Eastman Kodak (KODK) Q4 2020 Earnings Call Transcript

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Eastman Kodak (KODK 0.33%)
Q4 2020 Earnings Call
Mar 16, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Eastman Kodak Q4 2020 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker for today, Paul Dils. You may begin.

Paul Dils -- Investor Relations

Thank you, and good afternoon, everyone. I am Paul Dils, Eastman Kodak Company's chief tax officer and director of investor relations. Welcome to Kodak's fourth-quarter and full-year 2020 earnings call. At 4:15 p.m.

this afternoon, Kodak filed its 2020 Form 10-K and issued its release on financial results for the fourth-quarter and full-year 2020. You may access the presentation and the webcast for today's call on our investors center at investor.kodak.com. During today's call, we will 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 events or results 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 US 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 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 investors 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.

We will not be holding a formal Q&A during today's call. As always, the investor relations team is available for follow-up. I will now turn the call over to Jim.

Jim Continenza -- Executive Chairman

Welcome, everyone, and thank you for joining the fourth-quarter investor call for Kodak. Beginning on Slide 4. Fourth-quarter results continue to be impacted by COVID-19. As the pandemic continues to present challenges for the company around the world, the company was able to mitigate some of its impact through cost savings, including furloughs and pay reductions.

Dave will provide more detail on the company's results shortly. Key Kodak achievements for 2020. Ended 2020 with 196 million of cash and cash equivalents. Generated cash in third and fourth quarter for 2020.

Again, as I keep saying, we're going to continue to focus on free cash flow. We're going to grow our way out of this, not cut our way out of it. Reduction in net debt by 368 million compared with March of 2019. No.

1 priority was to maintain the safety of our employees and our customers during this pandemic. Continue to invest in our business. Again, we won innovation awards in print and digital packaging business. The customer-first model, the One Kodak model, this approach is clearly paying off for us.

Materially fixed our balance sheet and financial foundation. We've been talking about that for a couple of years. Let's fix the foundation. Let's get hold of our debt.

Let's find a path forward. Let's recapitalize and then raise growth capital as we find our path. Those have been the steps over the last couple of years, and we're proud to say that we're heading in the right direction. Turning to Slide 5.

We recently announced exciting news that reflects the beginning of Kodak's next chapter. On March 1, Kodak announced a series of financial transactions that provide access to new capital, addressing maturing obligations and strengthening the company's ability to invest in strategic growth opportunities in print, advanced materials and chemicals, which includes also new initiatives. The transaction reflects investors, the board and management's confidence in the company's strategy and technologies, placing Kodak in the best financial position in years. Dave will provide specific details shortly.

However, at a high level, the transaction includes financing transactions with Kennedy Lewis Investment Management, which includes a five-year senior secured term loan of up to 275 million, 225 million funded at close, and a 50 million delayed draw for up to 24 months, issuance of 25 million nonvoting convertible note, 1 million common shares issued at $10 per share upon close of the term loan and convertible notes. Series A/B preferred stock redemption and exchange with funds managed by Southeastern Asset Management, a redemption of 100 million of existing 200 million Series A convertible preferred stock exchange and a five-year extension of the remaining 100 million Series A convertible preferred stock for Series B convertible preferred stock. This is exciting to us to have Southeastern continue to support the company. They want to be part of this.

I can't thank them enough for their support through the years. An issuance of 100 million of Series C convertible preferred stock to Grand Oaks Capital, an investment firm founded by businessman and Paychex Founder, Tom Golisano. We're excited to have Tom joining the Kodak family and helping us through the next chapter of Kodak. Amended and extended ABL facility, a new 50 million letter of credit facility issued.

These transactions represent the next step in our strategy for returning the company to growth and help position us to invest in our core business in print, advanced materials, chemicals and new initiatives. We're excited about having these investors in our capital structure and as part of our business and business strategy. We look forward to the next chapter of Kodak and their experience and guidance to help us achieve our goals. I will now turn it over to Dave to discuss the details of our recently added financing transaction and the 2020 financial results.

