kodk-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018

or

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to            

Commission File Number 1-87

 

EASTMAN KODAK COMPANY

(Exact name of registrant as specified in its charter)

 

 

NEW JERSEY

 

16-0417150

(State of incorporation)

 

(IRS Employer

Identification No.)

 

 

 

343 STATE STREET, ROCHESTER, NEW YORK

 

14650

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: 585-724-4000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.

See definition of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No 

As of November 1, 2018, the registrant had 42,726,652 shares of common stock, $0.01 par value per share, outstanding.

[1]


 

EASTMAN KODAK COMPANY

Form 10-Q

September 30, 2018

Table of Contents

 

 

 

 

 

Page

Part I.—Financial Information

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Consolidated Statement of Operations (Unaudited)

 

3

 

 

Consolidated Statement of Comprehensive (Loss) Income (Unaudited)

 

4

 

 

Consolidated Statement of Financial Position (Unaudited)

 

5

 

 

Consolidated Statement of Cash Flows (Unaudited)

 

6

 

 

Notes to Financial Statements (Unaudited)

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

31

 

 

Liquidity and Capital Resources

 

43

Item 4.

 

Controls and Procedures

 

46

 

 

 

 

 

Part II. —Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

47

Item 1A.

 

Risk Factors

 

47

Item 2.

 

Unregistered Sales of Securities and Use of Proceeds

 

59

Item 5.

 

Other Information

 

60

Item 6.

 

Exhibits

 

60

 

 

 

 

 

 

 

Index to Exhibits

 

61

 

 

Signatures

 

62

 

 

[2]


Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

(in millions, except per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

293

 

 

$

303

 

 

$

878

 

 

$

893

 

Services

 

 

73

 

 

 

76

 

 

 

217

 

 

 

224

 

Total revenues

 

 

366

 

 

 

379

 

 

 

1,095

 

 

 

1,117

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

251

 

 

 

261

 

 

 

765

 

 

 

759

 

Services

 

 

50

 

 

 

54

 

 

 

151

 

 

 

162

 

Total cost of revenues

 

 

301

 

 

 

315

 

 

 

916

 

 

 

921

 

Gross profit

 

 

65

 

 

 

64

 

 

 

179

 

 

 

196

 

Selling, general and administrative expenses

 

 

59

 

 

 

61

 

 

 

185

 

 

 

192

 

Research and development costs

 

 

13

 

 

 

16

 

 

 

42

 

 

 

54

 

Restructuring costs and other

 

 

9

 

 

 

4

 

 

 

13

 

 

 

22

 

Other operating (income) expense, net

 

 

(10

)

 

 

20

 

 

 

(12

)

 

 

32

 

Goodwill impairment

 

 

 

 

 

56

 

 

 

 

 

 

56

 

Loss from continuing operations before interest expense,

   other (income) charges, net and income taxes

 

 

(6

)

 

 

(93

)

 

 

(49

)

 

 

(160

)

Interest expense

 

 

9

 

 

 

8

 

 

 

26

 

 

 

24

 

Pension income excluding service cost component

 

 

(35

)

 

 

(39

)

 

 

(99

)

 

 

(114

)

Other (income) charges, net

 

 

(4

)

 

 

(4

)

 

 

13

 

 

 

(33

)

Earnings (loss) from continuing operations before income

   taxes

 

 

24

 

 

 

(58

)

 

 

11

 

 

 

(37

)

Provision (benefit) for income taxes

 

 

5

 

 

 

(13

)

 

 

13

 

 

 

(6

)

Equity in loss of equity method investment, net of income taxes

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Earnings (loss) from continuing operations

 

 

19

 

 

 

(46

)

 

 

(2

)

 

 

(32

)

Loss from discontinued operations, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

(3

)

Net earnings (loss)

 

$

19

 

 

$

(46

)

 

$

(2

)

 

$

(35

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings (loss) per share attributable to

   Eastman Kodak Company common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.33

 

 

$

(1.20

)

 

$

(0.40

)

 

$

(1.08

)

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

(0.07

)

Basic net earnings (loss) per share attributable to

   Eastman Kodak Company common shareholders

 

$

0.33

 

 

$

(1.20

)

 

$

(0.40

)

 

$

(1.15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings (loss) per share attributable to

   Eastman Kodak Company common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.33

 

 

$

(1.20

)

 

$

(0.40

)

 

$

(1.08

)

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

(0.07

)

Diluted net earnings (loss) per share attributable to

   Eastman Kodak Company common shareholders

 

$

0.33

 

 

$

(1.20

)

 

$

(0.40

)

 

$

(1.15

)

Number of common shares used in basic and diluted net

   earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42.7

 

 

 

42.5

 

 

 

42.7

 

 

 

42.5

 

Diluted

 

 

43.0

 

 

 

42.5

 

 

 

42.7

 

 

 

42.5

 

 

The accompanying notes are an integral part of these consolidated financial statements.

[3]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(in millions)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in millions)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

NET INCOME (LOSS)

 

$

19

 

 

$

(46

)

 

$

(2

)

 

$

(35

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

(12

)

 

 

(5

)

 

 

(19

)

 

 

9

 

Pension and other postretirement benefit plan obligation activity,

   net of tax

 

 

3

 

 

 

(3

)

 

 

3

 

 

 

(9

)

Other comprehensive loss, net of tax

 

 

(9

)

 

 

(8

)

 

 

(16

)

 

 

 

COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

$

10

 

 

$

(54

)

 

$

(18

)

 

$

(35

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

[4]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

238

 

 

$

344

 

Trade receivables, net of allowances of $9 in each period

 

 

244

 

 

 

282

 

Inventories, net

 

 

306

 

 

 

276

 

Other current assets

 

 

56

 

 

 

56

 

Total current assets

 

 

844

 

 

 

958

 

Property, plant and equipment, net of accumulated depreciation of $426 and $394,

   respectively

 

 

276

 

 

 

314

 

Goodwill

 

 

32

 

 

 

32

 

Intangible assets, net

 

 

76

 

 

 

86

 

Restricted cash

 

 

10

 

 

 

17

 

Deferred income taxes

 

 

175

 

 

 

188

 

Other long-term assets

 

 

127

 

 

 

112

 

TOTAL ASSETS

 

$

1,540

 

 

$

1,707

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY

 

 

 

 

 

 

 

 

Accounts payable, trade

 

$

167

 

 

$

198

 

Short-term borrowings and current portion of long-term debt

 

 

396

 

 

 

4

 

Other current liabilities

 

 

216

 

 

 

217

 

Total current liabilities

 

 

779

 

 

 

419

 

Long-term debt, net of current portion

 

 

5

 

 

 

399

 

Pension and other postretirement liabilities

 

 

384

 

 

 

466

 

Other long-term liabilities

 

 

183

 

 

 

202

 

Total Liabilities

 

 

1,351

 

 

 

1,486

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable, convertible Series A preferred stock, no par value, $100 per share liquidation preference

 

171

 

 

164

 

 

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

Additional paid in capital

 

 

621

 

 

 

631

 

Treasury stock, at cost

 

 

(9

)

 

 

(9

)

Accumulated deficit

 

 

(187

)

 

 

(174

)

Accumulated other comprehensive loss

 

 

(407

)

 

 

(391

)

Total shareholders’ equity

 

 

18

 

 

 

57

 

TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY

 

$

1,540

 

 

$

1,707

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 


[5]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in millions)

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) earnings

 

$

(2

)

 

$

(35

)

Adjustments to reconcile to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

58

 

 

 

62

 

Pension income

 

 

(81

)

 

 

(91

)

Change in fair value of embedded conversion features derivative liability

 

 

2

 

 

 

(42

)

Non-cash restructuring costs and asset impairments

 

 

 

 

 

87

 

Prosper asset remeasurement

 

 

 

 

 

12

 

Net gain on sales of assets/businesses

 

 

(7

)

 

 

(2

)

Stock based compensation

 

 

5

 

 

 

7

 

Non-cash changes in workers' compensation and legal reserves

 

 

(10

)

 

 

 

Provision (benefit) for deferred income taxes

 

 

6

 

 

 

(18

)

Decrease in trade receivables

 

 

28

 

 

 

28

 

Increase in inventories

 

 

(42

)

 

 

(42

)

Decrease in trade payables

 

 

(25

)

 

 

(17

)

Decrease in liabilities excluding borrowings and trade payables

 

 

(20

)

 

 

(20

)

Other items, net

 

 

9

 

 

 

(6

)

Total adjustments

 

 

(77

)

 

 

(42

)

Net cash used in operating activities

 

 

(79

)

 

 

(77

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to properties

 

 

(24

)

 

 

(28

)

Proceeds from sales of assets/businesses, net

 

 

8

 

 

 

2

 

Proceeds from sales of marketable securities

 

 

 

 

 

1

 

Net cash used in investing activities

 

 

(16

)

 

 

(25

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of emergence credit facilities

 

 

 

 

 

(1

)

Repayment of capital leases

 

 

(2

)

 

 

(3

)

Preferred stock dividend payments

 

 

(8

)

 

 

(7

)

Payment of contingent consideration related to the sale of a business

 

 

 

 

 

(7

)

Treasury stock purchases

 

 

 

 

 

(1

)

Net cash used in financing activities

 

 

(10

)

 

 

(19

)

Effect of exchange rate changes on cash

 

 

(7

)

 

 

9

 

Effect of exchange rate changes on restricted cash

 

 

(1

)

 

 

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(113

)

 

 

(112

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

369

 

 

 

478

 

Cash, cash equivalents and restricted cash, end of period

 

$

256

 

 

$

366

 

 

The accompanying notes are an integral part of these consolidated financial statements. 

