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EX-32.2 - EX-32.2 CEO SOX CERTIFICATION - EASTMAN KODAK COkodk-ex322_65.htm
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EX-31.2 - EX-31.2 CFO CERTIFICATION - EASTMAN KODAK COkodk-ex312_66.htm
EX-31.1 - EX-31.1 CEO CERTIFICATION - EASTMAN KODAK COkodk-ex311_63.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2016

or

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

For the transition period from            to            

Commission File Number 1-87

 

EASTMAN KODAK COMPANY

(Exact name of registrant as specified in its charter)

 

 

NEW JERSEY

 

16-0417150

(State of incorporation)

 

(IRS Employer

Identification No.)

 

 

 

343 STATE STREET, ROCHESTER, NEW YORK

 

14650

(Address of principal executive offices)

 

(Zip Code)

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

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

Title of each Class

 

Number of Shares Outstanding at

November 3, 2016

 

 

Common Stock, $0.01 par value

 

42,359,022

 

 

 

 

 

 


 

EASTMAN KODAK COMPANY

Form 10-Q

September 30, 2016

Table of Contents

 

 

 

 

 

Page

Part I.—Financial Information

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Consolidated Statement of Operations (Unaudited)

 

3

 

 

Consolidated Statement of Comprehensive (Loss) Income (Unaudited)

 

4

 

 

Consolidated Statement of Financial Position (Unaudited)

 

5

 

 

Consolidated Statement of Cash Flows (Unaudited)

 

6

 

 

Notes to Financial Statements (Unaudited)

 

7

Item 2.

 

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

 

24

 

 

Liquidity and Capital Resources

 

34

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

Part II. —Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

Item 2.

 

Unregistered Sales of Securities and Use of Proceeds

 

38

Item 5.

 

Other Information

 

39

Item 6.

 

Exhibits

 

39

 

 

 

 

 

 

 

Signature

 

40

 

 

Index to Exhibits

 

41

 

 

[2]


 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

(in millions, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

309

 

 

$

342

 

 

$

920

 

 

$

1,021

 

Services

 

 

71

 

 

 

83

 

 

 

219

 

 

 

249

 

Total revenues

 

 

380

 

 

 

425

 

 

 

1,139

 

 

 

1,270

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

244

 

 

 

275

 

 

 

720

 

 

 

835

 

Services

 

 

44

 

 

 

56

 

 

 

141

 

 

 

174

 

Total cost of revenues

 

 

288

 

 

 

331

 

 

 

861

 

 

 

1,009

 

Gross profit

 

 

92

 

 

 

94

 

 

 

278

 

 

 

261

 

Selling, general and administrative expenses

 

 

43

 

 

 

52

 

 

 

133

 

 

 

162

 

Research and development costs

 

 

11

 

 

 

11

 

 

 

30

 

 

 

36

 

Restructuring costs and other

 

 

1

 

 

 

6

 

 

 

12

 

 

 

28

 

Other operating (income) expense, net

 

 

(6

)

 

 

(2

)

 

 

2

 

 

 

-

 

Income from continuing operations before interest expense, other charges, net, reorganization items, net and income taxes

 

 

43

 

 

 

27

 

 

 

101

 

 

 

35

 

Interest expense

 

 

16

 

 

 

16

 

 

 

48

 

 

 

46

 

Other charges, net

 

 

1

 

 

 

3

 

 

 

3

 

 

 

15

 

Reorganization items, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5

 

Income (loss) from continuing operations before income taxes

 

 

26

 

 

 

8

 

 

 

50

 

 

 

(31

)

Provision for income taxes

 

 

4

 

 

 

14

 

 

 

16

 

 

 

27

 

Income (loss) from continuing operations

 

 

22

 

 

 

(6

)

 

 

34

 

 

 

(58

)

Loss from discontinued operations, net of income taxes

 

 

(10

)

 

 

(15

)

 

 

(29

)

 

 

(40

)

Net earnings (loss)

