Q3 2023 Eastman Kodak Co Earnings Call

Participants

Anthony Redding

David Edward Bullwinkle; CFO, President of Eastman Business Park & Senior VP; Eastman Kodak Company

James V. Continenza; Executive Chairman & CEO; Eastman Kodak Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eastman Kodak Third Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would like now to turn the conference over to your speaker today, Anthony Redding. Please go ahead.

Anthony Redding

Thank you, and good afternoon, everyone. I'm Anthony Redding, Eastman Kodak Company's Chief Compliance Officer. Welcome to Kodak's Third Quarter 2023 Earnings Call.
At 4:15 p.m. this afternoon, Kodak filed its Form 10-Q and issued its release on financial results for the third quarter of 2023. You may access the presentation and webcast for today's call at 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 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 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 the 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 Chief Executive Officer; and David Bullwinkle, Chief Financial Officer of Eastman Kodak Company. 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 Continenza.

James V. Continenza

Welcome, everyone, and thank you for joining the third quarter 2023 investor call for Kodak.
I am pleased with the continuing improvement reported in our company's results for the third quarter 2023. Our accomplishments have not come easy. The ongoing challenges that we face, including inflation, high interest rates, bank failures, labor shortages, supply issues and now another new war, we have overcome these challenges and built a strong foundation by continuing to focus on our existing long-term strategic plan, which started almost 5 years ago.
Improving our operations has been critical for us, the efficiencies that we put in and investing in opportunities to leverage our strength in industrial manufacturing, drive smart revenue and always put our customers first. As a result, we have delivered increased gross profit and operational EBITDA year-over-year for the fourth consecutive quarter and improvement in our cash performance during these very difficult times. That shows our investments that we are making are starting to deliver. I'm extremely proud of our remarkable ability to continue our momentum in the face of unprecedented headwinds.
I'd like to thank our employees for their dedication, loyalty and hard work, the resilience that they have shown in supporting our customers and our customers have stayed loyal to us. We made a commitment to them that we will try to be as efficient as we can because we can only win when they win.
Some highlights from the third quarter. We continue to invest in long-term growth initiatives in our Advanced Materials and Chemicals group, known as AMC. We are seeing top line revenue growth, but more importantly, we're also seeing a much greater contribution to the net profit of the company.
In our substrate coating businesses, we are looking to expand the capabilities of our existing production machine beyond prime foils.
In our light blocking area, we are focused on entering the hospitality segment in applications such as room-darkening drapes and curtains.
In our test reagent initiatives, we are moving forward with the construction of a cGMP, which means current good manufacturing practices, facility which we intend to have operational midyear 2025. The facility is intended to help meet the growing demand for FDA-certified test reagents made in the U.S.A.
And in our functional printing area, we are now ready to manufacture antennas for automotive windshield applications as an entry point into the transportation segment.
It's important to note that these AMC initiatives are natural extensions of our unique strengths in material science and layering and coding and the technologies that we've developed over decades in the film business. They are great examples of how we can create new growth opportunities based on skills and infrastructure that are unique to Kodak.
We also continue to see growing demand in our still and motion picture film business. We are committed to manufacturing film as long as we have demand from our customers. I'm proud of our role in continuing to make this artistic medium available to photographers, directors, filmmakers, who love the unique look and quality of film.
We have completed the placement of 2 leading-edge Kodak inkjet presses. We placed the first Ultra 520 Press, which offers offset quality at unmatched production speeds; and the new PROSPER 7000 Turbo, which is the world's fastest inkjet press. Our press portfolio is now moving into full production, and we're excited about the rollout.
As I have stressed frequently, we are committed to being the last major manufacturer standing in the plates business. In our opinion, plates aren't going away. There are billions of dollars of CapEx out there in which printing equipment and those offset presses are going to be used. We are continuing to support our customers in the printing business to make sure they have options. Whether they want to use plates on their offset presses or transition to digital, we are committed to support them on both sides of the equation. We want to help them convert to the digital transition over a long period of time. That way, they can maximize the value of their current investment.
We recently have seen a surge in competitors, that used to manufacture in the U.S., importing plates from China and Japan. These plates are selling at an unfair low price. As a result, Kodak recently filed petitions with the U.S. Department of Commerce and the U.S. International Trade Commission, requesting relief from unfair trade imports of aluminum lithographic printing plates from China and Japan. Our goal in taking this action is simple: to restore fairness in pricing and have a level playing field so we can preserve U.S. manufacturing jobs and continue to serve our customers. It's vitally important that the U.S. not lose the last major manufacturer of these plates because they will be subjected to only imports, and you're right back to where we were during the pandemic, having trouble with logistics and supply chain by not having locally sourced products.
Turning to Slide 6. Let me give some highlights of the third quarter. We had a decline in revenue of $20 million, which reflects a conscious decision we are making to prioritize increased productivity, investments in innovation and driving smart revenue. The trade-off was this strategy enabled us to increase our profit by $7 million or 16%. When we look at the business and we look at our customers and we look at the dollars and the trades that we need to make in these difficult times, we will trade negative revenue or less profitable revenue for an improvement in gross profit. And that's something we focus on over the last 3, 4 years, and we will continue to do so.
And part of that result is we had a cash increase of $29 million in the 9 months ending September 30, 2023, compared with a decrease of $146 million in the prior year, an improvement of $175 million of cash flow. These improvements are encouraging and evidence of our ability to continue making progress despite unfavorable business conditions never seen before. However, we recognize that the environment will remain difficult and there are more headwinds on the horizon.
To continue building our momentum, we will stay committed to executing our long-term plan, investing in innovation, improving efficiency and helping our customers stay profitable and productive. We only win when they win.
I would now like to turn it over to Dave to discuss the third quarter 2023 financial results. Dave?