[6]


EASTMAN KODAK COMPANY

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1: BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

 

BASIS OF PRESENTATION

 

The consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results of operations, financial position and cash flows of Eastman Kodak Company (“EKC” or the “Company”) and all companies directly or indirectly controlled, either through majority ownership or otherwise (collectively, “Kodak”). The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These consolidated interim statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

GOING CONCERN

 

The consolidated interim financial statements have been prepared on the going concern basis of accounting, which assumes Kodak will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  

 

The Company has $395 million of outstanding indebtedness under the Senior Secured First Lien Term Credit Agreement (the “First Lien Term Credit Agreement”).  The loans made under the First Lien Term Credit Agreement become due on the earlier to occur of (i) the maturity date of September 3, 2019 or (ii) the acceleration of such loans following the occurrence of an event of default (as defined in the First Lien Term Credit Agreement).  The Company also has issued approximately $85 million and $96 million of letters of credit under the Amended and Restated Credit Agreement (the “Amended Credit Agreement”) as of September 30, 2018 and December 31, 2017, respectively.  Should the Company not repay, refinance or extend the maturity of the loans under the existing First Lien Term Credit Agreement prior to June 5, 2019, the termination date will occur under the Amended Credit Agreement on such date unless the Amended Credit Agreement has been amended in the interim.  Upon the occurrence of the termination date under the Amended Credit Agreement, the obligations thereunder will become due and the Company will need to provide alternate collateral in place of the letters of credit issued under the Amended Credit Agreement.

 

As of September 30, 2018 and December 31, 2017, Kodak had approximately $238 million and $344 million, respectively, of cash and cash equivalents.  $122 million and $172 million was held in the U.S. as of September 30, 2018 and December 31, 2017, respectively, and $116 million and $172 million were held outside the U.S. Cash balances held outside the U.S. are generally required to support local country operations and may have high tax costs or other limitations that delay the ability to repatriate, and therefore may not be readily available for transfer to other jurisdictions.  Outstanding inter-company loans to the U.S. as of September 30, 2018 and December 31, 2017 were $379 million and $358 million, respectively, which includes short-term intercompany loans from Kodak’s international finance center of $81 million and $59 million as of September 30, 2018 and December 31, 2017, respectively. In China, where approximately $60 million and $108 million of cash and cash equivalents was held as of September 30, 2018 and December 31, 2017, respectively, there are limitations related to net asset balances that may impact the ability to make cash available to other jurisdictions in the world.  Kodak had a net decrease in cash, cash equivalents, and restricted cash of $109 million, $122 million, and $158 million for the years ended December 31, 2017, 2016, and 2015, respectively, and a decrease in cash, cash equivalents, and restricted cash of $113 million for the nine months ended September 30, 2018.  

 

U.S. GAAP requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued or prior to the conditions or events that create the going concern risk.

 

As of the date of issuance of these financial statements, Kodak has debt coming due within twelve months and does not have committed financing or available liquidity to meet such debt obligations if they were to become due in accordance with their current terms.  In October 2018, Kodak entered into a non-binding work letter with an existing lender under the First Lien Term Credit Agreement and another potential financing source, which outlines the terms and conditions of a proposed new term loan facility. The proceeds from the proposed new facility, if consummated, would be used to refinance the loans under the First Lien Term Credit Agreement in full. The non-binding work letter replaces the non-binding letter of intent entered into during the third quarter of 2018. Under the non-binding work letter, Kodak has agreed to work exclusively with the potential financing sources to reach a binding commitment letter setting out the key terms of the proposed new facility. Kodak is currently in negotiations with the potential financing sources regarding the terms of the proposed new facility, however, there can be no assurance that Kodak and the potential financing

[7]


sources will reach a binding commitment letter on such terms. Exclusive negotiations between Kodak and the potential financing sources expire on November 12, 2018 in accordance with the terms of the non-binding work letter.

