Eastman Kodak(US:KODK)2020-11-10 21:15Part I. Financial Information Financial Statements The company reported a significant revenue decline and a net loss of $561 million for the first nine months of 2020, facing substantial liquidity challenges Consolidated Statement of Operations Highlights (in millions, except per share data) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Total Revenues | $732 | $913 | | Gross Profit | $88 | $135 | | Loss from Continuing Operations | $(561) | $(28) | | Net (Loss) Income | $(561) | $178 | | Diluted EPS (Total) | $(11.34) | $3.79 | Consolidated Statement of Financial Position Highlights (in millions) | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $193 | $233 | | Total Current Assets | $622 | $706 | | TOTAL ASSETS | $1,220 | $1,415 | | Total Current Liabilities | $295 | $368 | | Total Liabilities | $943 | $1,134 | | Total Shareholders' Equity | $88 | $99 | Consolidated Statement of Cash Flows Highlights (in millions) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(48) | $(4) | | Net cash (used in) provided by investing activities | $(9) | $315 | | Net cash provided by (used in) financing activities | $10 | $(295) | - The company's ability to continue as a going concern is in substantial doubt due to operating losses, negative cash flow, and upcoming debt maturities2123 Notes to Financial Statements Key disclosures include a going concern warning, the conversion of all convertible notes, a large deferred tax asset valuation allowance, and significant restructuring charges - All outstanding 5.00% Secured Convertible Notes ($100 million principal) were converted into approximately 31.5 million shares of common stock, resulting in a $2 million loss on early extinguishment of debt555660 - A $167 million provision was recorded in Q1 2020 to establish a valuation allowance on deferred tax assets in non-U.S. jurisdictions due to reduced profitability estimates119122 - Restructuring actions incurred charges of $9 million related to eliminating approximately 130 positions and are expected to generate annual cash savings of about $13 million126128129 - The company recognized a significant stock-based compensation expense of approximately $17 million in Q3 2020, primarily from 2.4 million stock options granted on July 27, 2020147149 - Effective January 1, 2020, Kodak changed its organizational structure and reportable segments to Traditional Printing, Digital Printing, Advanced Materials and Chemicals, and Brand158 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 20% revenue decline due to COVID-19, cost-saving measures, the potential $765 million DFC loan, and ongoing liquidity concerns - The COVID-19 pandemic had a material impact on sales, and mitigation efforts like furloughs and pay cuts resulted in approximately $20 million in cost savings194 - The company is exploring a potential $765 million loan from the U.S. International Development Finance Corporation (DFC) to launch Kodak Pharmaceuticals, but approval is not assured192196 - Kodak faces significant liquidity challenges and substantial doubt about its ability to continue as a going concern due to operating losses and upcoming debt maturities in 2021270272 Results of Operations Q3 2020 saw a 20% revenue decline and a significant loss from continuing operations, driven by lower volumes and a large derivative liability charge Q3 2020 vs Q3 2019 Performance (in millions) | Metric | Q3 2020 | Q3 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $252 | $315 | $(63) | -20.0% | | Gross Profit | $31 | $53 | $(22) | -41.5% | | SG&A Expenses | $56 | $48 | $8 | +16.7% | | Loss from Continuing Operations | $(445) | $(10) | $(435) | -4350% | - The increase in SG&A for Q3 2020 was primarily driven by a $17 million increase in stock compensation expense, partially offset by $12 million in cost reductions231 - 'Other charges, net' increased by $426 million in Q3 2020, mainly due to the change in fair value of the derivative liability associated with the Convertible Notes226233 Segment Analysis All business segments experienced revenue declines in Q3 2020 due to the pandemic, with Traditional Printing's profitability significantly impacted Segment Performance - Q3 2020 vs Q3 2019 (in millions) | Segment | Revenue Q3 2020 | Revenue Q3 2019 | Operational EBITDA Q3 2020 | Operational EBITDA Q3 2019 | | :--- | :--- | :--- | :--- | :--- | | Traditional Printing | $146 | $187 | $5 | $21 | | Digital Printing | $56 | $70 | $(3) | $(3) | | Advanced Materials and Chemicals | $44 | $53 | $(6) | $(6) | | Brand | $3 | $3 | $3 | $2 | - Traditional Printing's performance was significantly impacted by volume declines and the absence of a $13 million intellectual property licensing deal that occurred in the prior-year quarter238240 - Despite revenue declines, Digital Printing and Advanced Materials & Chemicals maintained flat Operational EBITDA losses, benefiting from cost reduction efforts246252 Liquidity and Capital Resources The company's liquidity remains challenged with declining cash balances, an upcoming credit facility maturity, and substantial doubt about its going concern status Cash and Liquidity Position (in millions) | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash | $241 | $290 | | Cash held in U.S. | $108 | $72 | | Cash held outside U.S. | $85 | $161 | - The ABL Credit Agreement, which matures May 26, 2021, had $87 million of letters of credit issued and requires the company to maintain Excess Availability of over $13.75 million270285 - In July and August 2020, the company received approximately $29 million in net proceeds from the exercise of stock options290 - The company paid $11 million in aggregate for four quarterly dividends that were in arrears on its Series A Preferred Stock in July 2020288 Controls and Procedures Disclosure controls were deemed ineffective due to a material weakness in internal controls related to the unauthorized exercise of forfeited stock options - A material weakness was identified in internal controls over financial reporting, rendering disclosure controls ineffective as of September 30, 2020294 - The weakness was due to control deficiencies that failed to prevent the unauthorized exercise of forfeited stock options by five former officers and employees in July 2020296 - Remediation efforts are underway, with an expected completion date by December 31, 2020297 Part II. Other Information Legal Proceedings The company faces new class-action lawsuits, shareholder demands, and regulatory investigations following the potential DFC loan announcement - Two securities class-action lawsuits were filed against the company and executives in August 2020 related to the announcement of the potential DFC loan300 - The company is also subject to investigations by several congressional committees and the SEC stemming from the DFC loan announcement302305 - Ongoing litigation in Brazil related to indirect taxes continues, with accruals of approximately $2 million for claims aggregating around $107 million303 Risk Factors Key risks include the uncertainty of the DFC loan, execution challenges of the Pharmaceutical Initiative, and significant stock price volatility - There is no guarantee the potential $765 million DFC loan will be consummated, as it is subject to due diligence and investigations309 - The Pharmaceutical Initiative, if it proceeds, faces significant execution risks, including construction, regulatory approvals, and competition310 - The company's stock price has been extremely volatile following the DFC loan announcement and may continue to experience significant fluctuations311 - Holders of the recently converted notes have sold all 29.9 million shares received, plus an additional 4 million shares, which could continue to impact the stock price312 Unregistered Sales of Equity Securities and Use of Proceeds The company purchased a small number of its own shares to satisfy employee tax obligations but conducted no unregistered equity sales - The company purchased 23,131 shares in September 2020 at an average price of $6.46 per share313 - These purchases were made solely to satisfy tax withholding obligations for employees upon the vesting of restricted stock units and not as part of a formal buyback plan313 Exhibits This section lists filed exhibits, including new stock option agreements and required CEO/CFO certifications under the Sarbanes-Oxley Act - The filing includes new forms of nonqualified stock option award agreements for executives and directors, dated July 27, 2020322 - Certifications from the CEO and CFO as required by Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits322