kodk-10q_20190331.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 March 31, 2019

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 May 1, 2019, the registrant had 43,000,688 shares of common stock, $0.01 par value per share, outstanding.

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of each class

 

Common

Trading Symbol (s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

KODK

New York Stock Exchange

[1]


 

 

EASTMAN KODAK COMPANY

Form 10-Q

March 31, 2019

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)

 

8

Item 2.

 

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

 

32

 

 

Liquidity and Capital Resources

 

40

Item 4.

 

Controls and Procedures

 

43

 

 

 

 

 

Part II. —Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

44

Item 1A.

 

Risk Factors

 

44

Item 2.

 

Unregistered Sales of Securities and Use of Proceeds

 

44

Item 5.

 

Other Information

 

44

Item 6.

 

Exhibits

 

44

 

 

 

 

 

 

 

Index to Exhibits

 

45

 

 

Signatures

 

46

 

 

[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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

Sales

 

$

224

 

 

$

248

 

Services

 

 

67

 

 

 

70

 

Total revenues

 

 

291

 

 

 

318

 

Cost of revenues

 

 

 

 

 

 

 

 

Sales

 

 

205

 

 

 

231

 

Services

 

 

46

 

 

 

49

 

Total cost of revenues

 

 

251

 

 

 

280

 

Gross profit

 

 

40

 

 

 

38

 

Selling, general and administrative expenses

 

 

59

 

 

 

58

 

Research and development costs

 

 

11

 

 

 

13

 

Restructuring costs and other

 

 

2

 

 

 

2

 

Other operating (income) expense, net

 

 

 

 

 

 

Loss from continuing operations before interest expense,

   other charges, net and income taxes

 

 

(32

)

 

 

(35

)

Interest expense

 

 

3

 

 

 

2

 

Pension income excluding service cost component

 

 

(27

)

 

 

(32

)

Other charges, net

 

 

1

 

 

 

16

 

Loss from continuing operations before income taxes

 

 

(9

)

 

 

(21

)

Provision for income taxes

 

 

3

 

 

 

4

 

Loss from continuing operations

 

 

(12

)

 

 

(25

)

Loss from discontinued operations, net of income taxes

 

 

(6

)

 

 

 

Net loss

 

$

(18

)

 

$

(25

)

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share attributable

   to Eastman Kodak Company common shareholders:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.40

)

 

$

(0.70

)

Discontinued operations

 

 

(0.14

)

 

 

 

Total

 

$

(0.54

)

 

$

(0.70

)

 

 

 

 

 

 

 

 

 

Number of common shares used in basic and diluted net

   loss per share

 

 

 

 

 

 

 

 

Basic

 

 

42.9

 

 

 

42.6

 

Diluted

 

 

42.9

 

 

 

42.6

 

 

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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

NET LOSS

 

$

(18

)

 

$

(25

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

3

 

 

 

13

 

Pension and other postretirement benefit plan obligation activity,

   net of tax

 

 

(1

)

 

 

 

Other comprehensive income, net of tax

 

 

2

 

 

 

13

 

COMPREHENSIVE LOSS, NET OF TAX

 

$

(16

)

 

$

(12

)

 

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

 

 

[4]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

240

 

 

$

246

 

Trade receivables, net of allowances of $8 and $9, respectively

 

 

201

 

 

 

232

 

Inventories, net

 

 

249

 

 

 

236

 

Other current assets

 

 

53

 

 

 

51

 

Current assets held for sale

 

 

116

 

 

 

113

 

Total current assets

 

 

859

 

 

 

878

 

Property, plant and equipment, net of accumulated depreciation of $431 and $422,

   respectively

 

 

233

 

 

 

246

 

Goodwill

 

 

12

 

 

 

12

 

Intangible assets, net

 

 

58

 

 

 

60

 

Operating lease right-of-use assets

 

 

49

 

 

 

 

Restricted cash

 

 

8

 

 

 

11

 

Deferred income taxes

 

 

155

 

 

 

160

 

Other long-term assets

 

 

164

 

 

 

144

 

TOTAL ASSETS

 

$

1,538

 

 

$

1,511

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Accounts payable, trade

 

$

160

 

 

$

149

 

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

 

 

396

 

 

 

396

 

Current portion of operating leases

 

 

23

 

 

 

 

Other current liabilities

 

 

191

 

 

 

213

 

Current liabilities held for sale

 

 

25

 

 

 

20

 

Total current liabilities

 

 

795

 

 

 

778

 

Long-term debt, net of current portion

 

 

18

 

 

 

5

 

Pension and other postretirement liabilities

 

 

368

 

 

 

379

 

Operating leases, net of current portion

 

 

35

 

 

 

 

Other long-term liabilities

 

 

163

 

 

 

179

 

Total Liabilities

 

 

1,379

 

 

 

1,341

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

175

 

 

173

 

 

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

Additional paid in capital

 

 

615

 

 

 

617

 

Treasury stock, at cost

 

 

(9

)

 

 

(9

)

Accumulated deficit

 

 

(213

)

 

 

(200

)

Accumulated other comprehensive loss

 

 

(409

)

 

 

(411

)

Total shareholders’ deficit

 

 

(16

)

 

 

(3

)

TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY (DEFICIT)

 

$

1,538

 

 

$

1,511

 

 

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

 

 


[5]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in millions)

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(18

)

 

$

(25

)

Adjustments to reconcile to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

15

 

 

 

19

 

Pension income

 

 

(23

)

 

 

(28

)

Change in fair value of embedded conversion features derivative liability

 

 

1

 

 

 

14

 

Net gain on sales of assets/businesses

 

 

 

 

 

(1

)

Stock based compensation

 

 

3

 

 

 

2

 

Provision for deferred income taxes

 

 

1

 

 

 

2

 

Decrease in trade receivables

 

 

25

 

 

 

30

 

Increase in inventories

 

 

(11

)

 

 

(27

)

Increase (decrease) in trade payables

 

 

14

 

 

 

(6

)

Decrease in liabilities excluding borrowings and trade payables

 

 

(27

)

 

 

(9

)

Other items, net

 

 

8

 

 

 

2

 

Total adjustments

 

 

6

 

 

 

(2

)

Net cash used in operating activities

 

 

(12

)

 

 

(27

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to properties

 

 

(3

)

 

 

(10

)

Net cash used in investing activities

 

 

(3

)

 

 

(10

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

14

 

 

 

 

Repayment of capital leases

 

 

(1

)

 

 

(1

)

Preferred stock dividend payments

 

 

 

 

 

(3

)

Payment of contingent consideration related to the sale of a business

 

 

(10

)

 

 

 

Net cash provided by (used in) financing activities

 

 

3

 

 

 

(4

)

Effect of exchange rate changes on cash

 

 

2

 

 

 

5

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(10

)

 

 

(36

)

Cash, cash equivalents, restricted cash and cash in assets held for sale, beginning of period

 

 

267

 

 

 

369

 

Cash, cash equivalents, restricted cash and cash in assets held for sale, end of period

 

$

257

 

 

$

333

 

 

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


[6]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT) (Unaudited)

 

 

 

Three-Month Period Ending March 31, 2019

 

 

 

Eastman Kodak Company Common Shareholders

 

 

 

 

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive Income (Loss)

 

 

Treasury

Stock

 

 

Total

 

 

Series A Redeemable Convertible Preferred Stock

 

Equity (deficit) as of December 31, 2018

 

$

 

 

$

617

 

 

$

(200

)

 

$

(411

)

 

$

(9

)

 

$

(3

)

 

$

173

 

Net loss

 

 

 

 

 

 

 

 

(18

)

 

 

 

 

 

 

 

 

(18

)

 

 

 

Other comprehensive loss (net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Pension and other postretirement

   liability adjustments

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

Series A preferred stock cash dividends

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

Series A preferred stock deemed dividends

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

2

 

Stock-based compensation

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

Prior period adjustment due to adoption

   of ASU 2016-02

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

 

 

 

Equity (deficit) as of March 31, 2019

 

$

 

 

$

615

 

 

$

(213

)

 

$

(409

)

 

$

(9

)

 

$

(16

)

 

$

175

 

 

 

 

Three-Month Period Ending March 31, 2018

 

 

 

Eastman Kodak Company Common Shareholders

 

 

 

 

