kodk-10q_20200331.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, 2020

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

 

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

 

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 (or for such shorter period that the registrant was required to file such reports), 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 the definitions 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, 2020, the registrant had 43,733,599 shares of common stock, par value $0.01 per share, outstanding.

[1]


 

EASTMAN KODAK COMPANY

Form 10-Q

March 31, 2020

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

 

27

 

 

Liquidity and Capital Resources

 

38

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

Part II. —Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

41

Item 1A.

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

Item 6.

 

Exhibits

 

42

 

 

 

 

 

 

 

Index to Exhibits

 

43

 

 

Signatures

 

44

 

 

[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,

 

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

Sales

 

$

210

 

 

$

224

 

Services

 

 

57

 

 

 

67

 

Total revenues

 

 

267

 

 

 

291

 

Cost of revenues

 

 

 

 

 

 

 

 

Sales

 

 

191

 

 

 

205

 

Services

 

 

40

 

 

 

46

 

Total cost of revenues

 

 

231

 

 

 

251

 

Gross profit

 

 

36

 

 

 

40

 

Selling, general and administrative expenses

 

 

48

 

 

 

59

 

Research and development costs

 

 

9

 

 

 

11

 

Restructuring costs and other

 

 

7

 

 

 

2

 

Other operating income, net

 

 

(7

)

 

 

 

Loss from continuing operations before interest expense,

   pension income excluding service cost component,

   other (income) charges, net and income taxes

 

 

(21

)

 

 

(32

)

Interest expense

 

 

4

 

 

 

3

 

Pension income excluding service cost component

 

 

(26

)

 

 

(27

)

Other (income) charges, net

 

 

(53

)

 

 

1

 

Earnings (loss) from continuing operations before

   income taxes

 

 

54

 

 

 

(9

)

Provision for income taxes

 

 

165

 

 

 

3

 

Loss from continuing operations

 

 

(111

)

 

 

(12

)

Loss from discontinued operations, net of

   income taxes

 

 

 

 

 

(6

)

Net loss

 

$

(111

)

 

$

(18

)

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share attributable to

   Eastman Kodak Company common shareholders:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(2.66

)

 

$

(0.40

)

Discontinued operations

 

 

 

 

 

(0.14

)

Total

 

$

(2.66

)

 

$

(0.54

)

 

 

 

 

 

 

 

 

 

Number of common shares used in basic and diluted net

   loss per share:

 

 

 

 

 

 

 

 

Basic

 

 

43.6

 

 

 

42.9

 

Diluted

 

 

43.6

 

 

 

42.9

 

 

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

[3]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

(in millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

NET LOSS

 

$

(111

)

 

$

(18

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

(12

)

 

 

3

 

Pension and other postretirement benefit plan obligation activity,

   net of tax

 

 

3

 

 

 

(1

)

Other comprehensive (loss) income, net of tax

 

 

(9

)

 

 

2

 

COMPREHENSIVE LOSS, NET OF TAX

 

$

(120

)

 

$

(16

)

 

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)

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

209

 

 

$

233

 

Trade receivables, net of allowances of $12 and $8, respectively

 

 

183

 

 

 

208

 

Inventories, net

 

 

236

 

 

 

215

 

Restricted cash - current portion

 

 

8

 

 

 

12

 

Other current assets

 

 

31

 

 

 

36

 

Current assets held for sale

 

 

2

 

 

 

2

 

Total current assets

 

 

669

 

 

 

706

 

Property, plant and equipment, net of accumulated depreciation of $413 and $423,

   respectively

 

 

165

 

 

 

181

 

Goodwill

 

 

12

 

 

 

12

 

Intangible assets, net

 

 

43

 

 

 

47

 

Operating lease right-of-use assets

 

 

49

 

 

 

49

 

Restricted cash

 

 

24

 

 

 

45

 

Deferred income taxes

 

 

 

 

 

147

 

Other long-term assets

 

 

258

 

 

 

228

 

TOTAL ASSETS

 

$

1,220

 

 

$

1,415

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Accounts payable, trade

 

$

152

 

 

$

153

 

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

 

 

2

 

 

 

2

 

Current portion of operating leases

 

 

11

 

 

 

12

 

Other current liabilities

 

 

175

 

 

 

201

 

Total current liabilities

 

 

340

 

 

 

368

 

Long-term debt, net of current portion

 

 

111

 

 

 

109

 

Pension and other postretirement liabilities

 

 

372

 

 

 

378

 

Operating leases, net of current portion

 

 

48

 

 

 

48

 

Other long-term liabilities

 

 

190

 

 

 

231

 

Total liabilities

 

 

1,061

 

 

 

