Eastman Kodak Co (NYSE: KODK) Q2 2020 earnings call dated Aug. 11, 2020
Corporate Participants:
Paul Dils — Chief Tax Officer and Director of Investor Relations
James V. Continenza — Executive Chairman
David Bullwinkle — Senior Vice President and Chief Financial Officer
Presentation:
Operator
Ladies and gentlemen, thank you for standing by. and welcome to the Eastman Kodak Second Quarter 2020 Conference Call. [Operator Instructions]
It is now my pleasure to introduce, Paul Dils.
Paul Dils — Chief Tax Officer and Director of Investor Relations
Thank you, and good afternoon, everyone. I am Paul Dils, Eastman Kodak Company’s Chief Tax Officer and Director of Investor Relations. Welcome to Kodak’s second quarter 2020 earnings call. At 4:15 PM this afternoon, Kodak filed its second quarter 2020 Form 10-Q and issued its release and financial results for the second quarter.
You may access the presentation and webcast for today’s call on our Investor Center at investor.kodak.com. During today’s call, we will be making certain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.
All forward-looking statements are based upon Kodak’s expectations and various assumptions. Future events or results may differ from those anticipated or expressed in the forward-looking statements. Important factors that could cause actual events or results to differ materially from the forward-looking statements include, among others, the risks, uncertainties, and other factors described in more detail in Kodak’s filings with the US Securities and Exchange Commission from time to time. There may be other factors that may cause Kodak’s actual results to differ materially from the forward-looking statements.
All forward-looking statements attributable to Kodak or persons acting on its behalf apply only as of the date of this presentation and are expressly qualified in their entirety by the cautionary statements included or referenced in this presentation. Kodak undertakes no obligation to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.
In addition, the release just issued and the presentation provided contain certain measures that are deemed non-GAAP measures. Reconciliations to the most directly comparable GAAP measures have been provided with the release and within the presentation on our website in our Investor Center at investor.kodak.com. Speakers on today’s call are Jim Continenza, Kodak’s Executive Chairman; and David Bullwinkle, Chief Financial Officer of Kodak.
Before handing the call over to Jim, I would like to acknowledge our announcement last week regarding the appointment of a special committee of Independent Directors to conduct an internal review of Kodak’s activity in connection with the letter of interest from the US International Development Finance Corporation. In light of this internal review, we cannot discuss the potential loan or the related matters beyond the details provided on this call. 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.
James V. Continenza — Executive Chairman
Welcome, everyone, and thank you for joining the second quarter investor call for Kodak. Beginning on Slide 4, second quarter results were impacted by COVID-19 as the pandemic continue to present challenges for the Company around the world. Dave will provide more details on the second quarter results and year-to-date shortly.
As an essential business, we have remained operational. We put health and safety of our employees first by enforcing social distancing measures requiring mask and providing hand sanitizers to all the essential workers. I am grateful for the dedication and flexibility of the whole organization has shown at these unprecedented conditions.
In addition, as a company with experience in applied materials and chemicals, we have challenged ourselves to flex our manufacturing capabilities in order to serve our country and all of the essential workers on the front line of the pandemic. We will continue to produce our traditional Kodak products. We have also leveraged our facilities to manufacture face shields, IPA and film for printed circuit board that are used in ventilators.
We have continued to see the benefit of the new organizational structure that we implemented in 2019, the One Kodak customer-first model. In the way we go to market, the way our customers have reacted with us, we are more nimble, we are functional, accountable and measurable, which ultimately results in being a more reliable partner for our customers. In addition, the steps we took in 2019 to strengthen our balance sheet have provided us with financial flexibility to navigate throughout the pandemic. Recent conversion of the $95 million in convertible notes further strengthens the balance sheet.
Next, I want to take a moment to discuss the potential loan from the US government. Please keep in mind that the announcement two weeks ago was only a letter of interest, which was signed for a potential loan. More work is necessary to move this forward. The potential loan announced is about the ability to produce key starting materials and active pharmaceutical ingredients. Again, we call then KSM and APIs, for essential generic drugs in this country and on a much larger scale.
Kodak is an iconic American brand with a heritage and innovation including over 20,000 patents throughout its history. We have the potential to expand our production capabilities and capacity. Our existing chemical manufacturing operations is located in Eastman Business Park, a 1,200-acre city within a city in Rochester, New York, which is uniquely suited for chemical development and production.
