Financial analysts for years have criticized Eastman Kodak Co.'s reliance on intellectual property deals and asset sales to pump up its top and bottom lines.
Those revenue streams largely dried up in the fourth quarter, and the impact on 2011 overall became jarringly visible in Kodak's cash performance last year.
Kodak burned through $763 million in cash in 2011-underscoring its need to file for bankruptcy protection on Jan. 19. The company finished the year with $861 million in cash, down from $1.6 billion the year before, a filing last week with the U.S. Securities and Exchange Commission shows.
A big hit for Kodak came on the IP front, where revenue from non-recurring licensing agreements plunged. Those agreements contributed $82 million in 2011, down from $838 million in 2010 and $435 million in 2009, the SEC filing states.
Kodak has told the investment community for years to expect IP licensing to generate an annual average of $250 million to $350 million.
In November, less than two months before the end of the fourth quarter and less than three months before filing for bankruptcy-Chairman and CEO Antonio Perez said Kodak expected to finish the year with $1.3 billion to $1.4 billion in cash.
Kodak had $862 million in cash on Sept. 30. That means the company generated no additional cash in the final three months, its key quarter for both revenues and profit.
Hitting the full-year cash forecast depended on Kodak executing its operational plans and assumed full-year sales of non-strategic assets totaling some $200 million and IP licensing transactions of $250 million to $350 million, Perez said in November.
Much of Kodak's cash is held outside the United States, the SEC filing shows. On Dec. 31, some $170 million in cash was held in the United States, down from $580 million a year earlier. The company reported that roughly $320 million in cash had been repatriated, or loaned, from foreign subsidiaries to the United States during 2011. Some $340 million in cash is held in China, however, where there are limitations related to net asset balances that affect the ability to make cash available to other jurisdictions around the globe, the company said.
Of the company's $6.02 billion in sales last year, U.S. sales amounted to $2.1 billion, down 34 percent. The other $3.96 billion occurred outside the United States, and that was down 2 percent.
Kodak likely will continue to face liquidity challenges until it is successful in selling its digital imaging patent portfolio. Estimates of the portfolio's value exceed $2 billion.
Standard & Poor's Rating Services, which this week discontinued its ratings on Kodak for the duration of the bankruptcy, noted last month that Kodak had relied on significant proceeds from licensing IP and the sale of non-core assets to fund its transformation into a digital technology company. That cash source, however, shrank dramatically in 2011, and legal rulings on the validity of key patents remain unsettled, it added.
Kodak, in its bankruptcy, secured a debtor-in-possession credit agreement for up to $950 million.
That financing provides interim liquidity relief, but the factors that drove Kodak into bankruptcy remain, the ratings services noted. "Absent a large monetary settlement of its digital patents, we believe that there are risks surrounding Kodak's liquidity and ability to meet its covenants."
In its SEC filing, Kodak acknowledges such potential issues among its many risks going forward.
Ultimately, however, Standard & Poor's expects proceeds from IP deals to help address Kodak's liquidity needs.
Red ink rises in 2011
Kodak posted a net loss for 2011 of $764 million, or $2.84 a share, compared with a loss of $687 million, or $2.56 a share, in 2010. Net sales totaled $6.02 billion, down 16 percent from $7.17 billion in 2010.
Prior to Kodak's January bankruptcy filing, analysts had expected the company's revenues to decline 13 percent to $6.2 billion. That was below Kodak's guidance of $6.3 billion to $6.4 billion.
In addition to the IP revenue drop, the company's top and bottom lines were hurt by industry-related volume declines and increased commodity costs, particularly for silver, the company states in the filing. Revenue declines also resulted from competitive pricing pressures and participation choices made by Kodak in digital cameras.
Last month Kodak said it planned to phase out its dedicated capture devices business-including digital cameras, pocket video cameras and digital picture frames-by July.
Net sales of digital capture devices accounted for 15 percent of Kodak's total net sales in 2011, down from 28 percent in 2010. Net revenues from licensing and royalties within the segment accounted for 1 percent of total revenues in 2011, down from 12 percent in 2010.
In addition, Kodak signed an agreement last week for the proposed sale of some assets of its Kodak Gallery online photo business to rival Shutterfly Inc. for $23.8 million. The terms of the agreement include the transfer of Kodak Gallery customer accounts and images in the United States and Canada to Shutterfly. The agreement constitutes the initial, stalking-horse bid in a Bankruptcy Court-supervised auction process, Kodak said.
Some revenue decline in the consumer group was offset by sales growth in consumer inkjet and the graphic communications group, but profitability was hurt by Kodak's ongoing investment in the consumer and commercial inkjet businesses, the company said.
Kodak reported net sales from continuing operations for its consumer digital imaging group of $1.74 billion, down 36 percent from $2.73 billion in 2010. The graphic communications group saw an uptick of 2 percent-including a 3 percent foreign currency impact-to $2.74 billion. The film, photofinishing and entertainment group saw revenues fall 12 percent to $1.55 billion.
The consumer digital imaging group reported a loss from continuing operations of $349 million, compared with income a year ago of $278 million. The graphic communications group loss grew 101 percent to $191 million from $95 million in 2010. The film, photofinishing and entertainment group posted the only segment income, at $34 million, down 63 percent.
For the fourth quarter, Kodak logged $1.75 billion in sales from continuing operations and a net loss of $117 million, or 43 cents a share. That compared with sales of $1.94 billion in the same quarter a year earlier and a net loss of $595 million, or $2.17 a share.
The company spent $274 million on research and development in 2011, down from $318 million in 2010 and $351 million in 2009. R&D investment in the graphic communications group was $147 million, down from $159 million in 2010 and $173 million in 2009. Consumer digital imaging group investment was $134 million, down from $176 million and $166 million.
Kodak has been using its cash to fund its investment in digital growth initiatives and to transform itself from a traditional manufacturing company to a digital technology enterprise. Its four digital growth initiatives are consumer inkjet, commercial inkjet, workflow software and services, and packaging solutions.
Revenue from the growth initiative product lines grew 17 percent for the year.
The 2011 results show the disparity between Kodak's results in the United States and internationally on a group level as well. The consumer digital imaging group's domestic sales totaled $864 million in 2011, down 51 percent. Non-U.S. sales fell 5 percent to $875 million.
In the graphic communications group, nearly $2 billion in sales came from outside the United States, up 7 percent. U.S. sales totaled $738 million, down 9 percent. The film, photofinishing and entertainment group sales totaled $1.55 billion, down 12 percent. Some $1.1 billion of those sales were outside the United States.
Fewer Rochester jobs
Kodak finished 2011 with 5,129 Rochester-area employees, down 780 from a year ago. That decline puts the onetime local giant below Xerox Corp. and out of the area's top five private-sector employers.
On Dec. 31, Kodak employed the full-time equivalent of some 17,081 people, including 8,341 in the United States. A year earlier, the company employed 18,800 people worldwide, with 9,600 in the United States.
Kodak had reported having 7,100 Rochester employees a year ago, but the apparent big drop reflects a change in its classification system, Kodak spokesman Christopher Veronda said. Its system previously counted as Rochester employees a number of non-local staffers-1,200 in 2011-who report to Rochester-based supervisors. Kodak employed 5,909 people locally in 2010, using the new methodology.
The company reported 2011 severance costs of $133 million related to the elimination of some 1,225 positions, including roughly 575 manufacturing/service, 550 administrative and 100 R&D positions. Some 725 of the cuts were in the United States and Canada.
Kodak plans to lay off 91 more employees, including 70 at a plant on Manitou Road in Gates, a filing with the state Department of Labor shows.
3/9/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email firstname.lastname@example.org.