Eastman Kodak Co: Form 10-Q for the period ended Jun 30, 2024

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report on Form 10-Q includes “forward–looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995.

Forward–looking statements include statements concerning Kodak’s plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, liquidity, investments, financing needs and business trends and other information that is not historical information. When used in this document, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “predicts,” “forecasts,” “strategy,” “continues,” “goals,” “targets” or future or conditional verbs, such as “will,” “should,” “could,” or “may,” and similar words and expressions, as well as statements that do not relate strictly to historical or current facts, are intended to identify forward–looking statements. All forward–looking statements, including management’s examination of historical operating trends and data, are based upon Kodak’s current expectations and assumptions. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in or implied by such forward-looking statements. Important factors that could cause actual events or results to differ materially from the forward-looking statements include, among others, the risks and uncertainties described in more detail in the Company’s Annual Report on Form 10–K for the year ended December 31, 2023 under the headings “Business,” “Risk Factors,” “Legal Proceedings,” and/or “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources,” in the corresponding sections of this report on Form 10-Q and the Company’s quarterly report on Form 10‐Q for the quarter ended March 31, 2024, and in other filings the Company makes with the SEC from time to time, as well as the following:

• Kodak’s ability to improve and sustain its operating structure, cash flow, profitability and other financial results;
• Kodak’s ability to achieve strategic objectives, cash forecasts, financial projections and projected growth;
• Kodak’s ability to achieve the financial and operational results contained in its business plans;
• Kodak’s ability to obtain additional or alternate financing if and as needed, Kodak's continued ability to manage world-wide cash through inter-company loans, distributions and other mechanisms, and Kodak's ability to provide or facilitate financing for its customers;
• Kodak’s ability to fund continued investments, capital needs and collateral requirements and to service its debt and Series B Preferred Stock and Series C Preferred Stock;
• Changes in foreign currency exchange rates, commodity prices, interest rates and tariff rates;
• The impact of the global economic environment, including inflationary pressures, geopolitical issues such as the war in Ukraine and conflicts involving Israel, medical epidemics, and Kodak’s ability to effectively mitigate the associated increased costs of aluminum and other raw materials, energy, labor, shipping, delays in shipment and production times, and fluctuations in demand;
• Kodak's ability to effectively compete with large, well-financed industry participants or with competitors whose cost structure is lower than Kodak's;
• The performance by third parties of their obligations to supply products, components or services to Kodak and Kodak’s ability to address supply chain disruptions and continue to obtain raw materials and components available from single or limited sources of supply, which may be adversely affected by the war in Ukraine, the conflicts involving Israel and residual effects of the COVID-19 pandemic;
• Kodak’s ability to comply with the covenants in its various credit facilities;
• Kodak’s ability to effectively anticipate technology and industry trends and develop and market new products, solutions and technologies, including products based on its technology and expertise that relate to industries in which it does not currently conduct material business;
• Kodak’s ability to effect strategic transactions, such as investments, acquisitions, strategic alliances, divestitures and similar transactions, or to achieve the benefits sought to be achieved from such strategic transactions;
• Kodak's ability to discontinue, sell or spin-off certain non-core businesses or operations, or otherwise monetize assets;
• The impact of the investigations, litigation and claims arising out of the circumstances surrounding the announcement on July 28, 2020, by the U.S. International Development Finance Corporation of the signing of a non‐binding letter of interest to provide a subsidiary of Kodak with a potential loan to support the launch of an initiative for the manufacture of pharmaceutical ingredients for essential generic drugs; and
• The potential impact of force majeure events, cyber‐attacks or other data security incidents or information technology outages that could disrupt or otherwise harm Kodak’s operations.

Future events and other factors 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 report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included or referenced in this document. 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, except as required by law.

EXECUTIVE OVERVIEW

Kodak is a global manufacturer focused on commercial print and advanced materials and chemicals. With 79,000 patents earned over 130 years of research and development ("R&D"), Kodak believes in the power of technology and science to enhance what the world sees and creates. Kodak’s innovative, award-winning products, combined with its customer-first approach, make Kodak the partner of choice for commercial printers worldwide. Kodak is committed to environmental stewardship, including industry leadership in developing sustainable solutions for print.

Consolidated revenues in the three and six months ended June 30, 2024 were $267 million and $516 million, respectively, decreases of $ 28 million ( 9% ) and $57 million (10%) when compared to the three and six months ended June 30, 2023 . Currency had an unfavorable impact on revenues in the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 ($4 million each period).

Print revenues in the three and six months ended June 30, 2024 were $186 million and $368 million, respectively, decreases of $29 million (13%) and $56 million (13%), respectively, compared to the prior year quarter and year-to-date period. Print revenues accounted for 70% and 71% of Kodak’s total revenues for the three and six months ended June 30, 2024, respectively. Advanced Materials and Chemicals revenues in the three and six months ended June 30, 2024 were $73 million and $132 million, respectively, an increase of $1 million (1%) compared to the prior year quarter and a decrease of $1 million (1%) compared to the prior year year-to-date period.