 

 

12

 

 

 

(21

)

 

 

5

 

 

 

(98

)

Less: Net (loss) income attributable to noncontrolling interests

 

 

(4

)

 

 

1

 

 

 

-

 

 

 

6

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO EASTMAN

KODAK COMPANY

 

$

16

 

 

$

(22

)

 

$

5

 

 

$

(104

)

Basic net earnings (loss) per share attributable to Eastman Kodak Company common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.62

 

 

$

(0.17

)

 

$

0.81

 

 

$

(1.53

)

Discontinued operations

 

 

(0.24

)

 

 

(0.36

)

 

 

(0.69

)

 

 

(0.95

)

Total

 

$

0.38

 

 

$

(0.53

)

 

$

0.12

 

 

$

(2.48

)

Diluted net earnings (loss) per share attributable to Eastman Kodak Company common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.60

 

 

$

(0.17

)

 

$

0.80

 

 

$

(1.53

)

Discontinued operations

 

 

(0.23

)

 

 

(0.36

)

 

 

(0.68

)

 

 

(0.95

)

Total

 

$

0.37

 

 

$

(0.53

)

 

$

0.12

 

 

$

(2.48

)

Number of common shares used in basic and diluted net earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42.3

 

 

 

41.9

 

 

 

42.2

 

 

 

41.9

 

Diluted

 

 

42.8

 

 

 

41.9

 

 

 

42.5

 

 

 

41.9

 

 

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

[3]


 

EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(in millions)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

NET INCOME (LOSS)

 

$

12

 

 

$

(21

)

 

$

5

 

 

$

(98

)

Less: Net (loss) income attributable to noncontrolling interests

 

 

(4

)

 

 

1

 

 

 

-

 

 

 

6

 

Net income (loss) attributable to Eastman Kodak Company

 

 

16

 

 

 

(22

)

 

 

5

 

 

 

(104

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

1

 

 

 

(23

)

 

 

10

 

 

 

(27

)

Unrealized losses on available-for-sale securities,

   net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Pension and other postretirement benefit plan obligation activity,

   net of tax

 

 

(1

)

 

 

(3

)

 

 

(149

)

 

 

2

 

Other comprehensive loss, net of tax attributable to Eastman

   Kodak Company

 

 

-

 

 

 

(26

)

 

 

(139

)

 

 

(26

)

COMPREHENSIVE INCOME (LOSS), NET OF TAX ATTRIBUTABLE TO

   EASTMAN KODAK COMPANY

 

$

16

 

 

$

(48

)

 

$

(134

)

 

$

(130

)

 

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

 

 

[4]


 

EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

489

 

 

$

546

 

Receivables, net

 

 

303

 

 

 

350

 

Inventories, net

 

 

280

 

 

 

263

 

Deferred income taxes

 

 

-

 

 

 

22

 

Other current assets

 

 

22

 

 

 

25

 

Current assets held for sale

 

 

143

 

 

 

72

 

Total current assets

 

 

1,237

 

 

 

1,278

 

Property, plant and equipment, net of accumulated depreciation of $365 and $314,

   respectively

 

 

361

 

 

 

394

 

Goodwill

 

 

88

 

 

 

88

 

Intangible assets

 

 

88

 

 

 

119

 

Restricted cash

 

 

37

 

 

 

43

 

Deferred income taxes

 

 

38

 

 

 

23

 

Other long-term assets

 

 

132

 

 

 

122

 

Long-term assets held for sale

 

 

-

 

 

 

71

 

TOTAL ASSETS

 

$

1,981

 

 

$

2,138

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Accounts payable, trade

 

$

175

 

 

$

186

 

Current portion of long-term debt

 

 

8

 

 

 

6

 

Other current liabilities

 

 

205

 

 

 

245

 

Current liabilities held for sale

 

 

35

 

 

 

22

 

Total current liabilities

 

 

423

 

 

 

459

 

Long-term debt, net of current portion

 

 

