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Eastman Kodak Co  (NYSE:KODK)
Q4 2018 Earnings Conference Call
April 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for your patience. You joined the Eastman Kodak Q4 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Bill Love.

William G. Love -- Treasurer & Director of Investor Relations

Thank you, and good afternoon, everyone. I'm Bill Love, Eastman Kodak Company's Treasurer and Director of Investor Relations. Welcome to Kodak's fourth quarter 2018 earnings call. At 4:15 p.m., this afternoon, Kodak filed its annual report on Form 10-K and issued its release on financial results for 2018. You may access the presentation and webcast for today's call on our Investor Center at investor.kodak.com.

During today's call, we'll be making certain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. All forward-looking statements are based upon Kodak's expectations and various assumptions. Future events or results may differ from those anticipated or expressed in the forward-looking statements. Important factors that could cause actual results or events to differ materially from these forward-looking statements include, among others, the risks, uncertainties and other factors described in more detail in Kodak's filings with the U.S. Securities and Exchange Commission from time to time.

There may be other factors that may cause Kodak's actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to Kodak or persons acting on its behalf apply only as of the date of this presentation and are expressly qualified in their entirety by the cautionary statements included or referenced in this presentation. Kodak undertakes no obligation to update or revise forward-looking statements to reflect events or circumstances that may arise after the date made or to reflect the occurrence of unanticipated events.

In addition, the release just issued and the presentation provided contains certain measures that are deemed non-GAAP measures. Reconciliations to the most directly comparable GAAP measures have been provided with the release and within the presentation on our website in our Investor Center at investor.kodak.com.

Speakers on today's call are Jim Continenza, Kodak's Executive Chairman; and David Bullwinkle, Chief Financial Officer of Kodak.

I will now turn the call over to Jim.

James V. Continenza -- Executive Chairman

Thank you, Bill. Welcome, everyone, and thank you for joining the fourth quarter 2018 investor call for Kodak. Before we begin, I'd like to say moving from Chairman to newly appointed Executive Chairman, I have become an integral part of day to day operations as the Company continues to execute on critical initiatives. I look forward to working with my team to help Kodak become cash-flow positive, build long-term value for shareholders as we continue to deleverage our balance sheet, increase operational efficiencies and maximize potential of our key growth drivers.

Before I turn it over to Dave to discuss the 2018 financial results, I want to update you on the Flexographic Packaging Division sales process. The Company entered into an agreement to sell FPD on November 11, 2018. Subject to the satisfaction of customary closing conditions, the Company expects to close the sale as early as April 8, 2019, and intends to use the proceeds to repay over $300 million of the term loans outstanding under the Company's first lien credit agreement. As we previously mentioned, the FPD sale will be an important step in improving our balance sheet.

I will now turn it over to Dave to discuss the 2018 financial results and other important updates. David?

David E. Bullwinkle -- Chief Financial Officer & Senior Vice President

Thanks, Jim, and good afternoon. Today, the Company filed its Form 10-K for the year ended December 31, 2018 with the Securities and Exchange Commission. As always, I recommend you read this filing in its entirety.

First, I would like to discuss the filing of the Company's Form 12b-25, which extended the filing deadline for the Company's Form 10-K. The Company and its senior management have been engaged in a review process to enable Jim to execute the Chief Executive Officer certifications required to be filed as exhibits to the Form 10-K. In addition, the evaluation disclosure of aspects of the Company's obligations under its credit agreements, all in the context of preparing to close the sale of FPD and working to refinance the remaining first lien term loans resulted in the Company being unable to file the Form 10-K within the prescribed time period.

Jim mentioned subject to the satisfaction of customary closing conditions, the Company expects the closing of sale of FPD as early as April 8, 2019, and intends to use the proceeds to repay over $300 million of the term loans outstanding under the Company's first lien term credit agreement. The Company has also been engaged in negotiations to refinance the portion of the first lien term loans that will not be paid from proceeds from the sale of FPD.

I will now share further details on the full company results, operational EBITDA and cash flow results for 2018. Please note, the results of FPD have been reported as discontinued operations in 2018, and the comparable 2017 period due to the expected sale of the division which will be completed soon.

On Slide 4, as we reported in our earnings release, our financial results were net loss of $16 million for 2018 compared to net income of $94 million in 2017. The 2018 results include a benefit of $16 million related to the Korean withholding tax refund and $11 million associated with non-cash changes in workers compensation and legal reserves.