 

Kodak has retained an investment banker in connection with a sale of its Flexographic Packaging segment and is in negotiations on an exclusive basis to sell this segment. Net proceeds from any sale of Kodak’s Flexographic Packaging segment will be used to reduce outstanding term loan debt.  Under the terms of the First Lien Term Credit Agreement, Kodak is required to maintain a Secured Leverage Ratio. The Secured Leverage Ratio is generally determined by dividing secured debt, net of U.S. cash and cash equivalents, by consolidated EBITDA, as calculated under the First Lien Term Credit Agreement. The consolidated EBITDA, as calculated under the First Lien Term Credit Agreement, could be adversely affected by the sale process or the sale of the Flexographic Packaging segment, which could result in non-compliance with a debt covenant. 

 

Additionally, Kodak is facing liquidity challenges due to negative cash flow.  Based on forecasted cash flows, there are uncertainties regarding Kodak’s ability to meet commitments in the U.S. as they come due.  Kodak’s plans to improve cash flow include reducing interest expense by decreasing the debt balance using proceeds from asset sales, including the sale of the Flexographic Packaging segment; further restructuring Kodak’s cost structure; and paring investment in new technology by eliminating, slowing, and partnering with investors in product development programs.

 

The sale of the Flexographic Packaging segment and/or refinancing of the loans under the First Lien Term Credit Agreement are not solely within Kodak’s control.  Executing agreements for the sale or a refinancing of the First Lien Term Credit Agreement and the timing for a closing of the sale or a refinancing of the First Lien Term Credit Agreement are dependent upon several external factors outside Kodak’s control, including but not limited to, the ability of the Company to reach acceptable agreements with different counterparties and the time required to meet conditions to closing under a sale agreement or credit facility.

 

Kodak makes no assurances regarding the likelihood, certainty or timing of consummating any asset sales, including of the Flexographic Packaging segment, refinancing of the Company’s existing debt, or regarding the sufficiency of any such actions to meet Kodak’s debt obligations, including compliance with debt covenants, or other commitments in the U.S. as they come due.

 

These conditions raise substantial doubt about Kodak’s ability to continue as a going concern.

 

For more information regarding the First Lien Term Credit Agreement, the Amended Credit Agreement and debt covenants see Note 6, “Debt and Capital Leases”.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2017-07, Compensation—Retirements Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  ASU 2017-07 requires entities to report the service cost component of net periodic pension and postretirement benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period and to report all other components of net benefit costs outside a subtotal of income from operations. In addition, the ASU allows only the service cost component to be eligible for capitalization when applicable. Kodak adopted ASU 2017-07 effective January 1, 2018, retrospectively for the presentation of the service cost and other cost components and prospectively for the application of the capitalization eligibility. The components of net benefit cost are shown in Note 14, “Retirement Plans and Other Postretirement Benefits”. The guidance impacted presentation in Kodak’s consolidated financial statements and the capitalization of costs to inventory. The presentation of the service cost component was consistent with the requirements of the new standard. The other components (which were presented within Cost of revenues, Selling and general administrative expenses and Research and development costs) are being presented separately on the face of the Consolidated Statement of Operations. The segment measure of profit and loss previously included only the service cost and amortization of prior service credits components of net periodic pension and postretirement benefit costs (refer to Note 20, “Segment Information”). Effective January 1, 2018, the segment measure of profit and loss only includes the service cost component of net periodic pension and postretirement benefit costs and prior periods have been reclassified to conform to this presentation.  

 

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 defines in-substance nonfinancial assets, provides guidance with respect to accounting for partial sales of nonfinancial assets and conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard (Topic 606 as described below). Kodak adopted ASU 2017-05 effective January 1, 2018 using the modified retrospective adoption approach.  The application of this standard did not have a material impact on Kodak’s consolidated financial statements.  

 

 

 

 

 

[8]


In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the ASU all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Kodak adopted ASU 2016-01 effective January 1, 2018.  The adoption of this guidance did not have a material impact on Kodak’s consolidated financial statements.    

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and most industry-specific guidance. The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  Kodak adopted the provisions of the new standard effective January 1, 2018 using the modified retrospective method which allows companies to record a one-time adjustment to opening retained earnings for the cumulative effect of the standard on open contracts at the time of adoption. Kodak derives revenue from various brand licensing arrangements, which may include upfront payments and/or sales-based royalties subject to minimum annual guaranteed amounts. Kodak recorded a cumulative effect adjustment of approximately $10 million as a decrease to the opening balance of retained earnings related to these arrangements. With the exception of brand license revenue, Kodak did not identify any changes in the timing of revenue recognition that resulted in a material transition adjustment. 

