The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
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, 2020 (the “2020 Form 10-K”).
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the current period classification in the disaggregated revenue information for the Advanced Materials and Chemicals segment.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments. More convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted EPS calculation in certain circumstances. The ASU is effective for smaller reporting companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, (January 1, 2024 for Kodak). Early adoption is permitted for all entities for fiscal years beginning after December 15, 2020. The ASU allows entities to use either a modified retrospective or full retrospective transition method. Kodak adopted this ASU on January 1, 2021 using the modified retrospective method, under which companies apply the guidance to all financial instruments that are outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. The adoption of this standard had no impact on Kodak’s financial statements.
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, 2020 (January 1, 2021 for Kodak). Kodak adopted this ASU prospectively on January 1, 2021 and it did not have any impact on Kodak’s consolidated financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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, 2019-10, 2019-11, 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.
[9]
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)
|
|
2021
|
|
|
2020
|
|
Cash and cash equivalents
|
|
$
|
401
|
|
|
$
|
196
|
|
Restricted cash reported in Other current assets
|
|
|
7
|
|
|
|
7
|
|
Restricted cash
|
|
|
69
|
|
|
|
53
|
|
Total cash, cash equivalents and restricted cash shown in
the Statement of Cash Flows
|
|
$
|
477
|
|
|
$
|
256
|
|
Restricted cash reported in Other current assets on the Consolidated Statement of Financial Position primarily represents amounts that support hedging activities.
Restricted cash includes $49 million as of March 31, 2021 representing the cash collateral required to be posted by the Company under the Letter of Credit Facility (“L/C Cash Collateral”). Restricted cash included $35 million as of December 31, 2020, supporting compliance with the Excess Availability threshold under the ABL Credit Agreement, as defined therein (Refer to Note 5, “Debt and Finance Leases” for information on the Restricted cash supporting the L/C Cash Collateral and the Excess Availability threshold). In addition, Restricted cash as of March 31, 2021 and December 31, 2020 includes an escrow of $15 million and $12 million, respectively, in China to secure various ongoing obligations under the agreements for the strategic relationship with Lucky HuaGuang Graphics Co. Ltd. Restricted cash also included $3 million and $4 million of security posted related to Brazilian legal contingencies as of March 31, 2021 and December 31, 2020, respectively.
NOTE 3: INVENTORIES, NET
|
|
March 31,
|
|
|
December 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Finished goods
|
|
$
|
110
|
|
|
$
|
97
|
|
Work in process
|
|
|
59
|
|
|
|
54
|
|
Raw materials
|
|
|
55
|
|
|
|
55
|
|
Total
|
|
$
|
224
|
|
|
$
|
206
|
|
NOTE 4: OTHER LONG-TERM ASSETS
|
|
March 31,
|
|
|
December 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Pension assets
|
|
$
|
290
|
|
|
$
|
262
|
|
Estimated workers' compensation recoveries
|
|
|
18
|
|
|
|
18
|
|
Long-term receivables
|
|
|
11
|
|
|
|
11
|
|
Other
|
|
|
27
|
|
|
|
26
|
|
Total
|
|
$
|
346
|
|
|
$
|
317
|
|
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.
[10]
NOTE 5: DEBT AND FINANCE LEASES
Debt and finance leases and related maturities and interest rates were as follows at March 31, 2021 and December 31, 2020:
(in millions)
|
|
Type
|
|
Maturity
|
|
Weighted-Average
Effective Interest Rate
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RED-Rochester, LLC
|
|
2033
|
|
11.46%
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
Finance leases
|
|
Various
|
|
Various
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Non-current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note
|
|
2026
|
|
13.96%
|
|
|
|
216
|
|
|
|
—
|
|
|
|
Convertible debt
|
|
2026
|
|
17.09%
|
|
|
|
13
|
|
|
|
—
|
|
|
|
RED-Rochester, LLC
|
|
2033
|
|
11.46%
|
|
|
|
12
|
|
|
|
12
|
|
|
|
Finance leases
|
|
Various
|
|
Various
|
|
|
|
3
|
|
|
|
3
|
|
|
|
Other debt
|
|
Various
|
|
Various
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
246
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
$
|
248
|
|
|
$
|
19
|
|
Annual maturities of debt and finance leases outstanding at March 31, 2021 were as follows:
|
|
Carrying
Value
|
|
|
Maturity
Value
|
|
Q2 -Q4 2021
|
|
$
|
2
|
|
|
$
|
2
|
|
2022
|
|
|
2
|
|
|
|
2
|
|
2023
|
|
|
1
|
|
|
|
1
|
|
2024
|
|
|
1
|
|
|
|
1
|
|
2025
|
|
|
1
|
|
|
|
1
|
|
2026 and thereafter
|
|
|
241
|
|
|
|
439
|
|
Total
|
|
$
|
248
|
|
|
$
|
446
|
|
Term Loan Credit Agreement
On February 26, 2021, the Company entered into a Credit Agreement (the “Term Loan Credit Agreement”) with certain funds affiliated with Kennedy Lewis Investment Management LLC (“KLIM”) as lenders (the “Term Loan Lenders”) and Alter Domus (US) LLC, as administrative agent. Pursuant to the Term Loan Credit Agreement, the Term Loan Lenders provided the Company with (i) an initial term loan in the amount of $225 million, which was drawn in full on the same date, and (ii) a commitment to provide delayed draw term loans in an aggregate principal amount of up to $50 million on or before February 26, 2023 (collectively, the “Term Loans”). Net proceeds from the Term Loan Credit Agreement were $215 million ($225 million aggregate principal less $10 million in debt transaction costs). The Term Loans have a five-year maturity and are non-amortizing.
The Term Loans bear interest at a rate of 8.5% per annum payable quarterly in cash and 4.0% per annum Paid-In-Kind interest (“PIK”) or in cash quarterly, at the Company’s option, for an aggregate interest rate of 12.5% per annum. The Company expects to elect the 4.0% per annum in PIK which will be added to the carrying value of the debt through the term and interest expense will be recorded using the effective interest method. The Term Loans are guaranteed by the Company and certain of its domestic subsidiaries (the “Subsidiary Guarantors”), and are secured by (i) a first priority lien on substantially all assets of the Company and the Subsidiary Guarantors (subject to certain exceptions) not constituting ABL Priority Collateral or L/C Cash Collateral (see below for definitions of ABL Priority Collateral and L/C Cash Collateral), including 100% of the stock of material U.S. subsidiaries and 65% of the stock of material foreign subsidiaries (the “Term Loan Priority Collateral”) and (ii) a third priority lien on the ABL Priority Collateral and L/C Cash Collateral. The Term Loan Credit Agreement limits, among other things, the ability of the Company and its Restricted Subsidiaries (as defined in the Term Loan Credit Agreement) to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) make restricted payments and (v) make investments, and also contains customary affirmative covenants including delivery of certain of the Company’s financial statements set forth therein. The Term Loan Credit Agreement does not include a financial maintenance covenant.