Economic Environment and Other Global Events:

Kodak's products are sold and serviced in numerous countries across the globe with more than half of sales generated outside the U.S. Current global economic conditions remain highly volatile due to the uncertain and unpredictable macroeconomic environment, heightened levels of inflation, the war in Ukraine, the conflicts involving Israel, and other global events which impacted Kodak’s operations. Kodak is experiencing revenue declines and increased manufacturing costs for certain businesses due to lower volumes and increases in labor, material and distribution costs, as well as supply chain disruptions and shortages in materials and labor.

Kodak implemented various pricing actions and customer-focused initiatives largely in 2022 and 2023 to mitigate the impact of increased manufacturing costs, primarily within its Print and Advanced Materials and Chemicals segments. While these actions have positively impacted the profitability of these segments, certain businesses are experiencing pricing pressures.

The Print segment is experiencing a slowdown in customer demand for plates that negatively impacted volume due to current global economic conditions and the impact of pricing actions. In addition to the pricing actions and customer-focused initiatives described above, Kodak has implemented supply chain and workforce optimization, productivity improvements and other cost savings activities. The combined actions have largely mitigated the impact of lower volumes and increased manufacturing costs. However, the potential worsening of economic conditions, continued decreases in volume and increases in manufacturing and other costs without further price increases, productivity improvements or other cost savings measures, could unfavorably impact this segment's operating results.

The Advanced Materials and Chemicals segment has also experienced labor shortages in certain manufacturing areas. Increased demand for consumer film products along with manufacturing equipment limitations and labor shortages have contributed to increased backorders. Kodak has increased headcount in this segment to better meet demand, and improved the infrastructure and streamlined processes to increase capacity in the film business, but supply will continue to be constrained by manufacturing equipment limitations without further capital improvements.

Kodak has implemented numerous measures to mitigate the challenges associated with supply chain disruptions and shortages in materials, including increasing safety stock on certain materials, increasing lead-times, providing suppliers with longer forecasts of future demand and certifying additional sources or substitute materials where possible. These measures have enabled Kodak to largely meet current demand.

Following the cessation of U.S. plate manufacturing operations by Kodak’s key competitors, Kodak has faced increasing competition in the U.S. from low-priced plates imported from China and Japan. On September 28, 2023, Kodak filed petitions with the U.S. Department of Commerce and the U.S. International Trade Commission requesting relief from unfairly traded imports of plates from China and Japan in the form of the imposition of anti-dumping and/or countervailing duties on such imported plates. On November 15, 2023 the U.S. International Trade Commission determined that there is a reasonable indication that a U.S. industry is materially injured by reason of imports of aluminum lithographic printing plates from China and Japan that are allegedly sold in the U.S. at less than fair value and subsidized by the government of China. The U.S. Department of Commerce has commenced investigations to determine dumping and subsidy margins against imports of plates manufactured in China and Japan. On February 27, 2024, the Commerce Department announced the preliminary findings in its countervailing duty investigation on imports of plates manufactured in China and imposed a provisional duty of 38.50% on practically all such plates. The Commerce Department announced preliminary findings in its anti-dumping duty investigations on imports of plates manufactured in China and Japan on April 26, 2024 and issued amended preliminary findings in connection with its anti-dumping investigation on plates from China on May 28, 2024. As a result of the Commerce Department’s preliminary determinations, provisional anti-dumping duties are being imposed on U.S. imports of plates as follows: (i) 164.30% on such plates manufactured in China by Fuji and 477.59% on such plates manufactured in China by other entities, and (ii) 87.81% on such plates manufactured in Japan. The final duty determinations are due to be announced by the Commerce Department in the third quarter of 2024, and the final injury determination is due to be made by the U.S. International Trade Commission in the fourth quarter of 2024. There can be no assurance that the provisional duties will become final or that Kodak will otherwise obtain the relief sought or, if relief is obtained, that the final rates of duties that may be imposed on such imported plates will provide effective relief.

Kodak is monitoring the events surrounding the conflicts involving Israel and the impact on the operations of its Israel subsidiary. A leased warehouse in Israel was destroyed in 2023; however, none of Kodak’s employees were injured. While the implications of this conflict are difficult to predict at this time, Kodak has been able to adapt its operations to avoid material disruption to its business. The direct operations of Kodak’s Israel subsidiary are less than 1% of total consolidated revenue and assets for 2023.

Kodak also continues to monitor the events surrounding the war in Ukraine and the various sanctions imposed in response to the war. Kodak believes it is in compliance with all sanctions. Kodak is experiencing worldwide supply constraints for aluminum and increased energy and transportation costs due in part to the war in Ukraine. The extent to which the war in Ukraine will impact the global economy and Kodak's business and operations remains uncertain.

