Quarterly Report


 

 

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 June 30, 2017

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, a smaller reporting company, or an emerging growth company.

See definition of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of August 1, 2017, the registrant had 42,489,231 shares of common stock, $0.01 par value per share, outstanding.

[1]


 

EASTMAN KODAK COMPANY

Form 10-Q

June 30, 2017

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

 

22

 

 

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

 

37

Item 2.

 

Unregistered Sales of Securities and Use of Proceeds

 

37

Item 5.

 

Other Information

 

37

Item 6.

 

Exhibits

 

37

 

 

 

 

 

 

 

Signature

 

38

 

 

Index to Exhibits

 

39

 

 

[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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

306

 

 

$

342

 

 

$

586

 

 

$

639

 

Services

 

 

75

 

 

 

81

 

 

 

152

 

 

 

161

 

Total revenues

 

 

381

 

 

 

423

 

 

 

738

 

 

 

800

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

240

 

 

 

261

 

 

 

462

 

 

 

497

 

Services

 

 

50

 

 

 

55

 

 

 

102

 

 

 

108

 

Total cost of revenues

 

 

290

 

 

 

316

 

 

 

564

 

 

 

605

 

Gross profit

 

 

91

 

 

 

107

 

 

 

174

 

 

 

195

 

Selling, general and administrative expenses

 

 

53

 

 

 

58

 

 

 

106

 

 

 

103

 

Research and development costs

 

 

15

 

 

 

16

 

 

 

30

 

 

 

31

 

Restructuring costs and other

 

 

11

 

 

 

7

 

 

 

18

 

 

 

11

 

Other operating expense (income), net

 

 

2

 

 

 

(6

)

 

 

12

 

 

 

8

 

Earnings from continuing operations before interest

   expense, other (income) charges, net and income

   taxes

 

 

10

 

 

 

32

 

 

 

8

 

 

 

42

 

Interest expense

 

 

8

 

 

 

16

 

 

 

16

 

 

 

32

 

Other (income) charges, net

 

 

(9

)

 

 

1

 

 

 

(29

)

 

 

2

 

Earnings from continuing operations before income taxes

 

 

11

 

 

 

15

 

 

 

21

 

 

 

8

 

Provision for income taxes

 

 

4

 

 

 

6

 

 

 

7

 

 

 

13

 

Earnings (loss) from continuing operations

 

 

7

 

 

 

9

 

 

 

14

 

 

 

(5

)

Loss from discontinued operations, net of income taxes

 

 

(3

)

 

 

(1

)

 

 

(3

)

 

 

(2

)

Net earnings (loss)

 

 

4

 

 

 

8

 

 

 

11

 

 

 

(7

)

Less: Net income attributable to noncontrolling interests

 

 

 

 

 

1

 

 

 

 

 

 

4

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO EASTMAN

   KODAK COMPANY

 

$

4

 

 

$

7

 

 

$

11

 

 

$

(11

)

Basic net (loss) earnings per share attributable to

   Eastman Kodak Company common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.05

 

 

$

0.19

 

 

$

0.09

 

 

$

(0.21

)

Discontinued operations

 

 

(0.07

)

 

 

(0.02

)

 

 

(0.07

)

 

 

(0.05

)

Total

 

$

(0.02

)

 

$

0.17

 

 

$

0.02

 

 

$

(0.26

)

Diluted net (loss) earnings per share attributable to

   Eastman Kodak Company common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.05

 

 

$

0.18

 

 

$

0.09

 

 

$

(0.21

)

Discontinued operations

 

 

(0.07

)

 

 

(0.02

)

 

 

(0.07

)

 

 

(0.05

)

Total

 

$

(0.02

)

 

$

0.16

 

 

$

0.02

 

 

$

(0.26

)

Number of common shares used in basic and diluted net

   (loss) earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42.5

 

 

 

42.2

 

 

 

42.5

 

 

 

42.2

 

Diluted

 

 

42.7

 

 

 

42.6

 

 

 

42.7

 

 

 

42.2

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

NET INCOME (LOSS)

 

$

4

 

 

$

8

 

 

$

11

 

 

$

(7

)

Less: Net income attributable to noncontrolling interests

 

 

 

 

 

1

 

 

 

 

 

 

4

 

Net income (loss) attributable to Eastman Kodak Company

 

 

4

 

 

 

7

 

 

 

11

 

 

 

(11

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

1

 

 

 

14

 

 

 

9

 

Pension and other postretirement benefit plan obligation activity,

   net of tax

 

 

(3

)

