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Other includes revenue from non-recurring engineering services, tenant rent and related property management services and licensing.
Sales are reported in the geographic area in which they originate. No non-U.S. country generated more than 10% of net sales in the years ended December 31, 2022, 2021 and 2020.
Other consists of Intellectual Property Licensing, Brand Licensing and Eastman Business Park.
Growth consists of Coatng Services and Advanced Materials and Functional Printing within the Advanced Materials and
Chemicals segment.
Consists of third-party costs such as security, maintenance, and utilities required to maintain land and buildings in certain locations not used in any Kodak operations and the costs, net of any rental income received, of underutilized portions of certain properties.
Core includes the Print business, Motion Picture, and Industrial Film and Chemicals, excluding coating and product commercialization services (“Coating Services”).
Reclassified to Pension income - refer to Note 20, "Retirement Plans" and Note 21, "Other Postretirement Benefits" for additional information.
Interest income associated with a refund received in the first quarter of 2023 from a
governmental authority in a location outside the U.S that was previously held in order to
guarantee potential tax disputes in that jurisdiction.
Refer to Note 2, “Cash, Cash Equivalents and Restricted Cash” for the components of cash, cash equivalents and restricted cash.
Refer to Note 17, "Financial Instruments".
Consulting and other costs are primarily professional services and internal costs associated with certain corporate strategic initiatives, investigations and litigation. Consulting and other costs include $10 million of income in the three months ended March 31, 2023 representing insurance reimbursement of legal costs previously paid by the Company associated with investigations and litigation matters. Kodak received $15 million of insurance reimbursement proceeds in the first quarter of 2023, of which $5 million was recorded in Other current assets in the Consolidated Statement of Financial Position as of December 31, 2022.
As reported in the Consolidated Statement of Operations.
Sales are reported in the geographic area in which they originate.
Variable lease income primarily represents operating costs under real estate leases and incremental variable income based on usage under equipment leases.
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Table of Contents
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, 2023 |
☐ 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 |
1-00087 |
EASTMAN KODAK COMPANY |
(Exact name of registrant as specified in its charter) |
| |
New Jersey | 16-0417150 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| |
343 STATE STREET, ROCHESTER, New York | 14650 |
(Address of principal executive offices) | (Zip Code) |
(585) 724-4000 |
(Registrant’s telephone number, including area code) |
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, 2023, the registrant had 79,343,371 shares of common stock, par value $0.01 per share, outstanding.
EASTMAN KODAK COMPANY
Form 10-Q
March 31, 2023
Table of Contents
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, |
|
|
|
2023 |
|
|
2022 |
|
Revenues |
|
|
|
|
|
|
|
|
Sales |
|
$ |
224 |
|
|
$ |
234 |
|
Services |
|
|
54 |
|
|
|
56 |
|
Total revenues |
|
|
278 |
|
|
|
290 |
|
Cost of revenues |
|
|
|
|
|
|
|
|
Sales |
|
|
192 |
|
|
|
220 |
|
Services |
|
|
36 |
|
|
|
37 |
|
Total cost of revenues |
|
|
228 |
|
|
|
257 |
|
Gross profit |
|
|
50 |
|
|
|
33 |
|
Selling, general and administrative expenses |
|
|
34 |
|
|
|
43 |
|
Research and development costs |
|
|
9 |
|
|
|
9 |
|
Restructuring costs and other |
|
|
1 |
|
|
|
— |
|
Other operating expense |
|
|
1 |
|
|
|
— |
|
Earnings (loss) from operations before interest expense, pension income excluding service cost component, other (income) charges, net and income taxes |
|
|
5 |
|
|
|
(19 |
) |
Interest expense |
|
|
11 |
|
|
|
9 |
|
Pension income excluding service cost component |
|
|
(40 |
) |
|
|
(30 |
) |
Other (income) charges, net |
|
|
(7 |
) |
|
|
3 |
|
Earnings (loss) from operations before income taxes |
|
|
41 |
|
|
|
(1 |
) |
Provision for income taxes |
|
|
8 |
|
|
|
2 |
|
NET EARNINGS (LOSS) |
|
$ |
33 |
|
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) per share attributable to Eastman Kodak Company common shareholders |
|
$ |
0.33 |
|
|
$ |
(0.08 |
) |
Diluted net earnings (loss) per share attributable to Eastman Kodak Company common shareholders |
|
$ |
0.30 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
Number of common shares used in basic and diluted net earnings (loss) per share |
|
|
|
|
|
|
|
|
Basic |
|
|
79.1 |
|
|
|
78.7 |
|
Diluted |
|
|
92.2 |
|
|
|
78.7 |
|
The accompanying notes are an integral part of these consolidated financial statements.
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2023 |
|
|
2022 |
|
NET EARNINGS (LOSS) |
|
$ |
33 |
|
|
$ |
(3 |
) |
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
(1 |
) |
|
|
5 |
|
Pension and other postretirement benefit plan obligation activity, net of tax |
|
|
(6 |
) |
|
|
— |
|
Other comprehensive (loss) income, net of tax |
|
|
(7 |
) |
|
|
5 |
|
COMPREHENSIVE INCOME, NET OF TAX |
|
$ |
26 |
|
|
$ |
2 |
|
The accompanying notes are an integral part of these consolidated financial statements.
