could materially affect the company's reputation, financial condition, and stock price[62][136][137] - Failure to comply with complex global laws, including anti-corruption, economic sanctions, and data privacy regulations, could result in significant penalties and reputational harm[62][139][142] - Future pension and postretirement benefit costs could be unfavorably impacted by changes in actuarial assumptions or market performance, potentially requiring significant cash contributions[68][151] Risks Related to the Company's Common Stock Common stockholders face risks from potential dilution by convertible securities, significant voting power of preferred holders, and stock price volatility due to registered share resales - The conversion of outstanding Series B Preferred Stock, Series C Preferred Stock, and 2021 Convertible Notes may dilute the value and ownership percentage of current common stockholders[66][155] - Holders of Series C Preferred Stock and 2021 Convertible Notes have significant voting power and board nomination rights, potentially influencing corporate actions[66][158][161] - The company has registered a large number of shares for resale, and their sale or perceived sale could cause the common stock price to decline[66][163] - The company's stock price has been and may continue to be volatile, influenced by company announcements, operating results, and DFC-related investigations[66][165] Properties Kodak's global operations include 11 million square feet owned and 4 million square feet leased space, with headquarters in Rochester, New York, and key manufacturing sites worldwide - Kodak owns 11 million square feet and leases 4 million square feet of space worldwide, with headquarters at Eastman Business Park in Rochester, New York[167][170] Principal Manufacturing Facilities by Segment | Digital Printing | Traditional Printing | Advanced Materials and Chemicals | | :--- | :--- | :--- | | Rochester, New York, USA | Rochester, New York, USA | Rochester, New York, USA | | Dayton, Ohio, USA | Columbus, Georgia, USA | Xiamen, China | | Vancouver, Canada | Osterode, Germany | Vancouver, Canada | | Shanghai, China | Gunma, Japan | | Information About Our Executive Officers This section provides biographical information for Kodak's executive officers, including the Executive Chairman and CEO, CFO, General Counsel, Chief Accounting Officer, and Chief Technical Officer Executive Officers | Name | Age | Positions Held | | :--- | :--- | :--- | | James V. Continenza | 60 | Executive Chairman and Chief Executive Officer | | David E. Bullwinkle | 48 | Chief Financial Officer, Senior Vice President and President of Eastman Business Park | | Roger W. Byrd | 57 | General Counsel, Secretary and Senior Vice President | | Richard T. Michaels | 49 | Chief Accounting Officer and Corporate Controller | | Terry R. Taber | 68 | Chief Technical Officer, Vice President, Senior Vice President Advanced Materials and Chemicals | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Kodak's common stock trades on the NYSE under "KODK"; no dividends were paid in 2021-2022, with payments potentially restricted by credit agreements - Kodak's common stock is listed on the NYSE under the symbol "KODK"[192] - No dividends on common stock were declared or paid during 2022 or 2021, with payments potentially restricted by credit and preferred stock agreements[193][194] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2022, consolidated revenues increased by 5% to $1.205 billion, driven by pricing improvements despite currency impacts, as Kodak navigates economic volatility and focuses on strategic growth and liquidity management - Consolidated revenues for the year ended December 31, 2022, were $1.205 billion, a 5% increase from 2021, despite a $70 million unfavorable currency impact[206] - The company's operations are impacted by global economic volatility, including supply chain disruptions, inflation, and the war in Ukraine, leading to increased costs and volume declines[208] - Kodak's strategy focuses on investing in print, advanced materials, and chemicals, growing revenues, promoting film use, and continuing cost reductions[218] - The company ended 2022 with a cash balance of $217 million, a decrease of $145 million from December 31, 2021[250] Results of Operations In 2022, Kodak's revenues increased by $55 million to $1.205 billion, with net earnings rising to $26 million, driven by pricing improvements and reduced SG&A expenses Consolidated Results of Operations (2021 vs. 2022) | (in millions) | 2022 | 2021 | $ Change | | :--- | :--- | :--- | :--- | | Revenues | $1,205 | $1,150 | $55 | | Gross profit | $170 | $164 | $6 | | Selling, general and administrative expenses | $153 | $177 | ($24) | | Earnings from continuing operations before income taxes | $31 | $28 | $3 | | NET EARNINGS | $26 | $24 | $2 | - SG&A expenses decreased by $24 million in 2022, primarily due to lower consulting and litigation costs, including a $10 million insurance reimbursement[226] Liquidity and Capital Resources Kodak's liquidity, at $217 million cash in 2022, is managed through credit facilities, despite increased cash used in operations, with long-term funding dependent on refinancing and positive cash flow generation Cash Flow Summary (2021 vs. 2022) | (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($116) | ($47) | | Net cash used in investing activities | ($56) | ($20) | | Net cash provided by financing activities | $43 | $238 | | Net decrease in cash, cash equivalents and restricted cash | ($137) | $167 | - The company's cash balance decreased by $145 million to $217 million at year-end 2022, including proceeds from a $50 million term loan offset by a $25 million investment in Wildcat[250] - Kodak is required to maintain Minimum Liquidity of at least $80 million quarterly, with $150 million reported as of December 31, 2022[258] Contractual Obligations as of