Dave Bullwinkle -- Chief Financial Officer and Senior Vice President

Thanks, Jim, and good afternoon. Before I get into the details for the quarter, I would like to comment on a series of important financing transactions that occurred in the first quarter of 2021. As Jim mentioned, on March 1, we announced a series of financial transactions that provide access to new capital, address maturing obligations and strengthen the company's ability to invest in strategic growth opportunities in our core businesses. First, Kodak entered into financing agreements with Kennedy Lewis Investment Management.

Kennedy Lewis has provided Kodak with an initial $225 million term loan and a commitment to provide delayed draw term loans of up to an additional $50 million, which may be drawn on or before February 26, 2023. The term loans mature in five years and bear interest comprised of 8.5% payable in cash quarterly and 4% PIK interest. The company has also issued Kennedy Lewis $25 million of 5% unsecured convertible promissory notes due May 28, 2026. The convertible notes bear 5% PIK interest with a conversion price of $10 per share and have a mandatory conversion option by the company if the share price equals or exceeds $14.50 for 45 of 60 trading days.

Additionally, Kennedy Lewis has purchased 1 million shares of the company's common stock at a purchase price of $10 per share. As part of the agreement, Kennedy Lewis will have the right, subject to certain conditions, for three years or until they hold less than 50% of the initial principal amount of the term loans, to nominate one person to be elected to the company's board of directors. With the proceeds from these transactions, Kodak repurchased 1 million shares of the company's 5.5% Series A convertible preferred stock due to mature on November 15, 2021, from funds managed by Southeastern Asset Management for $100 million plus accrued and unpaid dividends. In addition, Kodak has issued the Southeastern managed funds 1 million shares of Series B convertible preferred stock in exchange for the remaining Series A preferred stock for a total of $100 million.

The Series B preferred stock has a 4% quarterly dividend payable in cash with a mandatory redemption in five years and 91 days. The conversion price is $10.50 per share with a mandatory conversion option by the company if the price equals or exceeds $14.50 for 45 of 60 trading days. Additionally, Grand Oaks Capital, an investment firm founded by a businessman and Paychex Founder, Tom Golisano, has committed to invest a total of $100 million in the company. The firm purchased $75 million of Kodak's 5% Series C convertible preferred stock and has agreed to purchase an additional $25 million of this series of preferred stock subject to HSR Act clearance.

The Series C preferred stock has a 5% quarterly dividend payable in Series C preferred stock with a mandatory redemption in five years and 91 days. The conversion price is $10 per share with a mandatory conversion option by the company after a two-year period if the price equals or exceeds $20 per share for 45 of 60 trading days in year three or $15 per share in years five or five. As part of the agreement, Grand Oaks Capital will have the right, subject to certain conditions, for three years or until they hold less than 50% of the initial amount of the preferred shares or common stock into which it is converted, to nominate one person to be elected to the company's board of directors. Kodak's existing ABL facility is amended and extended using the same lending group with prorated reduction of commitments.

The amendment extends the term to three years and reduces the commitment from $110 million to $90 million. Additionally, a new $50 million letter of credit facility was entered into with a subset of the ABL facility group. This agreement also contains a three-year term. These transactions together provide the company with approximately $210 million of incremental cash after fees, expenses and incremental ABL funding to invest in growth opportunities in Kodak's core businesses of print, advanced materials and chemicals.