The 2018 results also include expense of $13 million related to a trade name impairment driven by the expected sale of FPD. The 2017 results include a benefit of $101 million associated with the release of a valuation allowance on deferred tax assets outside the U.S. The 2017 results also include $58 million of expense related to goodwill and trade name impairments, $47 million of income related to changes in value for the derivative embedded in the Series A preferred stock and $12 million of depreciation and amortization expense related to PROSPER asset remeasurement. Excluding these current and prior year items, the loss for 2018 was $13 million compared to income of $16 million in the prior year.

Turning to Slide 5, for 2018 we reported revenues of $1.325 billion compared to $1.386 billion in 2017 for a decline of 4%. On a constant currency basis, revenue declined by 6%. Operational EBITDA for 2018 was $1 million compared to $10 million in 2017. Excluding the unfavorable impacts of foreign exchange and aluminum costs, offset by the favorable impact of reduction in workers compensation reserves, operational EBITDA improved to $21 million compared to $10 million in the prior year. Adjusted operational EBITDA for 2018 after the expected declines of Consumer Inkjet were $16 million compared to a loss of $1 million in 2017.

In 2018, we delivered strong performance in our key growth engines. Volumes for SONORA Process-Free Plates grew by 19%, and the annuity revenue for PROSPER grew by 8%. We also continued to invest in future growth areas ULTRASTREAM, light blocking materials and printed electronics.

Moving on to the Company cash performance presented on Slide 6. The Company ended 2018 with $246 million in cash and cash equivalents, a decrease of $97 million from December 31, 2017. When adjusted for $14 million of proceeds from a non-recurring transaction expected to be received in December of 2018, but received in 2019 -- January, 2019, our ending cash balance was within our expectations.

During 2018, cash used in operating activities was $62 million, driven primarily by a change in working capital of $28 million and a decrease in liabilities excluding trade payables of $31 million. Cash used in investing activities was $22 million for 2018 as compared to a use of $24 million in the prior year period. Cash used in financing activities was $11 million for 2018 compared to a use of $29 million in the prior year period.

Finally, as disclosed in our Form 10-K, we remain in compliance with our financial covenants under our credit agreements. In particular, the Company's EBITDA used in the secured leverage ratio, as calculated under the first lien term loan credit agreement, exceeded the EBITDA necessary to satisfy the covenant ratio by $20 million.

I will now turn the discussion back to Jim.

James V. Continenza -- Executive Chairman

Thank you, Dave. In summary, we worked to return Kodak to financial health. We will not make forward-looking statements, instead we will take action by focusing on the core competencies in printing, imaging, working closely with our customers, deleveraging the company and improving operational efficiencies to achieve our primary goal, generating free cash flow on a consistent basis and sustainable basis.

We will now open the call up for questions. Operator, please remind the participants of the instructions to ask the questions.

Questions and Answers:

Operator

Absolutely, sir. (Operator Instructions) Thank you. Our first question comes from the line of Eamon Trebilcock of Ellington Management. Your line is open.

Eamon Trebilcock -- Ellington Management -- Analyst

Hi, guys. Thanks for the time. With regards to your refinancing of the remaining term loan, can you put a little bit more meat on the bone there. I mean, do you guys expect to be able to refinance that stub, and if not, is there -- can you guys use excess cash to repay that stub, if the refinancing is not possible? Thanks.

David E. Bullwinkle -- Chief Financial Officer & Senior Vice President

Sure. So, this is Dave. So, we can't obviously come on specific terms, but we are in advanced negotiations with a large and existing term loan lender to provide debt refinancing of the debt outstanding subsequent to the pay down of debt from the packaging sale proceeds. We've previously disclosed that we expect to receive from packaging that really hasn't changed. So, the remaining debt that we expect to have, and that's what we call the stub debt or remaining debt after the packaging sale would be somewhere in the neighborhood of $70 million to $90 million, and we expect to complete that within a reasonable timeline of the FPD sale closing. And we have high confidence we'll get that done.

Eamon Trebilcock -- Ellington Management -- Analyst

Great. Thanks.

Operator

Thank you. (Operator Instructions) And as there appear to be no further questions in queue, I'd like to turn the call back over to Jim Continenza for any closing remarks. Sir?

James V. Continenza -- Executive Chairman

Thank you, everyone. As you can tell, we have a lot going on in the business. We are again proud that we were able to incubate the business and sell it and move it on. Now we're going to get back to our core competencies as we said, and I look forward to working with everyone in my team and turning the Company around. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.

Duration: 14 minutes

Call participants:

William G. Love -- Treasurer & Director of Investor Relations

James V. Continenza -- Executive Chairman

David E. Bullwinkle -- Chief Financial Officer & Senior Vice President

Eamon Trebilcock -- Ellington Management -- Analyst

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