The war in Ukraine and the international response have disrupted Kodak’s ability to operate its Russian subsidiary in the ordinary course, affecting its ability to pay vendors and employees, receive amounts owed from customers in Russia and deliver product. Kodak is in the process of an orderly winding down of its Russian subsidiary and has ceased its direct Russian operations. The direct operations of Kodak’s Russian subsidiary did not have a material impact on the Company’s financial statements (less than 1% of total consolidated revenues and assets for 2021 - 2023), and there were no material impacts on the consolidated results of operations as of and for the quarter ended June 30, 2024 from the wind-down activities.

The ongoing changes in global economic conditions and the impact of other global events on Kodak’s operations and financial performance remains uncertain and will depend on several factors such as the slowdown in customer demand, the ability to offset higher labor, material and distribution costs through pricing actions, duration of supply chain disruptions and the ability to secure raw materials and components.

Kodak’s strategy:

Segments within the print industry and the film industry face competition from digital substitution. Kodak’s strategy is to:

• Focus product investment in core competency areas of print and advanced materials, leveraging Kodak’s proprietary technologies to deliver technologically advanced products in the product goods packaging, graphic communications, and functional printing markets;
• Grow revenues through a focus on customers in Kodak’s print division, increasing overall share;
• Promote the use of film and expand the applications of Kodak’s film and chemicals to best utilize the existing infrastructure; and
• Continue to streamline processes to drive cost reductions and improve operating leverage.

A discussion of opportunities and challenges related to Kodak’s strategy follows:

• Print’s digital plate products include traditional digital plates and Kodak SONORA Process Free Plates. SONORA Process Free Plates allow Kodak customers to skip the plate processing step prior to mounting plates on a printing press. This improvement in the printing process saves time and costs for customers. Also, SONORA Process Free Plates reduce the environmental impact of the printing process because they eliminate the use of chemicals (including solvents), water and power that is otherwise required to process a traditional plate. The segment's digital plate products are experiencing challenges from higher prices and availability of raw materials, digital substitution and competitive pricing pressures. Kodak seeks to mitigate the impact of increases in manufacturing costs through a combination of surcharges and price increases, improved production efficiency and cost reduction initiatives. In addition, Kodak seeks to offset the impact of short-term and long‐term market dynamics on pricing and volume pressures through innovations in Kodak product lines, including investing in digital print technologies.
• In Print's digital printing businesses, the PROSPER business is expected to grow as the legacy VERSAMARK business continues to decline as a percentage of the segment’s total revenue. The PROSPER Inkjet Systems business is expected to continue to build profitability. Kodak launched the PROSPER 7000 Turbo Press in June 2022. The PROSPER 7000 Turbo Press enables commercial, publishing and newspaper printers to compete more effectively with offset and to shift more long run jobs from conventional printing processes to inkjet. Kodak completed the placement of its first PROSPER 7000 Turbo Press during the third quarter of 2023. Investment in the next generation technology, ULTRASTREAM, is focused on the ability to place ULTRASTREAM writing systems in Kodak branded presses and in various original equipment manufacturers in applications ranging from commercial print to packaging. The first flexible packaging printing system utilizing Kodak’s ULTRASTREAM inkjet technology was placed during the second quarter of 2022. In addition, Kodak officially launched the KODAK PROSPER ULTRA 520 Digital Press utilizing Kodak’s ULTRASTREAM inkjet technology, which offers offset print quality in a smaller footprint. Kodak completed the placement of the first KODAK PROSPER ULTRA 520 Digital Press in the fourth quarter of 2023.
• Advanced Materials and Chemicals is using Kodak’s deep expertise in chemistry and strengths in deposition and coating processes that come from decades of experience in film manufacturing to work on new initiatives:
• Electric Vehicle (“EV”)/Energy Storage Battery Material Manufacturing - Coating of substrates is a critical aspect of manufacturing materials for batteries and Kodak plans to capitalize on its expertise in coating technology to develop opportunities in this area. Kodak is currently in the process of expanding its pilot coating facility. On July 13, 2022, Kodak invested $25 million to acquire a minority preferred equity interest in Wildcat Discovery Technologies, Inc. (“Wildcat”), a private technology company that uses proprietary methods to research and develop new battery materials, including an EV battery. Kodak also entered into an agreement to provide coating and engineering services in collaboration with Wildcat to develop and scale film coating technologies. Wildcat has granted Kodak certain rights to negotiate a production or licensing arrangement with Wildcat when and if Wildcat’s technology reaches commercial readiness.
• Light-Blocking Technology - Kodak plans to leverage a proprietary technology initially developed for electrophotographic toners to commercialize a carbon‐less fabric coating designed to offer superior light management, from complete blackout to selective light filtering, and coating compatibility with an unmatched range of fabrics. Kodak has installed a production-scale machine to coat fabrics in Eastman Business Park, located in Rochester, NY.
• Transparent Antennas - Kodak plans to leverage its proprietary copper micro‐wire technologies and high‐resolution printing expertise to contract‐manufacture custom transparent antennas for automotive, commercial construction, and other applications requiring excellent radio frequency (“RF”) and optical performance. The integration of antennas is growing worldwide due to the rapid expansion of 5G and an overall increase in RF communications, and the ubiquity of glass surfaces makes transparent antennas attractive for multiple end‐use markets.
• Reagent Manufacturing - Kodak plans to capitalize on its existing chemical manufacturing expertise, including current production of unregulated Key Starting Materials for pharmaceuticals, to implement an expansion into manufacturing Diagnostic Test Reagent solutions. Kodak has started construction of a lab and manufacturing facility to manufacture reagents for healthcare applications within an existing building located at Eastman Business Park. Production is scheduled to begin in 2025.
• Film and related component manufacturing operations and Kodak Research Laboratories utilize capacity at Eastman Business Park, which helps cost absorption for both Kodak operations and tenants at Eastman Business Park.
• Kodak plans to capitalize on its intellectual property through new business or licensing opportunities in 3D printing materials, smart material applications, and printed electronics markets.