[11]
Board Rights Agreement
On February 26, 2021, in connection with the execution of the Term Loan Credit Agreement, the Company entered into a letter agreement with KLIM (the “Board Rights Agreement”). Pursuant to the Board Rights Agreement, the Company’s Board of Directors (“Board”) appointed an individual designated by KLIM as a member of the Board effective April 1, 2021. The individual appointed has been nominated for reelection at the next annual meeting on May 19, 2021. KLIM also has the right to nominate one (1) director at each annual or special meeting of the Company’s shareholders until the third anniversary of the execution of the Board Rights Agreement or until KLIM ceases to hold at least 50% of the original principal amount of the Term Loans and commitments under the Term Loan Credit Agreement, whichever is earlier.
Until KLIM ceases to hold at least 50% of the original principal amount of the Term Loans and commitments under the Term Loan Credit Agreement, at any time that KLIM’s designated director is not serving on the Board, KLIM will have the right to designate a non-voting observer to the Board. Such observer will have the right to attend meetings of the Board and, under certain circumstances, committees and subcommittees of the Board and to receive information and materials made available to the Board, in each case, subject to certain restrictions and exceptions.
Securities Purchase Agreement
On February 26, 2021, the Company and the Term Loan Lenders (the “Buyers”), entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) pursuant to which the Company sold to the Buyers (i) an aggregate of 1,000,000 shares (the “Purchased Shares”) of the Company’s common stock (“Common Stock”) for a purchase price of $10.00 in cash per share for an aggregate purchase price of $10 million and (ii) $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 issuance and sale of the Purchased Shares and Convertible Notes were consummated on February 26, 2021.
Convertible Notes
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 PIK. Therefore, PIK will be added to the carrying value of the debt through the term and interest expense will be recorded using the effective interest method. The maturity date of the Convertible Notes is May 28, 2026.
Conversion Features
The Buyers will have the right to elect at any time to convert the Convertible Notes into shares of 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 will be 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 Convertible Notes were considered more akin to a debt-type instrument and the economic characteristics and risks of the embedded conversion features are not considered clearly and closely related to the Convertible Notes. Accordingly, these embedded features were bifurcated from the Convertible Notes and separately accounted for on a combined basis at fair value as a single derivative liability. Kodak allocated $12 million of the net proceeds received 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, net in the Consolidated Statement of Operations. The fair value of the Convertible Notes embedded derivative as of March 31, 2021 was a liability of $11 million and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 20, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the Convertible Notes as of March 31, 2021 and at the time of issuance was $13 million ($25 million aggregate gross proceeds less $12 million allocated to the derivative liability). The estimated fair value of the Convertible Notes as of March 31, 2021 was $24 million (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.
[12]
Securities Registration Rights Agreement
On February 26, 2021, the Company and the Buyers entered into a Registration Rights Agreement (the “Securities Registration Rights Agreement”) providing the Buyers with registration rights in respect of the Purchased Shares and the Common Stock issuable upon conversion of the Convertible Notes. The Securities Registration Rights Agreement contains other customary terms and conditions, including certain customary indemnification obligations; however, the Securities Registration Rights Agreement does not obligate the Company to facilitate an underwritten offering of the registered Common Stock by the Buyers.
Amended and Restated ABL Credit Agreement
On February 26, 2021, the Company and the Subsidiary Guarantors entered into an amendment to the Amended and Restated Credit Agreement, dated as of May 26, 2016, among the Company, the Subsidiary Guarantors, the lenders party thereto, Bank of America, N.A., as agent (the “Agent”), and Bank of America, N.A. and JPMorgan Chase Bank, N.A., as arrangers (the “ABL Credit Agreement” and, as amended by the Amended ABL Credit Agreement, the “Amended ABL Credit Agreement”), with the Agent and the Required Lenders. Each of the capitalized and undefined terms have the meaning ascribed to such term in the ABL Credit Agreement.
The Amended ABL Credit Agreement amends the ABL Credit Agreement to, among other things, (i) extend the maturity date to February 26, 2024 or the date that is 90 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company’s Term Loan Credit Agreement, Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing and (ii) decrease the aggregate amount of commitments from $110 million to $90 million. Commitments under the Amended ABL Credit Agreement continue to be able to be used in the form of revolving loans or letters of credit. The Company had issued approximately $42 million letters of credit under the Amended ABL Credit Agreement as of March 31, 2021 and $90 million letters of credit under the ABL Credit Agreement as of December 31, 2020.
The revolving loans bear interest at the rate of LIBOR plus 3.50%-4.00% per annum (subject to provisions providing for a replacement benchmark rate upon the discontinuation of LIBOR) or a floating Base Rate (as defined in the Amended ABL Credit Agreement) plus 2.50%-3.00% per annum, based on Excess Availability (as defined in the Amended ABL Credit Agreement). 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 Amended ABL Credit Agreement continue to be 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 Amended ABL Credit Agreement continues to limit, among other things, the ability of the Company and its Restricted Subsidiaries (as defined in the Amended ABL Credit Agreement) to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) make restricted payments and (v) make investments. The 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 Amended ABL Credit Agreement the Company is required to maintain Minimum Liquidity of at least $80 million, which is tested at the end of each quarter. Minimum Liquidity was $284 million at March 31, 2021. If Minimum Liquidity falls below $80 million an Event of Default would occur and the Agent has 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 Amended ABL Credit Agreement to be due and payable.
Under the Amended ABL Credit Agreement the Company is required to maintain Excess Availability above 12.5% of lender commitments ($11.25 million and $13.75 million as of March 31, 2021 and December 31, 2020, respectively), which is tested at the end of each month. Excess Availability was $41 million and $20 million as of March 31, 2021 and December 31, 2020, respectively. If Excess Availability falls below 12.5% of lender commitments 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 12.5% of lender commitments, 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 at March 31, 2021 and December 31, 2020, Kodak is not required to have a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0. The Amended ABL Credit Agreement also removed Eligible Cash from the Borrowing Base. Therefore, amounts funded into the Eligible Cash account will no longer increase Excess Availability for purposes of compliance reporting. As of December 31, 2020, to maintain Excess Availability of greater than 12.5% of lender commitments, Kodak funded $35 million to the Eligible Cash account held with the ABL Credit Agreement Administrative Agent, which was classified as Restricted Cash in the Consolidated Statement of Financial Position.
[13]
If Excess Availability falls below 12.5% of lender commitments and the Fixed Charge Coverage Ratio is less than 1.0 to 1.0, an Event of Default would occur and the Agent has 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 Amended ABL Credit Agreement to be due and payable.
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 Term Loan Credit Agreement and the 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”).
The term of the L/C Facility Agreement is three years, subject to the same automatic springing maturity as the Amended ABL Credit Agreement. The Company had issued approximately $48 million letters of credit under the L/C Facility Agreement as of March 31, 2021. The current balance on deposit in the L/C Cash Collateral account is approximately $49 million, of which $14 million was deposited into the L/C Cash Collateral account from proceeds of the financing transactions described herein and the remainder of which was cash collateral previously used to secure letters of credit under the ABL Credit Agreement. The L/C Facility Agreement has the same requirement to maintain Minimum Liquidity of $80 million as is contained in the Amended ABL Credit Agreement.
NOTE 6: REDEEMABLE, CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock was as follows at March 31, 2021 and December 31, 2020
|
|
March 31,
|
|
|
December 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Series A preferred stock
|
|
$
|
—
|
|
|
$
|
191
|
|
Series B preferred stock
|
|
|
94
|
|
|
|
—
|
|
Series C preferred stock
|
|
|
98
|
|
|
|
—
|
|
Total
|
|
$
|
192
|
|
|
$
|
191
|
|
Series A Preferred Stock
On November 15, 2016, the Company issued 2,000,000 shares of Series A Preferred Stock for an aggregate purchase price of $200 million, or $100 per share, pursuant to a Series A Preferred Stock Purchase Agreement with 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”), dated November 7, 2016. The Company classified the Series A Preferred Stock as temporary equity in the Consolidated Statement of Financial Position.
Repurchase and Exchange Agreement
On February 26, 2021 the Company entered into a Series A Preferred Stock Repurchase and Exchange Agreement (the “Repurchase and Exchange Agreement”) with Southeastern and the Purchasers. The Company repurchased one million shares of the Series A Preferred Stock under the terms of the Repurchase and Exchange Agreement for $100,641,667, representing the liquidation value of the Series A Preferred Stock plus accrued and unpaid dividends. In addition, the Company and the Purchasers agreed to exchange the remaining one million shares of Series A Preferred Stock held by 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 of $641,667. The exchange of shares of Series A Preferred Stock for shares of Series B Preferred Stock is a noncash financing activity.
Embedded Conversion Features
Kodak allocated $43 million of the net proceeds from the issuance of the Series A Stock to a derivative liability based on the aggregate fair value of the embedded conversion features on the date of issuance, which reduced the net carrying value of the Series A Preferred Stock (see Note 20, “Financial Instruments”). The carrying value of the Series A Preferred Stock at the time of issuance, $155 million ($200 million aggregate gross proceeds less $43 million allocated to the derivative liability and $2 million in transaction costs), was 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, November 15, 2021.
Extinguishment of Series A Preferred Stock
The carrying value, including the fair value of the embedded derivative liability, of the Series A Preferred Stock prior to extinguishment approximated $203 million. Upon repurchase and exchange of the Series A Preferred Stock, Kodak recorded $8 million as a deemed dividend to Additional paid in
[14]
capital in the Consolidated Statement of Financial Position, representing the difference between the fair value of consideration transferred and the carrying value of the Series A Preferred Stock.
Dividend and Other Rights
The holders of Series A Preferred Stock were entitled to cumulative dividends payable quarterly in cash at a rate of 5.50% per annum.
Series B Preferred Stock
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
On February 25, 2021, the Company filed with the Department of Treasury of the State of New Jersey a Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of the Company (the “Series B Certificate of Designations”) which established the designation, number of shares, rights, preferences and limitations of the Series B Preferred Stock which became effective upon filing. 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. The Company declared the quarterly cash dividends for the first quarter of 2021 in March 2021, which were paid in April 2021. Holders of Series B Preferred Stock will have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company.
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 will be 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 concluded that the Series B Preferred Stock is considered more akin to a debt-type instrument and that the economic characteristics and risks of the conversion option upon a fundamental change by the holder was not considered clearly and closely related to the Series B Preferred Stock. Accordingly, this embedded conversion feature was bifurcated from the Series B Preferred Stock and separately accounted for at fair value as a derivative. The Company allocated $1 million to the derivative liability based on the aggregate fair value of the embedded conversion feature 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, net in the Consolidated Statement of Operations. The fair value of the Series B Preferred Stock embedded derivative as of March 31, 2021 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 20, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the Series B Preferred Stock at the time of issuance, $93 million ($95 million fair value of Series B Preferred Stock on February 26, 2021 less $1 million allocated to the derivative liability and $1 million of transaction costs) 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.
Redemption Features
If any shares of Series B Preferred Stock have not been converted prior to May 28, 2026 (the “Redemption Date”), the Company is required to redeem such shares at $100 per share plus the amount of accrued and unpaid dividends. As the Company concluded that the Series B Preferred Stock is considered more akin to a debt-type instrument, the redemption feature is considered to be clearly and closely related to the host contract and therefore was not required to be separated from the Series B Preferred Stock.
Series C Preferred Stock
[15]
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 initial issuance and sale of 750,000 shares ($75 million gross proceeds) closed on February 26, 2021, and the final issuance and sale of the remaining 250,000 shares ($25 million gross proceeds) closed on March 30, 2021 after expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. The Investor is a fund managed by Grand Oaks Capital. The Company intends to use the proceeds from the sale of the Series C Preferred Stock for general corporate purposes including the funding of growth initiatives. The Company has classified the Series C Preferred Stock as temporary equity in the Consolidated Statement of Financial Position.
Dividend and Other Rights
On February 25, 2021, the Company filed with the Department of Treasury of the State of New Jersey a Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of the Company (the “Series C Certificate of Designations”) which established the designation, number of shares, rights, preferences and limitations of the Series C Preferred Stock and became effective upon filing. The Series C Preferred Stock ranks senior to the Common Stock and pari passu with the Series B Preferred Stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Series C Preferred Stock has an initial liquidation preference of $100 per share, and holders of Series C Preferred Stock will be 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. If dividends on the Series C Preferred Stock are not declared and paid for any given fiscal quarter, the liquidation preference is automatically increased by the amount of such unpaid dividends. Holders of the Series C Preferred Stock will also be 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. The Company declared the quarterly “in-kind” dividend for the first quarter of 2021 in March 2021 and issued additional shares of Series C Preferred Stock in April 2021.
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 will have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company.
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 will be 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 concluded that the Series C Preferred Stock is considered more akin to a debt-type instrument and that the economic characteristics and risks of the conversion option upon a fundamental change by the holder is not considered clearly and closely related to the Series C Preferred Stock. Accordingly, this embedded conversion feature was bifurcated from the Series C Preferred Stock and separately accounted for as a derivative. The Company allocated $2 million of the net proceeds received to the derivative liability based on the aggregate fair value of the embedded conversion features 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, net in the Consolidated Statement of Operations. The fair value of the Series C Preferred Stock derivative as of March 31, 2021 was a liability of $2 million and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 20, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the Series C Preferred Stock at the time of issuance, $97 million ($100 million aggregate gross proceeds less $2 million allocated to the derivative liability and $1 million in transaction costs) is being accreted to the mandatory redemption amount using the effective
[16]
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.
Redemption Features
If any shares of Series C Preferred Stock have not been converted prior to the Redemption Date, the Company is required to redeem such shares at $100 per share plus the amount of accrued and unpaid dividends thereon; provided that the holders of the Series C Preferred Stock have the right to extend such redemption date by up to two years. As the Company concluded that the Series C Preferred Stock is considered more akin to a debt-type instrument, the redemption feature is considered to be clearly and closely related to the host contract and therefore was not required to be separated from the Series C Preferred Stock.