 

 

(2

)

 

 

(6

)

 

 

(148

)

Other comprehensive (loss) income, net of tax attributable to Eastman

   Kodak Company

 

 

(3

)

 

 

(1

)

 

 

8

 

 

 

(139

)

COMPREHENSIVE INCOME (LOSS), NET OF TAX ATTRIBUTABLE

  TO EASTMAN KODAK COMPANY

 

$

1

 

 

$

6

 

 

$

19

 

 

$

(150

)

 

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

 

 

[4]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

370

 

 

$

434

 

Receivables, net

 

 

298

 

 

 

311

 

Inventories, net

 

 

313

 

 

 

271

 

Other current assets

 

 

23

 

 

 

23

 

Total current assets

 

 

1,004

 

 

 

1,039

 

Property, plant and equipment, net of accumulated depreciation of $376 and $343,

   respectively

 

 

320

 

 

 

342

 

Goodwill

 

 

88

 

 

 

88

 

Intangible assets, net

 

 

108

 

 

 

121

 

Restricted cash

 

 

11

 

 

 

36

 

Deferred income taxes

 

 

42

 

 

 

35

 

Other long-term assets

 

 

120

 

 

 

115

 

TOTAL ASSETS

 

$

1,693

 

 

$

1,776

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Accounts payable, trade

 

$

177

 

 

$

200

 

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

 

 

7

 

 

 

6

 

Other current liabilities

 

 

212

 

 

 

211

 

Total current liabilities

 

 

396

 

 

 

417

 

Long-term debt, net of current portion

 

 

404

 

 

 

405

 

Pension and other postretirement liabilities

 

 

568

 

 

 

603

 

Other long-term liabilities

 

 

224

 

 

 

268

 

Total Liabilities

 

 

1,592

 

 

 

1,693

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

160

 

 

156

 

 

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

Additional paid in capital

 

 

636

 

 

 

641

 

Treasury stock, at cost

 

 

(8

)

 

 

(8

)

Accumulated deficit

 

 

(257

)

 

 

(268

)

Accumulated other comprehensive loss

 

 

(430

)

 

 

(438

)

Total shareholders’ deficit

 

 

(59

)

 

 

(73

)

TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND DEFICIT

 

$

1,693

 

 

$

1,776

 

 

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

 

 

[5]


EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in millions)

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

11

 

 

$

(7

)

Adjustments to reconcile to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

41

 

 

 

57

 

Pension income

 

 

(59

)

 

 

(72

)

Change in fair value of embedded conversion features derivative liability

 

 

(36

)

 

 

 

Prosper asset remeasurement

 

 

12

 

 

 

 

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

 

 

10

 

 

 

26

 

Net gain on sales of assets/businesses

 

 

(2

)

 

 

(7

)

Stock based compensation

 

 

5

 

 

 

3

 

Provision for deferred income taxes

 

 

1

 

 

 

5

 

Decrease in receivables

 

 

26

 

 

 

35

 

Increase in inventories

 

 

(40

)

 

 

(22

)

Decrease in trade payables

 

 

(29

)

 

 

(9

)

Decrease in liabilities excluding borrowings and trade payables

 

 

(21

)

 

 

(37

)

Other items, net

 

 

7

 

 

 

(2

)

Total adjustments

 

 

(85

)

 

 

(23

)

Net cash used in operating activities

 

 

(74

)

 

 

(30

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to properties

 

 

(17

)

 

 

(12

)

Proceeds from sales of assets/businesses, net

 

 

2

 

 

 

10

 

Proceeds from sales of marketable securities

 

 

1

 

 

 

 

Net cash used in investing activities

 

 

(14

)

 

 

(2

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of emergence credit facilities

 

 

 

 

 

(2

)

Repayment of capital leases

 

 

(2

)

 

 

 

Payment of contingent consideration related to the sale of a business

 

 

 

 

 

(4

)

Equity transactions of noncontrolling interests

 

 

 

 

 

(1

)

Preferred stock dividend payments

 

 

(5

)

 

 

 

Treasury stock purchases

 

 

 

 

 

(1

)

Net cash used in financing activities

 

 

(7

)

 

 

(8

)

Effect of exchange rate changes on cash

 

 

6

 

 

 

2

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(89

)

 

 

(38

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

478

 

 

 

600

 

Cash, cash equivalents and restricted cash, end of period

 

$

389

 

 

$

562

 

 

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 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, 2016.

