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10-Q: EASTMAN KODAK CO

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 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 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 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, 2020 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, 2021, 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 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 comply with the covenants in its various credit facilities;

Kodak's ability to fund continued investments, capital needs and restructuring payments and service its debt and Series B Preferred Stock and Series C Preferred Stock;

The impact of the global economic environment or medical epidemics such as the COVID-19 pandemic, including the restrictions and other actions implemented to fight the COVID-19 pandemic;

The impact of the investigations, litigations and claims arising out of the circumstances surrounding the DFC Announcement;

The performance by third parties of their obligations to supply products, components or services to Kodak and the 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 COVID-19 pandemic;

Changes in foreign currency exchange rates, commodity prices, interest rates and tariff rates;

Kodak's ability to effectively anticipate technology trends and develop and market new products, solutions and technologies;

Kodak's ability to effectively compete with large, well-financed industry participants;

Continued sufficient availability of borrowings and letters of credit under the Amended ABL Credit Agreement and L/C Facility Agreement, Kodak's ability to obtain additional financing if and as needed and Kodak's ability to provide or facilitate financing for its customers;

The potential impact of cyber-attacks and other data security incidents that disrupt Kodak's operations; and

Kodak's ability to effect strategic transactions such as acquisitions, strategic alliances, divestitures and similar transactions, or to achieve the benefits sought to be achieved from such strategic transactions.

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 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.

[34]

OVERVIEW

Kodak is a global technology company focused on print, advanced materials and chemicals. Kodak provides industry-leading hardware, software, consumables and services primarily to customers in commercial print, packaging, publishing, manufacturing and entertainment. Kodak is committed to environmental stewardship and ongoing leadership in developing sustainable solutions. Kodak's broad portfolio of superior products, responsive support and world-class research and development ("R&D") make Kodak solutions a smart investment for customers looking to improve their profitability and drive growth.

Revenue increased $78 million (37%) and $76 million (16%) when compared to the prior year quarter and year-to-date periods, respectively, including the favorable impact of currency ($10 million and $19 million) in the current year quarter and year-to-date periods, respectively.

The film industry and segments within the print 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 across Kodak's print divisions, 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:

The COVID-19 pandemic continues to impact Kodak's operations. While Kodak has experienced a substantial recovery of customer demand and volumes when compared to the prior year quarter, certain businesses are experiencing supply chain disruptions, shortages in materials and labor, and increased commodity and distribution costs. While these businesses have been able to meet current demand and have implemented numerous measures to mitigate these challenges, the full impact of the COVID-19 pandemic on Kodak's operations and financial performance remains uncertain and will depend on the duration of the pandemic as well as other factors including, vaccination coverage, infection rates, the duration and effectiveness of the vaccines and their effectiveness against future variants. Kodak continued to work closely with government and health officials in the jurisdictions where it operates to protect employees world-wide, with particular measures in place for those working in plants and distribution facilities. The manufacturing facilities have returned or are at close to normal capacity. None of Kodak's manufacturing facilities were ordered to close by governmental authorities.

Traditional Printing'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. While traditional digital plate offerings are experiencing pricing pressure, innovations in Kodak product lines which command premium prices, such as SONORA Process Free Plates, are expected to offset some of the long-term price erosion in the market and manufacturing efficiencies and cost reductions are expected to mitigate the impact of revenue declines and higher raw material costs on earnings. To further mitigate the impact of higher aluminum, energy and packaging costs, Kodak announced surcharges on purchases of plates in April 2021. The surcharges were effective largely beginning in the latter part of the second quarter of 2021 and will be periodically reviewed and adjusted accordingly. Traditional Printing revenues accounted for approximately 58% and 57% of Kodak's revenues for the three and six months ended June 30, 2021. Traditional Printing's revenues increased $50 million (42%) and $44 million (16%) compared with the prior year quarter and year-to-date periods, respectively, primarily due to the impact of the pandemic on the prior year periods. Segment earnings improved $5 million (500%) and $9 million (450%) compared to the prior year quarter and year-to-date periods, respectively, reflecting the impact of higher revenues and operating cost reductions.