Our vast infrastructure of Eastman Business Park includes a wide variety of industrial utilities, including steam, gas, electric wastewater treatment, access to 13 miles of rail in the park, as well as fire, safety and security services. It’s an incredible facility. Kodak also possesses deep expertise with over 100 years in chemicals manufacturing and experience in manufacturing unregulated KSMs, critical components in pharmaceutical production for the past few years.
Importantly, we appreciate and support the DFC’s decision to wait clarification before moving forward with the loan process. The proposed expansion of our chemical manufacturing operations to supply pharmaceutical needs does not affect our existing business. We remain 100% committed to our core business of print and advanced materials and chemicals, including the continuing manufacturing of unregulated KSMs and investing in groundbreaking innovations to meet our customer needs.
Turning to Slide 5, reinforcing this commitment, during the quarter, the Company announced several new products and enhancements to existing products, which support our vision for the print and digital packaging business. The product announcements include, enhancements to our industry-leading Kodak SONORA Plates, two new Kodak MAGNUS Platesetters, which will be the world’s fastest CTP devices, Kodak PRINERGY On-Demand Workflow Software, our first cloud-based platform, a joint development machine with UTECO called the UTECO Sapphire Digital Packaging Press known as the EVO Wide Press, powered by Kodak ULTRASTREAM continuous inkjet technology, a revolutionary new PROSPER ULTRA 520 Inkjet Press that will redefine what’s possible in terms of quality, productivity, and cost for digital printing.
I will now turn it over to Dave to discuss the 2020 second quarter and first half financial results.
David Bullwinkle — Senior Vice President and Chief Financial Officer
Thanks, Jim, and good afternoon. Today, the Company filed its Form 10-Q for the quarter ended June 30, 2020 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 highlight an important transaction which occurred subsequent to the second quarter. On July 29, 2020, the Company received conversion notices from holders of the Company’s 5% secured convertible notes due 2021 exercising their rights to convert an aggregate of $95 million of principal amount of the notes into shares of the Company’s common stock. The Company’s delivery of the conversion shares and its payment of the accrued interest satisfies the Company’s obligations under the notes. The remaining outstanding principal amounts of the notes is $5 million.
Additionally, I would like to make a few comments regarding the COVID-19 pandemic impacts. The COVID-19 pandemic did have a negative impact on our second quarter sales volumes and collections of accounts receivable. The conversion of accounts receivable to cash is taking longer and collection risk has increased since before the pandemic. The percentage of past due amounts in accounts receivable has doubled when compared to the prior year. The Company has been able to maintain our operations to serve our customers and adapt to the changes in their businesses.
We anticipate that sales volumes will improve in the third quarter as global recovery continues. I will now share further details on the full company results, operational EBITDA and cash flow for the second quarter and first half of 2020.
On Slide 6, for the second quarter of 2020, we reported revenues of $213 million compared to $307 million in the prior year quarter for a decline of $94 million. On a US GAAP basis, we reported a net loss of $5 million for the second quarter compared to net income of $201 million in the prior year quarter. The 2020 and 2019 second quarter results include expense of $4 million, an income of $3 million, respectively, related to changes in value for the derivative embedded in the Series A preferred stock and convertible notes.
The second quarter of 2020 results also include income of $1 million related to the net gain on the sale of assets. The second quarter of 2019 includes income of $209 million primarily related to the impact of the gain on the sale of the Flexographic Packaging Business. Excluding these current and prior quarter items, loss for 2020 was $2 million, compared to a loss of $11 million in the prior year quarter, reflecting an improvement of $9 million.
Operational EBITDA for the quarter was a negative $7 million, compared to negative $1 million in the prior year quarter. The decline in operational EBITDA is driven by the reduction in revenues as a result of the COVID-19 impacts on our business. Operational EBITDA for the second quarter was unfavorably impacted by higher manufacturing costs driven by unfavorable cost absorption due to volume declines of $13 million, partially offset by cost savings, including furloughs and pay reductions. Foreign exchange did not have an impact on operational EBITDA.