1,134

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

184

 

 

182

 

 

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

Additional paid in capital

 

 

600

 

 

 

604

 

Treasury stock, at cost

 

 

(9

)

 

 

(9

)

Accumulated deficit

 

 

(190

)

 

 

(79

)

Accumulated other comprehensive loss

 

 

(426

)

 

 

(417

)

Total shareholders’ equity (deficit)

 

 

(25

)

 

 

99

 

TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY

   (DEFICIT)

 

$

1,220

 

 

$

1,415

 

 

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

 


[5]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

 

 

 

 

 

 

March 31,

 

(in millions)

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(111

)

 

$

(18

)

Adjustments to reconcile to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10

 

 

 

15

 

Pension income

 

 

(22

)

 

 

(23

)

Change in fair value of embedded derivatives in the Series A Preferred Stock and

   Convertible Notes

 

 

(53

)

 

 

1

 

Net gain on sales of assets

 

 

(8

)

 

 

 

Asset impairments

 

 

3

 

 

 

 

Stock based compensation

 

 

1

 

 

 

3

 

Provision for deferred income taxes

 

 

161

 

 

 

1

 

Decrease in trade receivables

 

 

19

 

 

 

25

 

Increase in inventories

 

 

(26

)

 

 

(11

)

Increase in trade payables

 

 

1

 

 

 

14

 

Decrease in liabilities excluding borrowings and trade payables

 

 

(27

)

 

 

(27

)

Other items, net

 

 

11

 

 

 

8

 

Total adjustments

 

 

70

 

 

 

6

 

Net cash used in operating activities

 

 

(41

)

 

 

(12

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to properties

 

 

(4

)

 

 

(3

)

Net proceeds from return on equity investment

 

 

2

 

 

 

 

Net proceeds from sales of assets

 

 

1

 

 

 

 

Net cash used in investing activities

 

 

(1

)

 

 

(3

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

 

 

 

14

 

Repayment of finance leases

 

 

 

 

 

(1

)

Preferred stock dividend payments

 

 

(3

)

 

 

 

Payment of contingent consideration related to the sale of a business

 

 

 

 

 

(10

)

Net cash (used in) provided by financing activities

 

 

(3

)

 

 

3

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(4

)

 

 

2

 

Net decrease in cash, cash equivalents, restricted cash and cash in assets held for sale

 

 

(49

)

 

 

(10

)

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

 

 

290

 

 

 

267

 

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

 

$

241

 

 

$

257

 

 

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, 2020

 

 

 

Eastman Kodak Company Common Shareholders

 

 

 

 

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive Loss

 

 

Treasury

Stock

 

 

Total

 

 

Series A Redeemable Convertible Preferred Stock

 

Equity (deficit) as of December 31, 2019

 

$

 

 

$

604

 

 

$

(79

)

 

$

(417

)

 

$

(9

)

 

$

99

 

 

$

182

 

Net loss

 

 

 

 

 

 

 

 

(111

)

 

 

 

 

 

 

 

 

(111

)

 

 

 

Other comprehensive loss (net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

 

 

 

Pension and other postretirement

   liability adjustments

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Series A preferred stock cash dividends

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

Series A preferred stock deemed dividends

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

2

 

Stock-based compensation

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

Equity (deficit) as of March 31, 2020

 

$

 

 

$

600

 

 

$

(190

)

 

$

(426

)

 

$

(9

)

 

$

(25

)

 

$

184

 

 

 

 

 

Three-Month Period Ending March 31, 2019

 

 

 

Eastman Kodak Company Common Shareholders

 

 

 

 

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive 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

 

 

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, 2019 (the “2019 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, 2020 and December 31, 2019, Kodak had approximately $209 million and $233 million, respectively, of cash and cash equivalents.  $62 million and $72 million were held in the United States (“U.S.”) as of March 31, 2020 and December 31, 2019, respectively, and $147 million and $161 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, 2020 and December 31, 2019 were $416 million and $408 million, respectively, which includes short-term intercompany loans from Kodak’s international finance center of $117 million and $110 million as of March 31, 2020 and December 31, 2019, respectively. In China, where approximately $88 million and $89 million of cash and cash equivalents was held as of March 31, 2020 and December 31, 2019, 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 $49 million and $10 million for the three months ended March 31, 2020 and 2019, respectively, and a net increase in cash, cash equivalents, restricted cash and cash in assets held for sale of $23 million the year ended December 31, 2019.  Kodak used cash of $41 million and $12 million in operating activities for the three months ended March 31, 2020 and 2019, respectively, and generated cash from operating activities for the year ended December 31, 2019 of $12 million.  On May 12, 2020, a Chinese subsidiary of Kodak transferred approximately $70 million to a U.S. subsidiary of Kodak in anticipation of an inter-company transaction.