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
| | March 31, | | | December 31, | |
(in millions) | | 2023 | | | 2022 | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 225 | | | $ | 217 | |
Trade receivables, net of allowances of $8 and $7, respectively | | | 167 | | | | 177 | |
Inventories, net | | | 251 | | | | 237 | |
Other current assets | | | 42 | | | | 48 | |
Current assets held for sale | | | 2 | | | | 2 | |
Total current assets | | | 687 | | | | 681 | |
Property, plant and equipment, net of accumulated depreciation of $457 and $450, respectively | | | 153 | | | | 154 | |
Goodwill | | | 12 | | | | 12 | |
Intangible assets, net | | | 27 | | | | 28 | |
Operating lease right-of-use assets | | | 38 | | | | 39 | |
Restricted cash | | | 62 | | | | 62 | |
Pension and other postretirement assets | | | 1,266 | | | | 1,233 | |
Other long-term assets | | | 77 | | | | 76 | |
TOTAL ASSETS | | $ | 2,322 | | | $ | 2,285 | |
| | | | | | | | |
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY | | | | | | | | |
Accounts payable, trade | | $ | 139 | | | $ | 134 | |
Short-term borrowings and current portion of long-term debt | | | 1 | | | | 1 | |
Current portion of operating leases | | | 15 | | | | 15 | |
Other current liabilities | | | 140 | | | | 143 | |
Total current liabilities | | | 295 | | | | 293 | |
Long-term debt, net of current portion | | | 320 | | | | 316 | |
Pension and other postretirement liabilities | | | 232 | | | | 230 | |
Operating leases, net of current portion | | | 29 | | | | 31 | |
Other long-term liabilities | | | 173 | | | | 171 | |
Total liabilities | | | 1,049 | | | | 1,041 | |
| | | | | | | | |
Commitments and Contingencies (Note 6) | | | | | | | | |
| | | | | | | | |
Redeemable, convertible preferred stock, no par value, $100 per share liquidation preference | | | 205 | | | | 203 | |
| | | | | | | | |
Equity | | | | | | | | |
Common stock, $0.01 par value | | | — | | | | — | |
Additional paid in capital | | | 1,161 | | | | 1,160 | |
Treasury stock, at cost | | | (11 | ) | | | (11 | ) |
Accumulated deficit | | | (537 | ) | | | (570 | ) |
Accumulated other comprehensive income | | | 455 | | | | 462 | |
Total shareholders’ equity | | | 1,068 | | | | 1,041 | |
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY | | $ | 2,322 | | | $ | 2,285 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
| | Three Months Ended | |
| | March 31, | |
(in millions) | | 2023 | | | 2022 | |
Cash flows from operating activities: | | | | | | | | |
Net earnings (loss) | | $ | 33 | | | $ | (3 | ) |
Adjustments to reconcile to net cash provided by (used in) operating activities: | | | | | | | | |
Depreciation and amortization | | | 8 | | | | 7 | |
Pension income | | | (36 | ) | | | (26 | ) |
Change in fair value of the Preferred Stock and Convertible Notes embedded derivatives | | | 1 | | | | 3 | |
Non-cash changes in workers' compensation and employee benefit reserves | | | 1 | | | | (4 | ) |
Stock based compensation | | | 4 | | | | 2 | |
Decrease (increase) in trade receivables | | | 12 | | | | (9 | ) |
Decrease (increase) in miscellaneous receivables | | | 7 | | | | (1 | ) |
Increase in inventories | | | (13 | ) | | | (32 | ) |
Increase in trade payables | | | 3 | | | | 31 | |
Decrease in liabilities excluding borrowings and trade payables | | | (13 | ) | | | (13 | ) |
Other items, net | | | 7 | | | | 2 | |
Total adjustments | | | (19 | ) | | | (40 | ) |
Net cash provided by (used in) operating activities | | | 14 | | | | (43 | ) |
Cash flows from investing activities: | | | | | | | | |
Additions to properties | | | (5 | ) | | | (5 | ) |
Net cash used in investing activities | | | (5 | ) | | | (5 | ) |
Cash flows from financing activities: | | | | | | | | |
Preferred stock cash dividend payments | | | (1 | ) | | | (1 | ) |
Net cash used in financing activities | | | (1 | ) | | | (1 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | — | | | | — | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | | 8 | | | | (49 | ) |
Cash, cash equivalents and restricted cash, beginning of period | | | 286 | | | | 423 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 294 | | | $ | 374 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT) (Unaudited)
(in millions)
| | Three-Month Period Ending March 31, 2023 | |
| | Eastman Kodak Company Common Shareholders | | | | | |
| | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Income | | | Treasury Stock | | | Total | | | Redeemable Convertible Preferred Stock | |
Equity (deficit) as of December 31, 2022 | | $ | — | | | $ | 1,160 | | | $ | (570 | ) | | $ | 462 | | | $ | (11 | ) | | $ | 1,041 | | | $ | 203 | |
Net earnings | | | — | | | | — | | | | 33 | | | | — | | | | — | | | | 33 | | | | — | |
Other comprehensive income (loss), (net of tax): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Currency translation adjustments | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) | | | — | |
Pension and other postretirement liability adjustments | | | | | | | | | | | | | | | (6 | ) | | | | | | | (6 | ) | | | | |
Preferred stock cash dividends | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | | | — | |
Preferred stock in-kind dividends | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | | | 1 | |
Preferred stock deemed dividends | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | | | 1 | |
Stock-based compensation | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | 4 | | | | — | |
Equity (deficit) as of March 31, 2023 | | $ | — | | | $ | 1,161 | | | $ | (537 | ) | | $ | 455 | | | $ | (11 | ) | | $ | 1,068 | | | $ | 205 | |
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT) (Unaudited) (cont’d)
(in millions)
| | Three-Month Period Ending March 31, 2022 | |
| | Eastman Kodak Company Common Shareholders | | | | | |
| | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Income | | | Treasury Stock | | | Total | | | Redeemable Convertible Preferred Stock | |
Equity (deficit) as of December 31, 2021 | | $ | — | | | $ | 1,166 | | | $ | (596 | ) | | $ | 221 | | | $ | (10 | ) | | $ | 781 | | | $ | 196 | |
Net loss | | | — | | | | — | | | | (3 | ) | | | — | | | | — | | | | (3 | ) | | | — | |
Other comprehensive income (loss) (net of tax): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Currency translation adjustments | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | — | |
Preferred stock cash dividends | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | | | — | |
Preferred stock in-kind dividends | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | | | 1 | |
Preferred stock deemed dividends | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | | | 1 | |
Stock-based compensation | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | 2 | | | | — | |
Equity (deficit) as of March 31, 2022 | | $ | — | | | $ | 1,165 | | | $ | (599 | ) | | $ | 226 | | | $ | (10 | ) | | $ | 782 | | | $ | 198 | |
The accompanying notes are an integral part of these consolidated financial statements.
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 and all companies directly or indirectly controlled, either through majority ownership or otherwise (“Kodak” or the “Company”). 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, 2022 (the “2022 Form 10-K”).
Reclassifications
Certain amounts from previous periods have been reclassified to conform to the current period classification due to Kodak's new organization structure as of February 2023. Refer to Note 16, "Segment Information" and Note 8, "Revenue" for additional information.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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, 2019‐10, 2019‐11, 2020‐02, 2020‐03 and 2022‐02) 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 Kodak for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 ( January 1, 2023 for Kodak). Kodak adopted the new standard on January 1, 2023 using the modified retrospective approach and it did not have a material impact on Kodak’s consolidated financial statements.
Allowance for Credit Losses
Kodak records allowance for credit losses for the current expected credit losses inherent in the asset over its expected life. The allowance for credit losses is maintained based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Kodak records a specific reserve for individual accounts when Kodak becomes aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the customer's operating results or financial position.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
There are no recently issued accounting pronouncements that are applicable to Kodak.
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) | | 2023 | | | 2022 | |
Cash and cash equivalents | | $ | 225 | | | $ | 217 | |
Restricted cash reported in Other current assets | | | 7 | | | | 7 | |
Restricted cash | | | 62 | | | | 62 | |
Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows | | $ | 294 | | | $ | 286 | |
Restricted cash reported in Other current assets on the Consolidated Statement of Financial Position primarily represents amounts that support hedging activities.
Restricted cash includes $44 million as of both March 31, 2023 and December 31, 2022, representing the cash collateral required to be posted by the Company under the Letter of Credit Facility (“L/C Cash Collateral”). In addition, Restricted cash as of both March 31, 2023 and December 31, 2022 includes an escrow of $5 million in China to secure various ongoing obligations under the agreements for a strategic relationship with Lucky HuaGuang Graphics Co. Ltd. Restricted cash also included $6 million of security posted related to Brazilian legal contingencies as of both March 31, 2023 and December 31, 2022, respectively, and $5 million of cash collateral posted in the United Kingdom for a letter of credit for aluminum purchases as of both March 31, 2023 and December 31, 2022, respectively.