RESULTS OF OPERATIONS

2024 COMPARED TO 2023

SECOND QUARTER RESULTS OF OPERATIONS

(in millions)

Revenue

Current Quarter

For the three months ended June 30, 2024 revenues declined $28 million compared with the same period in 2023, primarily driven by lower volume as well as price and product mix declines in Print ($23 million and $1 million, respectively) and unfavorable foreign currency ($4 million). See segment discussions for additional details.

Year-to-Date

For the six months ended June 30, 2024 revenues declined $57 million compared with the same period in 2023, primarily driven by lower volume as well as price and product mix declines in Print ($47 million and $4 million, respectively), lower volume in Advanced Materials and Chemicals ($3 million) and unfavorable foreign currency ($4 million) partially offset by improved pricing and product mix within Advanced Materials and Chemicals ($2 million). See segment discussions for additional details.

Gross Profit

Current Quarter

Gross profit for the three months ended June 30, 2024 was $5 million lower than the same period in 2023, primarily due to increased manufacturing costs ($5 million) partially offset by lower costs for aluminum ($2 million). See segment discussions for additional details.

Year-to-Date

Gross profit for the six months ended June 30, 2024 was $6 million lower than the same period in 2023, primarily due to lower volumes and less favorable pricing and product mix in Print (each $3 million), lower volumes for Advanced Materials and Chemicals ($4 million) and increased manufacturing costs ($2 million) partially offset by improved pricing and product mix within Advanced Materials and Chemicals ($2 million) and lower costs for aluminum ($4 million). See segment discussions for additional details.

Selling, General and Administrative Expenses

Current Quarter

Consolidated selling and general administrative expenses ("SG&A") increased $7 million in the three months ended June 30, 2024 compared to the prior year period primarily due to $1 million of income in the prior year quarter representing insurance reimbursement of legal costs previously paid by the Company associated with investigations and litigation and an increase in selling and administrative costs ($6 million) related to investments in information technology systems and organizational structure to drive further operational efficiencies, as well as costs associated with the drupa trade show and certain litigation matters.

Year-to-Date

Consolidated selling and general administrative expenses ("SG&A") increased $18 million in the six months ended June 30, 2024 compared to the prior year period due to $11 million of income in the prior year representing insurance reimbursement of legal costs previously paid by the Company associated with investigations and litigation. In addition, selling and administrative costs increased $9 million primarily related to investments in information technology systems and organizational structure to drive further operational efficiencies, as well as costs associated with the drupa trade show and certain litigation matters. The costs increases were partially offset by a $1 million decline in equity compensation costs in the current year to date period.

Research and Development Costs

Consolidated research and development ("R&D") expenses in the three and six months ended June 30, 2024 remained relatively flat.

Pension Income Excluding Service Cost Component

Pension income excluding service cost component remained relatively flat in the three and six months ended June 30, 2024. Refer to Note 12, "Retirement Plans and Other Postretirement Benefits".

Other Operating Expense (Income), Net

For details, refer to Note 9, "Other Operating Expense (Income), Net".

Other Expense (Income), Net

For details, refer to Note 10, "Other Expense (Income), Net".

REPORTABLE SEGMENTS

Kodak has three reportable segments: Print, Advanced Materials and Chemicals and Brand. A description of Kodak’s reportable segments follows.

Print: The Print segment is comprised of five lines of business: the Prepress Solutions business, the PROSPER business, the Software business, the Electrophotographic Printing Solutions business and the VERSAMARK business.