664

 

 

 

679

 

Pension and other postretirement liabilities

 

 

662

 

 

 

619

 

Other long-term liabilities

 

 

255

 

 

 

271

 

Long-term liabilities held for sale

 

 

-

 

 

 

7

 

Total Liabilities

 

 

2,004

 

 

 

2,035

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

-

 

 

 

-

 

Additional paid in capital

 

 

641

 

 

 

633

 

Treasury stock, at cost

 

 

(7

)

 

 

(5

)

Accumulated deficit

 

 

(278

)

 

 

(283

)

Accumulated other comprehensive loss

 

 

(406

)

 

 

(267

)

Total Eastman Kodak Company shareholders’ (deficit) equity

 

 

(50

)

 

 

78

 

Noncontrolling interests

 

 

27

 

 

 

25

 

Total (deficit) equity

 

 

(23

)

 

 

103

 

TOTAL LIABILITIES AND EQUITY (DEFICIT)

 

$

1,981

 

 

$

2,138

 

 

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

 

 

[5]


 

EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

5

 

 

$

(98

)

Adjustments to reconcile to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

82

 

 

 

113

 

Pension and other postretirement income

 

 

(110

)

 

 

(81

)

Net gain on sales of businesses/assets

 

 

(7

)

 

 

(4

)

Gain on assets acquired for no monetary consideration

 

 

-

 

 

 

(3

)

Non-cash restructuring costs, asset impairments and other charges, net

 

 

20

 

 

 

7

 

Stock based compensation

 

 

6

 

 

 

17

 

Payment of claims

 

 

-

 

 

 

(10

)

Provision for deferred income taxes

 

 

5

 

 

 

8

 

Decrease in receivables

 

 

47

 

 

 

12

 

Increase in inventories

 

 

(9

)

 

 

(40

)

Decrease in liabilities excluding borrowings

 

 

(70

)

 

 

(65

)

Other items, net

 

 

(1

)

 

 

1

 

Total adjustments

 

 

(37

)

 

 

(45

)

Net cash used in operating activities

 

 

(32

)

 

 

(143

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to properties

 

 

(26

)

 

 

(25

)

Proceeds from sales of businesses/assets, net

 

 

10

 

 

 

2

 

Release (funding) of restricted cash

 

 

9

 

 

 

(6

)

Net cash used in investing activities

 

 

(7

)

 

 

(29

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of emergence credit facilities

 

 

(20

)

 

 

(3

)

Payment of contingent consideration related to the sale of a business

 

 

(4

)

 

 

-

 

Net borrowing from (repayment of) VIE borrowings

 

 

4

 

 

 

(1

)

Equity transactions of noncontrolling interests

 

 

2

 

 

 

-

 

Treasury stock purchases

 

 

(2

)

 

 

(1

)

Net cash used in financing activities

 

 

(20

)

 

 

(5

)

Effect of exchange rate changes on cash

 

 

2

 

 

 

(14

)

Net decrease in cash and cash equivalents

 

 

(57

)

 

 

(191

)

Cash and cash equivalents, beginning of period (1)

 

 

547

 

 

 

712

 

Cash and cash equivalents, end of period (1)

 

$

490

 

 

$

521

 

 

(1)

Cash and cash equivalents, beginning of period for the nine months ended September 30, 2016 includes $546 million of cash reported in the Statement of Financial Position and $1 million of cash reported in Current assets held for sale.  Cash and cash equivalents, end of period for the nine months ended September 30, 2016 includes $489 million of cash reported in the Statement of Financial Position and $1 million of cash reported in Current assets held for sale.

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

 

 

[6]


 

EASTMAN KODAK COMPANY

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1: BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

 

BASIS OF PRESENTATION

 

The consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly 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 financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and Current Report on Form 8-K filed on August 9, 2016 to update the 2015 Annual Report on Form 10-K for the reclassification of the Kodak Prosper enterprise inkjet printing business (the “Prosper Business”) as discontinued operations.  The Form 8-K also reflected the presentation of the first quarter 2016 change in segment measure of profit and loss.