NOTE 3: INVENTORIES, NET
| | March 31, | | | December 31, | |
(in millions) | | 2023 | | | 2022 | |
Finished goods | | $ | 108 | | | $ | 98 | |
Work in process | | | 67 | | | | 64 | |
Raw materials | | | 76 | | | | 75 | |
Total | | $ | 251 | | | $ | 237 | |
NOTE 4: CONVERTIBLE SECURITIES AND CREDIT FACILITIES
2021 Convertible Notes
On February 26, 2021, the Company entered into a Securities Purchase Agreement with certain funds affiliated with Kennedy Lewis Investment Management LLC (“KLIM”) as lenders (the “Buyers”) pursuant to which the Company sold to the Buyers $25 million aggregate principal amount of the Company’s newly issued 5.0% unsecured convertible promissory notes due May 28, 2026 (the “Convertible Notes”) in a private placement transaction. The Convertible Notes bear interest at a rate of 5.0% per annum, which will be payable in cash on the maturity date and in additional shares of Common Stock on any conversion date. The payment of interest only at the maturity date has the same effect as delivering additional debt instruments to the Holders of the Convertible Notes and therefore is considered payable-in-kind ("PIK"). PIK is being added to the carrying value of the debt through the term. Interest expense is being recorded using the effective interest method. The maturity date of the Convertible Notes is May 28, 2026.
Conversion Features
The Buyers have the right to elect at any time to convert the Convertible Notes into shares of the Company's Common Stock, par value $0.01 per share ("Common Stock"). Common Stock at an initial conversion rate equal to 100 shares of Common Stock per each $1,000 principal amount of the Convertible Notes (based on an initial conversion price equal to $10.00 per share of Common Stock). The conversion rate and conversion price are subject to certain customary anti-dilution adjustments.
If the closing price of the Common Stock equals or exceeds $14.50 (subject to adjustment in the same manner as the conversion price) for 45 trading days within any period of 60 consecutive trading days, the Company will have the right to cause the mandatory conversion of the Convertible Notes into shares of Common Stock.
In the event of certain fundamental transactions, the Buyers will have the right, within a period of 30 days following the occurrence of such transaction (“Holder Fundamental Transaction Election Period”), to elect to either require prepayment of the Convertible Notes at par plus accrued and unpaid interest or convert all or a portion of the Convertible Notes into shares of Common Stock at the conversion rate then in effect plus any additional shares based on the price per share of Common Stock in connection with the fundamental transaction, or to receive the shares of a successor entity, if any.
Embedded Derivatives
The Company allocated $12 million of the net proceeds received from the issuance of the Convertible Notes to a derivative liability based on the aggregate fair value of the embedded features on the date of issuance which reduced the net carrying value of the Convertible Notes. The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other (income) charges, net in the Consolidated Statement of Operations. The fair value of the Convertible Notes embedded derivative at March 31, 2023 and December 31, 2022 was a liability of $3 million and $2 million, respectively, and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 17, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the Convertible Notes at both March 31, 2023 and December 31, 2022 was $18 million. The Convertible Notes unamortized discount at March 31, 2023 and December 31, 2022 was $8 million and $9 million, respectively. The estimated fair value of the Convertible Notes as of March 31, 2023 and December 31, 2022 was $17 million and $16 million, respectively, (Level 3). The carrying value is being accreted to the aggregate principal amount using the effective interest method from the date of issuance through the maturity date.
Amended and Restated ABL Credit Agreement
On March 14, 2023, the Company and the subsidiaries of the Company that are guarantors (the “Subsidiary Guarantors”) entered into amendment No.5 to the Amended and Restated Credit Agreement (the “2023 Amended ABL Credit Agreement") with the lenders party thereto (the “Lenders”), Bank of America, N.A., as administrative agent and collateral agent to, among other things: (i) extend the maturity date of the Company's asset based loan facility from February 26, 2024 to the earliest of June 12, 2024, the termination of the 2023 Amended L/C Facility Agreement (as defined below) or the date that is 91 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company’s Term Loans, 2021 Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing; (ii) require the Company to maintain daily Minimum Liquidity of $50 million, subject to certain cure rights, in addition to maintaining the existing quarterly Minimum Liquidity of $80 million, and (iii) on February 26, 2024, decrease the aggregate amount of commitments from $90 million to $81 million. Each of the capitalized but undefined terms used in the context of describing the 2023 Amended ABL Credit Agreement has the meaning ascribed to such term in the 2023 Amended ABL Credit Agreement.
The revolving loans bear interest at the rate of 3.50%‐4.00% per annum based on the secured overnight financing rate as administered by the Federal Reserve Bank of New York (or a successor administrator). The Company will pay an unused line fee of 37.5‐50 basis points per annum, depending on whether the unused portion of the maximum amount available is less than or equal to 50% or greater than 50%, respectively. The Company will pay a letter of credit fee of 3.50%‐4.00% per annum, based on Excess Availability, on issued and outstanding letters of credit, in addition to a fronting fee of 25 basis points on such letters of credit.
Obligations under the 2023 Amended ABL Credit Agreement are secured by: (i) a first priority lien on assets of the Company and the Subsidiary Guarantors constituting cash (other than L/C Cash Collateral, as defined below), accounts receivable, inventory, machinery and equipment and certain other assets (the “ABL Priority Collateral”) and (ii) a second priority lien on substantially all assets of the Company and the Subsidiary Guarantors (subject to certain exceptions) other than the ABL Priority Collateral, including the L/C cash collateral and 100% of the stock of material U.S. subsidiaries and 65% of the stock of material foreign subsidiaries.
The 2023 Amended ABL Credit Agreement limits, among other things, the ability of the Company and its Restricted Subsidiaries to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) make restricted payments and (v) make investments. The 2023 Amended ABL Credit Agreement leaves in place customary affirmative covenants, including delivery of certain of the Company’s financial statements set forth therein.
Under the 2023 Amended ABL Credit Agreement the Company is required to maintain Minimum Liquidity of at least (a) $50 million daily, subject to certain cure rights, and $80 million at the end of each quarter. Quarterly Minimum Liquidity was $143 million and $150 million at March 31, 2023 and December 31, 2022, respectively, and daily Minimum Liquidity exceeded the $50 million threshold. If Minimum Liquidity falls below the daily or quarterly required minimum an Event of Default would occur, in which case the Agent would have the right to declare the obligation of each Lender to make Revolving Loans and of the Issuing Banks to issue Letters of Credit to be terminated, and declare the Revolving Loans, all interest thereon and all other amounts payable under the 2023 Amended ABL Credit Agreement to be due and payable.
The Company is required to maintain Excess Availability above the greater of 12.5% of lender commitments or $11.25 million ($11.25 million at both March 31, 2023 and December 31, 2022) which is tested at the end of each month. Excess Availability was $21 million as of both March 31, 2023 and December 31, 2022.
If Excess Availability falls below the greater of 12.5% of lender commitments or $11.25 million a Fixed Charge Coverage Ratio Trigger Event would occur. During any Fixed Charge Coverage Ratio Trigger Event, the Company would be required to maintain a Fixed Charge Coverage Ratio of greater than or equal to 1.0 to 1.0. If Excess Availability falls below the greater of 12.5% of lender commitments or $11.25 million, Kodak may, in addition to the requirement to be in compliance with the minimum Fixed Charge Coverage Ratio, become subject to cash dominion control. Since Excess Availability was greater than 12.5% of lender commitments or $11.25 million at March 31, 2023 and December 31, 2022, Kodak was not required to have a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0.
If Excess Availability falls below the greater of 12.5% of lender commitments or $11.25 million and the Fixed Charge Coverage Ratio is less than 1.0 to 1.0, an Event of Default would occur and the Agent would have the right to declare the obligation of each Lender to make Revolving Loans and of the Issuing Banks to issue Letters of Credit to be terminated, and declare the Revolving Loans, all interest thereon and all other amounts payable under the 2023 Amended ABL Credit Agreement to be due and payable.
Each existing direct or indirect U.S. subsidiary of the Company (other than Immaterial Subsidiaries, Unrestricted Subsidiaries and certain other subsidiaries) has provided an unconditional guarantee (and any such future subsidiaries must provide an unconditional guarantee) of the obligations of the Company under the Credit Agreements (as defined below).
Letter of Credit Facility Agreement
On February 26, 2021, the Company and the Subsidiary Guarantors entered into a Letter of Credit Facility Agreement (the “L/C Facility Agreement”, and together with the 2023 Amended ABL Credit Agreement (the “Credit Agreements”) among the Company, the Subsidiary Guarantors, the lenders party thereto (the “L/C Lenders”), Bank of America, N.A., as agent, and Bank of America, N.A., as issuing bank. Pursuant to the L/C Facility Agreement, the L/C Lenders committed to issue letters of credit on the Company’s behalf in an aggregate amount of up to $50 million, provided that the Company posts cash collateral in an amount greater than or equal to 103% of the aggregate amount of letters of credit issued and outstanding at any given time (the “L/C Cash Collateral”).
On March 14, 2023, the Company entered into an amendment to the Letter of Credit Facility Agreement (the “2023 Amended L/C Facility Agreement") to, among other things: (i) extend the maturity date of the Company's cash collateralized letter of credit facility from February 26, 2024 to the earliest of June 12, 2024, the termination of the 2023 Amended ABL Credit Agreement, as applicable, or the date that is 91 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company’s Term Loans, 2021 Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing and (ii) require the Company to maintain daily Minimum Liquidity of $50 million, subject to certain cure rights, in addition to maintaining the existing quarterly Minimum Liquidity of $80 million.
The Company issued approximately $58 million and $43 million letters of credit under the 2023 Amended ABL Agreement and L/C Facility Agreement as of both March 31, 2023 and December 31, 2022, respectively. The balance on deposit in the L/C Cash Collateral account as of both March 31, 2023 and December 31, 2022 was approximately $44 million.
The Company will pay an unused line fee of 37.5‐50 basis points per annum, depending on whether the unused portion of the maximum commitments is less than or equal to 50% or greater than 50% of such commitments, respectively. The Company will pay a letter of credit fee of 3.75% per annum on issued and outstanding letters of credit, in addition to a fronting fee of 25 basis points on such letters of credit. Amounts drawn under any letter of credit will be reimbursed from the L/C Cash Collateral. If not so reimbursed, and not otherwise repaid by the Company to the applicable L/C Lenders, such amounts will accrue interest, to be paid monthly, at a floating Base Rate (as defined in the 2023 Amended L/C Facility Agreement and L/C Facility Agreement) plus 2.75% per annum until repaid.
As with the 2023 Amended ABL Credit Agreement, the 2023 Amended L/C Facility Agreement requires the Company to maintain Excess Availability above the greater of 12.5% of lender commitments or $11.25 million. If Excess Availability falls below the greater of 12.5% of lender commitments or $11.25 million a Fixed Charge Coverage Ratio Trigger Event would occur under the 2023 Amended L/C Facility Agreement as with the 2023 Amended ABL Credit Agreement. During any Fixed Charge Coverage Ratio Trigger Event, the Company would be required to maintain a Fixed Charge Coverage Ratio of greater than or equal to 1.0 to 1.0.
The Company’s obligations under the 2023 Amended L/C Facility Agreement are guaranteed by the Subsidiary Guarantors and are secured by (i) a first priority lien on the L/C Cash Collateral, (ii) a second priority lien on the ABL Priority Collateral and (iii) a third priority lien on the Term Loan Priority Collateral.
Preferred Stock
Redeemable convertible preferred stock was as follows:
| | March 31, | | | December 31, | |
(in millions) | | 2023 | | | 2022 | |
Series B preferred stock | | $ | 96 | | | $ | 95 | |
Series C preferred stock | | | 109 | | | | 108 | |
Total | | $ | 205 | | | $ | 203 | |
Series B Preferred Stock
On February 26, 2021 the Company agreed to exchange one million shares of Series A Preferred Stock held by Southeastern Asset Management, Inc. (“Southeastern”) and Longleaf Partners Small-Cap Fund, C2W Partners Master Fund Limited and Deseret Mutual Pension Trust, which are investment funds managed by Southeastern (such investment funds, collectively, the “Purchasers”), for shares of the Company’s newly created 4.0% Series B Convertible Preferred Stock, no par value (the “Series B Preferred Stock”), on a one-for-one basis plus accrued and unpaid dividends. The fair value of the Series B Preferred Stock at the time of issuance approximated $95 million. The Company has classified the Series B Preferred Stock as temporary equity in the Consolidated Statement of Financial Position.
Dividend and Other Rights
The Series B Preferred Stock ranks senior to the Common Stock and pari passu with the Series C Preferred Stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Series B Preferred Stock has a liquidation preference of $100 per share, and the holders of Series B Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 4.0% per annum. If dividends on any Series B Preferred Stock are in arrears for six or more consecutive or non-consecutive dividend periods, the holders of the Series B Preferred Stock will be entitled to nominate one director at the next annual shareholder meeting and all subsequent shareholder meetings until all accumulated dividends on such Series B Preferred Stock have been paid or set aside. Dividends owed on the Series B Preferred Stock have been declared and paid when due.
Conversion Features
Each share of Series B Preferred Stock is convertible, at the option of each holder at any time, into shares of Common Stock at the initial conversion rate of 9.5238 shares of Common Stock for each share of Series B Preferred Stock (equivalent to an initial conversion price of $10.50 per share of Common Stock). The initial conversion rate and the corresponding conversion price are subject to certain customary anti-dilution adjustments. If a holder elects to convert any shares of Series B Preferred Stock during a specified period in connection with a fundamental change (as defined in the Series B Certificate of Designations), such holder can elect to have the conversion rate adjusted and can elect to receive a cash payment in lieu of shares for a portion of the shares. Such holder will also be entitled to a payment in respect of accumulated dividends. In addition, the Company will have the right to require holders to convert any shares of Series B Preferred Stock in connection with certain reorganization events in which case the conversion rate will be adjusted, subject to certain limitations.
The Company will have the right to cause the mandatory conversion of the Series B Preferred Stock into shares of Common Stock at any time after the initial issuance of the Series B Preferred Stock if the closing price of the Common Stock has equaled or exceeded $14.50 (subject to adjustment in the same manner as the conversion price) for 45 trading days within a period of 60 consecutive trading days.
Embedded Conversion Features
The Company allocated $1 million to the derivative liability based on the aggregate fair value of the embedded conversion feature of the Series B Preferred Stock on the date of issuance which reduced the original carrying value of the Series B Preferred Stock. The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other (income) charges, net in the Consolidated Statement of Operations. The fair value of the Series B Preferred Stock embedded derivative as of both March 31, 2023 and December 31, 2022 was a liability of $1 million and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 17, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the Series B Preferred Stock is being accreted to the mandatory redemption amount using the effective interest method to Additional paid in capital in the Consolidated Statement of Financial Position as a deemed dividend from the date of issuance through the mandatory redemption date, May 28, 2026.
Series C Preferred Stock
Purchase Agreement
On February 26, 2021, the Company and GO EK Ventures IV, LLC (the “Investor”) entered into a Series C Preferred Stock Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company agreed to sell to the Investor, and the Investor agreed to purchase from the Company, an aggregate of 1,000,000 shares of the Company’s newly created 5.0% Series C Convertible Preferred Stock, no par value per share (the “Series C Preferred Stock”), for a purchase price of $100 per share, representing $100 million of gross proceeds to the Company. The Investor is a fund managed by Grand Oaks Capital. The Company has classified the Series C Preferred Stock as temporary equity in the Consolidated Statement of Financial Position.
Dividend and Other Rights
The Series C Preferred Stock has a liquidation preference of $100 per share, and the holders of Series C Preferred Stock are entitled to cumulative dividends payable quarterly “in‐kind” in the form of additional shares of Series C Preferred Stock at a rate of 5.0% per annum. Dividends owed on the Series C Preferred Stock have been declared and additional Series C shares issued when due. Holders of the Series C Preferred Stock are also entitled to participate in any dividends paid on the Common Stock (other than stock dividends) on an as-converted basis, with such dividends on any shares of the Series C Preferred Stock being payable upon conversion of such shares of Series C Preferred Stock to Common Stock. Holders of Series C Preferred Stock are entitled to vote together with the holders of the Common Stock as a single class, in each case, on an as‐converted basis, except where a separate class vote is required by law. Holders of Series C Preferred Stock have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company. The Investor has the right to nominate one director at each annual or special meeting of the Company’s shareholders until the earlier of the third anniversary of the execution of the Purchase Agreement and such time as the Investor and its Affiliates (as defined in the Purchase Agreement) do not hold at least a majority of the Series C Preferred Stock purchased under the Purchase Agreement.
Conversion Features
Each share of Series C Preferred Stock is convertible, at the option of each holder at any time, into shares of Common Stock at the initial conversion price of $10 per share of Common Stock. The initial conversion price and the corresponding conversion rate are subject to certain customary anti-dilution adjustments and to proportional increase in the event the liquidation preference of the Series C Preferred Stock is automatically increased as described above. If a holder elects to convert any shares of Series C Preferred Stock during a specified period in connection with a fundamental change (as defined in the Series C Certificate of Designations), such holder can elect to have the conversion rate adjusted and can elect to receive a cash payment in lieu of shares for a portion of the shares of Common Stock. Such holder will also be entitled to a payment in respect of accumulated dividends and a payment based on the present value of all required remaining dividend payments through May 28, 2026, the mandatory redemption date. Such additional payments will be payable at the Company’s option in cash or in additional shares of Common Stock. In addition, the Company will have the right to require holders to convert any shares of Series C Preferred Stock in connection with certain reorganization events in which case the conversion rate will be adjusted, subject to certain limitations.
The Company will have the right to cause the mandatory conversion of the Series C Preferred Stock into shares of Common Stock (i) at any time after February 26, 2023 if the closing price of the Common Stock has equaled or exceeded 200% of the then-effective conversion price for 45 trading days within a period of 60 consecutive trading days, or (ii) at any time after February 26, 2024 if the closing price of the Common Stock has equaled or exceeded 150% of the then-effective conversion price for 45 trading days within a period of 60 consecutive trading days.
Embedded Conversion Features
The Company allocated $2 million of the net proceeds received to the derivative liability based on the aggregate fair value of the embedded conversion feature of the Series C Preferred Stock on the dates of issuance which reduced the original carrying value of the Series C Preferred Stock. The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other (income) charges, net in the Consolidated Statement of Operations. The fair value of the Series C Preferred Stock derivative as of both March 31, 2023 and December 31, 2022 was a liability of $1 million and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 17, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the Series C Preferred Stock is being accreted to the mandatory redemption amount using the effective interest method to Additional paid in capital in the Consolidated Statement of Financial Position as a deemed dividend from the date of issuance through the mandatory redemption date.
NOTE 5: LEASES
Income recognized on operating lease arrangements for the three months ended March 31, 2023 and 2022 is presented below. Income recognized for sales-type lease arrangements for both the three months ended March 31, 2023 and 2022 was less than $1 million.
| | Three Months Ended | |
| | March 31, | |
(in millions) | | 2023 | | | 2022 | |
Lease income - operating leases: | | | | | | | | |
Lease income | | $ | 2 | | | $ | 2 | |
Variable lease income | | | 1 | | | | 1 | |
Total lease income | | $ | 3 | | | $ | 3 | |
NOTE 6: COMMITMENTS AND CONTINGENCIES
As of March 31, 2023, the Company had outstanding letters of credit of $58 million and $43 million issued under the 2023 Amended ABL Credit Agreement and the 2023 Amended L/C Facility Agreement, respectively, as well as bank guarantees and letters of credit of $1 million, surety bonds in the amount of $29 million, and restricted cash of $69 million, primarily related to cash collateral for the outstanding letters of credit under the 2023 Amended L/C Facility Agreement, to ensure payment of possible casualty and workers’ compensation claims, legal contingencies, hedging activities, environmental liabilities, rental payments and to support various customs, tax and trade activities.
Kodak’s Brazilian operations are involved in various litigation matters in Brazil and have received or been the subject of numerous governmental assessments related to indirect and other taxes in various stages of litigation, as well as civil litigation and disputes associated with former employees and contract labor. The tax matters, which comprise the majority of the litigation matters, are primarily related to federal and state value-added taxes. Kodak’s Brazilian operations are disputing these matters and intend to vigorously defend its position. Kodak routinely assesses all these matters as to the probability of ultimately incurring a liability in its Brazilian operations and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable. As of March 31, 2023, Kodak’s Brazilian Operations maintained accruals of approximately $2 million for claims aggregating approximately $118 million inclusive of interest and penalties where appropriate. The unreserved portion of the indirect taxes, civil litigation and disputes associated with former employees and contract labor claims, inclusive of any related interest and penalties, for which there was at least a reasonable possibility that a loss may be incurred, amounted to approximately $6 million.