Series C Registration Rights Agreement
On February 26, 2021, the Company and the Investor entered into a Registration Rights Agreement (the “Series C Registration Rights Agreement”) which provides the Investor with customary registration rights in respect of the shares of Common Stock issuable upon conversion of the Series C Preferred Stock. The Series C Registration Rights Agreement contains other customary terms and conditions, including certain customary indemnification obligations.
NOTE 7: LEASES
Income recognized on operating lease arrangements for the three months ended March 31, 2021 and 2020 is presented below. Income recognized for sales-type lease arrangements is $1 million and $0 million for three months ended March 31, 2021 and 2020, respectively:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Lease income - operating leases:
|
|
|
|
|
|
|
|
|
Lease income
|
|
$
|
2
|
|
|
$
|
2
|
|
Sublease income
|
|
|
—
|
|
|
|
2
|
|
Variable lease income
|
|
|
1
|
|
|
|
1
|
|
Total lease income
|
|
$
|
3
|
|
|
$
|
5
|
|
NOTE 8: COMMITMENTS AND CONTINGENCIES
As of March 31, 2021, the Company had outstanding letters of credit of $42 million and $48 million issued under the Amended ABL Credit Agreement and the L/C Facility Agreement, respectively, as well as bank guarantees and letters of credit of $2 million, surety bonds in the amount of $29 million, and restricted cash of $76 million, primarily related to cash collateral for the outstanding letters of credit under the 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, 2021, the unreserved portion of these contingencies, 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 $4 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, 2021, Kodak’s Brazilian operations have posted security composed of $3 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 $39 million. Generally, any encumbrances on the Brazilian assets would be removed to the extent the matter is resolved in Kodak's favor.
On July 28, 2020, the U.S. International Development Finance Corporation (the “DFC”) announced (the “DFC Announcement”) 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 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
[17]
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 DFC Announcement of the potential DFC Loan and DFC Pharmaceutical Project. Since the filing of the Securities Class Actions, procedural activities have been ongoing relating to the determination of venue and lead plaintiff.
In addition to the Securities Class Actions, on December 29, 2020 Robert Garfield commenced a class action lawsuit against the Company and each of the members of its Board of Directors, in the Superior Court of Mercer County, New Jersey seeking equitable relief and damages in favor of the Company based on alleged breaches of fiduciary duty by the Company’s Board of Directors associated with alleged false and misleading proxy statement disclosure (the “Fiduciary Class Action”). The Company filed a motion to dismiss the Fiduciary Class Action on April 13, 2021.
The Company has also received three 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. The Company has responded to and engaged in discussions concerning these requests, and its response and discussions may serve as the basis for the requestors to bring shareholder derivative lawsuits (any such lawsuits, collectively with the Fiduciary Class Action, the “Fiduciary Matters”).
The DFC Announcement has also prompted investigations by several congressional committees, the SEC and the New York Attorney General’s office.
The Attorney General of the State of New York has threatened to file a lawsuit against the Company and its Chief Executive Officer alleging violations of New York State’s Martin Act in connection with the Chief Executive Officer’s purchase of 46,737 shares of the Company’s common stock on June 23, 2020 (the “Threatened Claim”). This purchase was made by the Chief Executive Officer during an ‘open window’ period and in compliance with the Company’s insider trading policy, including pre-approval by its general counsel. The Chief Executive Officer has never sold any Kodak shares. The Company considers the Threatened Claim to be unsupported by law or fact and intends to vigorously defend itself against the Threatened Claim should it be filed.
The Securities Class Actions, Fiduciary Matters and investigations by several congressional committees, the SEC and the New York Attorney General’s office pertaining to the DFC Announcement remain ongoing. The Company intends to vigorously defend itself against the Securities Class Actions and Fiduciary Matters and is cooperating in the investigations related to the DFC Announcement.
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 and claims arising out of Kodak’s licensing its brand. 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 any of these 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 9: 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, 2020 to March 31, 2021, 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, 2020
|
|
$
|
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, 2021
|
|
$
|
19
|
|
[18]
NOTE 10: REVENUE
Disaggregation of Revenue
The following tables present revenue disaggregated by major product, portfolio summary and geography.
Major Product:
Three Months Ended
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Traditional Printing
|
|
|
Digital Printing
|
|
|
Advanced Materials and Chemicals
|
|
|
Brand
|
|
|
All Other
|
|
|
Total
|
|
Plates, inks and other
consumables
|
|
$
|
121
|
|
|
$
|
17
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
143
|
|
Ongoing service arrangements (1)
|
|
|
20
|
|
|
|
34
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
Total annuities
|
|
|
141
|
|
|
|
51
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
198
|
|
Equipment & software
|
|
|
7
|
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
Film and chemicals
|
|
|
—
|
|
|
|
—
|
|
|
|
40
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40
|
|
Other (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
Total
|
|
$
|
148
|
|
|
$
|
64
|
|
|
$
|
46
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Traditional Printing
|
|
|
Digital Printing
|
|
|
Advanced Materials and Chemicals
|
|
|
Brand
|
|
|
All Other
|
|
|
Total
|
|
Plates, inks and other consumables
|
|
$
|
126
|
|
|
$
|
18
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
149
|
|
Ongoing service arrangements (1)
|
|
|
21
|
|
|
|
35
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56
|
|
Total annuities
|
|
|
147
|
|
|
|
53
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
205
|
|
Equipment & software
|
|
|
7
|
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
Film and chemicals
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
Other (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
|
|
8
|
|
Total
|
|
$
|
154
|
|
|
$
|
65
|
|
|
$
|
42
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Service revenue in the Consolidated Statement of Operations includes the ongoing service revenue shown above as well as revenue from project-based document management and managed print services businesses, which is included in Other above.
|
(2)
|
Other includes revenue from professional services, non-recurring engineering services, print and managed media services, tenant rent and related property management services and licensing.
|
[19]
Product Portfolio Summary:
Three Months Ended
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Traditional Printing
|
|
|
Digital Printing
|
|
|
Advanced Materials and Chemicals
|
|
|
Brand
|
|
|
All Other
|
|
|
Total
|
|
Growth engines (1)
|
|
$
|
47
|
|
|
$
|
37
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
85
|
|
Strategic other businesses (2)
|
|
|
101
|
|
|
|
14
|
|
|
|
45
|
|
|
|
3
|
|
|
|
4
|
|
|
|
167
|
|
Planned declining
businesses (3)
|
|
|
—
|
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
Total
|
|
$
|
148
|
|
|
$
|
64
|
|
|
$
|
46
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Traditional Printing
|
|
|
Digital Printing
|
|
|
Advanced Materials and Chemicals
|
|
|
Brand
|
|
|
All Other
|
|
|
Total
|
|
Growth engines (1)
|
|
$
|
44
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80
|
|
Strategic other businesses (2)
|
|
|
110
|
|
|
|
15
|
|
|
|
39
|
|
|
|
3
|
|
|
|
3
|
|
|
|
170
|
|
Planned declining
businesses (3)
|
|
|
—
|
|
|
|
14
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
Total
|
|
$
|
154
|
|
|
$
|
65
|
|
|
$
|
42
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Growth engines consist of Sonora in the Traditional Printing segment, PROSPER and Software in the Digital Printing segment, and Advanced Materials and Functional Printing in the Advanced Materials and Chemicals segment, excluding intellectual property (IP) licensing.
|
(2)
|
Strategic other businesses include plates in the Traditional Printing segment; Computer to Plate (“CTP”) equipment and related service and Nexpress and related toner business in the Digital Printing segment and Motion Picture and Industrial Film and Chemicals (including external inks) and IP licensing in the Advanced Materials and Chemicals segment and the Brand segment.
|
(3)
|
Planned declining businesses are product lines where the decision has been made to stop new product development and manage an orderly expected decline in the installed product and annuity base or are otherwise not strategic to Kodak. These product families consist of Kodak Services for Business in the Advanced Materials and Chemicals segment and Versamark and Digimaster in the Digital Printing segment.
|
Geography (1):
Three Months Ended
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Traditional Printing
|
|
|
Digital Printing
|
|
|
Advanced Materials and Chemicals
|
|
|
Brand
|
|
|
All Other
|
|
|
Total
|
|
United States
|
|
$
|
29
|
|
|
$
|
27
|
|
|
$
|
33
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
96
|
|
Canada
|
|
|
2
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
North America
|
|
|
31
|
|
|
|
30
|
|
|
|
33
|
|
|
|
3
|
|
|
|
4
|
|
|
|
101
|
|
Europe, Middle East and Africa
|
|
|
68
|
|
|
|
19
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
Asia Pacific
|
|
|
42
|
|
|
|
14
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66
|
|
Latin America
|
|
|
7
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
Total
|
|
$
|
148
|
|
|
$
|
64
|
|
|
$
|
46
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[20]
Three Months Ended
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Traditional Printing
|
|
|
Digital Printing
|
|
|
Advanced Materials and Chemicals
|
|
|
Brand
|
|
|
All Other
|
|
|
Total
|
|
United States
|
|
$
|
35
|
|
|
$
|
28
|
|
|
$
|
30
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
99
|
|
Canada
|
|
|
3
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
North America
|
|
|
38
|
|
|
|
30
|
|
|
|
30
|
|
|
|
3
|
|
|
|
3
|
|
|
|
104
|
|
Europe, Middle East and Africa
|
|
|
68
|
|
|
|
24
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
95
|
|
Asia Pacific
|
|
|
39
|
|
|
|
10
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58
|
|
Latin America
|
|
|
9
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
Total
|
|
$
|
154
|
|
|
$
|
65
|
|
|
$
|
42
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 amounts recorded for contract assets at March 31, 2021 and December 31, 2020 were $1 million and $2 million, respectively, and are 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 amounts recorded for contract liabilities at March 31, 2021 and December 31, 2020 were $57 million and $64 million, respectively, of which $41 million and $47 million are reported in Other current liabilities, respectively, and $16 million and $17 million, respectively, are reported in Other long-term liabilities in the Consolidated Statement of Financial Position.
Revenue recognized for the three months ended March 31, 2021 and 2020 that was included in the contract liability balance at the beginning of the year was $25 million and $26 million, respectively, and primarily represented revenue from prepaid service contracts and equipment revenue recognition. Contract liabilities as of both March 31, 2021 and 2020 included $19 million of cash payments received during the three months ended March 31, 2021 and 2020.
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, 2021, there was approximately $70 million of unrecognized revenue from unsatisfied performance obligations. Approximately 25% of the revenue from unsatisfied performance obligations is expected to be recognized in the remainder of 2021, 25% in 2022, 20% in 2023 and 30% thereafter.
NOTE 11: OTHER OPERATING INCOME, NET
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Expense (income):
|
|
|
|
|
|
|
|
|
Gain on sale of assets (1)
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
Asset impairments (2)
|
|
|
—
|
|
|
|
3
|
|
Transition services agreement income
|
|
|
—
|
|
|
|
(2
|
)
|
Other
|
|
|
(1
|
)
|
|
|
—
|
|
Total
|
|
$
|
(1
|
)
|
|
$
|
(7
|
)
|
|
(1)
|
In March 2020 Kodak sold a property in the U.S.
|
|
(2)
|
In the first quarter of 2020 Kodak recorded a pre-tax impairment charge of the Kodak trade name.
|
[21]
NOTE 12: OTHER INCOME, NET
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Change in fair value of embedded conversion features
derivative liability (1)
|
|
$
|
1
|
|
|
$
|
(53
|
)
|
Loss on foreign exchange transactions
|
|
|
—
|
|
|
|
2
|
|
Other
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
(53
|
)
|
|
(1)
|
Refer to Note 20, “Financial Instruments”.
|
NOTE 13: INCOME TAXES
Kodak’s income tax provision and effective tax rate were as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Earnings from operations before income taxes
|
|
$
|
7
|
|
|
$
|
54
|
|
Effective tax rate
|
|
|
14.3
|
%
|
|
|
305.6
|
%
|
Provision for income taxes
|
|
|
1
|
|
|
|
165
|
|
Provision for income taxes at U.S. statutory tax rate
|
|
|
1
|
|
|
|
11
|
|
Difference between tax at effective vs. statutory rate
|
|
$
|
—
|
|
|
$
|
154
|
|
For the three months ended March 31, 2021, 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, (2) the results from operations in jurisdictions outside the U.S., (3) a benefit associated with foreign withholding taxes on undistributed earnings and (4) changes in audit reserves, including a settlement with a taxing authority in a location outside the U.S.
During the quarter ended March 31,2021, Kodak agreed to terms with a taxing authority outside the U.S. and settled open tax audits for years through 2014. For these years, Kodak originally recorded liabilities for unrecognized tax positions totaling $3 million (plus interest of approximately $4 million), which were substantially offset by pre-paid assets.
For the three months ended March 31, 2020, 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 (2) the results from operations in jurisdictions outside the U.S.
Kodak establishes valuation allowances for deferred income tax assets in accordance with U.S. GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, Kodak considers the scheduled reversal of deferred tax liabilities and assets, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment.
As of March 31, 2020, Kodak determined that it was more likely than not that deferred tax assets outside the U.S. which were not offset with valuation allowances as of March 31, 2020 would not be realized due to reductions in estimates of future profitability as a result of the COVID-19 pandemic in locations outside the U.S. Accordingly, Kodak recorded a provision of $167 million associated with the establishment of a valuation allowance on those deferred tax assets.
Additionally, on February 21, 2020, Kodak agreed to terms with the IRS and settled the federal audit for calendar years 2013 and 2014. For these years, Kodak originally recorded a federal unrecognized tax position totaling $41 million, which was fully offset by tax attributes. This settlement resulted in an increase in net deferred tax assets and was fully offset by a corresponding increase in Kodak’s U.S. valuation allowance, resulting in no net tax benefit.