 

Kodak is the primary beneficiary of a utilities variable interest entity, RED – Rochester, LLC (“RED”). Therefore, Kodak consolidates RED’s assets, liabilities and results of operations.  Consolidated assets and liabilities of RED are $67 million and $25 million, respectively, as of September 30, 2016 and $69 million and $13 million, respectively, as of December 31, 2015.  RED’s equity in those net assets as of September 30, 2016 and December 31, 2015 is $27 million and $25 million, respectively.  RED’s results of operations are reflected in net (loss) income attributable to noncontrolling interests in the accompanying Consolidated Statement of Operations.  If Kodak was no longer required to consolidate RED, the difference between the carrying value of net assets sold to RED and RED’s equity in those net assets, $19 million as of September 30, 2016, would be recognized as a loss in Kodak’s consolidated statement of operations.

Reclassifications

Certain amounts for prior periods have been reclassified to conform to the current period classification primarily due to the presentation of discontinued operations, assets held for sale and for a change in the segment measure of profitability.  Refer to Note 17, “Segment Information” and Note 18, “Discontinued Operations” for additional information.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.  ASU 2015-17 amends the accounting for income taxes and requires all deferred tax assets and liabilities to be classified as long-term on the consolidated balance sheet. ASU 2015-17 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016 (January 1, 2017 for Kodak), with early adoption permitted in any annual or interim period. ASU 2015-17 may be adopted either prospectively or retrospectively. Kodak early adopted ASU 2015-17 effective September 30, 2016, prospectively.  Adoption resulted in a $19 million decrease in current deferred income tax assets, with a corresponding $19 million increase in long-term deferred income tax assets in Kodak’s Consolidated Statement of Financial Position at September 30, 2016.  

 

In April 2015, the FASB issued ASU 2015-03, Imputation of Interest (Sub-Topic 835.30): Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15 clarifying the application of this guidance to line of credit arrangements.  The amendments in the ASUs are effective retrospectively for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for Kodak). The adoption of this guidance did not have a material impact on Kodak’s Consolidated Financial Statements.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory.  ASU 2016-16 requires the recognition of the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs.  The new standard is effective on a modified retrospective basis for annual reporting periods beginning after December 15, 2017, (January 1, 2018 for Kodak) including interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance (January 1, 2017 for Kodak).  Kodak is currently evaluating the impact of this ASU.

 

[7]


 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  ASU 2016-15 provides clarification with respect to classification of several cash flow issues on the Statement of Cash Flows including debt prepayment or extinguishment costs, proceeds from the settlement of insurance claims, and distributions received from equity method investees.   The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 (January 1, 2018 for Kodak).  Early adoption is permitted. Kodak does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  In addition, the ASU requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses.  The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 (January 1, 2020 for Kodak).  Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018 (January 1, 2019 for Kodak).  Kodak is currently evaluating the impact of this ASU.

 

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016 (January 1, 2017 for Kodak).  Early adoption is permitted.  Kodak does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets and eliminates certain real estate-specific provisions. The new leasing standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 (January 1, 2019 for Kodak).  Early adoption is permitted.  Kodak is currently evaluating the impact of this ASU.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.  ASU 2016-01 primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the ASU all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings.  In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The classification and measurement guidance will be effective for Kodak beginning January 1, 2018, including interim periods within those fiscal years.  Kodak does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

 In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and most industry-specific guidance.  The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In July 2015, the FASB deferred the effective date of ASU 2014-09. In 2016 the FASB issued ASU 2016-08 and ASUs 2016-10 through 12 clarifying guidance regarding principle vs agent considerations, identification of performance obligations and analysis of licensing transactions. The new revenue standards are collectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (January 1, 2018 for Kodak) and allow either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application recognized at the date of initial application.  Kodak is currently evaluating the adoption alternatives and impact of these ASUs.