An additional $25 million will be funded no later than 45 days from the closing of the other transactions, subject only to Hart-Scott-Rodino Act approval, and $50 million of delayed draw on the term loan will remain available for up to 24 months. Furthermore, the transactions address the mandatory redemption of the Series A preferred stock that was required in November of 2021, extend the maturity date of the company's ABL and limit the amount of cash needed to service capital. Prior to the financing transactions, which closed on February 26, 2021, in accordance with US GAAP accounting rules, there was substantial doubt about the company's ability to operate as a going concern due to the recent history of negative operating cash flow, maturity of the ABL credit agreement in 2021, redemption date in November of 2021 for the Series A convertible preferred stock, and increased challenges in managing cash during the COVID-19 pandemic. The additional liquidity provided by the financing, the extension of the maturity date of the ABL credit agreement, and the repurchase and exchange of the Series A convertible preferred stock eliminates the substantial doubt about Kodak's ability to continue as a going concern.

As previously mentioned, in the third quarter, the company discovered efficiencies and controls required to safeguard its assets. The company determined that controls were inadequate with regard to the timely input and verification of master data updates for equity grants and, therefore, resulted in the detection of errors or misstatements in employee equity account balances. This control weakness did not result in the misstatement of any current or prior period financial statements. The company has remediated these control deficiencies as of December 31, 2020.

Documentation and supervisory review controls around master data were strengthened, and an audit trail of stock-based compensation award additions and modifications performed by the service provider is now being maintained. A complete reconciliation of the repository of equity grants is being performed, and controls have been strengthened by employing an independent reconciliation process and ensuring appropriate segregation of duties. I will now share further details on the full company results, operational EBITDA and cash flow for 2020. On Slide 6, as we reported in our earnings release, for 2020, we reported revenues of $1.029 billion compared to $1.242 billion in the prior year for a decline of $213 million.

Adjusting for the favorable impact of foreign exchange of $9 million and license revenue received in the prior year from the HuaGuang transaction of $13 million, revenue declined by $209 million compared to the prior year. On a US GAAP basis, we reported net loss for 2020 of $541 million compared to net income of $116 million in 2019. The 2020 results include expense of $382 million related to changes in value for the derivative embedded in the Series A preferred stock and convertible notes, $2 million related to the loss on extinguishment of debt, $4 million related to noncash changes in workers' compensation and post-employment reserves, $10 million related to a net gain on the sale of assets, $3 million related to a trade name impairment, $3 million related to an increase in accounts receivable reserves and $167 million noncash expense as a result of the increase in deferred tax valuation allowances outside the US The 2019 results include a net gain on asset sales due primarily to the sale of the FPD business of $201 million, noncash changes in workers' compensation adjustments of $3 million, expense of $4 million related to trade name impairments, and the related changes in the fair value for the derivatives embedded in the Series A preferred stock and convertible notes of $42 million. Excluding the impact of these current and prior-year items, the 2020 adjusted net income was $10 million compared to a loss of $36 million in the prior year.

Operational EBITDA for 2020 was negative $1 million compared to $13 million in 2019. Excluding the current year impact of the increase in accounts receivable reserves, the license revenue received from the HuaGuang transaction in 2019 and adjusting for the increase in workers' compensation and post-employment reserves, operational EBITDA increased by $3 million from the prior year. Operational EBITDA for 2020 was unfavorably impacted by higher manufacturing costs driven by unfavorable cost absorption due to volume declines of $29 million, partially offset by cost savings, including furloughs and pay reductions. Foreign exchange did not have an impact on operational EBITDA.

On a full-year basis, volumes for SONORA Process-Free Plates declined by 6%, and the annuity revenue for PROSPER declined by 7%, which was attributable to the market downturn related to the COVID-19 pandemic. At the height of the impact of COVID-19 in 2020, which was our second quarter, volumes for SONORA process-free plates decreased by 33% and PROSPER annuity revenue decreased by 25%. The company began to recognize some recovery of volumes during the third and fourth quarters of 2020 and the beginning of 2021. We expect to continue to place our solutions with new and existing customers in these areas.

We also continue to invest in future growth areas of Ultrastream and advanced materials. Moving on to the company cash performance presented on Slide 7. Cash, cash equivalents and restricted cash for 2020 decreased by $34 million compared to an increase of $23 million in the prior year. Restricted cash and cash included in assets held for sale increased by $3 million as compared to an increase of $23 million in the prior year.