[22]
NOTE 14: 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,
|
|
|
|
2021
|
|
|
2020
|
|
(in millions)
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
Major defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
1
|
|
Interest cost
|
|
|
12
|
|
|
|
1
|
|
|
|
21
|
|
|
|
2
|
|
Expected return on plan assets
|
|
|
(42
|
)
|
|
|
(3
|
)
|
|
|
(49
|
)
|
|
|
(5
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
Actuarial loss
|
|
|
7
|
|
|
|
2
|
|
|
|
4
|
|
|
|
2
|
|
Net pension (income) expense before
special termination benefits
|
|
|
(22
|
)
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
—
|
|
Special termination benefits
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Total net pension (income)
expense
|
|
$
|
(22
|
)
|
|
$
|
1
|
|
|
$
|
(22
|
)
|
|
$
|
—
|
|
For the three months ending March 31, 2020 the special termination benefits were incurred as a result of Kodak’s restructuring actions and have been included in Restructuring costs and other in the Consolidated Statement of Operations for that period.
NOTE 15: 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 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, 2021 and 2020 follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
6
|
|
|
$
|
(111
|
)
|
Less: Preferred stock cash dividends
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Less: Preferred stock deemed dividends
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Less: Preferred stock in-kind dividend
|
|
|
(1
|
)
|
|
|
—
|
|
Plus: Expiration of Series A preferred stock embedded derivative
|
|
|
11
|
|
|
|
—
|
|
Net income (loss) available to common shareholders
- basic and diluted
|
|
$
|
13
|
|
|
$
|
(116
|
)
|
(in millions of shares)
|
|
|
|
|
|
|
|
|
Weighted average shares — basic
|
|
|
77.8
|
|
|
|
43.6
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
2.3
|
|
|
|
—
|
|
Unvested restricted stock units
|
|
|
0.5
|
|
|
|
—
|
|
Weighted average shares — diluted
|
|
|
80.6
|
|
|
|
43.6
|
|
The computation of diluted earnings per share for the three months ended March 31, 2021 excluded the impact of (1) the assumed conversion of 1.0 million shares of Series B Preferred Stock, (2) the assumed conversion of 1.0 million shares of Series C Preferred Stock, (3) the assumed exercise of 3.2 million of outstanding employee stock options, (4) the assumed conversion of $25 million of Convertible Notes issued in 2021 and (5) the assumed vesting of 0.3 million unvested restricted stock units because the effects would have been anti-dilutive.
[23]
As a result of the net loss available to common shareholders for the three months ended March 31, 2020, Kodak calculated diluted earnings per share using weighted-average basic shares outstanding. If Kodak reported income available to common shareholders for the three months ended March 31, 2020, the calculation of diluted earnings per share would have included the assumed vesting of 0.3 million unvested restricted stock units.
The computation of diluted earnings per share for the three months ended March 31, 2020 also excluded the impact of (1) the assumed conversion of 2.0 million shares of Series A Preferred Stock, (2) the assumed exercise of 6.8 million outstanding employee stock options and (3) the assumed conversion of $100 million of Convertible Notes issued in 2019 because the effects would have been anti-dilutive.
NOTE 16: STOCK-BASED COMPENSATION
On February 26, 2021 James V. Continenza, Executive Chairman and Chief Executive Officer of Kodak, and the Company entered into an Executive Chairman and CEO Agreement (the “New Employment Agreement”). The New Employment Agreement is effective for a three-year period beginning on February 26, 2021. Pursuant to the New Employment Agreement, Mr. Continenza will not have the right to exercise any stock options granted to him in February 2019 or July 2020 to the extent that, after giving effect to the issuance of the Company’s common stock resulting from such exercise, Mr. Continenza (together with his affiliates and any person acting as a group), would beneficially own more than 4.99% of the then issued and outstanding shares of Common Stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation shall cease and be of no further force and effect upon a Change of Control (as such term is defined in the Company’s Amended and Restated 2013 Omnibus Incentive Plan). The restrictions on the exercisability of previous stock option awards is a modification of the original awards. As the February 2019 and July 2020 stock options were fully vested prior to the modification date and there was no incremental value provided in the modification, no additional compensation expense was recognized. Also pursuant to the New Employment Agreement, Mr. Continenza was granted 200,000 fully vested restricted stock units. The Company recognized $2 million of stock-based compensation expense associated with the grant of restricted stock units.
NOTE 17: SHAREHOLDERS’ EQUITY
The Company has 560 million shares of authorized stock, consisting of: (i) 500 million shares of common stock, par value $0.01 per share and (ii) 60 million shares of preferred stock, no par value, issuable in one or more series.
Common Stock
As of March 31, 2021 and December 31, 2020, there were 78.5 million and 77.2 million shares of common stock outstanding, respectively. In the three months ended March 31, 2021 the Company issued 1.0 million shares of common stock pursuant to the Securities Purchase Agreement. Refer to Note 5, “Debt and Finance Leases” for information on the Securities Purchase Agreement.
Preferred Stock
Preferred stock issued and outstanding as of March 31, 2021 consisted of 1.0 million shares of Series B Preferred Stock and 1.0 million shares of Series C Preferred Stock. Preferred stock issued and outstanding as of December 31, 2020 consisted of 2.0 million shares of Series A Preferred Stock. Refer to Note 6, “Redeemable, Convertible Preferred Stock” for information on the changes in preferred stock.
Treasury Stock
Treasury stock consisted of approximately 0.8 million shares and 0.7 million shares as of March 31, 2021 and December 31, 2020, respectively.
[24]
NOTE 18: OTHER COMPREHENSIVE INCOME (LOSS)
The changes in Other comprehensive income (loss), by component, were as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Currency translation adjustments
|
|
$
|
(1
|
)
|
|
$
|
(12
|
)
|
Pension and other postretirement benefit plan changes
|
|
|
|
|
|
|
|
|
Newly established net actuarial (loss) gain
|
|
|
(1
|
)
|
|
|
1
|
|
Tax Provision
|
|
|
—
|
|
|
|
—
|
|
Newly established net actuarial (loss) gain, net of tax
|
|
|
(1
|
)
|
|
|
1
|
|
Reclassification adjustments:
|
|
|
|
|
|
|
|
|
Amortization of prior service credit (a)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Amortization of actuarial losses (a)
|
|
|
9
|
|
|
|
5
|
|
Recognition of losses (gains) due to curtailments and settlements
|
|
|
—
|
|
|
|
—
|
|
Total reclassification adjustments
|
|
|
7
|
|
|
|
3
|
|
Tax provision
|
|
|
—
|
|
|
|
(1
|
)
|
Reclassification adjustments, net of tax
|
|
|
7
|
|
|
|
2
|
|
Pension and other postretirement benefit plan changes,
net of tax
|
|
|
6
|
|
|
|
3
|
|
Other comprehensive income (loss)
|
|
$
|
5
|
|
|
$
|
(9
|
)
|
|
(a)
|
Reclassified to Total Net Periodic Benefit Cost - refer to Note 14, "Retirement Plans and Other Postretirement Benefits".
|
NOTE 19: SEGMENT INFORMATION
Kodak has four reportable segments: Traditional Printing, Digital Printing, Advanced Materials and Chemicals and Brand. A description of Kodak’s reportable segments follows.
Traditional Printing: The Traditional Printing segment is comprised of Prepress Solutions.
Digital Printing: The Digital Printing segment is comprised of four lines of business: the Electrophotographic Printing Solutions business, the Prosper business, the Versamark business and the Kodak Software business.
Advanced Materials and Chemicals: The Advanced Materials and Chemicals segment is comprised of four lines of business: Industrial Film and Chemicals, Motion Picture, Advanced Materials and Functional Printing and Kodak Services for Business.
Brand: The Brand segment contains the brand licensing business.
All Other: All Other is comprised of the operations of the Eastman Business Park, a more than 1,200-acre technology center and industrial complex.
Segment financial information is shown below:
Segment Revenues
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Traditional Printing
|
|
$
|
148
|
|
|
$
|
154
|
|
Digital Printing
|
|
|
64
|
|
|
|
65
|
|
Advanced Materials and Chemicals
|
|
|
46
|
|
|
|
42
|
|
Brand
|
|
|
3
|
|
|
|
3
|
|
All Other
|
|
|
4
|
|
|
|
3
|
|
Consolidated total
|
|
$
|
265
|
|
|
$
|
267
|
|
[25]
Segment Operational EBITDA and Consolidated Income from Operations Before Income Taxes
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Traditional Printing
|
|
$
|
5
|
|
|
$
|
1
|
|
Digital Printing
|
|
|
—
|
|
|
|
(2
|
)
|
Advanced Materials and Chemicals
|
|
|
(4
|
)
|
|
|
(9
|
)
|
Brand
|
|
|
2
|
|
|
|
2
|
|
Total of reportable segments
|
|
|
3
|
|
|
|
(8
|
)
|
All Other
|
|
|
—
|
|
|
|
(1
|
)
|
Depreciation and amortization
|
|
|
(8
|
)
|
|
|
(10
|
)
|
Restructuring costs and other
|
|
|
(1
|
)
|
|
|
(7
|
)
|
Stock based compensation
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Consulting and other costs (1)
|
|
|
(5
|
)
|
|
|
—
|
|
Idle costs (2)
|
|
|
(1
|
)
|
|
|
—
|
|
Other operating income, net, excluding income from
transition services agreement (3)
|
|
|
1
|
|
|
|
6
|
|
Interest expense (4)
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Pension income excluding service cost component (4)
|
|
|
25
|
|
|
|
26
|
|
Other income net (4)
|
|
|
—
|
|
|
|
53
|
|
Consolidated income from operations before
income taxes
|
|
$
|
7
|
|
|
$
|
54
|
|
|
(1)
|
Consulting and other costs are primarily professional services and internal costs associated with certain corporate strategic initiatives and investigations.
|
|
(2)
|
Consists of 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.
|
|
(3)
|
$0 million and $2 million of income from the transition services agreement with the purchaser of Kodak’s Flexographic Packaging Business was recognized in the three months ended March 31, 2021 and 2020. The income was reported in Other operating income, net in the Consolidated Statement of Operations. Other operating income, net is typically excluded from the segment measure. However, the income from the transition services agreement was included in the segment measure.
|
|
(4)
|
As reported in the Consolidated Statement of Operations.
|
Segment Measure of Profit and Loss
Kodak’s segment measure of profit and loss is an adjusted earnings before interest, taxes, depreciation and amortization (“Operational EBITDA”).
As demonstrated in the above table, Operational EBITDA represents the earnings (loss) from operations excluding the provision for income taxes; non-service cost components of pension and other postemployment benefits (“OPEB”) income; depreciation and amortization expense; restructuring costs; stock-based compensation expense; consulting and other costs; idle costs; other operating income, net (unless otherwise indicated); interest expense and other income, net.
Kodak’s segments are measured using Operational EBITDA both before and after allocation of corporate selling, general and administrative expenses (“SG&A”). The segment earnings measure reported is after allocation of corporate SG&A as this most closely aligns with U.S. GAAP. Research and Development activities not directly related to the other segments are reported within the Advanced Materials and Chemicals segment.
NOTE 20: FINANCIAL INSTRUMENTS
Kodak, as a result of its global operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates, which may adversely affect its results of operations and financial position. Kodak manages such exposures, in part, with derivative financial instruments. Foreign currency forward contracts are used to mitigate currency risk related to foreign currency denominated assets and liabilities. Kodak’s exposure to changes in interest rates results from its investing and borrowing activities used to meet its liquidity needs. Kodak does not utilize financial instruments for trading or other speculative purposes.
Kodak’s foreign currency forward contracts are not designated as hedges and are marked to market through net income (loss) at the same time that the exposed assets and liabilities are remeasured through net income (loss) (both in Other income, net in the Consolidated Statement of Operations). The notional amount of such contracts open at March 31, 2021 and December 31, 2020 was approximately $331 million and $361
[26]
million, respectively. The majority of the contracts of this type held by Kodak as of March 31, 2021 and December 31, 2020 are denominated in euros, Chinese renminbi and Japanese yen.
The net effect of foreign currency forward contracts in the results of operations is shown in the following table:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in millions)
|
|
2021
|
|
|
2020
|
|
Net loss (gain) from derivatives not designated as hedging
instruments
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
Kodak had no derivatives designated as hedging instruments for the three months ended March 31, 2021.
In the event of a default under the Company’s Credit Agreements, or a default under any derivative contract or similar obligation of Kodak, subject to certain minimum thresholds, the derivative counterparties would have the right, although not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value, but with liability positions netted against asset positions with the same counterparty.
As discussed in Note 5, “Debt and Finance Leases”, the Company concluded that the Convertible Notes are considered more akin to a debt-type instrument and that the economic characteristics and risks of the embedded conversion features, are not considered clearly and closely related to the Convertible Notes. The embedded conversion features not considered clearly and closely related are the conversion at the option of the holder (“Optional Conversion”), the mandatory conversion by Kodak (“Mandatory Conversion”) and the conversion in the event of a fundamental transaction by the holder at the then applicable conversion rate (“Fundamental Change”). Accordingly, these embedded conversion features were bifurcated from the Convertible Notes and separately accounted for on a combined basis as a single derivative asset or liability. The derivative was in a liability position at March 31, 2021 and was reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivative is being accounted for at fair value with changes in fair value reported in Other income, net in the Consolidated Statement of Operations.
As discussed in Note 6, “Redeemable, Convertible, Preferred Stock”, the Company concluded that the Series B Preferred Stock and the Series C Preferred Stock are considered more akin to a debt-type instrument and that the economic characteristics and risks of the conversion in the event of a Fundamental Change is not considered clearly and closely related to the Series B and Series C Preferred Stock. Accordingly, this embedded conversion feature was bifurcated from both the Series B and Series C Preferred Stock and both are separately accounted for as a single derivative asset or liability. Both derivatives were in a liability position at March 31, 2021 and were reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivatives are being accounted for at fair value with changes in fair value reported in Other income, net in the Consolidated Statement of Operations.
As discussed in Note 6, “Redeemable, Convertible, Preferred Stock”, the Company concluded that the Series A Preferred Stock was considered more akin to a debt-type instrument and that the economic characteristics and risks of the embedded conversion features, except where the conversion price was increased to the liquidation preference, were not considered clearly and closely related to the Series A Preferred Stock. The embedded conversion features not considered clearly and closely related are the conversion at the option of the holder (“Optional Conversion”); the ability of Kodak to automatically convert the stock after the second anniversary of issuance (“Mandatory Conversion”) and the conversion in the event of a fundamental change or reorganization (“Fundamental Change or Reorganization Conversion”). Accordingly, these embedded conversion features were bifurcated from the Series A Preferred Stock and separately accounted for on a combined basis as a single derivative asset or liability. The embedded conversion features were revalued as of February 26, 2021 when the Company repurchased one million of the Series A Preferred Stock and exchanged the remaining one million shares of Series A Preferred Stock for Series B Preferred Stock. The revaluation as of February 26, 2021 resulted in the recognition of $2 million of net expense which was reported in Other income, net in the Consolidated Statement of Operations. With the repurchase and exchange of the shares of the Series A Preferred Stock the embedded conversion features derivative liability expired. The derivative was in a liability position at December 31, 2020 and was reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivative was being accounted for at fair value with changes in fair value being reported in Other income, net in the Consolidated Statement of Operations.
Fair Value
Fair values of Kodak’s foreign currency forward contracts are determined using observable inputs (Level 2 fair value measurements) and are based on the present value of expected future cash flows (an income approach valuation technique) considering the risks involved and using discount rates appropriate for the duration of the contracts. The gross fair value of foreign currency forward contracts in an asset position are reported in Other current assets and the gross fair value of foreign currency forward contracts in a liability position are reported in Other current liabilities in the Consolidated Statement of Financial Position. The gross fair value of forward contracts in an asset position as of March 31, 2021 and December 31, 2020 was $0 million and $1 million, respectively. The gross fair value of foreign currency forward contracts in a liability position as of March 31, 2021 and December 31, 2020 was $2 million and $0 million, respectively.
Transfers between levels of the fair value hierarchy are recognized based on the actual date of the event or change in circumstances that caused the transfer. There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2021.
[27]
The fair value of the embedded conversion features derivatives was calculated using unobservable inputs (Level 3 fair measurements). The value of the embedded derivatives associated with the Convertible Notes and Series A, Series B and Series C Preferred Stock were calculated using a binomial lattice model.
The following tables present the key inputs in the determination of fair value for the embedded conversion features:
Convertible Notes:
|
|
Valuation Date
|
|
|
|
|
|
|
|
February 26,
|
|
|
|
March 31,
|
|
|
2021
|
|
|
|
2021
|
|
|
(Inception)
|
|
Total value of embedded derivative liability ($ millions)
|
|
$
|
11
|
|
|
$
|
12
|
|
Kodak's closing stock price
|
|
$
|
7.87
|
|
|
$
|
8.62
|
|
Expected stock price volatility
|
|
|
70.00
|
%
|
|
|
70.00
|
%
|
Risk free rate
|
|
|
0.96
|
%
|
|
|
0.80
|
%
|
Implied credit spread on the Convertible Notes
|
|
|
18.25
|
%
|
|
|
18.25
|
%
|
Series B Preferred Stock:
|
|
Valuation Date
|
|
|
|
|
|
|
|
February 26,
|
|
|
|
March 31,
|
|
|
2021
|
|
|
|
2021
|
|
|
(Inception)
|
|
Total value of embedded derivative liability ($ millions)
|
|
$
|
1
|
|
|
$
|
1
|
|
Kodak's closing stock price
|
|
$
|
7.87
|
|
|
$
|
8.62
|
|
Expected stock price volatility
|
|
|
70.00
|
%
|
|
|
70.00
|
%
|
Risk free rate
|
|
|
0.96
|
%
|
|
|
0.80
|
%
|
Implied credit spread on the preferred stock
|
|
|
19.75
|
%
|
|
|
19.75
|
%
|
Series C Preferred Stock:
|
|
Valuation Date
|
|
|
|
|
|
|
|
March 30,
|
|
|
February 26,
|
|
|
|
|
|
|
|
2021
|
|
|
2021
|
|
|
|
March 31,
2021
|
|
|
(Inception - Final Sale)
|
|
|
(Inception -
Initial Sale)
|
|
Total value of embedded derivative liability ($ millions)
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Kodak's closing stock price
|
|
$
|
7.87
|
|
|
$
|
8.05
|
|
|
$
|
8.62
|
|
Expected stock price volatility
|
|
|
70.00
|
%
|
|
|
70.00
|
%
|
|
|
70.00
|
%
|
Risk free rate
|
|
|
0.96
|
%
|
|
|
0.94
|
%
|
|
|
0.80
|
%
|
Implied credit spread on the preferred stock
|
|
|
21.75
|
%
|
|
|
21.75
|
%
|
|
|
21.75
|
%
|
Series A Preferred Stock:
|
|
Valuation Date
|
|
|
|
February 26,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Total value of embedded derivative liability ($ millions)
|
|
$
|
11
|
|
|
$
|
9
|
|
Kodak's closing stock price
|
|
$
|
8.62
|
|
|
$
|
8.14
|
|
Expected stock price volatility
|
|
|
137.53
|
%
|
|
|
133.44
|
%
|
Risk free rate
|
|
|
0.07
|
%
|
|
|
0.10
|
%
|
Implied credit spread on the preferred stock
|
|
|
14.02
|
%
|
|
|
11.97
|
%
|
[28]
The Fundamental Change values at issuance were calculated as the difference between the total value of the Convertible Notes, Series B or Series C Preferred Stock, as applicable, and the sum of the net present value of the cash flows if the Convertible Notes are repaid at their maturity date or Series B and Series C Preferred Stock is redeemed on their redemption date and the values of the other embedded derivatives. The Fundamental Change values reduce the value of the embedded conversion features derivative liability. Other than events that alter the likelihood of a fundamental change or reorganization event, the value of the Fundamental Change reflects the value as of the issuance date, amortized for the passage of time.
The fair values of long-term debt (Level 2 fair value measurements) are determined by reference to quoted market prices of similar instruments, if available, or by pricing models based on the value of related cash flows discounted at current market interest rates. The fair values of long-term borrowings were $283 million and $17 million at March 31, 2021 and December 31, 2020, respectively.
The carrying values of cash and cash equivalents, restricted cash and the current portion of long-term debt approximate their fair values at both March 31, 2021 and December 31, 2020.
[29]