 

Reclassifications

Certain amounts for prior periods have been reclassified to conform to the current period classification due to changes to Kodak’s organization structure effective January 1, 2017 and April 1, 2017 and a change in the presentation of discontinued operations and assets held for sale.  In addition to the changes in segment reporting under the new organization structure, solvent recovery income for the Consumer and Film segment previously reported in Cost of Revenues is reported in Revenues and there is a change in the segment measure of profitability.  Refer to Note 20, “Segment Information” and Note 21, “Discontinued Operations” for additional information.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2017-09, Compensation—Stock Compensation (Topic 718) — Scope of Modification Accounting, to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. The ASU is effective prospectively for annual and interim periods beginning after December 15, 2017 (January 1, 2018 for Kodak). Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued.  Kodak early adopted ASU 2017-09 effective April 1, 2017.  The adoption of this guidance had no impact on Kodak’s Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU No: 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.  The ASU simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. The ASU requires entities to calculate a goodwill impairment as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  The same one-step impairment test applies to goodwill at all reporting units, even those with zero or negative carrying amounts. The ASU requires entities to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The ASU is effective prospectively for annual periods beginning after December 15, 2019, (January 1, 2020 for Kodak) with early adoption permitted for goodwill impairment tests performed after January 1, 2017.  Kodak early adopted ASU 2017-04 effective January 1, 2017.  The adoption of this guidance had no impact on Kodak’s Consolidated Financial Statements.  As of the last goodwill assessment date, December 31, 2016, the Unified Workflow Solutions reporting unit had a negative carrying value.  Total goodwill assigned to the Unified Workflow Solutions reporting unit is $6 million.  

 

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash.  ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows.  As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The ASU requires changes in the Company’s restricted cash to be classified as either operating activities, investing activities or financing activities in the Consolidated Statement of Cash Flows, depending on the nature of the activities that gave rise to the restriction.  The new standard is effective 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 in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period.  Kodak early adopted ASU 2016-18 effective January 1, 2017 which resulted in a decrease of $6 million in net cash flows provided by investing activities from what was previously reported for the six-month period ended June 30, 2016.

 

[7]


In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash P ayments.  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 re ceived 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).  Kodak early adopted ASU 2016-15 retrospectively effect ive January 1, 2017.  The adoption of this guidance had no impact on Kodak’s Consolidated Financial Statements.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): 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 early adopted ASU 2016-16 on a modified retrospective basis during the first quarter of 2017.  The adoption of this guidance had no impact on Kodak’s Consolidated Financial Statements.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715):  Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  ASU 2017-07 requires entities to report the service cost component in the same line item(s) as other compensation costs arising from services rendered during the period and to report all other components of net benefit costs outside a subtotal of income from operations.  In addition, the ASU allows only the service cost component to be eligible for capitalization when applicable.  ASU 2017-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (January 1, 2018 for Kodak); retrospective application is required for the presentation of the service cost and other cost components however the restrictions on the capitalization eligibility will be applied prospectively from the date of adoption.  The components of net benefit cost are shown in Note 14, “Retirement Plans and Other Postretirement benefits”.   The guidance will impact presentation in the Consolidated Financial Statements and the capitalization of costs to inventory.  The current presentation of the service cost component is consistent with the requirements of the new standard.  Upon adoption, the other components (which are currently being presented within Cost of revenues, Selling and general administrative expenses and Research and development costs) are expected to be presented within Other (income) charges, net.  The segment profit measure currently includes only the service cost and amortization of prior service credits components of net periodic pension costs (refer to Note 20, “Segment Information”).  

 

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.  ASU 2017-05 defines in-substance nonfinancial assets, provides guidance with respect to accounting for partial sales of nonfinancial assets and conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard (Topic 606 as described below).  ASU 2017-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (January 1, 2018 for Kodak) and allows 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 expects to apply the modified retrospective adoption approach and expects that application of this standard will not have a significant 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 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 (Topic 825): 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.

 

[8]


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 recogn ize 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 addition, the standard requires disclosure of the na ture, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  In July 2015, the FASB deferred the effective date of ASU 2014-09. In 2016 the FASB issued ASU 2016-08, ASUs 2016-10 through 12 and ASU 2016-20 clarifyi ng guidance regarding principle vs agent considerations, identification of performance obligations, analysis of licensing transactions, impairment considerations and disclosures. The new revenue standards are collectively effective for fiscal years, and in terim 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 appl ication recognized at the date of initial application.  Kodak currently anticipates applying the modified retrospective adoption approach.  To date, the Company has not yet identified any material changes in the timing of revenue recognition when consideri ng the amended accounting guidance, however, the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date.  Kodak is in the process of implementing appropriate changes to the business pro cesses, systems and controls to support recognition and disclosure under the new standard. Training of employees on the impacts of the standard and changes to processes, systems and controls will continue throughout 2017.