Advanced Materials and Chemicals: The Advanced Materials and Chemicals segment is comprised of four lines of business: the Industrial Film and Chemicals business, the Motion Picture business, the Advanced Materials and Functional Printing business and the IP Licensing and Analytical Services business.

Brand: The Brand segment contains the brand licensing business.

All Other: All Other is comprised of the operations of the Eastman Business Park, a more than 1,200-acre technology center and industrial complex.

Segment Revenues

(in millions)

Segment Operational EBITDA and Consolidated Earnings from Operations Before Income Taxes

(in millions)

(1) Consulting and other costs are primarily professional services and internal costs associated with certain corporate strategic initiatives, investigations and litigation. Consulting and other costs included $1 million and $11 million of income in the three and six months ended June 30, 2023, respectively, representing insurance reimbursement of legal costs previously paid by the Company associated with investigations and litigation matters.

(2) Consists of third‐party costs such as security, maintenance and utilities required to maintain land and buildings in certain locations not used in any Kodak operations and the costs, net of any rental income received, of underutilized portions of certain properties.

(3) As reported in the Consolidated Statement of Operations.

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Kodak decreased employee benefit reserves by approximately $1 million in the six months ended June 30, 2024 due to a decrease in workers' compensation reserves driven by changes in discount rates. The decrease in reserves in the six months ended June 30, 2024 impacted gross profit by approximately $1 million. There was no change to employee benefit reserves in the three months ended June 30, 2024.

Kodak decreased employee benefit reserves by approximately $1 million in the three months ended June 30, 2023, driven by changes in discount rates. The change in employee benefit reserves in the six months ended June 30, 2023 was less than $1 million.

Segment Measure of Profit and Loss

Kodak’s segment measure of profit and loss is an adjusted earnings before interest, taxes, depreciation and amortization (“Operational EBITDA”). Operational EBITDA represents the earnings from operations excluding the provision for income taxes; non-service cost components of pension and OPEB income; depreciation and amortization expense; restructuring costs and other; stock-based compensation expense; consulting and other costs; idle costs; interest expense; other operating (expense) income, net and other (expense) income, net.

Kodak’s segments are measured using Operational EBITDA both before and after the allocation of corporate SG&A expenses. The segment earnings measure reported is after allocation of corporate SG&A as this most closely aligns with U.S. GAAP. Research and development activities not directly related to the other segments are reported within the Advanced Materials and Chemicals segment.

PRINT SEGMENT

(in millions)

Revenues

Current Quarter

The decrease in Print revenues for the three months ended June 30, 2024 of approximately $29 million reflected lower volumes in Prepress consumables and Prepress service ($8 million and $2 million, respectively), lower volumes in Electrophotographic Printing Solutions consumables and service ($6 million), lower volumes in PROSPER equipment ($3 million), less favorable pricing in Prepress consumables ($2 million) and unfavorable foreign currency ($4 million).

Year-to-Date

The decrease in Print revenues for the six months ended June 30, 2024 of approximately $56 million reflected lower volumes in Prepress consumables and Prepress service ($21 million and $4 million, respectively), less favorable pricing in Prepress consumables ($5 million), lower volumes in Electrophotographic Printing Solutions consumables and service and Electrophotographic Printing Solutions equipment ($10 million and $3 million, respectively), lower volumes in Versamark consumables and service ($3 million), less favorable pricing and product mix in Prepress equipment ($2 million), lower volumes in PROSPER annuities and PROSPER components (each $2 million) and unfavorable foreign currency ($4 million) partially offset by favorable pricing in Electrophotographic Printing Solutions consumables and service ($3 million).

Operational EBITDA

Current Quarter

Print Operational EBITDA for the three months ended June 30, 2024 declined $8 million mainly reflecting higher selling and administrative costs ($4 million), higher manufacturing costs ($3 million) and less favorable pricing for Prepress consumables ($2 million) partially offset by lower costs for aluminum ($2 million) and favorable pricing in Electrophotographic Printing Solutions consumables and service ($2 million).

Year-to-Date

Print Operational EBITDA for the six months ended June 30, 2024 declined $14 million primarily reflecting higher selling and administrative costs ($6 million), less favorable pricing and lower volumes for Prepress consumables ($5 million and $3 million, respectively), higher manufacturing costs ($3 million) and lower volumes for Prepress service ($2 million) partially offset by lower costs for aluminum ($4 million) and favorable pricing in Electrophotographic Printing Solutions consumables and service ($3 million).

ADVANCED MATERIALS AND CHEMICALS SEGMENT

(in millions)

Revenues

Current Quarter

Advanced Materials and Chemicals revenues for the three months ended June 30, 2024 improved $1 million primarily from volume increases in Motion Picture ($2 million).