 

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.

 

Kodak is facing liquidity challenges due to operating losses, low or negative cash flow from operations, collateral needs and restrictions on the movement of cash from China.  Cash flow from operations in 2019 benefited from working capital improvements and individual transactions that occurred during the year.  The Company’s 5.00% Secured Convertible Notes due 2021 (the “Convertible Notes”) mature on November 1, 2021 if not converted prior to then and the Company’s 5.50% Series A Convertible Preferred Stock (the “Series A Preferred Stock”) must be redeemed on November 15, 2021 if not converted prior to then.  Additionally, Kodak has significant cash requirements to fund ongoing operations, restructuring programs, pension and other postretirement obligations, and other obligations.  Kodak’s plans to return to sustainable positive cash flow include growing revenues profitably, reducing operating expenses, continuing to simplify the organizational structure, generating cash from selling and leasing underutilized assets and paring investment in new technology by eliminating or delaying product development programs.  Additionally, the Company looks to implement ways to reduce collateral needs in the U.S. while accessing available cash in Chinese subsidiaries.

 

Kodak’s products are sold and serviced in numerous countries across the globe with more than half of sales generated outside the United States.  Current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in market size contractions in many countries due to economic slowdowns and government restrictions on movement.  The economic uncertainties surrounding the COVID-19 pandemic are adding complexity to Kodak’s plans to return to sustainable positive cash flow.  To mitigate the economic impacts of the pandemic Kodak is employing temporary furloughs and pay reductions, scaling manufacturing volumes due to expectations of reduced demand and delaying an increased number of product development programs.

[8]


 

The recent trend of negative operating cash flow, maturity and redemption dates in 2021 for the Convertible Notes and Series A Preferred Stock, increased challenges in managing cash during the COVID-19 pandemic and general lack of certainty regarding the return to positive cash flow raise substantial doubt about Kodak’s ability to continue as a going concern.

 

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 2020.  Refer to Note 22, “Segment Information” for additional information.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.  This guidance amended Topic 808 and Topic 606 to clarify that transactions in a collaborative arrangement should be accounted for under Topic 606 when the counterparty is a customer for a distinct good or service (i.e., unit of account).  The amendments preclude an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. 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).  The amendments should be applied retrospectively to the date of initial application of Topic 606. Kodak adopted this ASU on January 1, 2020, and it did not have any 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 Topic 820 by adding, changing, or removing certain 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 prospectively adopted the provisions related to new disclosures January 1, 2020. The standard addresses disclosures only and did not have an impact on Kodak’s consolidated financial statements.

 

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 (the year ended December 31, 2020 for Kodak).  Kodak adopted this ASU on January 1, 2020.  The standard addresses disclosures only and did 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.  The ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  Kodak adopted this ASU prospectively on January 1, 2020, and it did not have any impact on Kodak’s consolidated financial statements.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides optional relief through specific exceptions and practical expedients for transitioning away from reference rates that are expected to be discontinued.  The relief generally applies to eligible modifications of contractual terms that change (or have the potential to change) the amount or timing of contractual cash flows related to replacement of a reference rate.  The relief allows such modifications to be accounted for as continuations of existing contracts without additional analysis.  The optional relief is available from March 2020 through December 31, 2022.  Kodak is currently evaluating the impact of this ASU.  

[9]


 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” which removes certain exceptions related to intra-period tax allocations and deferred tax accounting on outside basis differences in foreign subsidiaries and equity method investments. Additionally, it provides other simplifying measures for the accounting for income taxes. The new standard is effective for fiscal years beginning after December 15, 2021 (January 1, 2022 for Kodak) with early adoption permitted. 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 (as amended by ASUs 2018-19, 2019-04, 2019-05, 2020-02 and 2020-03) 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 ASU is effective for smaller reporting companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, (January 1, 2023 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 Consolidated 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)

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

209

 

 

$

233

 

Restricted cash - current portion

 

 

8

 

 

 

12

 

Restricted cash

 

 

24

 

 

 

45

 

Total cash, cash equivalents and restricted cash shown in

   the Statement of Cash Flows

 

$

241

 

 

$

290

 

 