December 31, 2022 | (in millions) | Total | 2023 | 2024 | 2025 | 2026 | 2027 | 2028+ | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $379 | $1 | $2 | $1 | $366 | $1 | $8 | | Interest payments on debt | $99 | $31 | $29 | $29 | $6 | $1 | $3 | | Operating lease obligations | $68 | $20 | $12 | $7 | $6 | $5 | $18 | | Purchase obligations | $50 | $25 | $19 | $4 | $1 | $1 | — | | Convertible preferred stock cash dividends | $13 | $4 | $4 | $4 | $1 | — | — | | Total | $609 | $81 | $66 | $45 | $380 | $8 | $29 | Critical Accounting Policies and Estimates The company's financial statements rely on critical accounting policies and estimates for revenue recognition, long-lived asset valuation, embedded derivatives, income taxes, and pension benefits - Goodwill impairment testing as of December 31, 2022, indicated fair value of reporting units substantially exceeded carrying values, resulting in no impairment[296] - The annual impairment test for the Kodak trade name resulted in a $1 million pre-tax impairment charge in 2022, driven by lower forecasted revenues[299] - As of December 31, 2022, Kodak maintained a valuation allowance of $826 million against net deferred tax assets of $799 million, primarily due to uncertainty about asset realization[306][597] - Pension plan assumptions are critical, with a 25 basis point decrease in discount rate estimated to increase 2023 U.S. plan pre-tax pension expense by $6 million and PBO by $46 million[325] Quantitative and Qualitative Disclosures About Market Risk Kodak is exposed to market risks from foreign currency, commodity prices, and interest rates, with hedging strategies in place and limited interest rate risk due to fixed-rate debt - The company is exposed to market risk from foreign currency exchange rates, commodity prices, and interest rates[337] - A sensitivity analysis showed a 10% strengthening of the U.S. dollar at December 31, 2022, would decrease the fair value of open foreign currency forward contracts by $11 million[339] Financial Statements and Supplementary Data This section presents Kodak's audited consolidated financial statements for the three years ended December 31, 2022, including statements of operations, financial position, and cash flow, along with detailed notes Consolidated Statement of Operations Highlights (in millions) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total net revenues | $1,205 | $1,150 | $1,029 | | Gross profit | $170 | $164 | $135 | | Earnings (loss) from continuing operations | $26 | $24 | ($544) | | NET EARNINGS (LOSS) | $26 | $24 | ($541) | | Diluted earnings (loss) per share | $0.16 | $0.27 | ($9.77) | Consolidated Statement of Financial Position Highlights (in millions) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $681 | $807 | | TOTAL ASSETS | $2,285 | $2,171 | | Total current liabilities | $293 | $309 | | Total liabilities | $1,041 | $1,194 | | Total equity | $1,041 | $781 | | TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY | $2,285 | $2,171 | Consolidated Statement of Cash Flow Highlights (in millions) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | ($116) | ($47) | ($35) | | Net cash used in investing activities | ($56) | ($20) | ($13) | | Net cash provided by financing activities | $43 | $238 | $10 | | Net (decrease) increase in cash, cash equivalents and restricted cash | ($137) | $167 | ($34) | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, confirmed by independent auditors - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[720] - Based on the COSO framework, management concluded that Kodak's internal control over financial reporting was effective as of December 31, 2022[724] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement - Required information regarding directors and corporate governance is incorporated by reference from the company's definitive Proxy Statement[729] Executive Compensation Information regarding executive and director compensation, including CEO pay ratio and pay versus performance, is incorporated by reference from the company's definitive Proxy Statement - Required information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement[731] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the Proxy Statement, detailing outstanding options and available securities under equity compensation plans Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Number of Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price of Outstanding Options (b) | Number of Securities Remaining Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 8,327,287 | $6.97 | 4,579,397 | Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement - Required information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement[734] Principal Accounting Fees and Services Information detailing fees paid to the principal accountant for audit and other services is incorporated by reference from the company's definitive Proxy Statement - Required information regarding principal accounting fees and services is incorporated by reference from the company's definitive Proxy Statement[735] Part IV Financial Statement Schedules, Exhibits This section includes the financial statement schedule for Valuation and Qualifying Accounts (Schedule II) and a comprehensive index of all exhibits filed with the Form 10-K Valuation and Qualifying Accounts (in millions) | | Beginning Balance | Additions and Other | Deductions | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | Year ended Dec 31, 2022 | | | | | | Reserve for doubtful accounts | $7 | $2 | $2 | $7 | | Deferred tax valuation allowance | $934 | $18 | $126 | $826 | | Year ended Dec 31, 2021 | | | | | | Reserve for doubtful accounts | $10 | $0 | $3 | $7 | | Deferred tax valuation allowance | $1,112 | $33 | $211 | $934 | | Year ended Dec 31, 2020 | | | | | | Reserve for doubtful accounts | $8 | $7 | $5 | $10 | | Deferred tax valuation allowance | $821 | $344 | $53 | $1,112 |