In connection with assessments in Brazil, local regulations may require Kodak’s Brazilian operations to post security for a portion of the amounts in dispute. As of March 31, 2023, Kodak’s Brazilian operations have posted security composed of $6 million of pledged cash reported within Restricted cash in the Consolidated Statement of Financial Position and liens on certain Brazilian assets with a net book value of approximately $42 million. Generally, any encumbrances on the Brazilian assets would be removed to the extent the matter is resolved in Kodak's favor.
On August 13, 2020 Tiandong Tang commenced a class action lawsuit against the Company, its Executive Chairman and Chief Executive Officer and its Chief Financial Officer in Federal District Court in the District of New Jersey, and on August 26, 2020 Jimmie A. McAdams and Judy P. McAdams commenced a class action lawsuit against the Company and its Executive Chairman and Chief Executive Officer in Federal District Court in the Southern District of New York (collectively, the “Securities Class Actions”). The Securities Class Actions seek damages and other relief based on alleged violations of federal securities laws in the context of the U.S. International Development Finance Corporation (the “DFC”) announcement (the “DFC Announcement”) of the signing of a non-binding letter of interest to provide a subsidiary of the Company with a potential $765 million loan (the “DFC Loan”) to support the launch of Kodak Pharmaceuticals, an initiative that would manufacture pharmaceutical ingredients for essential generic drugs (the “DFC Pharmaceutical Project”) on July 28, 2020. The Securities Class Actions were transferred to the Federal District Court for the Western District of New York and were consolidated into a single proceeding (the “Consolidated Securities Class Action”) on June 22, 2021. Les Investissements Kiz Inc. and UAT Trading Service, Inc. were appointed by the court to serve as lead plaintiff for the Consolidated Securities Class Action on August 2, 2021, and the lead plaintiff filed an amended consolidated complaint on October 1, 2021 which added Kodak’s General Counsel and current and former members of its Board of Directors as additional defendants. The Company and individual defendants filed a joint motion to dismiss the Consolidated Securities Class Action on December 14, 2021. The lead plaintiff filed an opposition to the motion to dismiss on February 28, 2022, and the Company and the individual defendants filed responses to the plaintiff’s opposition on April 6, 2022. A hearing with respect to the motion to dismiss was held on August 3, 2022, and the lawsuit was dismissed with prejudice on September 28, 2022. The plaintiffs filed a notice of appeal of the dismissal on October 27, 2022 but later withdrew the appeal on January 25, 2023. As a result, the Consolidated Securities Class Action is concluded.
The Company has also received five requests under New Jersey law demanding, among other things, that the Company take certain actions in response to alleged breaches of fiduciary duty relating to option grants and securities transactions in the context of the DFC Announcement and alleged proxy statement disclosure deficiencies (each a “Derivative Demand”, and collectively the “Derivative Demands”). On May 19, 2021 Louis Peters, one of the persons making a Derivative Demand (“Peters”), commenced a derivative lawsuit on behalf of the Company against certain officers and current and former directors of the Company and the Company as a nominal defendant in the Supreme Court of the State of New York in Monroe County seeking damages and equitable relief based on alleged breaches of fiduciary duty and unjust enrichment resulting from stock trades, option grants and a charitable contribution in the context of the DFC Announcement of the potential DFC Loan and DFC Pharmaceutical Project (the “State Derivative Lawsuit”). The plaintiff filed an amended complaint in the State Derivative Lawsuit on August 23, 2021, and the Company and individual defendants filed motions to dismiss (or alternatively, in the case of the Company, a motion for summary judgment) in the State Derivative Lawsuit on October 22, 2021. On March 17, 2022, the court issued an order staying the State Derivative Lawsuit pending the resolution of the Federal Derivative Lawsuit described below.
On September 2, 2021 Herbert Silverberg, another person making a Derivative Demand (“Silverberg”), commenced a derivative lawsuit on behalf of the Company against one current and one former director of the Company and the Company as a nominal defendant in the Federal District Court for the Western District of New York seeking damages and equitable relief on a basis overlapping with the State Derivative Lawsuit and alleged proxy statement misrepresentations and omissions. On October 4, 2021 Peters commenced a derivative lawsuit on behalf of the Company against the same parties named in the State Derivative Lawsuit in the Federal District Court for the Western District of New York seeking damages and equitable relief on a basis overlapping with the State Derivative Lawsuit and alleged violations of Section 10(b) of the Exchange Act. The Federal derivative lawsuits filed by Silverberg and Peters were consolidated into a single proceeding (the “Federal Derivative Lawsuit”) on January 18, 2022, and Peters was appointed as lead plaintiff in the Federal Derivative Lawsuit. An amended consolidated complaint combining the allegations contained in the Federal derivative lawsuits filed by Silverberg and Peters was filed in the Federal Derivative Lawsuit on February 16, 2022, and the Company and individual defendants served motions to dismiss or, in the alternative in the case of the Company, for summary judgment on April 15, 2022. Threshold discovery in the case has been completed, and the Company and individual defendants formally filed their motions to dismiss on September 30, 2022. The plaintiffs filed an opposition to the motions to dismiss/for summary judgment on November 14, 2022, and the Company and the individual defendants filed responses to the plaintiffs' opposition on December 27, 2022 and December 23, 2022, respectively.
Additional shareholder derivative lawsuits may be brought based on the other Derivative Demands (any such lawsuits, collectively with the State Derivative Lawsuit, the Federal Derivative Lawsuit and the Fiduciary Class Action, the “Fiduciary Matters”). The Company, acting through a Special Committee of Independent Directors, previously determined that there was no merit to the claims alleged by the Derivative Demands made through the time of its determination (except with respect to the charitable contribution, which was not fully considered by the Special Committee). See the Company’s Current Report on Form 8‐K filed with the SEC on September 16, 2020. The Company, acting through a separate Special Litigation Committee of Independent Directors, concurred with the first Special Committee’s findings and further concluded that it is not in the Company’s interest to bring or allow any other shareholder to assert any of the claims alleged by the State Derivative Lawsuit or Federal Derivative Lawsuit (with the exception of the Peters claim purportedly arising under Section 10(b) of the Exchange Act, which was not addressed as no demand was made with respect to such claim). The second Special Litigation Committee will carefully review any other additional complaints constituting Fiduciary Matters which may be filed.
The DFC Announcement has also prompted investigations by several congressional committees, the SEC and the New York Attorney General’s office. The Company has cooperated in those investigations.
As previously reported, the Attorney General of the State of New York (the “NYAG”) has threatened to file a lawsuit against the Company and its Chief Executive Officer alleging violations of New York State’s Martin Act (the “Threatened Claim”). In connection with the Threatened Claim and pursuant to a special process under New York law, in 2021 additional documents were produced by the Company to the NYAG and the NYAG took testimony of the Company’s Chief Executive Officer and General Counsel. The Company had discussions with the NYAG regarding a potential resolution of the Threatened Claim in the spring of 2022, but those discussions did not result in a resolution. If the Threatened Claim is ultimately brought by the NYAG, the Company intends to vigorously defend itself against the Threatened Claim.