 

In August 2014, the FASB issued ASU No.2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU No. 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern.  ASU No. 2014-15 is effective for fiscal years ending after December 15, 2016 (December 31, 2016 for Kodak), and interim periods within fiscal years beginning after December 15, 2016 (January 1, 2017 for Kodak). The adoption of this guidance is not expected to have a material impact on the Company’s financial disclosures.

 

 

NOTE 2: RECEIVABLES, NET

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2016

 

 

2015

 

Trade receivables

 

$

265

 

 

$

300

 

Miscellaneous receivables

 

 

38

 

 

 

50

 

Total (net of allowances of $11 and $10 as of September 30, 2016

   and December 31, 2015, respectively)

 

$

303

 

 

$

350

 

[8]


 

 

Approximately $25 million and $28 million of the total trade receivable amounts as of September 30, 2016 and December 31, 2015, respectively, will potentially be settled through customer deductions in lieu of cash payments. Such deductions represent rebates owed to customers and are included in Other current liabilities in the accompanying Consolidated Statement of Financial Position.

 

 

NOTE 3: INVENTORIES, NET

 

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2016

 

 

2015

 

Finished goods

 

$

160

 

 

$

141

 

Work in process

 

 

62

 

 

 

61

 

Raw materials

 

 

58

 

 

 

61

 

Total

 

$

280

 

 

$

263

 

 

 

NOTE 4: INTANGIBLE ASSETS

The gross carrying amount and accumulated amortization by major intangible asset category as of September 30, 2016 and December 31, 2015 were as follows:

 

 

 

September 30, 2016

(in millions)

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted-Average

Amortization Period

Technology-based

 

$

75

 

 

$

44

 

 

$

31

 

 

2 years

Kodak trade name

 

 

40

 

 

 

-

 

 

 

40

 

 

Indefinite life

Customer-related

 

 

26

 

 

 

11

 

 

 

15

 

 

6 years

Other

 

 

2

 

 

 

-

 

 

 

2

 

 

22 years

Total

 

$

143

 

 

$

55

 

 

$

88

 

 

 

 

 

 

December 31, 2015

(in millions)

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted-Average

Amortization Period

Technology-based

 

$

83

 

 

$

38

 

 

$

45

 

 

3 years

Kodak trade name

 

 

46

 

 

 

-

 

 

 

46

 

 

Indefinite life

Customer-related

 

 

37

 

 

 

11

 

 

 

26

 

 

7 years

Other

 

 

2

 

 

 

-

 

 

 

2

 

 

21 years

Total

 

$

168

 

 

$

49

 

 

$

119

 

 

 

 

During the first quarter of 2016, Kodak updated its impairment analysis of the Kodak trade name due to the increased probability of selling its Prosper business.  Based on the results of Kodak’s analysis, the carrying value of the Kodak trade name exceeded its fair value.  The pre-tax trade name impairment charge of $5 million is included in Other operating (income) expense, net in the Consolidated Statement of Operations.

Due to the exit of its position in silver metal mesh touch screen development in the first quarter of 2016, Kodak concluded that the carrying value of intangible assets associated with those operations exceeded their fair value and recorded a pre-tax impairment charge of $8 million, which is included in Other operating (income) expense, net in the Consolidated Statement of Operations.

Amortization expense related to intangible assets was $4 million and $14 million for the three and nine months ended September 30, 2016, respectively, and $5 million and $15 million for the three and nine months ended September 30, 2015, respectively.