David Edward Bullwinkle

Thanks, Jim, and good afternoon. Today, the company filed its Form 10-Q for the quarter ended September 30, 2023, with the Securities and Exchange Commission. As always, I recommend you read this filing in its entirety.
Before I get into the details for the quarter, I would like to direct your attention to the refinancing transaction that the company announced and closed in the third quarter. On our last call, we provided an overview of the transactions. I will summarize those again here.
On July 21, 2023, the amended and restated term loan credit agreement became effective and the company completed its borrowing of the term loans. The company received net proceeds from the term loans of approximately $435 million, of which $318 million, representing the aggregate principal amount of the original term loans plus accrued paid-in-kind interest, prepayment premium and $2 million of cash interest, was paid by the company to refinance the obligations under the original term loan credit agreement. Approximately $28 million of the net proceeds from the term loans were used to repay in full the company's outstanding convertible notes, representing the aggregate principal amount of the convertible notes plus accrued paid-in-kind interest.
As a result of the early repayment of the term loans and the convertible notes, the company recorded a loss on early extinguishment of debt of $27 million in the third quarter of 2023. This is reported in the company's statement of operations for the quarter and year-to-date period.
In addition, the company repaid in full the amounts outstanding under its existing ABL credit agreement, used $59 million in net proceeds from the term loans to fund the L/C cash collateral account and paid approximately $1 million in fees in connection with an amended and restated letter of credit facility agreements. The remaining net proceeds from the term loans of approximately $29 million are being used by the company for general corporate purposes and working capital needs. The term loan amendment also amended and restated the original term loan credit agreement to, among other things, extend the maturity date to the earlier of August 15, 2028, or the date that is 91 days prior to the maturity date or mandatory redemption date of any of the company's then outstanding Series B preferred stock or Series C preferred stock or any extensions or refinancings of the Series B or Series C preferred stock.
The term loans bear interest at a rate of 7.5% per annum payable in cash and 5% per annum payable in kind or in cash at the company's option for an aggregate interest rate of 12.5% per annum.
The company had approximately $58 million in letters of credit outstanding under the 2023 amended ABL credit agreement and amended ABL credit agreements as of both June 30, 2023 and December 31, 2022. As noted above, the company repaid in full the amounts outstanding under its existing ABL credit agreement. Upon the termination of the 2023 amended ABL credit agreements, the letters of credit totaling $58 million were transferred to the letter of credit facility. The lender security interest in any of the companies or its subsidiaries assets or properties securing the existing ABL credit agreement was released.
The company had approximately $31 million and $43 million of letters of credit outstanding under the L/C facility agreement as of September 30, 2023, and December 31, 2022, respectively. The letters of credit under the 2023 L/C facility agreement are collateralized by cash collateral. L/C cash collateral was $32 million and $44 million at September 30, 2023 and December 31, 2022, respectively, which was classified as restricted cash on the company's statement of financial position.
On June 30, 2023, the company and the subsidiary guarantors entered into an amendment to the 2023 amended L/C facility agreement. The June 2023 L/C facility agreement became effective on July 21, 2023. Under the terms and conditions of the June 2023 L/C facility agreement, the L/C lender committed to issue additional letters of credit on the company's behalf he in an aggregate amount of up to $50 million to an aggregate principal amount of commitments of up to $100 million until August 30, 2023, upon which the aggregate L/C facility commitments reduced to $50 million, provided that, at all times, the company posted cash collateral in an amount greater than or equal to 104% of the aggregate amount of letters of credit issued and outstanding at any given time.
With the funding from the net proceeds from the term loans, the balance on deposit in the L/C cash collateral account was increased by an additional $59 million to a total of $102 million, and with the termination of the ABL credit agreement, commitments increased to $99 million. The commitments under the L/C facility included letters of credit of $68 million to ensure payment of the company's undiscounted actuarial workers' compensation obligation with the New York State Workers' Compensation Board.