Year-to-Date

Advanced Materials and Chemicals revenues for the six months ended June 30, 2024 declined $1 million mainly due to lower volumes in Industrial Film and Chemicals ($5 million) partially offset by pricing and product mix improvements in Industrial Film and Chemicals ($2 million) and volume increases for Motion Picture ($1 million).

Operational EBITDA

Current Quarter

Advanced Materials and Chemicals Operational EBITDA declined $3 million for the three months ended June 30, 2024 mainly reflecting higher selling and administrative costs ($2 million) and higher manufacturing costs ($2 million), partially offset by price and product mix improvements in Industrial Film and Chemicals ($2 million).

Year-to-Date

Advanced Materials and Chemicals Operational EBITDA declined $2 million for the six months ended June 30, 2024 primarily driven by lower volumes in Industrial Film and Chemicals ($5 million) and higher selling and administrative costs ($2 million) partially offset by price and product mix improvements in Industrial Film and Chemicals ($3 million).

BRAND SEGMENT

(in millions)

There were no material changes in Brand revenues or Operational EBITDA for the three and six months ended June 30, 2024 compared to the prior year periods.

RESTRUCTURING COSTS AND OTHER

Kodak recorded charges of $0 million and $5 million for the three and six months ended June 30, 2024, respectively, in Restructuring costs and other in the Consolidated Statement of Operations.

Kodak made cash payments related to restructuring of approximately $2 million and $4 million during the three and six months ended June 30, 2024, respectively.

The restructuring actions implemented in the first six months of 2024 are expected to generate future annual cash savings of approximately $9 million, which are expected to reduce future annual SG&A expenses and Cost of revenues by $4 million and $5 million, respectively. The majority of the annual savings are expected to be in effect by the end of the third quarter of 2024 as actions are completed.

LIQUIDITY AND CAPITAL RESOURCES

Management’s Assessment of Liquidity

Kodak ended the quarter with a cash balance of $251 million, a decrease of $4 million from December 31, 2023.

The financing transactions entered into during 2023, cash proceeds related to brand licensing arrangements and improvements in cash flow relating to pricing rationalization, cost reductions and operational efficiencies provided additional liquidity to the Company to fund on‐going operations and obligations, invest in growth opportunities in Kodak’s businesses of print and advanced materials and chemicals and for corporate infrastructure investments expected to contribute to improvements in cash flow.

Available liquidity includes existing cash balances and cash flows from operating activities. The amount of available liquidity is subject to fluctuations and includes cash balances held by various entities worldwide. At June 30, 2024 and December 31, 2023 approximately $144 million and $167 million, respectively, of cash and cash equivalents were held within the U.S. and approximately $107 million and $88 million, respectively, of cash and cash equivalents were held outside the U.S. Cash balances held outside the U.S. are generally required to support local country operations and may have high tax costs or other limitations that delay the ability to repatriate, and therefore may not be readily available for transfer to other jurisdictions. Kodak utilizes cash balances outside the U.S. to fund needs in the U.S. through the use of inter-company loans.

As of June 30, 2024 and December 31, 2023, outstanding inter-company loans to the U.S. were $453 million and $460 million, respectively, which include short-term inter-company loans from Kodak’s international finance center of $178 million and $173 million, respectively. In China, where approximately $34 million and $29 million of cash and cash equivalents was held as of June 30, 2024 and December 31, 2023, respectively, there are limitations related to net asset balances that may impact the ability to make cash available to other jurisdictions in the world. Under the terms of the Amended and Restated Term Loan Credit Agreement, the Company is permitted to invest up to $60 million (or $75 million after the Deleveraging Milestone Date) in Restricted Subsidiaries that are not Loan Parties and in joint ventures or Unrestricted Subsidiaries that are not party to the Amended and Restated Term Loan Credit Agreement.

The Company’s Hong Kong subsidiary has an inter-company loan from one of the Company’s Chinese subsidiaries with a maturity date of November 16, 2024, the proceeds of which were in turn loaned to the Company. The inter-company loan terms provide for it to be repaid over two years in four equal $20 million installments, the first of which was due by November 16, 2023 with the remaining installments due in 2024. The Company paid $2 million in the first quarter of 2024 and $10 million in the second quarter of 2024 towards the first $20 million installment. The outstanding amount of the intercompany loan as of June 30, 2024 was $68 million. The Company is evaluating alternatives for the remaining installments which would allow Kodak and its subsidiaries to perform their obligations to each other while minimizing the impact on U.S. liquidity taking into account requirements imposed by Chinese regulators. Any amounts repaid to the Chinese subsidiary may not be able to be loaned, repatriated or otherwise moved back to the U.S., in which case the Company’s U.S. liquidity would be reduced. If the inter-company loan is not extended, refinanced or amended and the Hong Kong subsidiary does not pay any of the individual installments by the end of the 30-day grace period following notice by the Chinese subsidiary after a failure to pay on the due date of such installment, the Hong Kong subsidiary would default on the inter-company loan. The Chinese subsidiary has not issued notice to the Hong Kong subsidiary based on the failure to make any installment payment that has come due.