The cumulative effect of the changes made to the Consolidated Statement of Financial Position for January 1, 2018 for the adoption of ASU 2014-09 were as follows.  The net reduction in opening retained earnings primarily reflected the impact related to brand licensing revenues.

 

(in millions)

 

Balance at

December 31,

2017

 

Adjustments Due to

ASU 2014-09

 

Balance at

January 1,

2018

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

217

 

$

2

 

$

219

 

Other long-term liabilities

 

 

202

 

 

8

 

 

210

 

 

 

 

 

 

 

 

 

 

 

 

Deficit

 

 

 

 

 

 

 

 

 

 

Accumulated Deficit

 

 

(174

)

 

(10

)

 

(184

)

 

The impact of the adoption on the Consolidated Statement of Operations and Consolidated Statement of Financial Position were as follows:

 

 

 

Three Months Ended September 30, 2018

 

(in millions)

 

As Reported

 

 

Amounts without Adoption of

ASU 2014-09

 

 

Effect of Change

Higher (Lower)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

293

 

 

$

292

 

 

$

1

 

Services

 

 

73

 

 

 

73

 

 

 

 

Total revenues

 

 

366

 

 

 

365

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19

 

 

$

18

 

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

(in millions)

 

As Reported

 

 

Amounts without Adoption of

ASU 2014-09

 

 

Effect of Change

Higher (Lower)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

878

 

 

$

875

 

 

$

3

 

Services

 

 

217

 

 

 

217

 

 

 

 

Total revenues

 

 

1,095

 

 

 

1,092

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2

)

 

$

(5

)

 

$

3

 

 

[9]


 

 

September 30, 2018

 

(in millions)

 

As Reported

 

Balances without Adoption of

ASU 2014-09

 

Effect of Change

Higher (Lower)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

216

 

$

214

 

$

2

 

Other long-term liabilities

 

 

183

 

 

178

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

Deficit

 

 

 

 

 

 

 

 

 

 

Accumulated Deficit

 

 

(187

)

 

(180

)

 

(7

)

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In September 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends the disclosure requirements in ASC 715-20 by adding, clarifying, or removing certain disclosures. ASU 2018-14 requires all entities to disclose (1) the weighted average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU also clarifies certain disclosure requirements for entities with two or more defined benefit pension plans when aggregate disclosures are presented. The ASU removes other disclosures from the existing guidance, such as the requirement to disclose the effects of a one-percentage-point change in the assumed health care cost trend rates. The ASU is effective retrospectively for fiscal years ending after December 15, 2020 (January 1, 2021 for Kodak). Early adoption is permitted. The standard addresses disclosures only and will not have an impact on Kodak’s consolidated financial statements.  Kodak is currently assessing its expected adoption date.

 

In September 2018 the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures. The ASU applies to disclosures about recurring or nonrecurring fair value measurements.  The additional and/or modified disclosures relate primarily to Level 3 fair value measurements while removing certain disclosures related to transfers between Level 1 and Level 2 of the fair value hierarchy.  The ASU is effective retrospectively, for fiscal years beginning after December 15, 2019 (January 1, 2020 for Kodak) and interim periods within those fiscal years.  Entities are permitted to early adopt any removed or modified disclosures but can delay adoption of the new disclosures until their effective date. The standard addresses disclosures only and will not have an impact on Kodak’s consolidated financial statements.  Kodak is currently assessing its expected adoption date.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which addresses how a customer should account for the costs of implementing a cloud computing service arrangement (also referred to as a “hosting arrangement”). Under ASU 2018-15, entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract in the same way as implementation costs associated with a software license; implementation costs incurred in the application development stage, such as costs for the cloud computing arrangement’s integration with on-premise software, coding, and configuration or customization, should be capitalized and amortized over the term of the cloud computing arrangement, including periods covered by certain renewal options. The ASU is effective in fiscal years beginning after December 15, 2019 (January 1, 2020 for Kodak) including interim periods within those fiscal years. Early adoption is permitted. The ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Kodak is currently evaluating the impact and adoption date of this standard.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The ASU addresses certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the Tax Cuts and Jobs Act (the “2017 Tax Act”). The ASU provides an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the 2017 Tax Act (or portion thereof) is recorded and requires additional disclosures. The ASU is effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for Kodak) and interim periods within those fiscal years. Early adoption is permitted and may be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the 2017 Tax Act is recognized.  Kodak plans to adopt the new standard on the effective date.  The adoption of this ASU will not have an impact on the Consolidated Financial Statements as a result of Kodak’s U.S. valuation allowance.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  In addition, the ASU requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses.  The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 (January 1, 2020 for Kodak).