The prior year includes $14 million for the establishment of an escrow in China to secure various ongoing obligations under the agreements for the strategic relationship with HuaGuang and $19 million in funding related to the ABL, primarily due to the sale of FPD. Included in the 2020 balance sheet changes is a $14 million historical obligation to Kodak Alaris that was eliminated by offsetting $11 million of accounts receivable and the recognition of a $3 million deferred gain. Additionally, in 2020, the company declared and paid four quarterly dividends on its Series A convertible preferred stock that were in arrears for a total of $11 million. In the fourth quarter of 2020, the company also increased restricted cash by $12 million primarily in anticipation of a letter of credit facility that I described earlier.

We continue to evaluate opportunities to eliminate restricted cash in 2021 and to benefit from our cash positions around the world. During 2020, cash used in operating activities was $35 million driven primarily by cash used from net earnings of $25 million and cash used in balance sheet changes of $10 million, including a change in working capital of $9 million and a decrease in other liabilities of $26 million. Accounts payable decreased by $36 million, inventory decreased by $12 million and accounts receivable decreased by $33 million. Cash used in investing activities was $13 million during 2020 as compared to cash generated of $311 million in the prior year.

The prior year included proceeds from the sale of the FPD and the HuaGuang transactions. Cash provided by financing activities was $10 million for 2020 compared to a use of $298 million in the prior year. The prior year included $395 million of cash used for the full repayment of the senior secured first lien term credit agreement, partially offset by the issuance of the secured convertible notes of $100 million. The company generated positive cash flow in the second half of 2020, which reflects benefits from working capital improvements and cost savings, including furloughs and pay reductions, which occurred during the year.

The company will remain focused on cash generation in 2021. Finally, we remain in compliance with all applicable financial covenants. In summary, the company has managed through 2020 despite the challenges presented by the COVID-19 pandemic, increasing its cash balances in both the third and fourth quarters of the year. We have further strengthened our balance sheet by removing legacy liabilities.

The financing transactions announced in March 2021 provided the company with incremental liquidity to pursue growth. We are excited to focus on growth opportunities in 2021. I will now turn the discussion back to Jim.

Jim Continenza -- Executive Chairman

Thank you, Dave. In summary, with a stronger capital structure and financial position, our 2021 priorities for Kodak include: continue to focus on organizing our business around our customers, accelerating our restructuring efforts and generating free cash flow, continue to invest in our strategic growth opportunities in print, advanced materials, chemicals and new initiatives, utilizing our technologies and extensive experience in all of these areas. Sorry. Excuse me.

Before we conclude the call, Dave, is there anything else you'd like for listeners?

Dave Bullwinkle -- Chief Financial Officer and Senior Vice President

Yes, Jim. Earlier this evening, Kodak filed two shelf registration statements following the filing of the 2020 Form 10-K. These replaced two existing shelf registrations that have been withdrawn. Under one of the new registration statements, the company will have the flexibility to issue and sell up to $500 million of securities, which is approximately $350 million less than the previous registration statement.

The second new registration statement registers the resale of common stock issuable under the new convertible securities issued on February 26, as well as the outstanding common stock previously registered and the 1 million shares of common stock issued on February 26. The shelf registration statement relating to the Series A preferred stock and the common stock issuable upon its conversion has been withdrawn as the Series A preferred stock has been retired. The new registration statements will not become effective until any necessary SEC review has been completed. Thanks, Jim.

Jim Continenza -- Executive Chairman

Thank you, Dave, and thank you to the listeners for attending the call and for your continued interest in Eastman Kodak. This concludes our call for today. Have a great week.

Questions & Answers:

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Paul Dils -- Investor Relations

Jim Continenza -- Executive Chairman

Dave Bullwinkle -- Chief Financial Officer and Senior Vice President

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