Kodak's cash flows continue to be negatively impacted by higher manufacturing costs due to volume declines and increased labor, material and distribution costs, supply chain disruptions and shortages in materials and labor. The impacts from price increases, continued cost reduction actions and supply chain-related cost improvements continue to positively impact Kodak’s operations. The economic uncertainties surrounding the current inflationary environment and other global events represent additional elements of complexity in Kodak’s plans to return to sustainable positive cash flow. The Company cannot predict the duration and scope of such events, including the war in Ukraine and the conflicts involving Israel, and other factors such as the ability to continue to secure raw materials and components, the impact of rising costs of labor, commodity and distribution costs, the ability to maintain current pricing levels or how quickly and to what extent normal economic and operating conditions can resume.

During the third quarter of 2023, Kodak entered into multiple long-term brand licensing arrangements and recorded total deferred revenue of approximately $57 million. Kodak received approximately $12 million of cash proceeds related to these licensing arrangements in 2023, $40 million in the first quarter of 2024 and expects to receive $5 million in 2025.

Kodak's plans to return to sustainable positive cash flow include generating profitable revenues through pricing actions and customer-focused initiatives, implementing effective working capital utilization, reducing operating expenses, continuing to simplify the organizational structure, investing in information technology systems to drive operational efficiencies, generating cash from selling and leasing underutilized assets or through new licensing opportunities and implementing ways to reduce cash collateral needs.

Kodak believes its liquidity position is adequate to fund its operating and investing needs and to provide the flexibility to respond as necessary to ordinary changes in the business and economic environment. Kodak’s ability to adequately fund its long‐term liquidity, debt servicing and capital requirements will be dependent on generating positive cash flows from operations, managing world‐wide cash through intercompany loans, distributions or other mechanisms, and the ability to convert, redeem or extend the existing Series B and Series C Preferred Stock past their current maturities of May 26, 2026.

Amended and Restated Term Loan Credit Agreement

During the first quarter of 2024, the Company prepaid $17 million of the Term Loans with net proceeds from the sale of Target Non-Core Assets (as defined in the Amended and Restated Term Loan Agreement).

Letter of Credit Facility Agreement

Approximately $27 million and $31 million of letters of credit were issued under the Amended and Restated L/C Facility Agreement and L/C Facility Agreement as of June 30, 2024 and December 31, 2023, respectively. The letters of credit under the Amended and Restated L/C Facility Agreement are collateralized by cash collateral (the “L/C Cash Collateral”). The L/C Cash Collateral was $29 million and $32 million at June 30, 2024, and December 31, 2023, respectively, which was classified as Restricted Cash.

Cash Flow

Cash, cash equivalents and restricted cash balances were as follows:

(in millions)

Cash Flow Activity

(in millions)

Operating Activities

Net cash from operating activities declined $11 million for the six months ended June 30, 2024 as compared with the corresponding period in 2023 reflecting a decline in proceeds from insurance reimbursements ($16 million) and a refund from a governmental authority ($9 million), both received in the prior year period, a decrease in liabilities excluding borrowings and trade payables and increased investment in inventory partially offset by a decrease in trade receivables primarily due to $40 million of cash proceeds related to brand licensing received in the first quarter of 2024.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2024 decreased $9 million compared to the corresponding period in 2023 due to proceeds from the sale of assets ($17 million) partially offset by an increase in additions to properties ($8 million).

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2024 increased $18 million compared to the corresponding period in 2023 driven by the $17 million Amended and Restated Term Loan prepayment in the three months ending March 31, 2024.

Other Uses of Cash Related to Financing Transactions

The holders of the Term Loans are entitled to quarterly cash interest payments at a rate of 7.5% per annum and holders of the Series B Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 4.0% per annum. All interest and dividends have been paid when due.

Other Collateral Requirements

The NYS WCB requires security deposits related to self-insured workers’ compensation obligations, which security deposits are recalculated annually. Due to changes in 2019 to the manner in which the required security deposit is determined, the Company has been required to post additional collateral over the last several years. At December 31, 2022, the Company posted $75.0 million of collateral, representing 107% of the Company’s undiscounted actuarial workers’ compensation obligations. Effective May 1, 2023, the Company added New York to its existing workers compensation liability insurance policy and is no longer self-insured for future claims. As a result, the NYS WCB confirmed the Company will no longer be obligated to post any additional collateral. Further, the NYS WCB confirmed the Company can request a review of the security deposits supporting the historical liability beginning on July 1, 2025 with the submission of a current actuarial report. Based on the results of the actuarial valuation report, the required security deposits may be eligible for reduction in future periods.