Restricted cash - current portion on the Consolidated Statement of Financial Position primarily represents amounts that support hedging activities. In addition, as of December 31, 2019, it also contained collateral for a guaranty provided to MIR Bidco, SA (the “Purchaser”) who purchased Kodak’s Flexographic Packaging business (“FPD”). On April 16, 2019 the Purchaser of FPD paid Kodak $15 million in the U.S. as a prepayment for transition services and products and services to be provided by Kodak to the Purchaser.  Kodak provided a $15 million guaranty, supported by cash collateral in China, to the Purchaser.  The Purchaser had the option to satisfy its payment obligations to Kodak through a reduction of the prepayment balance or in cash.  When the Purchaser satisfied its payment obligations to Kodak by utilizing its prepayment balance, Kodak followed a guaranty amendment process to reduce the amount of its guaranty and cash collateral supporting the prepayment balance.  As of March 31, 2020 and December 31, 2019, the remaining prepayment balance was $0 million and $3 million, respectively, and the cash collateral supporting Kodak’s guaranty was $0 million and $4 million, respectively.    

 

Restricted cash includes $3 million and $22 million as of March 31, 2020 and December 31, 2019, respectively, supporting compliance with the Excess Availability threshold under the Amended and Restated Credit Agreement (the “ABL Credit Agreement”), as defined therein (Refer to Note 8, “Debt and Finance Leases” for information on the decrease in Restricted cash supporting the Excess Availability threshold).  In addition, Restricted cash as of both March 31, 2020 and December 31, 2019 includes an escrow of $14 million in China to secure various ongoing obligations under the agreements for the strategic relationship with Lucky HuaGuang Graphics Co. Ltd.  Restricted cash also included $4 million and $5 million of security posted related to Brazilian legal contingencies as of March 31, 2020 and December 31, 2019, respectively.  

 

 

NOTE 3: INVENTORIES, NET

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2020

 

 

2019

 

Finished goods

 

$

119

 

 

$

105

 

Work in process

 

 

60

 

 

 

54

 

Raw materials

 

 

57

 

 

 

56

 

Total

 

$

236

 

 

$

215

 

 

 

 

 

[10]


 

NOTE 4: OTHER LONG-TERM ASSETS

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2020

 

 

2019

 

Pension assets

 

$

199

 

 

$

173

 

Estimated workers' compensation recoveries

 

 

18

 

 

 

18

 

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

 

 

10

 

 

 

11

 

Series A Preferred Stock embedded conversion option derivative asset

 

 

6

 

 

 

 

Other

 

 

25

 

 

 

26

 

Total

 

$

258

 

 

$

228

 

 

The Other component above consists of other miscellaneous long-term assets that, individually, were less than 5% of the total assets component within the Consolidated Statement of Financial Position as of the end of the preceding year, and therefore have been aggregated in accordance with Regulation S-X.

 

 

NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following table presents the carrying value of goodwill by reportable segment.

 

(in millions)

 

Traditional Printing

 

 

Digital Printing

 

 

Advanced Materials and Chemicals

 

 

Brand

 

 

Total

 

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

56

 

 

$

6

 

 

$

14

 

 

$

 

 

$

76

 

Accumulated impairment losses

 

 

(56

)

 

 

 

 

 

(8

)

 

 

 

 

 

(64

)

Balance as of December 31, 2019

 

 

 

 

 

6

 

 

 

6

 

 

 

 

 

 

12

 

Goodwill reallocation

 

 

 

 

 

 

 

 

(6

)

 

 

6

 

 

 

 

Balance as of March 31, 2020

 

$

 

 

$

6

 

 

$

 

 

$

6

 

 

$

12

 

 

As a result of the change in segments that became effective as of January 1, 2020, Kodak’s goodwill reporting units changed. Refer to Note 22, “Segment Information” for additional information on the change to Kodak’s organizational structure. The Digital Printing segment has three goodwill reporting units: Electrophotographic Printing Solutions, Prosper and Versamark and Software. The Advanced Materials and Chemicals segment has three goodwill reporting units: Motion Picture and Industrial Films and Chemicals, Advanced Materials and Functional Printing and Kodak Services for Business.  The Traditional Printing segment and Brand segment each have one goodwill reporting unit.  

 

As of December 31, 2019, the goodwill balance of $12 million under the prior year segment reporting structure was comprised of $6 million for the Brand, Film and Imaging segment and $6 million for the Kodak Software segment, which had only one reporting unit (Software).  The goodwill in the Brand, Film and Imaging segment was reported in the Consumer Products reporting unit.

 

The goodwill previously reported in the Consumer Products goodwill reporting unit was transferred to the Brand goodwill reporting unit using a relative fair value allocation to affected reporting units.  Goodwill previously reported in the Software reporting unit was transferred to the Digital Printing segment where it continues to remain its own reporting unit.