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive Income (Loss)

 

 

Treasury

Stock

 

 

Total

 

 

Series A Redeemable Convertible Preferred Stock

 

Equity (deficit) as of December 31, 2017

 

$

 

 

$

631

 

 

$

(174

)

 

$

(391

)

 

$

(9

)

 

$

57

 

 

$

164

 

Net loss

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

Other comprehensive loss (net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

 

 

 

Pension and other postretirement

   liability adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A preferred stock cash dividends

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

Series A preferred stock deemed dividends

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

2

 

Stock-based compensation

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

Prior period adjustment due to adoption

   of ASU 2014-09

 

 

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

(10

)

 

 

 

Equity (deficit) as of March 31, 2018

 

$

 

 

$

628

 

 

$

(209

)

 

$

(378

)

 

$

(9

)

 

$

32

 

 

$

166

 

 

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


[7]


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, 2018 (the “2018 Form 10-K”).

 

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.  

 

As of March 31, 2019, the Company had $395 million of outstanding indebtedness under the Senior Secured First Lien Term Credit Agreement (the “Term Credit Agreement”).  On April 12, 2019, the Company prepaid approximately $312 million of the loans made under the Term Credit Agreement using proceeds from the sale of Kodak’s Flexographic Packaging business (“FPD”) (Refer to Note 22, “Discontinued Operations”).  The loans made under the 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 Term Credit Agreement).  The Company also has issued approximately $85 million of letters of credit under the Amended and Restated Credit Agreement (the “ABL Credit Agreement”) as of both March 31, 2019 and December 31, 2018.  Should the Company not repay, refinance or extend the maturity of the loans under the Term Credit Agreement prior to June 5, 2019, the termination date will occur under the ABL Credit Agreement on such date unless the ABL Credit Agreement has been amended in the interim.  Upon the occurrence of the termination date under the ABL 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 ABL Credit Agreement.

 

As of March 31, 2019 and December 31, 2018, Kodak had approximately $240 million and $246 million, respectively, of cash and cash equivalents.  $94 million and $117 million was held in the U.S. as of March 31, 2019 and December 31, 2018, respectively, and $146 million and $129 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 March 31, 2019 and December 31, 2018 were $386 million and $390 million, respectively, which includes short-term intercompany loans from Kodak’s international finance center of $87 million and $92 million as of March 31, 2019 and December 31, 2018, respectively. In China, where approximately $88 million and $72 million of cash and cash equivalents was held as of March 31, 2019 and December 31, 2018, 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, restricted cash and cash in assets held for sale of $10 million and $102 million for the three months ended March 31, 2019 and the year ended December 31, 2018, respectively.  

 

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.  

 

[8]


Reporting requirements under the Term Credit Agreement require the Company to provide annual audited financial statements accompanied by an opinion of an independent public accountant without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit or other material qualification or exception, except for any such qualification or exception with respect to any indebtedness maturing within 364 days after the date of such financial statements. Lenders may take the position that the going concern explanatory paragraph contained in the audit report on the Company’s financial statements as of and for the year ended December 31, 2018 does not satisfy the requirements under the Term Credit Agreement. Under the Term Credit Agreement, if notice of a failure to comply with the reporting covenant is given to the Company by the lenders, an event of default would occur thereunder if such failure is not cured within thirty days after such notice is given, unless such event of default is waived by the requisite lenders. In the event of default, the debt could become immediately due.

 

The ABL Credit Agreement contains an opinion delivery requirement that corresponds to the requirement under the Term Credit Agreement, although under the ABL Credit Agreement there is an additional requirement that the opinion be reasonably acceptable to the agent under the ABL Credit Agreement. On March 31, 2019 the Company obtained a waiver from the agent and lenders under the ABL Credit Agreement with respect to any event of default under the reporting covenant that may be deemed to have occurred in relation to the going concern explanatory paragraph in the audit report. Such waiver does not waive any cross-default that may occur in the event of the occurrence of an event of default under the Term Credit Agreement as described above.

 

The Company has been engaged in negotiations to refinance the remaining $83 million of the loans under the Term Credit Agreement not repaid from proceeds from the sale of FPD. The Company intends to complete the refinancing prior to the maturity of the Term Credit Agreement or ABL Credit Agreement and prior to the date on which any event of default would occur under the Term Credit Agreement.

 

Additionally, Kodak is facing liquidity challenges due to operating losses and 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 FPD; further restructuring Kodak’s cost structure; and paring investment in new technology by eliminating, slowing, and partnering with investors in product development programs.

 

The refinancing of the loans under the Term Credit Agreement is not solely within Kodak’s control.  Executing agreements for a refinancing of the loans under the Term Credit Agreement and the timing for a closing of a refinancing of the loans under the 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 the terms of any refinancing.

 

Kodak makes no assurances regarding the likelihood, certainty or timing of consummating a refinancing of the Company’s existing debt, or regarding the sufficiency of any such refinancing 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 Term Credit Agreement, the ABL Credit Agreement and debt covenants see Note 7, “Debt and Finance Leases”.

 

RECLASSIFICATIONS

 

Certain amounts for prior periods have been reclassified to conform to the current period classification due to Kodak’s new organization structure as of January 2019. In addition to the changes in segment reporting under the new organization structure there is a change in the segment measure of profitability.  The segment measure of profitability was changed to exclude the costs, net of any rental income received, of underutilized portions of certain properties. Additionally, the allocation of costs from Eastman Business Park (“EBP”) to the Brand, Film and Imaging segment and Advanced Materials and 3D Printing Technology segment as tenants of EBP and to each of the segments as users of shared corporate space at the global headquarters changed.  Refer to Note 21, “Segment Information” for additional information.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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. Kodak adopted the new standard on January 1, 2019.  The adoption of this ASU did not have an impact on the Consolidated Financial Statements as a result of Kodak’s U.S. valuation allowance.

 

[9]


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Topic 842 (as amended by ASU’s 2018-01, 10, 11 and 20) 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 standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases.  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).  The original guidance required application on a modified retrospective basis to the earliest period presented. ASU 2018-11, Targeted improvements to ASC 842, 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 adopted the new standard on the effective date applying the new transition method allowed under ASU 2018-11.  Kodak elected the package of practical expedients which permitted Kodak to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any existing leases, and (3) any initial direct costs for any existing leases as of the effective date.  Kodak did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment.  The adoption of the amended lease guidance increased the assets and liabilities recorded in the Consolidated Statement of Financial Position due to the recognition of right-of-use assets and liabilities. Kodak recognized a cumulative-effect adjustment to increase retained earnings of approximately $5 million due to the derecognition of assets and deferred gain on previous sale-leaseback transactions.  As a lessor, recognition of rental revenue remained mainly consistent with previous guidance, apart from the narrower definition of initial direct costs that can be capitalized.  The impact of adoption on the Consolidated Statement of Financial Position is presented below:

 

(in millions)

Balance at December 31, 2018

 

Adjustments Due to

ASU 2016-02

 

Balance at January 1,

2019

 

Operating lease right-of-use assets

$

 

$

53

 

$

53

 

Operating lease liabilities

 

 

 

62

 

 

62

 

Deferred rent payable (1)

 

9

 

 

(9

)

 

 

Deferred gain on previous sale leaseback transaction (1)

 

6

 

 

(6

)

 

 

Net fixed assets from previous sale leaseback transaction

 

1

 

 

(1

)

 

 

Accumulated deficit

 

200

 

 

(5

)

 

195

 

 

 

(1)

Deferred amounts were previously reported in Other current liabilities ($1 million) and Other long-term liabilities ($14 million) in the Consolidated Statements of Financial Position.

 

 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 (December 31, 2020 for Kodak). Early adoption is permitted. The standard addresses disclosures only and will not have an impact on Kodak’s consolidated financial statements.

 

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.  Kodak retrospectively early adopted the provisions of the ASU that removed or modified disclosures in the fourth quarter of 2018 and expects to prospectively adopt the provisions related to new disclosures January 1, 2020. The standard addresses disclosures only and will not have an impact on Kodak’s consolidated financial statements.

 

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.

[10]


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 of this ASU.

 

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 (including amendments in ASU 2018-19) 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).  Early adoption is permitted. Kodak is currently evaluating the impact of this ASU.  