Many of the segment's customers around the globe continued to operate during the COVID-19 pandemic but at decreased volumes. The Traditional Printing segment was impacted by supply chain disruptions and travel restrictions and manufacturing volumes were reduced, primarily in 2020, in response to the decline in customer demand for the segment's products. The segment has seen some recovery of volumes starting in the later part of 2020 and continued improvement in customer demand in the first six months of 2021. However, certain markets in the printing industry are expected to take longer to recover to pre-pandemic levels which makes the duration and extent of demand declines and the ability to offset increased commodity and distribution costs through surcharges uncertain.

[35]

In Digital Printing, 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, excluding the negative impacts during the COVID-19 pandemic. 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. Digital Printing's revenues improved compared with the prior year quarter, $10 million (19%) and year-to-date, $9 million (8%) periods primarily due to the impact of the pandemic on the prior year periods. Segment operations also improved by $3 million (100%) and $5 million (100%) compared to the prior year quarter and year-to-date periods.

Many of the Digital Printing segment customers around the globe continued to operate during the COVID-19 pandemic but at decreased volumes. The Digital Printing segment was impacted by supply chain disruptions and travel restrictions and manufacturing volumes were reduced, primarily in 2020, in response to the decline in customer demand for the segment's products. The segment has seen some recovery of volumes starting in the later part of 2020 and continued improvement in customer demand in the first six months of 2021; however, certain markets in the printing industry are expected to take longer to recover to pre-pandemic levels which makes the duration and extent of demand declines uncertain.

Advanced Materials and Chemicals revenues increased $16 million (42%) and $20 million (25%) compared with the prior year quarter and year-to-date periods, primarily due to the impact of the pandemic on the prior year periods. The segment results improved $8 million (114%) and $13 million (81%) compared to the prior year quarter and year-to-date periods, respectively. Kodak plans to continue promoting the use of film and chemicals to utilize as much manufacturing capacity as possible.

Advanced Materials and Chemicals experienced adverse impacts from the COVID-19 pandemic in 2020, most notably in Motion Picture where the industry was heavily impacted and productions in affected regions were suspended. Each of the segment's product lines was impacted by lowered demand and travel restrictions. The segment has seen a recovery of customer demand starting in the later part of 2020 for Motion Picture film and other Advanced Materials and Chemicals product lines, which continued in the first six months of 2021 with volume improvements compared with the prior year quarter and year-to-date periods. Advanced Materials and Chemicals has experienced supply chain disruptions and shortages associated with raw materials as well as labor shortages in certain manufacturing areas. The segment has implemented numerous measures to mitigate these challenges while meeting current demand, however, the duration and extent of supply chain distributions and labor shortages remain unclear.

Kodak is working to organically expand its key starting materials ("KSM") production at Eastman Business Park in Rochester, New York while exploring alternatives to obtain necessary Current Good Manufacturing Practices ("cGMP") and FDA certification to make regulated KSMs and active pharmaceutical ingredients ("APIs") and otherwise utilize its assets and technology in the healthcare space. Depending on its assessment of the business opportunity and availability of capital, Kodak may also explore alternative means to further expand its chemical manufacturing operations for purposes of producing materials to support the healthcare industry. A portion of the capital raised by the Company on February 26, 2021 is being used to fund these exploratory activities and may be used to fund expansion opportunities that the Company considers attractive.

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.

[36]

CURRENT KODAK OPERATING MODEL AND REPORTING STRUCTURE

REPORTABLE SEGMENTS

Kodak has four reportable segments: Traditional Printing, Digital Printing, Advanced Materials and Chemicals, and Brand. The balance of Kodak's operations, which do not meet the criteria of a reportable segment, are reported in All Other and primarily represent the Eastman Business Park operations. Refer to the 2020 Form 10-K for a description of the Company's segments.







