Eastman Kodak (KODK) Q1 2021 Earnings Call Transcript

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Eastman Kodak (KODK 0.21%)
Q1 2021 Earnings Call
May 12, 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 Q1 2021 earnings conference call. [Operator instructions] Please be advised that today's conference may be recorded. [Operator instructions] And apologies, there will be no question-and-answer session for this call. I would now like to hand the conference over to your speaker today, Paul Dils.

Please go ahead.

Paul Dils -- Chief Tax Officer and Director of 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 first-quarter 2021 earnings call. At 4:15 p.m.

this afternoon, Kodak issued its press release and financial results for the first-quarter 2021. You may access the presentation and the webcast for today's call on our investor center at investor.kodak.com. Today's call is focused solely on Kodak's financial condition and results and business operations. 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, the 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 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. 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 first-quarter earnings call for Kodak. I'd like to start by saying I'm pleased with the progress we've made during the past two years. Actions we have taken to strengthen our balance sheet, focus on core customers, develop sustainable solutions and continue investing in innovations have created a foundation for growth and long-term value creation. An example of some of our recent achievements are we exceeded our revenue forecast and ended the first-quarter 2021 with $401 million of cash and cash equivalents, resulting from our strategic initiatives, which we began more than two years ago as part of our long-term strategy, including the financing transactions announced on March 1.

We have significantly strengthened our balance sheet by providing access to new capital and addressing maturing obligations, which will allow the company to invest in strategic growth opportunities and in our core businesses and competencies. Our simplified organization structure is being aligned with our customers' needs by providing a One Kodak customer first experience and better allows us to continue to focus on generating profitable revenues. Improvements include automation of our front-end customer-facing applications, realignment and consolidation of our service organization, improved cost structure, focus on our core competencies. Recognizing strong growth in our businesses include SONORA Process-Free Plates, PROSPER annuities this quarter and continued growth overall volumes increased in our businesses.

Hiring and making acquisitions as part of our key strategy for growth, strengthening our customer base, enhancing our ability to serve our customers, strategically focusing on our core competencies, leveraging our deep knowledge and experience in different areas of product innovations and technologies to meet our customers' needs, demands and environmental sustainability solutions. Kodak successfully featured a broad range of products at Drupa 2021 this year, which includes the KODAK MAGNUS Q4800 Platesetter, the largest format plate imaging CTP in the market. KODAK MAGNUS Q800 Platesetter with T-speed, the world's fastest eight-page CTP device. SONORA XTRA, Kodak's next generation of process-free plates delivers faster imaging, stronger contrast, improved handling, plus sustainability and waste savings in prepress and on press.

KODAK PRINERGY On Demand Business Solutions is the printing industry's first and only fully integrated and managed business software. e KODAK NEXFINITY Digital Press has the versatility that printers need today to handle a wide range of jobs with maximum productivity. The UTECO Sapphire EVO W Press powered by KODAK ULTRASTREAM Inkjet Technology is the industry's first digital press for flexible packaging to match the productivity of flexo. The Sapphire EVO M Press is powered by KODAK Stream Technology has already been successfully established in the growing packaging market.

KODAK PROSPER ULTRA 520 Digital Press, which utilizes KODAK ULTRASTREAM Inkjet Technology. This web press prints near-offset quality images faster than competitors across a broad range of commercial print substrates. It utilizes Kodak's water-based ink technology. I will now turn it over to Dave to discuss the first-quarter 2021 financial results.

David Bullwinkle -- Chief Financial Officer

Thanks, Jim, and good afternoon. Before we get into the details for the quarter, I would like to make a few general comments. The company's performance is beginning to turn the corner as a result of the many strategic efforts we have taken based on the implementation of our long-term strategy more than two years ago. We continue to recognize improvements in volumes, our cost structure and gross profit margins.

We expect to see this continue going forward. We are very pleased with the improved business performance and the strength of the balance sheet. Turning to Slide 6. As discussed on our last call, 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 their 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 holds 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 $10.5 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 businessman and Paychex founder, Tom Golisano, has invested a total of $100 million in the company.

The firm purchased $75 million of Kodak's 5% Series C convertible preferred stock on February 26, 2021, and an additional $25 million of this series of preferred stock on March 30, 2021, after the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. 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 four or five. As part of the agreement, Grand Oaks Capital obtained 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 was amended and extended using the same lending group with prorated reduction of commitments. The amendment extends the terms to three years and reduces the commitments 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 three-year terms.