In addition, Kodak is involved in various lawsuits, claims, investigations, remediations and proceedings, including, from time to time, commercial, customs, employment, environmental, tort and health and safety matters, which are being handled and defended in the ordinary course of business. Kodak is also subject, from time to time, to various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that are incorporated in a broad spectrum of Kodak’s products. These matters are in various stages of investigation and litigation and are being vigorously defended. Based on information currently available, Kodak does not believe that it is probable that the outcomes in these various matters, individually or collectively, will have a material adverse effect on its financial condition or results of operations. Litigation is inherently unpredictable, and judgments could be rendered or settlements entered that could adversely affect Kodak’s operating results or cash flows in a particular period. Kodak routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.
NOTE 7: GUARANTEES
In connection with the settlement of certain of the Company’s historical environmental liabilities at Eastman Business Park, a more than 1,200-acre technology center and industrial complex in Rochester, New York, in the event the historical liabilities exceed $99 million, the Company will become liable for 50% of the portion above $99 million with no limitation to the maximum potential future payments. There is no liability recorded for this guarantee.
Extended Warranty Arrangements
Kodak offers its customers extended warranty arrangements that are generally one year but may range from three months to six years after the original warranty period. The change in Kodak’s deferred revenue balance in relation to these extended warranty and maintenance arrangements from December 31, 2022 to March 31, 2023, which is reflected in Other current liabilities in the accompanying Consolidated Statement of Financial Position, was as follows:
(in millions) | | | | |
Deferred revenue on extended warranties as of December 31, 2022 | | $ | 19 | |
New extended warranty and maintenance arrangements deferred | | | 23 | |
Recognition of extended warranty and maintenance arrangement revenue | | | (23 | ) |
Deferred revenue on extended warranties as of March 31, 2023 | | $ | 19 | |
NOTE 8: REVENUE
Disaggregation of Revenue
The following tables present revenue disaggregated by major product, portfolio summary and geography
Major Product
Three Months Ended | |
March 31, 2023 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Advanced | | | | | | | | | | | | | |
| | | | | | Materials | | | | | | | | | | | | | |
| | | | | | and | | | | | | | | | | | | | |
(in millions) | | Print | | | Chemicals | | | Brand | | | All Other | | | Total | |
Core products (1) | |
Plates, inks and other consumables | | $ | 144 | | | $ | 6 | | | $ | — | | | $ | — | | | $ | 150 | |
Ongoing service arrangements | | | 51 | | | | — | | | | — | | | | — | | | | 51 | |
Total annuities | | | 195 | | | | 6 | | | | — | | | | — | | | | 201 | |
Equipment & software | | | 14 | | | | — | | | | — | | | | — | | | | 14 | |
Film and chemicals | | | — | | | | 52 | | | | — | | | | — | | | | 52 | |
Total Core | | | 209 | | | | 58 | | | | — | | | | — | | | | 267 | |
Growth products (2) | | | — | | | | 3 | | | | — | | | | — | | | | 3 | |
Other (3) | | | — | | | | — | | | | 4 | | | | 4 | | | | 8 | |
Total | | $ | 209 | | | $ | 61 | | | $ | 4 | | | $ | 4 | | | $ | 278 | |
Three Months Ended | |
March 31, 2022 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Advanced | | | | | | | | | | | | | |
| | | | | | Materials | | | | | | | | | | | | | |
| | | | | | and | | | | | | | | | | | | | |
(in millions) | | Print | | | Chemicals | | | Brand | | | All Other | | | Total | |
Core products (1) | | | | | | | | | | | | | | | | | | | | |
Plates, inks and other consumables | | $ | 161 | | | $ | 6 | | | $ | — | | | $ | — | | | $ | 167 | |
Ongoing service arrangements | | | 53 | | | | — | | | | — | | | | — | | | | 53 | |
Total annuities | | | 214 | | | | 6 | | | | — | | | | — | | | | 220 | |
Equipment & software | | | 14 | | | | — | | | | — | | | | — | | | | 14 | |
Film and chemicals | | | — | | | | 45 | | | | — | | | | — | | | | 45 | |
Total Core | | | 228 | | | | 51 | | | | — | | | | — | | | | 279 | |
Growth products (2) | | | — | | | | 3 | | | | — | | | | — | | | | 3 | |
Other (3) | | | — | | | | — | | | | 4 | | | | 4 | | | | 8 | |
Total | | $ | 228 | | | $ | 54 | | | $ | 4 | | | $ | 4 | | | $ | 290 | |
(1) | Core includes the Print business, Motion Picture, and Industrial Film and Chemicals, excluding coating and product commercialization services (“Coating Services”). |
(2) | Growth consists of Coating Services and Advanced Materials and Functional Printing within the Advanced Materials and Chemicals segment. |
(3) | Other consists of Intellectual Property Licensing, Brand Licensing and Eastman Business Park. |
Geography (1):
Three Months Ended | |
March 31, 2023 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Advanced | | | | | | | | | | | | | |
| | | | | | Materials | | | | | | | | | | | | | |
| | | | | | and | | | | | | | | | | | | | |
(in millions) | | Print | | | Chemicals | | | Brand | | | All Other | | | Total | |
United States | | $ | 66 | | | $ | 48 | | | $ | 4 | | | $ | 4 | | | $ | 122 | |
Canada | | | 3 | | | | 1 | | | | — | | | | — | | | | 4 | |
North America | | | 69 | | | | 49 | | | | 4 | | | | 4 | | | | 126 | |
Europe, Middle East and Africa | | | 89 | | | | 5 | | | | — | | | | — | | | | 94 | |
Asia Pacific | | | 45 | | | | 7 | | | | — | | | | — | | | | 52 | |
Latin America | | | 6 | | | | — | | | | — | | | | — | | | | 6 | |
Total | | $ | 209 | | | $ | 61 | | | $ | 4 | | | $ | 4 | | | $ | 278 | |
Three Months Ended | |
March 31, 2022 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Advanced | | | | | | | | | | | | | |
| | | | | | Materials | | | | | | | | | | | | | |
| | | | | | and | | | | | | | | | | | | | |
(in millions) | | Print | | | Chemicals | | | Brand | | | All Other | | | Total | |
United States | | $ | 62 | | | $ | 40 | | | $ | 4 | | | $ | 4 | | | $ | 110 | |
Canada | | | 5 | | | | — | | | | — | | | | — | | | | 5 | |
North America | | | 67 | | | | 40 | | | | 4 | | | | 4 | | | | 115 | |
Europe, Middle East and Africa | | | 103 | | | | 4 | | | | — | | | | — | | | | 107 | |
Asia Pacific | | | 49 | | | | 10 | | | | — | | | | — | | | | 59 | |
Latin America | | | 9 | | | | — | | | | — | | | | — | | | | 9 | |
Total | | $ | 228 | | | $ | 54 | | | $ | 4 | | | $ | 4 | | | $ | 290 | |
| (1) | Sales are reported in the geographic area in which they originate. |
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed trade receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) in the Consolidated Statement of Financial Position. The contract assets are transferred to trade receivables when the rights to consideration become unconditional. The amount recorded for contract assets at both March 31, 2023 and December 31, 2022 was $1 million and is reported in Other current assets in the Consolidated Statement of Financial Position. The contract liabilities primarily relate to prepaid service contracts, upfront payments for certain equipment purchases or prepaid royalties on intellectual property arrangements. The amount recorded for contract liabilities in the Consolidated Statement of Financial Position at both March 31, 2023 and December 31, 2022 was $51 million, of which $40 million was reported in Other current liabilities and $11 million was reported in Other long-term liabilities.