 

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:

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

240

 

 

$

246

 

Restricted cash included in Other current assets

 

 

8

 

 

 

8

 

Long-term restricted cash

 

 

8

 

 

 

11

 

Cash included in assets held for sale

 

 

1

 

 

 

2

 

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

 

$

257

 

 

$

267

 

 

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 $4 million and $5 million of security posted related to Brazilian legal contingencies as of March 31, 2019 and December 31, 2018, respectively.  Long-term restricted cash also includes $0 million and $3 million as of March 31, 2019 and December 31, 2018, respectively, supporting compliance with the Excess Availability threshold under the ABL Credit Agreement.

 

NOTE 3: INVENTORIES, NET

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Finished goods

 

$

130

 

 

$

119

 

Work in process

 

 

57

 

 

 

55

 

Raw materials

 

 

62

 

 

 

62

 

Total

 

$

249

 

 

$

236

 

 

NOTE 4: OTHER LONG-TERM ASSETS

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Pension assets

 

$

104

 

 

$

82

 

Estimated workers' compensation recoveries

 

 

17

 

 

 

17

 

Long-term receivables, net of reserve of $4 and $4, respectively

 

 

13

 

 

 

13

 

Other

 

 

30

 

 

 

32

 

Total

 

$

164

 

 

$

144

 

 

 

[11]


NOTE 5: OTHER CURRENT LIABILITIES

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Employee related liabilities

 

$

45

 

 

$

42

 

Deferred revenue

 

 

31

 

 

 

34

 

Customer rebates

 

 

20

 

 

 

26

 

Deferred consideration on disposed businesses

 

 

14

 

 

 

24

 

Workers compensation

 

 

9

 

 

 

9

 

Series A Preferred Stock dividends payable

 

 

8

 

 

 

6

 

Restructuring liabilities

 

 

7

 

 

 

8

 

Other

 

 

57

 

 

 

64

 

Total

 

$

191

 

 

$

213

 

 

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

 

NOTE 6: OTHER LONG-TERM LIABILITIES

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Workers compensation

 

$

82

 

 

$

83

 

Asset retirement obligations

 

 

48

 

 

 

48

 

Deferred taxes

 

 

13

 

 

 

14

 

Environmental liabilities

 

 

10

 

 

 

10

 

Other (1)

 

 

10

 

 

 

24

 

Total

 

$

163

 

 

$

179

 

 

 

(1)

Other decreased $14 million due to the adoption of ASU 2016-02.  Also see the Recently Adopted Accounting Pronouncements subsection of Note 1, “Basis of Presentation and Recent Accounting Pronouncements”.

 

[12]


NOTE 7:  DEBT AND FINANCE LEASES

Debt and finance leases and related maturities and interest rates were as follows at March 31, 2019 and December 31, 2018 (in millions):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

Type

 

Maturity

 

Weighted-Average

Effective Interest Rate

 

 

Carrying Value

 

 

Carrying Value

 

Current portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term note

 

2019

 

9.00%

 

 

$

394

 

 

$

394

 

 

 

Finance leases

 

Various

 

Various

 

 

 

2

 

 

 

2

 

 

 

Other debt

 

Various

 

Various

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

396

 

 

 

396

 

Non-current portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

Various

 

Various

 

 

 

2

 

 

 

3

 

 

 

RED-Rochester, LLC

 

2033

 

11.40%

 

 

 

14

 

 

 

 

 

 

Other debt

 

Various

 

Various

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

$

414

 

 

$

401

 

 

On September 3, 2013, the Company entered into (i) the First Lien Term Credit Agreement (the “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,”), 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 “Original ABL Credit Agreement” and together with the Term Credit Agreement and the Second Lien Term Credit Agreement, 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 Agreement and the Second Lien Term Credit Agreement were $664 million ($695 million aggregate principal less $15 million stated discount and $16 million in debt transaction costs). The loans made under the 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 Term Credit Agreement).  The Second Lien Term Credit Agreement was prepaid and terminated on November 15, 2016 using proceeds from the sale of Series A Convertible Preferred Stock together with cash on hand.  

 

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 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 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 Original ABL 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 Loans. 

[13]


As defined in the 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 Term Credit Agreement.  Under the terms of the 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,