[9]


 

Estimated future amortization expense related to intangible assets that are currently being amortized as of September 30, 2016 is as follows:

 

(in millions)

 

 

 

 

Q4 2016

 

$

4

 

2017

 

 

16

 

2018

 

 

12

 

2019

 

 

5

 

2020

 

 

4

 

2021 and thereafter

 

 

7

 

Total

 

$

48

 

 

NOTE 5: SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

Debt and related maturities and interest rates were as follows at September 30, 2016 and December 31, 2015:

 

 

(in millions)

 

 

 

 

 

 

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

Type

 

Maturity

 

Weighted-Average

Effective Interest Rate

 

 

Carrying Value

 

 

Carrying Value

 

Current portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term note

 

2017

 

 

7.50%

 

 

$

1

 

 

$

4

 

 

 

VIE credit facility

 

2017

 

 

3.50%

 

 

 

4

 

 

 

 

 

 

Capital leases

 

Various

 

Various

 

 

 

3

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

6

 

Non-current portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term note

 

2019

 

 

7.50%

 

 

 

396

 

 

 

400

 

 

 

Term note

 

2020

 

 

11.08%

 

 

 

258

 

 

 

270

 

 

 

VIE term loan

 

2035

 

 

6.07%

 

 

 

3

 

 

 

3

 

 

 

Capital leases

 

Various

 

Various

 

 

 

7

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

664

 

 

 

679

 

 

 

 

 

 

 

 

 

 

 

$

672

 

 

$

685

 

 

 

Senior Secured Second Lien Term Credit Agreement Note Repurchase

In accordance with the modified Dutch auction procedures in the Senior Secured Second Lien Term Credit Agreement, Kodak offered to repurchase up to $25 million of second lien term loans within a price range of 97% to 98.5% of par.  As a result of this auction process, on September 14, 2016 Kodak repurchased an aggregate of $13 million of second lien term loans at a price of 98% of par, representing all second lien term loans with respect to which bids were received at prices within the range.  The repurchased second lien term loans were automatically cancelled upon the repurchase pursuant to the terms of the Senior Secured Second Lien Term Credit Agreement.

 

Senior Secured First Lien Term Credit Agreement Prepayment

On July 7, 2016, Kodak prepaid $5 million of principal under the Senior Secured First Lien Term Credit Agreement from proceeds received from the sale of a business.  Under the terms of the Senior Secured First Lien Term Credit Agreement, the prepayment was applied first to the installment principal payments of $4 million due over the next twelve months, then ratably to the remaining scheduled payments.  The next scheduled installment principal payment is not due until September 30, 2017.  

 

Amended and Restated Credit Agreement

On May 26, 2016, the Company and certain of its domestic subsidiaries (the “Subsidiary Guarantors”) entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement” or “ABL Credit Agreement”) with the lenders party thereto (the “Lenders”), Bank of America, N.A., as administrative and collateral agent, and Bank of America, N.A. and JPMorgan Chase Bank, N.A., as joint lead arrangers and joint bookrunners, which amended and restated the existing Asset Based Revolving Credit Agreement, dated as of September 3, 2013 (the “Prior Credit Agreement”).  Each of the capitalized but undefined terms used in the context of describing the Amended Credit Agreement has the meaning ascribed to such term in the Amended Credit Agreement.  

 

The Amended Credit Agreement decreased the aggregate amount of commitments from $200 million to $150 million and extended the maturity date to the earlier of May 26, 2021 or the date that is 90 days prior to the earliest scheduled maturity date of any of the Company’s outstanding term loans

[10]


 

or refinancings thereof, of which the earliest maturity date is currently September 3, 2019. The Amended Credit Agreement, among other things, lowered reserve requirements by eliminating the Availability Block and removed the ability to use Qualified Cash to support Excess Availability.

 

The Amended Credit Agreement limits, among other things and subject to certain exceptions, the Company’s and the Subsidiary Guarantors’ ability to (i) incur Debt, (ii) incur or create Liens, (iii) Dispose of assets, (iv) make Restricted Payments and (v) make Investments. In addition to other customary affirmative covenants, the Amended Credit Agreement provides for a periodic delivery by the Company of its various financial statements as set forth in the Amended Credit Agreement.  Events of Default under the Amended Credit Agreement include, among others, failure to pay any loan, interest or other amounts when due, the occurrence of breach of covenants and a change of control of the Company. Upon an Event of Default, the applicable lenders may declare the outstanding obligations under the Amended Credit Agreement to be immediately due and payable and exercise other rights and remedies provided for in the Amended Credit Agreement.