In August of 2023, the company used $68 million of the fund in the L/C cash collateral account, cash collateralized its undiscounted actuarial workers' compensation obligations with the New York State Workers' Comp Board, which decreased commitments to $31 million and the balance on deposit in the L/C cash collateral account to $32 million. L/C facility agreements does not include a minimum liquidity or financial maintenance covenants.
We are pleased with the completion of these transactions to proactively solidify our capital structure and replace our ABL facility. These arrangements provide for an extended term of the term loan and L/C facility contingent on our ability to convert, redeem or extend the existing Series B and C preferred stock as their current maturities of May 26, 2026.
I will now share further details on the full company results, operational EBITDA and cash flow for the third quarter and 9 months ending September 30, 2023.
On Slide 7, for the third quarter of 2023, we reported revenues of $269 million compared to $289 million in the prior year quarter, a decline of $20 million or 7%. On a constant currency basis, revenue declined by $26 million or 9% compared to the prior year quarter. As Jim mentioned, pricing rationalization, cost reduction and customer-focused initiatives continue to be a priority for the company, and we continue to recognize significant improvements in profitability as a result of the collective impact of these initiatives in the face of difficult global economic environment.
Gross profit increased by $7 million or 16% when compared to the prior year quarter. Excluding the favorable impact of foreign exchange, gross profit improved $5 million or 12% when compared to the prior year quarter. Our gross profit percentage was 19% in Q3 2023 compared to 15% in the prior year quarter. This improvement is a result of the actions our team has taken to mitigate the effects of the global economy, to make our operations more efficient and to realize the value of our offerings.
On a U.S. GAAP basis, we reported net income of $2 million for the third quarter, flat when compared to the prior year quarter. The current year includes the loss on extinguishment of debt resulting from the refinancing transaction of $27 million. The 2023 and 2022 third quarter results include income of $3 million and $5 million, respectively, related to noncash changes in workers' compensation and employee benefit reserves. Excluding these current and prior year quarter items, income for 2023 was $26 million compared to a loss of $3 million in the prior year quarter, reflecting an improvement of $29 million.
Operational EBITDA for the quarter was $12 million compared to $7 million in the prior year quarter. Excluding the impact of noncash changes in workers' compensation and employee benefit reserves in the current and prior year quarters, and the favorable impact of foreign exchange in the current quarter, operational EBITDA improved by $6 million when compared to the prior year quarter. Operational EBITDA for the third quarter of 2023 was favorably impacted by pricing rationalization and improved operational efficiency, executing on cost controls, partially offset by higher continued ongoing global cost increases and lower volume.
Turning to Slide 8 for the 9 months ending September 30, 2023. We reported revenues of $842 million compared to $900 million in the prior year period for a decrease of $58 million. Adjusting for the unfavorable impact of foreign exchange of $4 million in the current year, revenue decreased by $54 million or 6% compared to the prior year. We also reported significantly higher gross profit with an increase of $36 million or 28% when compared to the prior year period. Foreign exchange had no impact on gross profit in the current year period.
Our gross profit percentage was 19% for the 9 months ending September 30, 2023, compared to 14% in the prior year. As we have consistently stated, we will prioritize smart revenue rather than trading profitability for revenue growth. These results reflect our disciplined approach to make our operations more efficient to better serve our customers.
On a U.S. GAAP basis, net income was $70 million for the 9 months ending September 30, 2023, compared to net income of $19 million in the prior year. The 2023 year-to-date results include charges of $2 million related to changes in the fair value of the embedded derivative liabilities, $27 million related to a loss on the extinguishment of debt, income of $9 million related to a refund from a non-U.S. governmental authority and income of $3 million related to noncash changes in workers' compensation and employee benefit reserves.
The year-to-date period of 2022 results include income of $1 million related to changes in the fair value of the embedded derivative liabilities, an income of $13 million related to noncash changes in workers' compensation and employee benefit reserves. Excluding these current and prior year items, income for 2023 was $87 million compared to income of $5 million in the prior year period, reflecting an increase of $82 million from the prior year period.