        Segment Revenues
                                              Three Months Ended           Six Months Ended
                                                   June 30,                    June 30,
        (in millions)                        2021            2020          2021          2020
        Traditional Printing               $     169       $     119     $    317       $  273
        Digital Printing                          62              52          126          117
        Advanced Materials and Chemicals          54              38          100           80
        Brand                                      3               2            6            5
        All Other                                  3               2            7            5
        Consolidated total                 $     291       $     213     $    556       $  480
        








        Segment Operational EBITDA and Consolidated Income (Loss) from Operations Before
        Income Taxes
                                                       Three Months Ended               Six Months Ended
                                                            June 30,                        June 30,
        (in millions)                                 2021             2020           2021             2020
        Traditional Printing                       $        6       $        1     $       11       $        2
        Digital Printing                                    -               (3 )            -               (5 )
        Advanced Materials and Chemicals                    1               (7 )           (3 )            (16 )
        Brand                                               3                2              5                4
        All Other                                           1                1              1                -
        Depreciation and amortization                      (8 )            (10 )          (16 )            (20 )
        Restructuring costs and other                       -               (1 )           (1 )             (8 )
        Stock based compensation                           (1 )              -             (4 )             (1 )
        Consulting and other costs (1)                     (4 )             (1 )           (9 )             (1 )
        Idle costs (2)                                      -               (1 )           (1 )             (1 )
        Other operating income, net, excluding
        income
          from transition services agreement (3)            6                -              7                6
        Interest expense (4)                              (10 )             (4 )          (14 )             (8 )
        Pension income excluding service cost
        component (4)                                      26               27             51               53
        Other (charges) income, net (4)                    (1 )             (8 )           (1 )             45
        Consolidated income (loss) from
        operations before
          income taxes                             $       19       $       (4 )   $       26       $       50
        


(1) Consulting and other costs are primarily professional services and internal costs associated with certain corporate strategic initiatives and investigations.

(2) Consists of 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) $2 million and $4 million of income from the transition services agreement with the purchaser of Kodak's Flexographic Packaging Business was recognized in the three and six months ended June 30, 2020, respectively. No income has been recognized in 2021. The income was reported in Other operating income, net in the Consolidated Statement of Operations. Other operating income, net is typically excluded from the segment measure. However, the income from the transition services agreement was included in the segment measure.

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

[37]

Kodak decreased workers' compensation reserves by approximately $3 million in the second quarter of 2021 driven by changes in discount rates. The decrease in reserves in the second quarter of 2021 impacted gross profit by approximately $2 million and SG&A by approximately $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 (loss) from operations excluding the provision for income taxes; non-service cost components of pension and OPEB income; depreciation and amortization expense; restructuring costs; stock-based compensation expense; consulting and other costs; idle costs; other operating income, net (unless otherwise indicated); interest expense and other (charges) 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.







        2021 COMPARED WITH 2020
        SECOND QUARTER RESULTS OF OPERATIONS
                                                         Three Months Ended June 30,                                  Six Months Ended June 30,
                                                      % of                   % of                                 % of                    % of
        (in millions)                      2021       Sales       2020      Sales        $ Change      2021       Sales        2020      Sales        $ Change
        Revenues                           $ 291                  $ 213                 $       78     $ 556                  $  480                 $       76
        Cost of revenues                     243                    192                         51       468                     423                         45
        Gross profit                          48          16 %       21         10 %            27        88          16 %        57         12 %            31
        Selling, general and
        administrative expenses               42          14 %       34         16 %             8        88          16 %        82         17 %             6
        Research and development costs         8           3 %        8          4 %             0        16           3 %        17          4 %            (1 )
        Restructuring costs and other          -           0 %        1          0 %            (1 )       1           0 %         8          2 %            (7 )
        Other operating income, net           (6 )        (2 )%      (3 )       (1 )%           (3 )      (7 )        (1 )%      (10 )       (2 )%            3
        Earnings (loss) from operations
        before interest
          expense, pension income
        excluding service cost
          component, other charges
        (income), net and
          income taxes                         4           1 %      (19 )       (9 )%           23       (10 )        (2 )%      (40 )       (8 )%           30
        Interest expense                      10           3 %        4          2 %             6        14           3 %         8          2 %             6
        Pension income excluding service
        cost component                       (26 )        (9 )%     (27 )      (13 )%            1       (51 )        (9 )%      (53 )      (11 )%            2
        Other charges (income), net            1           0 %        8          4 %            (7 )       1           0 %       (45 )       (9 )%           46
        Earnings (loss) from operations
        before
          income taxes                        19           7 %       (4 )       (2 )%           23        26           5 %        50         10 %           (24 )
        Provision for income taxes             3           1 %        1          0 %             2         4           1 %       166         35 %          (162 )
        Net income (loss)                  $  16           5 %    $  (5 )       (2 )%   $       21     $  22           4 %    $ (116 )      (24 )%   $      138
        