 

Each existing direct or indirect U.S. subsidiary of the Company (other than Immaterial Subsidiaries, Unrestricted Subsidiaries and certain other subsidiaries) has reaffirmed its unconditional guarantee (and any such future subsidiaries must provide an unconditional guarantee) of the obligations of the Company under the Amended Credit Agreement. Obligations under the Amended Credit Agreement are secured by: (i) a first priority lien on cash, accounts receivable, inventory, machinery and equipment (the “ABL Priority Collateral”) and (ii) a third priority lien on all assets of the Company and the Subsidiary Guarantors, other than the ABL Priority Collateral, including respectively, on 100% of the stock of material U.S. subsidiaries and 65% of the stock of material foreign subsidiaries.

 

The Lenders will make available asset-based revolving loans (the “ABL Loans”) and letters of credit in an aggregate amount of up to $150 million, subject to the Borrowing Base.  The Company has issued approximately $118 million of letters of credit under the Amended Credit Agreement as of September 30, 2016.  Under the Amended Credit Agreement’s borrowing base calculation, the Company had approximately $28 million of Excess Availability as of September 30, 2016.  Availability is subject to the borrowing base calculation, reserves and other limitations.

 

The ABL Loans bear interest at the rate of LIBOR plus 2.25%-2.75% per annum or Base Rate plus 1.25%-1.75% per annum based on Excess Availability.  

 

Excess Availability is equal to the sum of (i) 85% of the amount of the Eligible Receivables less a Dilution Reserve, (ii) the lesser of 85% of Net Orderly Liquidation Value or 75% of the Eligible Inventory (iii) the lesser of 75% of Net Orderly Liquidation Value of Eligible Equipment or $20 million, as of September 30, 2016 (which $20 million decreases by $1 million per quarter) and (iv) Eligible Cash less (a) Rent and Charges Reserves, (b) Principal Outstanding and (c) Outstanding Letters of Credit.

 

Under the Amended Credit Agreement, Kodak is required to maintain a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 when Excess Availability is less than 12.5% of lender commitments.  If Excess Availability falls below 12.5% of lender commitments ($18.75 million as of September 30, 2016), Kodak may, in addition to the requirement to be in compliance with the minimum Fixed Charge Coverage Ratio, become subject to cash dominion control.

 

As of September 30, 2016, Kodak had funded $23 million to the Eligible Cash account, held with the Amended Credit Agreement administrative agent, which is classified as Restricted Cash in the Consolidated Statement of Financial Position supporting the Excess Availability amount.  Since Excess Availability was greater than 12.5% of lender commitments at September 30, 2016, Kodak is not required to have a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0.  As of September 30, 2016 Kodak was in compliance with all the covenants under the Amended Credit Agreement.  

 

NOTE 6: COMMITMENTS AND CONTINGENCIES

As of September 30, 2016, the Company had outstanding letters of credit of $118 million issued under the Amended Credit Agreement, as well as bank guarantees and letters of credit of $6 million, surety bonds in the amount of $18 million, and restricted cash and deposits of $50 million, primarily to support compliance with the Excess Availability threshold under the Amended Credit Agreement, to ensure the payment of possible casualty and workers’ compensation claims, environmental liabilities, legal contingencies, rental payments and to support various customs, tax and trade activities. The restricted cash and deposits are reflected in Restricted cash, Other current assets and Other long-term assets in the Consolidated Statement of Financial Position.

Kodak’s Brazilian operations are involved in various litigation matters 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 is disputing these matters and intends 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 September 30, 2016, 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 $56 million.

[11]


 

In connection with assessments in Brazil, local regulations may require Kodak to post security for a portion of the amounts in dispute. As of September 30, 2016, Kodak has posted security composed of $7 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 $74 million.  Generally, any encumbrances on the Brazilian assets would be removed to the extent the matter is resolved in Kodak's favor.