 

 

NOTE 2: CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Statement of Financial Position that sums to the total of such amounts shown in the Statement of Cash Flows:

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

Cash and cash equivalents

 

$

370

 

 

$

434

 

Restricted cash included in Other current assets

 

 

8

 

 

 

8

 

Long-term restricted cash

 

 

11

 

 

 

36

 

Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows

 

$

389

 

 

$

478

 

 

Restricted cash included in Other current assets on the Statement of Financial Position primarily represents amounts which support hedging activities.

 

Long-term restricted cash as of June 30, 2017 and December 31, 2016 includes $6 million and $7 million, respectively, of security posted related to Brazilian legal contingencies.  Long-term restricted cash as of December 31, 2016 also included $25 million supporting compliance with the Excess Availability threshold under the Amended and Restated Credit Agreement (“Amended Credit Agreement”).  During the second quarter of 2017, the amount of outstanding letters of credit issued under the Amended Credit Agreement was reduced by $20 million, which had a corresponding reduction in the amount of long-term restricted cash necessary to support compliance with the Excess Availability threshold.  See Note 8, “Commitments and Contingencies” and “Sources of Liquidity” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

 

NOTE 3: RECEIVABLES, NET

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

Trade receivables

 

$

259

 

 

$

277

 

Miscellaneous receivables

 

 

39

 

 

 

34

 

Total (net of allowances of $9 as of June 30, 2017 and $8 as of December 31, 2016)

 

$

298

 

 

$

311

 

 

Approximately $23 million and $26 million of the total trade receivable amounts as of June 30, 2017 and December 31, 2016, 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.

 

 

[9]


NOTE 4: INVENTORIES, NET

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

Finished goods

 

$

177

 

 

$

149

 

Work in process

 

 

68

 

 

 

57

 

Raw materials

 

 

68

 

 

 

65

 

Total

 

$

313

 

 

$

271

 

 

 

NOTE 5: INTANGIBLE ASSETS

 

The gross carrying amount and accumulated amortization by major asset category as of June 30, 2017 and December 31, 2016 were as follows:

 

 

 

June 30, 2017

(in millions)

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted-Average

Amortization Period

Technology-based

 

$

122

 

 

$

70

 

 

$

52

 

 

6 years

Kodak trade name

 

 

40

 

 

 

-

 

 

 

40

 

 

Indefinite life

Customer-related

 

 

26

 

 

 

12

 

 

 

14

 

 

6 years

Other

 

 

2

 

 

 

-

 

 

 

2

 

 

21 years

Total

 

$

190

 

 

$

82

 

 

$

108

 

 

 

 

 

 

 

December 31, 2016

(in millions)

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted-Average

Amortization Period

Technology-based

 

$

122

 

 

$

57

 

 

$

65

 

 

6 years

Kodak trade name

 

 

40

 

 

 

-

 

 

 

40

 

 

Indefinite life

Customer-related

 

 

26

 

 

 

12

 

 

 

14

 

 

6 years

Other

 

 

2

 

 

 

-

 

 

 

2

 

 

21 years

Total

 

$

190

 

 

$

69

 

 

$

121

 

 

 

 

Amortization expense related to intangible assets was $5 million for both the three months ended June 30, 2017 and 2016 and $9 million and $10 million for the six months ended June 30, 2017 and 2016, respectively.

 

During the first quarter of 2017, Kodak recorded $4 million to adjust the Prosper intangible asset carrying value to the amount that would have been recorded had the Prosper intangible assets been continuously classified as held and used.  Refer to Note 10, “Other Operating Expense (Income), net and Note 21, “Discontinued Operations”.