 

Kodak performed an interim test of impairment for goodwill as of March 31, 2020 due to the decline in its market capitalization from the last goodwill impairment test (December 31, 2019) and the uncertainty resulting from the COVID-19 pandemic on its operations.  Based on the results of the March 31, 2020 analysis, no impairment of goodwill was indicated.  As of March 31, 2020, the Brand reporting unit had negative carrying value.

 

The gross carrying amount and accumulated amortization by major intangible asset category as of March 31, 2020 and December 31, 2019 were as follows:

 

[11]


 

 

March 31, 2020

(in millions)

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted-Average

Amortization Period

Technology-based

 

$

99

 

 

$

77

 

 

$

22

 

 

5 years

Kodak trade name

 

 

18

 

 

 

 

 

 

18

 

 

Indefinite life

Customer-related

 

 

11

 

 

 

8

 

 

 

3

 

 

4 years

Total

 

$

128

 

 

$

85

 

 

$

43

 

 

 

 

 

 

December 31, 2019

(in millions)

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted-Average

Amortization Period

Technology-based

 

$

99

 

 

$

76

 

 

$

23

 

 

5 years

Kodak trade name

 

 

21

 

 

 

 

 

 

21

 

 

Indefinite life

Customer-related

 

 

11

 

 

 

8

 

 

 

3

 

 

4 years

Total

 

$

131

 

 

$

84

 

 

$

47

 

 

 

 

Kodak also performed an interim test of impairment for the Kodak trade name as of March 31, 2020.  The interim impairment test of the Kodak trade name used the income approach, specifically the relief from royalty method.  Based on the result of the interim impairment test, Kodak concluded the carrying value of the Kodak trade name exceeded its fair value.  Pre-tax impairment charges of $3 million are included in Other operating income, net in the Consolidated Statement of Operations.

 

Amortization expense related to intangible assets was $1 million and $2 million for the three months ended March 31, 2020 and 2019, respectively.

 

Estimated future amortization expense related to intangible assets that are currently being amortized as of March 31, 2020 was as follows:

 

(in millions)

 

 

 

 

Q2 - Q4 2020

 

$

4

 

2021

 

 

5

 

2022

 

 

5

 

2023

 

 

4

 

2024

 

 

4

 

2025 and thereafter

 

 

3

 

Total

 

$

25

 

 

 

NOTE 6: OTHER CURRENT LIABILITIES

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2020

 

 

2019

 

Employee related liabilities

 

$

38

 

 

$

38

 

Deferred revenue

 

 

38

 

 

 

43

 

Customer rebates

 

 

18

 

 

 

23

 

Deferred consideration on disposed businesses (1)

 

 

14

 

 

 

14

 

Series A Preferred Stock dividends payable

 

 

14

 

 

 

14

 

Workers compensation

 

 

10

 

 

 

10

 

Restructuring liabilities

 

 

10

 

 

 

12

 

Transition services agreement prepayment

 

 

 

 

 

3

 

Other

 

 

33

 

 

 

44

 

Total

 

$

175

 

 

$

201

 

 

 

(1)

On September 3, 2013, Kodak consummated the sale of certain assets and the assumption of certain liabilities of the Personalized Imaging and Document Imaging Businesses (“PI/DI Businesses”) to the trustee of the U. K. pension plan (and/or its subsidiaries) for net cash consideration of $325 million. Up to $35 million in aggregate of the purchase price is subject to repayment if the PI/DI Business does not achieve certain annual adjusted EBITDA targets over the four-year period ending December 31, 2018.  The PI/DI Business did not achieve the adjusted annual EBITDA target for any year in the four-year period.  The amounts owed for 2015, 2016 and 2017 were paid in 2016, 2017 and 2019, respectively.  The maximum potential payment related to the year ending December 31, 2018 of $14 million was accrued at the time of the divestiture of the business.  The Company does not consider the procedural requirements giving rise to the

[12]


 

obligation to pay the amount relating to the year ended December 31, 2018 to have been met.  The PI/DI Businesses (operating as Kodak Alaris) have filed suit against the Company alleging breach of contract based on the failure to pay the $14 million amount with respect to 2018.  The Company has filed counterclaims seeking contractual penalties related to late payments for goods and services provided by Kodak under various separate agreements.

 

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

 

The Other component above consists of other miscellaneous current liabilities that, individually, were less than 5% of the current liabilities component within the Consolidated Statement of Financial Position as of the end of the preceding year, and therefore have been aggregated in accordance with Regulation S-X.

 

 

NOTE 7: OTHER LONG-TERM LIABILITIES

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2020

 

 

2019

 

Workers compensation

 

$

83

 

 

$

84

 

Asset retirement obligations

 

 

40

 

 

 

48

 

Deferred brand licensing revenue

 

 

17

 

 

 

18

 

Deferred taxes