Kodak: 'Sales Fell Short' but Emerging Tech Business Strong
Eastman Kodak has reported financial results for the fourth quarter and full year 2013. Performance highlights include:
- Full-year operational EBITDA of $160 million in 2013 was an improvement by $375 million, excluding fresh start and other accounting adjustments.
- Total net earnings for the year were $1.99 billion, including a reorganization items net gain of $2.01 billion, as well as a gain of $535 million related to the sale of the digital imaging patent portfolio, partially offset by a $77 million non-cash goodwill impairment charge. For 2012, there was a net loss of $1.38 billion.
- Sales for 2013 declined from the prior year by 14 percent to $2.35 billion, as the company prioritized profitable opportunities over sales volume, and sales of motion picture film and consumer inkjet printer ink continued to decline. The business emergence plan revenue projection for 2013 was approximately $2.5 billion.
- Full year 2013 gross profit margin improved year-over-year by ten percentage points, reflecting primarily increased contribution from non-recurring intellectual property arrangements, product mix improvements, and cost reductions.
- Liquidity remains strong; the year ended with $844 million cash and debt of $678 million.
- Fourth quarter net loss was reduced from $402 million in 2012 to $63 million in 2013.
Kodak is releasing these financial results in tandem with the filing of its Form 10-K annual report.
"We had significant year-over-year improvement in our operating performance, but our sales fell short of our plan. The decline was primarily due to the accelerated decline in our motion picture film business, the decline in revenues in our consumer inkjet business with the end of printer sales, and the loss of revenue while we were in reorganization," said Becky Roof, Chief Financial Officer.
Looking at 2014, Jeff Clarke, Chief Executive Officer, added, "I am excited about the strong increases we are seeing in revenues from our emerging technology businesses that will create the foundation for Kodak's future growth. We expect to mitigate the earnings declines in some of our mature businesses with improved performance from our strategic technology businesses. I also believe there are significant opportunities to improve the productivity and effectiveness of our sales, manufacturing and administrative functions."
2014 Outlook—Kodak currently estimates revenue in 2014 will total approximately $2.1-2.3 billion. The company anticipates substantial year-over-year sales growth in its emerging technology businesses, led by digital printing, packaging and functional printing; stability in its enterprise services and graphics communications businesses, and revenue declines for motion picture film and consumer inkjet printer ink sales. The company expects to achieve earnings from continuing operations between a $40 million loss and break-even and Operational EBITDA of approximately $145-$165 million in 2014. Capital expenditures of approximately $50 million are projected. Kodak does not intend to release projections beyond 2014 at this time.
Operational EBITDA is a good metric for evaluating the company's progress because it measures operating performance on a comparable basis. In July 2013, Kodak provided business emergence plan targets for the years 2013-2017. To properly compare the 2013 results to projections in that plan, it is appropriate to adjust the emergence plan for the removal of $24 million of non-cash income from its U.S. OPEB plan. The resulting comparable Operational EBITDA projection for 2013 was $143 million. Excluding fresh start and other accounting adjustments, the company exceeded the full year 2013 Operational EBITDA target by $17 million.
Kodak Reporting Structure
The company's portfolio of products and services meets two distinct needs for its customers: transforming large printing markets with digital offset, hybrid and digital print solutions; and commercializing new solutions for high-growth markets that build on the company's developed technologies and proprietary intellectual property. Kodak operates under two business segments: Graphics, Entertainment & Commercial Films (GECF) and Digital Printing & Enterprise (DP&E).
Graphics, Entertainment and Commercial Films (GECF): The GECF segment consists of the Graphics and Entertainment & Commercial Films groups, as well as Kodak's intellectual property and brand licensing activities.
2013 Full Year—The decrease in the GECF segment net sales of approximately 10 percent for 2013 was primarily due to lower demand for motion picture film within Entertainment & Commercial Films, as well as reduced demand in Graphics. Also contributing to the decline was unfavorable price/mix within Graphics due to industry pricing pressures. Partially offsetting these declines was favorable price/mix within Intellectual Property and Brand Licensing due to non-recurring intellectual property licensing agreements, as well as favorable product price/mix within Entertainment & Commercial Films due to pricing actions.
The improvement in the GECF segment gross profit percent for the year was primarily driven by the non-recurring intellectual property licensing agreements in Intellectual Property and Brand Licensing and pricing actions in Entertainment and Commercial Films, and strong manufacturing productivity and other cost improvements in Graphics. Partially offsetting these improvements was unfavorable product price/mix within Graphics due to industry pricing pressures, as well as increased manufacturing and other costs within Entertainment & Commercial Films due to lower industry volumes, and $43 million negative impact of fresh start and other accounting adjustments. Excluding the impact of these adjustments, gross profit improved by $101 million or 7.9 percent of revenue due to the improvements outlined above.
In the Graphics business, 450 existing customers and new accounts have converted to Kodak Sonora Process Free Plates, which provide cost savings and production efficiencies. Sonora Plates also enable printers to improve their sustainability profile by eliminating the use of processing chemistry and water.
Digital Printing & Enterprise (DP&E): The DP&E segment consists of four product/service groups, Digital Printing Solutions, Packaging and Functional Printing, Enterprise Services and Solutions, and Consumer Inkjet Systems.
2013 Full Year—The decrease in net sales for the DP&E segment of approximately 14 percent in 2013 was primarily attributable to volume declines within Consumer Inkjet Systems, driven by the discontinuance of printer sales, and lower sales of ink to the existing installed base of printers. Partially offsetting these declines were volume improvements within Digital Printing, driven by a larger number of placements of commercial inkjet components.
The increase in the DP&E segment gross profit percent for 2013 resulted mainly from favorable price/mix within Consumer Inkjet Systems due to a greater proportion of consumer ink sales. Within Digital Printing, an increase in scale and productivity initiatives allowed for cost reductions, which also contributed to the gross profit improvement. These improvements were partially offset by the $39 million negative impact of fresh start accounting adjustments. Excluding the impact of fresh start and other accounting adjustments, gross profit improved by $100 million or 14.7 percent of revenue due to the improvements outlined above.
Customers around the world continued to invest in KODAK PROSPER Solutions. Confidence in Kodak solutions was also demonstrated in the packaging segment, where KODAK FLEXCEL NX plate volumes rose at a strong double-digit level for the year, and Kodak entered a strategic development agreement with Bobst, a leading supplier of packaging machinery and services.
Notes: Kodak's Report on Form 10-K as filed with the U.S. Securities and Exchange Commission should be referenced for a comprehensive view of the company's financial performance for 2013.
Kodak is making available on its investor Website a presentation slide deck that provides an overview of the financial report.
Key "Fresh Start" and Other Accounting Impacts
In connection with the company's emergence from Chapter 11 Kodak applied the provisions of fresh start accounting to its financial statements as of September 1, 2013.
Upon the application of fresh start accounting, Kodak allocated its reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the successor company's assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets is reported as goodwill.
The major adjustments in value that have an associated impact in the successor statement of operations occurred as a result of an increase in the net book value of inventory to its estimated fair value and the revaluation of deferred revenues to the fair value of the company's related future performance obligations.
A summary of the impacts of these adjustments, as well as other accounting adjustments, on the company's Segment Earnings follows.
Kodak is a technology company focused on imaging for business. Kodak serves customers with disruptive technologies and breakthrough solutions for the product goods packaging, graphic communications and functional printing industries. The company also offers leading products and services in Entertainment Imaging and Commercial Films.