[10]


Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018 (January 1, 2019 for Kodak).  Kodak plans to adopt the new standard on the effective date.  Kodak is currently evaluating the impact of this ASU.  

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets and eliminates certain real estate-specific provisions. The new leasing standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 (January 1, 2019 for Kodak).  Early adoption is permitted. The original guidance required application on a modified retrospective basis to the earliest period presented.  In July 2018, the FASB issued ASU 2018-11, Targeted improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, as the date of initial application of transition.  Kodak plans to adopt the new standard on the effective date applying the new transition method allowed under ASU 2018-11 and is currently evaluating the impact of adoption on its financial statements.  Kodak is currently evaluating its existing lease portfolio, including accumulating all the necessary information required to properly account for the leases under the new standard.  Additionally, a new lease accounting system is being implemented to support the accounting and disclosure requirements of the new standard.  Kodak anticipates that the adoption of the amended lease guidance will materially increase the assets and liabilities recorded in its Consolidated Statement of Financial Position and may require certain changes to its systems and processes.  

 

NOTE 2: CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Statement of Financial Position that sums to the total of such amounts shown in the Statement of Cash Flows:

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

238

 

 

$

344

 

Restricted cash included in Other current assets

 

 

8

 

 

 

8

 

Long-term restricted cash

 

 

10

 

 

 

17

 

Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows

 

$

256

 

 

$

369

 

 

Restricted cash included in Other current assets on the Statement of Financial Position primarily represents amounts which support hedging activities.

 

Long-term restricted cash includes $5 million and $6 million of security posted related to Brazilian legal contingencies as of September 30, 2018 and December 31, 2017, respectively.  Long-term restricted cash also includes $0 million and $6 million as of September 30, 2018 and December 31, 2017, respectively, supporting compliance with the Excess Availability threshold under the Amended and Restated Credit Agreement (the “Amended Credit Agreement”).

 

NOTE 3: INVENTORIES, NET

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2018

 

 

2017

 

Finished goods

 

$

174

 

 

$

159

 

Work in process

 

 

65

 

 

 

57

 

Raw materials

 

 

67

 

 

 

60

 

Total

 

$

306

 

 

$

276

 

 

 

 

[11]


NOTE 4: OTHER CURRENT LIABILITIES

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2018

 

 

2017

 

Employee related liabilities

 

$

51

 

 

$

47

 

Deferred revenue

 

 

31

 

 

 

30

 

Deferred consideration on disposed businesses

 

 

24

 

 

 

10

 

Customer rebates

 

 

24

 

 

 

29

 

Workers compensation

 

 

10

 

 

 

10

 

Restructuring liabilities

 

 

8

 

 

 

10

 

Other

 

 

68

 

 

 

81

 

Total

 

$

216

 

 

$

217

 

 

The customer rebate amounts will potentially be settled through customer deductions applied to outstanding trade receivables in lieu of cash payments.

 

NOTE 5: OTHER LONG-TERM LIABILITIES

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2018

 

 

2017

 

Workers compensation

 

$

87

 

 

$

96

 

Asset retirement obligations

 

 

49

 

 

 

43

 

Deferred taxes

 

 

13

 

 

 

16

 

Environmental liabilities

 

 

11

 

 

 

12

 

Deferred consideration on disposed businesses

 

 

 

 

 

14

 

Other

 

 

23

 

 

 

21

 

Total

 

$

183

 

 

$

202

 

 

 

[12]


NOTE 6:  DEBT AND CAPITAL LEASES

Debt and capital leases and related maturities and interest rates were as follows at September 30, 2018 and December 31, 2017 (in millions):

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

 

Type

 

Maturity

 

Weighted-Average

Effective Interest Rate

 

 

Carrying Value

 

 

Carrying Value

 

Current portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term note

 

2019

 

7.35%

 

 

$

393

 

 

$

 

 

 

Capital leases

 

Various

 

Various

 

 

 

3

 

 

 

3

 

 

 

Other debt

 

Various

 

Various

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

396

 

 

 

4

 

Non-current portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term note

 

2019

 

7.35%

 

 

 

 

 

 

393

 

 

 

Capital leases

 

Various

 

Various

 

 

 

3

 

 

 

4

 

 

 

Other debt

 

Various

 

Various

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

399

 

 

 

 

 

 

 

 

 

 

 

$

401

 

 

$

403

 

 