Kodak is involved in various lawsuits, claims, investigations, remediation and proceedings, including commercial, customs, employment, environmental, 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 any of these matters, individually or collectively, will have a material adverse effect on its financial position 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

EKC guarantees obligations to third parties for some of its consolidated subsidiaries. The maximum amount guaranteed is $14 million and the outstanding amount for those guarantees is $5 million.

In connection with the settlement of certain of the Company’s historical environmental liabilities at Eastman Business Park, 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 five years after the original warranty period. Kodak provides repair services and routine maintenance under these arrangements. Kodak has not separated the extended warranty revenues and costs from the routine maintenance service revenues and costs, as it is not practicable to do so. Therefore, these revenues and costs have been aggregated in the discussion that follows. The change in Kodak’s deferred revenue balance in relation to these extended warranty and maintenance arrangements from December 31, 2015 to September 30, 2016, 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, 2015

 

$

26

 

New extended warranty and maintenance arrangements in 2016

 

 

125

 

Recognition of extended warranty and maintenance arrangement revenue in 2016

 

 

(127

)

Deferred revenue on extended warranties as of September 30, 2016

 

$

24

 

 

 

NOTE 8:  OTHER OPERATING (INCOME) EXPENSE, NET

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions)

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

(Income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairments (1) (2) (3) (4)

 

$

-

 

 

$

-

 

 

$

25

 

 

$

6

 

Legal settlements (5) (6)

 

 

(6

)

 

 

-

 

 

 

(16

)

 

 

-

 

Gain on sale of assets (7)

 

 

-

 

 

 

-

 

 

 

(7

)

 

 

(5

)

Gain recognized on assets acquired for no monetary consideration (8)

 

 

-

 

 

 

(3

)

 

 

-

 

 

 

(3

)

Other

 

 

-

 

 

 

1

 

 

 

-

 

 

 

2

 

Total

 

$

(6

)

 

$

(2

)

 

$

2

 

 

$

-

 

[12]


 

 

 

(1)

In the first quarter of 2016, due to the exit of its position in silver metal mesh touch screen development, Kodak concluded that the carrying value of property, plant and equipment associated with those operations exceeded their fair value.  Kodak recorded pre-tax impairment charges in the nine months ended September 30, 2016 of $12 million.

(2)

In the first quarter of 2016, Kodak recorded an impairment charge of $8 million related to silver metal mesh touch screen intangible assets.  Refer to Note 4, “Intangible Assets.”

(3)

In the first quarter of 2016, Kodak recorded an impairment charge of $5 million related to the Kodak trade name.  Refer to Note 4, “Intangible Assets.”

(4)

In the first quarter of 2015, due to the change in Kodak’s reporting units and the delay in commercializing new technologies in the Micro 3D Printing reporting unit, Kodak concluded the carrying value of the Micro 3D Printing reporting unit exceeded its implied fair value and recorded a goodwill impairment charge of $6 million representing the entire amount of goodwill for this reporting unit.

(5)

In the first quarter of 2016, Kodak received $10 million representing net litigation proceeds from DuPont.

(6)

In the third quarter of 2016, Kodak settled a legal contingency and reduced the associated reserve by $6 million.

(7)

On June 30, 2016, Kodak sold certain assets of its brand protection business to eApeiron Solutions Inc. in exchange for cash consideration of approximately $6 million and an equity investment of 19.9%.  Kodak accounts for this investment under the equity method of accounting.  Kodak recognized a gain of approximately $7 million on this transaction.

(8)

Refer to Note 17, “Segment Information”, footnote 7 to the table entitled, “Segment Operational EBITDA from Consolidated Earnings (Loss) from Continuing Operations before Income Taxes”.

 

 

 

NOTE 9: OTHER CHARGES, NET

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions)

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Loss on foreign exchange translation

 

$

1

 

 

$

3

 

 

$