Based on the legacy nature of the Company’s workers’ compensation obligations, the undiscounted actuarial obligation has been declining and the Company expects this trend to continue. While it may not be indicative of the rate of future declines, the undiscounted actuarial liability declined by an average of $5.3 million per year between 2014 and 2023. Accordingly, subject to the possibility of other changes to the calculation of required security deposits by the NYS WCB, the Company expects the amount of the required security deposits to decline over time and the gradual return of the security deposits that have been made or the capital used to support such security deposits.

As a result of the Company’s credit ratings, during the second quarter of 2020 two surety bond holders notified the Company they required approximately $9 million of incremental collateral. The Company reduced the surety bond value by approximately $9 million in July 2020 with an equivalent increase to an existing letter of credit with the NYS WCB. In the third quarter of 2023 the Company deposited $68 million directly with the NYS WCB and cancelled the corresponding letter of credit supporting the associated liability. The Company could be required to provide up to $13 million of letters of credit to the issuers of certain surety bonds in the future to fully collateralize the bonds.

Defined Benefit Pension and Postretirement Plans

Kodak made net contributions (funded plans) or paid benefits (unfunded plans) totaling approximately $9 million to its defined benefit pension and postretirement benefit plans in the first six months of 2024. For the balance of 2024, the forecasted contribution (funded plans) and benefit payment (unfunded plans) requirements for its pension and postretirement plans are approximately $6 million.

Kodak, in conjunction with the Kodak Retirement Income Plan Committee (“KRIP Committee”), continues to implement various actions to preserve and maximize the value of KRIP’s over-funding by reducing investment risk and improving the overall liquidity of KRIP. During the first quarter of 2024, the KRIP Committee outsourced the investment management of the plan to NEPC, LLC. Effective April 1, 2024, the KRIP Committee approved an updated investment policy that modified the target asset allocations by allocating a greater portion of KRIP’s assets to lower risk investments as well as interest rate hedging investments which aim to manage the liability interest rate risk associated with KRIP. As contemplated by the updated investment policy, NEPC subsequently initiated the redemption of a substantial majority of KRIP’s hedge fund investments and expanded its interest rate hedging strategy with a portion of those proceeds. During the second quarter of 2024, NEPC engaged a third-party broker to explore strategic options, including the potential secondary sale of KRIP’s private equity and certain other illiquid investments.

There can be no assurances that Kodak will receive excess assets from KRIP or concerning the timing or amount of any such receipt. All liabilities of KRIP must be satisfied before any excess assets revert to Kodak, and any amounts that ultimately revert to Kodak will depend on the amount of KRIP’s liabilities and the future investment performance and value of its assets. Also, any amount received will be subject to material excise tax and other obligations. To the extent Kodak receives net proceeds from excess KRIP assets, Kodak must use such proceeds to pay down the Term Loans to defined levels pursuant to the Plan Reversion Proceeds provisions of the Amended and Restated Term Loan Credit Agreement before such proceeds would be available for other purposes.

Capital Expenditures

Cash flow from investing activities included $19 million of capital expenditures for the six months ended June 30, 2024. Kodak expects approximately $40 million to $55 million of total capital expenditures for 2024.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of the Company’s Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The accounting policies most critical to the preparation of the consolidated financial statements and that require the most difficult, subjective or complex judgments are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2023 Form 10-K. There have been no material changes in the Company's critical accounting policies or estimates since December 31, 2023.

As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”), Kodak operates and conducts business in many foreign countries and as a result is exposed to fluctuations between the U.S. dollar and other currencies. Volatility in the global financial markets could increase the volatility of foreign currency exchange rates which would, in turn, impact sales and net income. For a discussion of the Company's exposure to market risk and how market risk is mitigated, refer to Part I, Item 1A "Risk Factors" and Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", contained in the 2023 Form 10-K.

Evaluation of Disclosure Controls and Procedures

Kodak maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Kodak’s reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including Kodak’s Executive Chairman and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Kodak’s management, with the participation of Kodak’s Executive Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Kodak’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, Kodak’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

Changes in Internal Control Over Financial Reporting

Kodak is in the process of a multi-year project to modernize and enhance the Company’s global information technology systems, to improve and standardize business and financial processes and to increase the efficiency and effectiveness of financial planning and reporting. As the phased implementation occurs, it may result in changes to processes and procedures which may result in changes to internal controls over financial reporting. As such changes occur, Kodak evaluates whether they materially affect the Company’s internal controls over financial reporting.

There have been no changes in Kodak’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, Kodak’s internal control over financial reporting.

See the Risk Factors set forth in Part I, Item 1A. of the 2023 Form 10-K for a detailed discussion of risk factors that could materially affect Kodak’s business, financial condition and results of operations.