 

Estimated future amortization expense related to intangible assets that are currently being amortized as of June 30, 2017, is as follows:

 

(in millions)

 

 

 

 

Q3-Q4 2017

 

$

10

 

2018

 

 

16

 

2019

 

 

9

 

2020

 

 

8

 

2021

 

 

7

 

2022 and thereafter

 

 

18

 

Total

 

$

68

 

 

 

[10]


NOTE 6: OTHER CURRENT LIABILITIES

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

Employee related liabilities

 

$

48

 

 

$

49

 

Deferred revenue

 

 

30

 

 

 

32

 

Customer rebates

 

 

23

 

 

 

27

 

Deferred consideration on disposed businesses

 

 

17

 

 

 

7

 

Restructuring liabilities

 

 

12

 

 

 

8

 

Workers compensation

 

 

9

 

 

 

8

 

Other

 

 

73

 

 

 

80

 

Total

 

$

212

 

 

$

211

 

 

 

NOTE 7: OTHER LONG-TERM LIABILITIES

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

Workers compensation

 

$

103

 

 

$

105

 

Asset retirement obligations

 

 

43

 

 

 

43

 

Deferred taxes

 

 

16

 

 

 

16

 

Environmental liabilities

 

 

12

 

 

 

12

 

Deferred consideration on disposed businesses

 

 

14

 

 

 

24

 

Embedded conversion features derivative liability

 

 

7

 

 

 

43

 

Other

 

 

29

 

 

 

25

 

Total

 

$

224

 

 

$

268

 

 

 

NOTE 8: COMMITMENTS AND CONTINGENCIES

As of June 30, 2017, the Company had outstanding letters of credit of $96 million issued under the Amended Credit Agreement, as well as bank guarantees and letters of credit of $4 million, surety bonds in the amount of $53 million, and restricted cash and deposits of $25 million, primarily to ensure the payment of possible casualty and workers’ compensation claims, environmental liabilities, legal contingencies and 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 June 30, 2017, 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 $52 million.

In connection with assessments in Brazil, local regulations may require Kodak to post security for a portion of the amounts in dispute. As of June 30, 2017, Kodak has posted security composed of $6 million of pledged cash reported within Restricted cash in the Consolidated Statement of Financial Position and liens on certain Brazilian assets with a net book value of approximately $72 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, remediations and proceedings, including, from time to time, 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.

 

 

[11]


NOTE 9: GUARANTEES

EKC guarantees obligations to third parties for some of its consolidated subsidiaries. The maximum amount guaranteed is $11 million and the outstanding amount for those guarantees is $4 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 six 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, 2016 to June 30, 2017, 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, 2016

 

$

24

 

New extended warranty and maintenance arrangements in 2017

 

 

67

 

Recognition of extended warranty and maintenance arrangement revenue in 2017

 

 

(68

)

Deferred revenue on extended warranties as of June 30, 2017

 

$

23

 

 

 

NOTE 10:  OTHER OPERATING EXPENSE (INCOME), NET

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

(Income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prosper asset remeasurement (1)

 

$

 

 

$

 

 

$

12

 

 

$

 

Asset impairments (2) (3)

 

 

2

 

 

 

1

 

 

 

2

 

 

 

25

 

Legal settlements (4)

 

 

 

 

 

 

 

 

 

 

 

(10

)

Gain on sale of assets (5)

 

 

 

 

 

(7

)

 

 

(2

)

 

 

(7

)

Total

 

$

2

 

 

$

(6

)

 

$

12

 

 

$

8

 

 

(1)

In the first quarter of 2017, Kodak reduced the carrying value of Prosper fixed assets ($8 million) and intangible assets ($4 million) to the amount that would have been recorded had the Prosper assets been continuously classified as held and used. Refer to Note 21, “Discontinued Operations”.

 

( 2)

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 quarter and six months ended June 30, 2016 of $1 million and $12 million, respectively.  Kodak also wrote off related intangible assets with a gross carrying amount of $14 million and accumulated amortization of $6 million and recorded an impairment charge of $8 million.

(3)

In the first quarter of 2016, Kodak concluded the carrying value of the Kodak trade name exceeded its fair value and recorded an impairment charge of $5 million related to the Kodak trade name.  

(4)

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

(5)

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 is accounting for this investment under the equity method of accounting.  Kodak recognized a gain of approximately $7 million on this transaction.

 


[12]


NOTE 11: OTHER (INCOME) CHARGES, NET

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Change in fair value of embedded conversion features derivative liability (1)

 

$

(14

)

 

$

 

 

$

(36

)

 

$

 

Loss on foreign exchange transactions

 

 

3

 

 

 

1

 

 

 

4

 

 

 

2

 

Other

 

 

2

 

 

 

 

 

 

3

 

 

 

 

Total

 

$

(9

)

 

$

1

 

 

$

(29

)

 

$

2

 

 

(1)

Refer to Note 22, “Financial Instruments”.

 

 

NOTE 12: INCOME TAXES

Kodak’s income tax provision and effective tax rate were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Earnings from continuing operations before

income taxes

 

$

11

 

 

$

15

 

 

$

21

 

 

$

8

 

Effective tax rate

 

 

36.4