[38]

Revenue

Current Quarter

For the three months ended June 30, 2021 revenues improved $78 million compared with the same period in 2020, driven by increased volume within Traditional Printing ($41 million), Advanced Materials and Chemicals ($17 million) and Digital Printing ($9 million) as well as favorable foreign currency ($10 million). The revenue improvements were offset by unfavorable pricing and product mix in Digital Printing and Advanced Materials and Chemicals (each $1 million). See segment discussions for additional details.

Year-to-Date

For the six months ended June 30, 2021 revenues improved $76 million compared with the same period in 2020, driven by increased volume within Traditional Printing ($31 million), Advanced Materials and Chemicals ($19 million), Digital Printing ($8 million) and Other ($2 million) as well as favorable foreign currency ($19 million). The revenue improvements were offset by unfavorable pricing and product mix in Traditional Printing and Digital Printing (each $3 million). See segment discussions for additional details.

Gross Profit

Current Quarter

Gross profit for the three months ended June 30, 2021 improved approximately $27 million compared with the same period in 2020 primarily due to improved manufacturing costs driven by more favorable cost absorption ($15 million) from improved volume, increased volume within Advanced Materials and Chemicals and Traditional Printing ($6 million and $1 million, respectively) and lower depreciation and amortization expenses ($2 million) partially offset by higher aluminum costs ($5 million). See segment discussions for additional details.

Year-to-Date

Gross profit for the six months ended June 30, 2021 improved approximately $31 million compared with the same period in 2020 primarily due to improved manufacturing costs driven by more favorable cost absorption ($20 million) from improved volume, increased volume in Advanced Materials and Chemicals ($7 million), lower depreciation and amortization expenses ($4 million) and favorable foreign currency ($1 million) partially offset by higher aluminum costs ($6 million), volume declines and unfavorable pricing and product mix in Digital Printing ($2 million and $1 million, respectively) and unfavorable pricing and product mix in Traditional Printing ($1 million). See segment discussions for additional details.

Selling, General and Administrative Expenses

Consolidated SG&A increased $8 million and $6 million in the three and six months ended June 30, 2021, respectively. The $8 million increase in the three months ended June 30, 2021 was driven by increased investment in segment selling and marketing activities ($5 million) primarily due to temporary furloughs and pay cuts that were instituted in the second quarter of 2020 ($3 million) that largely ended in January 2021 as well as higher consulting and project costs associated with the internal and external investigations that started in the third quarter of 2020 ($3 million). The $6 million increase in the six months ended June 30, 2021 was driven by higher consulting and project costs associated with the internal and external investigations that started in the third quarter of 2020 ($8 million) and a $3 million increase in stock-based compensation expense primarily attributable to equity awards granted to the Company's Executive Chairman and Chief Executive Officer in the current year. The increases in consolidated SG&A in the six-month period were partially offset by a lower investment in segment selling and marketing activities ($4 million) driven by cost reduction efforts as well as higher bad debt expense in the prior year period reflecting the increased collection risk associated with the COVID-19 pandemic ($3 million).

Research and Development Costs

Consolidated R&D expenses remained flat for the quarter and decreased $1 million for the year, primarily due to cost reduction efforts.

Other Charges (Income), Net

The change in Other charges (income), net was primarily driven by the embedded conversion features derivative liability associated with the Convertible Notes in 2020. Refer to Note 12, "Other Charges (Income), Net" and Note 20, "Financial Instruments".

Provision for Income Taxes

. . .

Aug 10, 2021

COMTEX_391339524/2041/2021-08-10T16:14:23

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