On September 3, 2013, the Company entered into (i) the First Lien Term Credit Agreement with the lenders party thereto (the “First Lien Lenders”), JPMorgan Chase Bank, N.A. as administrative agent, and J.P. Morgan Securities LLC, Barclays Bank PLC, and Merrill Lynch, Pierce, Fenner & Smith Inc. as joint lead arrangers and joint bookrunners, and (ii) a Senior Secured Second Lien Term Credit Agreement (the “Second Lien Term Credit Agreement,” and together with the First Lien Term Credit Agreement, the “Term Credit Agreements”), with the lenders party thereto (the “Second Lien Lenders,” and together with the First Lien Lenders, the “Term Credit Lenders”), Barclays Bank PLC as administrative agent, and J.P. Morgan Securities LLC, Barclays Bank PLC and Merrill Lynch, Pierce, Fenner & Smith Inc. as joint lead arrangers and joint bookrunners.

 

Additionally, the Company and its U.S. subsidiaries (the “Subsidiary Guarantors”) entered into an Asset Based Revolving Credit Agreement (the “ABL Credit Agreement” and together with the Term Credit Agreements, the “Credit Agreements”) with the lenders party thereto (the “ABL Lenders” and together with the First Lien Lenders and the Second Lien Lenders, the “Lenders”) and Bank of America N.A. as administrative agent and collateral agent, Barclays Bank PLC as syndication agent and Merrill Lynch, Pierce, Fenner & Smith Inc., Barclays Bank PLC and J.P. Morgan Securities LLC as joint lead arrangers and joint bookrunners.  Pursuant to the terms of the Credit Agreements, the Term Credit Lenders provided the Company with term loan facilities in an aggregate principal amount of $695 million, consisting of $420 million of first-lien term loans (the “First Lien Loans”) and $275 million of second-lien term loans (the “Second Lien Loans”).  Net proceeds from the Term Credit Agreements were $664 million ($695 million aggregate principal less $15 million stated discount and $16 million in debt transaction costs). The loans made under the First Lien Term Credit Agreement become due on the earlier to occur of (i) the maturity date of September 3, 2019 or (ii) the acceleration of such loans following the occurrence of an event of default (as defined in the First Lien Term Credit Agreement).  The Second Lien Term Credit Agreement was prepaid and terminated on November 15, 2016.  

 

The Credit Agreements limit, among other things, the Company’s and the Subsidiary Guarantors’ ability to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) make restricted payments (including dividend payments, et al.) and (v) make investments.  In addition to other customary affirmative covenants, the Credit Agreements provide for a periodic delivery by the Company of its various financial statements as set forth in the Credit Agreements.  Events of default under the Credit Agreements include, among others, failure to pay any loan, interest or other amount due under the applicable credit agreement, breach of specific covenants and a change of control of the Company.  Upon an event of default, the applicable lenders may declare the outstanding obligations under the applicable credit agreement to be immediately due and payable and exercise other rights and remedies provided for in such credit agreement.

 

The First Lien Loans bear interest at the rate of LIBOR plus 6.25% per annum, with a LIBOR floor of 1% or Alternate Base Rate (as defined in the First Lien Term Credit Agreement) plus 5.25%.   Each existing and future direct or indirect U.S. subsidiary of the Company (other than immaterial subsidiaries, unrestricted subsidiaries and certain other subsidiaries) have agreed to provide unconditional guarantees of the obligations of the Company under the Credit Agreements. Subject to certain exceptions, obligations under the First Lien Term Credit Agreement are secured by: (i) a first lien on all assets of the Company and the Subsidiary Guarantors, other than the ABL Collateral (as defined below), including a first lien on 100% of the stock of material domestic subsidiaries and 65% of the stock of material first-tier foreign subsidiaries (collectively the “Term Collateral”) and (ii) a second lien on the ABL Collateral. Obligations under the Asset Based Revolving Credit Agreement are secured by: (i) a first lien on cash, accounts receivable, inventory, machinery and equipment (the “ABL Collateral”) and (ii) a second lien on the Term Collateral.  The Company may voluntarily prepay the First Lien Loan. 

[13]


As defined in the First Lien Term Credit Agreement, the Company is required to prepay loans with net proceeds from asset sales, recovery events or issuance of indebtedness, subject to, in the case of net proceeds received from asset sales or recovery events, reinvestment rights by the Company in assets used or usable by the business within certain time limits.  During 2016 and 2017, Kodak prepaid $11 million of principal under the First Lien Term Credit Agreement.  Under the terms of the First Lien Term Credit Agreement, the prepayments were applied first to the installment principal payments of $4 million due over the next twelve months, then ratably to the remaining scheduled payments.  With the prepayments, Kodak does not owe any future scheduled principal payments until the maturity date of the loan.

On an annual basis, the Company will prepay on June 30 of the following fiscal year loans in an amount equal to a percentage of Excess Cash Flow (“ECF”) as defined in the First Lien Term Credit Agreement, provided no such prepayment is required if such prepayment would cause U.S. liquidity (as defined in the First Lien Term Credit Agreement) to be less than $100 million or the Secured Leverage ratio is less than 2.25 to 1.00.  For the year ended December 31, 2017 ECF was a negative amount.   Therefore, no prepayment of First Lien term debt was required.  Any mandatory prepayments as described above shall be reduced by any mandatory prepayments of the First Lien Loan.

 

Under the First Lien Term Credit Agreement, the Company is required to maintain a Secured Leverage Ratio (as defined therein) not to exceed specified levels. The Secured Leverage Ratio under the First Lien Term Credit Agreement is tested at the end of each quarter based on the prior four quarters.  The maximum Secured Leverage Ratio permitted under the First Lien Term Credit Agreement is  2.75:1.  As of September 30, 2018 and December 31, 2017, Kodak was in compliance with all covenants under the First Lien Term Credit Agreement.  

 

Under the terms of the Credit Agreements, the Company may designate Restricted Subsidiaries as Unrestricted Subsidiaries provided the aggregate sales of all Unrestricted Subsidiaries are less than 7.5% of the consolidated sales of Kodak and the aggregate assets of all Unrestricted Subsidiaries are less than 7.5% of Kodak’s consolidated assets.  Further, under the Amended Credit Agreement, on a pro forma basis at the time of designation and immediately after giving effect thereto, Excess Availability must be at least $30 million and the pro forma Fixed Charge Coverage Ratio must be no less than 1.0 to 1.0.  Upon designation of Unrestricted Subsidiaries, the Company will be required to provide to the Lenders reconciling statements to eliminate all financial information pertaining to Unrestricted Subsidiaries which is included in its annual and quarterly financial statements.

 

In March 2018, the Company designated five subsidiaries as Unrestricted Subsidiaries, Kodak PE Tech, LLC, Kodak LB Tech, LLC, Kodak Realty, Inc., Kodakit Singapore Pte. Limited and KP Services (Jersey) Ltd.  This action allowed the Company to better position assets which may be monetized in the future and address costs related to underutilized properties.  Collectively, these subsidiaries had sales of approximately $3 million and $8 million for the three and nine months ended September 30, 2018, respectively, which represents 1% of Kodak’s consolidated sales for both the three and nine months ended September 30, 2018.  These subsidiaries had assets of $25 million as of September 30, 2018, which represents 2% of Kodak’s consolidated assets as of September 30, 2018. Each of the capitalized but undefined terms has the meaning ascribed to such term in the Credit Agreements.  EBITDA of the Unrestricted Subsidiaries, as calculated under the First Lien Term Credit Agreement and the Amended Credit Agreement, is a loss and is excluded from the calculation of the Secured Leverage Ratio.  Therefore, designating these Subsidiaries as Unrestricted had the impact of improving the Secured Leverage Ratio.

 

Kodak intends to conduct its operations in a manner that will result in continued compliance with the Credit Agreements; however, compliance for future quarters may depend on Kodak undertaking one or more non-operational transactions, such as the repatriation of cash into the U.S., the management of operating cash outflows, the designation of additional subsidiaries as Unrestricted Subsidiaries, a monetization of assets, a debt refinancing, the raising of equity capital, or a similar transaction.  If Kodak is unable to remain in compliance and does not make alternate arrangements with its term lenders, an event of default would occur under the Credit Agreements which, among other remedies, would entitle the lenders or their agents to declare the outstanding obligations under the First Lien Term Credit Agreement to be immediately due and payable.  There is no assurance Kodak will be able to complete any non-operational transaction it may undertake to maintain compliance with covenants under the Credit Agreements or to refinance, or otherwise pay, the First Lien Loans on or before the maturity date of September 3, 2019 or the obligations under the ABL Credit Agreement on June 6, 2019 if the First Lien Loans are not refinanced or paid on or before their maturity date.

 

See also the Going Concern subsection of Note 1, “Basis of Presentation and Recent Accounting Pronouncements”.

 

Amended and Restated Credit Agreement

On May 26, 2016, the Company and certain of its domestic subsidiaries (the “Subsidiary Guarantors”) entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement” or “ABL Credit Agreement”) with the lenders party thereto (the “Lenders”), Bank of America, N