These transactions together provide the company with $233 million of incremental cash in the quarter after fees, expenses and incremental ABL funding, and $50 million of the 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 2021 extend the maturity date of the company's ABL and limit the amount of cash needed to service capital. These financial transactions provide the company with cash to invest in growth opportunities in Kodak's core businesses of print and advanced materials and chemicals. I will now share further details on the full company results, operational EBITDA and cash flow results for the first quarter.

Turning to Slide 7. As we reported in our earnings release, for the first quarter of 2021, we reported revenues of $265 million, compared to $267 million in the prior-year quarter for a decline of $2 million. On a constant-currency basis, revenue declined by $11 million. On a U.S.

GAAP basis, we reported net income of $6 million for the first quarter, compared to net loss of $111 million in the prior-year quarter. The 2021 and 2020 first-quarter results include expense of $1 million and income of $53 million, respectively, related to changes in the fair value of embedded derivative liabilities. The first quarter of 2020 also includes the impact of a trade name impairment for $3 million, an increase in accounts receivable reserves of $3 million and $167 million noncash expense as a result of the increase in deferred tax valuation allowances outside the U.S. Excluding these current and prior-year items, income for 2021 was $7 million, compared to income of $9 million in the prior-year quarter.

Operational EBITDA for the quarter was a positive $3 million, compared to a negative $8 million in the prior-year quarter. Excluding the prior-year impact of an increase in accounts receivable reserves, operational EBITDA increased $8 million from the prior-year quarter. Operational EBITDA for 2021 was favorably impacted by savings from cost-reduction efforts and improved year-over-year sales volumes in key product areas. Foreign exchange did not have an impact on operational EBITDA.

During the first quarter, volumes for SONORA Process-Free Plates grew by 8%, and the annuity revenue for PROSPER improved by 12%. We continue to invest in our core competencies and future growth areas of ULTRASTREAM and advanced materials and chemicals. The display of products at Drupa 2021 mentioned earlier by Jim showcase Kodak's most recent innovations that utilize enhancements to existing products like ULTRASTREAM, SONORA Plates and Digital Print. Moving on to the company cash performance presented on Slide 8.

The company ended the first quarter with $401 million in cash and cash equivalents, an increase of $205 million from December 31, 2020. Cash used in operating activities was $16 million, driven primarily by a change in working capital of $10 million and a decrease in other liabilities of $22 million. Accounts payable increased by $24 million. Inventory increased by $22 million, and accounts receivable decreased by $8 million compared to December 31, 2020.

We continue to tightly manage our working capital to improve our cash performance. Cash used in investing activities was $1 million in the first quarter, flat when compared to the prior year. Cash provided by financing activities was $242 million in the quarter compared to cash used in financing activities of $3 million in the prior-year period. Cash provided by financing activities included $247 million of incremental cash in the quarter after fees and expenses driven by the financial transactions announced on March 1.

Restricted cash at the end of the quarter was $76 million, an increase of $16 million from December 31, 2020. This increase was primarily a result of cash collateral required under the new letter of credit facility. We will continue to focus on alternatives to reduce restrictions on cash and view this as an upside opportunity for incremental liquidity for the company. Cash and equivalents, together with restricted cash, totaled almost $500 million at the end of March 2021.

We will be utilizing these assets to continue to build the company with growing businesses in the areas of print, advanced materials and chemicals. As our commercialization processes are much closer to producing revenues, we will provide further details on future calls. Our objectives are to create shareholder value and employment at Kodak for the next generation. We are excited to continue our progress and to share our successes with you in the future.

Finally, we remain in compliance with applicable financial covenants. I will now turn the discussion back to Jim.

Jim Continenza -- Executive Chairman

Thank you, Dave. In summary, the steps we have taken in the last few years, strengthening our balance sheet, establishing a customer-first approach and continuing to invest in innovation have created the foundation for growth. We continue to execute on those strategies to create long-term value for our shareholders and our employees. Thank you for attending the call and your continued interest in Kodak.

Questions & Answers:

Operator

[Operator signoff]

Duration: 21 minutes

Call participants:

Paul Dils -- Chief Tax Officer and Director of Investor Relations

Jim Continenza -- Executive Chairman

David Bullwinkle -- Chief Financial Officer

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