Operational EBITDA for the period was $43 million compared to $11 million in the prior year period. Excluding the favorable impact of noncash changes in workers' compensation and employee benefit reserves in the current and prior year, operational EBITDA increased by $42 million. Foreign exchange had no impact on the change in operational EBITDA. Operational EBITDA for 2023 was favorably impacted by growth in gross profit due to the factors described above.
Moving on to the company's cash performance presented on Slide 9. The company ended the second quarter with $246 million in cash and cash equivalents, an increase of $29 million from December 31, 2022. For the 9 months ending September 30, 2023, cash provided by operating activities was $21 million driven primarily by positive cash flow from net earnings of $15 million and cash provided from balance sheet changes of $6 million, including a use of cash for working capital of $35 million and an increase in other liabilities of $23 million.
Accounts payable decreased by $15 million, inventory increased by $4 million and accounts receivable increased by $16 million.
Cash provided by operating activities improved by $151 million from the prior year driven by a $103 million improvement in balance sheet changes, including an improvement in working capital cash flows of $41 million and an increase in cash flows from liabilities, excluding borrowings and trade payables, of $49 million.
We are comfortable with our levels of working capital and have maintained our focus on serving our customers throughout this difficult economic period. Cash used in investing activities was $15 million in the year-to-date period, an improvement of $29 million when compared to the prior year period. The prior year period includes a $25 million equity interest investment in Wildcat Discovery Technologies.
Cash provided by financing activities was $87 million in the 9 months ending September 30, 2023, compared to cash provided by financing activities of $45 million in the prior year period. The improvement in cash from financing activities is driven by the impacts of the refinancing transaction, which occurred in the third quarter of 2023.
Restricted cash at the end of the quarter was $128 million, an increase of $59 million from December 31, 2022. Restricted cash primarily represents cash collateral required to support workers' compensation liabilities, cash collateral supporting the existing letter of credit facility and certain aluminum supply contracts, in addition to escrows to secure various ongoing obligations.
As referred to earlier, the company deposited $68 million of refinancing proceeds with the New York State Workers' Compensation Board during the quarter. This is reported as restricted cash on our statement of financial position. We will continue to focus on alternatives to reduce restrictions on cash.
As presented on the bottom portion of the slide, excluding the changes in restricted cash for each period, the impact of net proceeds from the refinancing transaction in the current year and the delayed draw term loan financing in the prior year, the current year receipt of a refund from a non-U.S. governmental authority and the current and prior year effect of exchange rates on cash, year-over-year increase in cash and cash equivalents was $175 million. This is primarily the result of the improved cash flow from operations of $151 million.
We are pleased with the company's cash flow performance and the health of our balance sheet. We will continue to focus on the execution of our long-term strategy. Finally, we remain in compliance with applicable financial covenants.
I will now turn the discussion back to Jim.

James V. Continenza

Thank you, Dave. Kodak continued to navigate in an extremely challenging business environment. We delivered strong performance in the third quarter, increasing gross profit and operational EBITDA year-over-year for the fourth consecutive quarter and improving our cash flow performance.
Our performance reflects our commitment to our strategy, our employees' commitment to executing and our customers' loyalty to stay with Kodak during these times. We'll continue to work closely with our customers and overcome these obstacles. We have built a strong foundation that is allowing us to continue to gain momentum and which I would call again some of the most difficult times that I've ever worked in. We continue to invest in our print business. We'll continue to invest in our Advanced Materials and Chemicals business. Inside of Kodak today, it's a fight for capital. Where we feel we'll get the greatest return is where we will invest those dollars.
We will continue to invest in infrastructure and improvements that make us more efficient and easy to do business with. It's important to us that we make it as simple as possible for our customers to interact with us and efficiently so they can continue to grow their profit and their business. We will continue to focus on adapting to the environment and all the challenges that we see, supporting our employees, investing in our customers and delivering products to help them succeed.
I want to thank you all for attending the call and your continued interest in Eastman Kodak.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.