Revenue recognized for the three months ended March 31, 2023 and 2022 that was included in the contract liability balance at the beginning of the year was $21 million and $20 million, respectively, and primarily represented revenue from prepaid service contracts and equipment revenue recognition. Contract liabilities as of March 31, 2023 and 2022 included $21 million and $24 million of cash payments received during the three months ended March 31, 2023 and 2022, respectively.
Kodak does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less or for which revenue is recognized at the amount to which Kodak has the right to invoice for services performed. Performance obligations with an original expected length of greater than one year generally consist of deferred service contracts, operating leases and licensing arrangements. As of March 31, 2023, there was approximately $50 million of unrecognized revenue from unsatisfied performance obligations. Approximately 30% of the revenue from unsatisfied performance obligations is expected to be recognized in the remainder of 2023, 25% in 2024, 15% in 2025 and 30% thereafter.
NOTE 9: OTHER (INCOME) CHARGES
| | Three Months Ended | |
| | March 31, | |
(in millions) | | 2023 | | | 2022 | |
Change in fair value of embedded conversion features derivative liability (1) | | $ | 1 | | | $ | 3 | |
Other (2) | | | (8 | ) | | | — | |
Total | | $ | (7 | ) | | $ | 3 | |
(1) | Refer to Note 17, "Financial Instruments". |
(2) | Interest income associated with a refund received in the first quarter of 2023 from a governmental authority in a location outside the U.S that was previously held in order to guarantee potential tax disputes in that jurisdiction. |
NOTE 10: INCOME TAXES
Kodak’s income tax provision and effective tax rate were as follows:
| | Three Months Ended | |
| | March 31, | |
(in millions) | | 2023 | | | 2022 | |
Earnings (loss) from operations before income taxes | | $ | 41 | | | $ | (1 | ) |
Effective tax rate | | | 19.5 | % | | | (200.0 | )% |
Provision for income taxes | | | 8 | | | | 2 | |
Provision for income taxes at U.S. statutory tax rate | | | 9 | | | | 0 | |
Difference between tax at effective vs. statutory rate | | $ | (1 | ) | | $ | 2 | |
For the three months ended March 31, 2023, the difference between Kodak’s effective tax rate and the U.S. statutory rate of 21.0% is primarily attributable to: (1) the impact related to existing valuation allowances associated with changes in net deferred tax assets from current earnings and losses, (2) the results from operations in jurisdictions outside the U.S., and (3) a provision associated with foreign withholding taxes on undistributed earnings.
For the three months ended March 31, 2022, the difference between Kodak’s effective tax rate and the U.S. statutory rate of 21.0% is primarily attributable to: (1) the impact related to existing valuation allowances associated with changes in net deferred tax assets from current earnings and losses, (2) the results from operations in jurisdictions outside the U.S., (3) a benefit associated with foreign withholding taxes on undistributed earnings and (4) a settlement with a taxing authority in a location outside the U.S.
During the quarter ended March 31, 2022, Kodak agreed to terms with a taxing authority outside the U.S. and settled open tax audits for years 2015 through 2018. This settlement included a cash payment of $2 million which is reflected in the provision for taxes in the prior year-to-date period, and a decrease in net deferred tax assets of $3 million which was fully offset by a corresponding change in the valuation allowance.
NOTE 11: RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of the net periodic benefit cost for all major U.S. and non-U.S. defined benefit plans are as follows:
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
(in millions) | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
Major defined benefit plans: | | | | | | | | | | | | | | | | |
Service cost | | $ | 3 | | | $ | 1 | | | $ | 3 | | | $ | 1 | |
Interest cost | | | 29 | | | | 5 | | | | 15 | | | | 2 | |
Expected return on plan assets | | | (64 | ) | | | (5 | ) | | | (44 | ) | | | (4 | ) |
Amortization of: | | | | | | | | | | | | | | | | |
Prior service cost (credit) | | | 2 | | | | — | | | | (2 | ) | | | — | |
Actuarial (gain) loss | | | (7 | ) | | | — | | | | — | | | | 3 | |
Total net pension (income) expense | | $ | (37 | ) | | $ | 1 | | | $ | (28 | ) | | $ | 2 | |
NOTE 12: EARNINGS PER SHARE
Basic earnings per share computations are based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share computations include any dilutive effect of potential common shares. In periods with a net loss available to common shareholders, diluted earnings per share are calculated using weighted-average basic shares for that period, as utilizing diluted shares would be anti-dilutive to loss per share.
A reconciliation of the amounts used to calculate basic and diluted earnings per share for the three months ended March 31, 2023 and 2022 follows:
| | Three Months Ended | |
| | March 31, | |
(in millions) | | 2023 | | | 2022 | |
Net earnings (loss) | | $ | 33 | | | $ | (3 | ) |
Less: Series B Preferred stock cash dividends | | | (1 | ) | | | (1 | ) |
Less: Series C Preferred stock in-kind dividends | | | (1 | ) | | | (1 | ) |
Less: Preferred stock deemed dividends | | | (1 | ) | | | (1 | ) |
Less: Earnings attributable to Series C Preferred shareholders | | | (4 | ) | | | — | |
Net earnings (loss) available to common shareholders - basic | | $ | 26 | | | $ | (6 | ) |
| | | | | | | | |
Effect of dilutive securities: | | | | | | | | |
Add back: Series B preferred stock cash and deemed dividends | | $ | 1 | | | $ | — | |
Add back: 2021 Convertible Notes interest expense | | | 1 | | | | — | |
Net earnings (loss) available to common shareholders - diluted | | $ | 28 | | | $ | (6 | ) |
| | Three Months Ended | |
| | March 31, | |
(in millions of shares) | | 2023 | | | 2022 | |
Weighted average shares — basic | | | 79.1 | | | | 78.7 | |
Effect of dilutive securities | | | | | | | | |
Employee stock options | | | 0.4 | | | | — | |
Unvested restricted stock units | | | 0.7 | | | | — | |
Series B Preferred Stock | | | 9.5 | | | | — | |
2021 Convertible Notes | | | 2.5 | | | | — | |
Weighted average shares — diluted | | | 92.2 | | | | 78.7 | |
The computation of diluted earnings per share for the three months ended March 31, 2023 excluded the impact of (1) the assumed conversion of 1.1 million shares of Series C Preferred Stock, (2) the assumed vesting of