During the second quarter, volumes for SONORA Process Free Plates declined by 33% and the annuity revenue for PROSPER declined by 25%, which was attributable to the market downturn related to the COVID-19 pandemic. Overall, PROSPER revenue was flat year-over-year as a result of growth in print head component sales attributable to increased demand in packaging and personal care applications. However, we will continue to face future revenue fluctuations throughout the year in the PROSPER business as these applications develop. We continue to invest in future growth areas of ULTRASTREAM and advanced materials, which will lead to the new product introductions, Jim referred to earlier.
Turning to Slide 7, for the first half of 2020, we reported revenues of $480 million compared to $598 million in the prior-year period for a decline of $118 million. We reported a net loss of $116 million for the first half compared to a net income of $183 million in the prior year. The 2020 and 2019 first half results include income of $49 million and $2 million, respectively, related to changes in the value for the derivative embedded in the Series A preferred stock and convertible notes.
The first half of 2020 also includes the impact of a trade name impairment for $3 million, an increase in accounts receivable reserves of $4 million, a $167 million non-cash expense as a result of the increase in deferred tax valuation allowances outside the US and income of $9 million related to the net gain on the sale of assets. The first half of 2019 includes income of $209 million related primarily to the impact of the gain on the sale of the Flexographic Packaging Business.
Excluding these current and prior year items, results for 2020 were breakeven compared to a loss of $28 million in the prior year. This increase reflects the impacts of our cost reduction initiatives as we continue the transformation of our business, focused on the key areas of print, advanced materials, and chemicals.
Operational EBITDA for the period was a negative $15 million compared to a negative $6 million in the prior year period. Excluding the increase in accounts receivable reserves of $4 million, operational EBITDA declined by $5 million. Operational EBITDA for the first half of the year was unfavorably impacted by higher manufacturing costs, driven by unfavorable cost absorption due to volume declines of $19 million, partially offset by cost savings, including furloughs and pay reductions. Foreign exchange did not have an impact on operational EBITDA.
On a year-to-date basis volumes for SONORA Process Free Plates declined by 9% and the annuity revenue for PROSPER declined by 14% which was attributable to the market downturn related to the COVID-19 pandemic. Overall, PROSPER revenue increased $1 million compared to the prior year period as a result of growth in print head component sales attributable to increased demand in packaging and personal care applications. However, as I noted previously, we will continue to face future revenue fluctuations throughout the year in the PROSPER business, as these applications develop. We also continue to invest in future growth areas of ULTRASTREAM and advanced materials.
Moving on to the Company cash performance presented on Slide 8, the Company ended the second quarter with $180 million in cash and cash equivalents, a decrease of $53 million from December 31, 2019. For the six months ending June 30, 2020, cash used in operating activities was $64 million, driven primarily by cash used from net earnings of $33 million and cash used from balance sheet changes of $31 million, including a change in working capital of $3 million, and a decrease in other liabilities of $31 million.
Accounts payable decreased by $50 million, inventory increased by $17 million and accounts receivable decreased by $64 million. Included in the balance sheet changes is a $14 million historical obligation to Kodak Alaris that was eliminated by offsetting a $11 million of accounts receivable and the recognition of a $3 million deferred gain. In addition, cash used for the reduction of other liabilities includes pension payments, severance payments for restructuring actions, value-added tax and income tax payments and accrued interests. Payments for the first half of 2020 have increased for income taxes and restructuring payments, offset by a reduction in accrued interest.
Cash used in investing activities was $5 million in the first half of 2020 as compared to cash provided by investing activities of $297 million in the prior year period. The prior year included proceeds from the sale of the Flexographic Packaging division. Cash used in financing activities was $6 million in the first half compared to a use of $294 million in the prior year period. The prior year included $395 million of cash used for the full repayment of the senior secured first lien term credit agreement, partially offset by the issuance of the secured convertible notes of $100 million.
As I have indicated on past calls, the Company was focused on reducing restricted cash in 2020 in order to fund operations and our continued restructuring activities. In the first half of 2020, restricted cash was reduced by $25 million due to our efforts, which included the amendment of our ABL facility during the first quarter. Restricted cash at the end of the quarter was $32 million. We will continue to focus on alternatives to reduce restrictions on cash.
Additionally, in order to make cash available to other jurisdictions across the Company and in the world, during the second quarter, a Chinese subsidiary of Kodak transferred approximately $70 million to a US subsidiary of Kodak to complete an inter-company transaction. This transaction reduces the cash considered trapped in China and enables the Company to operate with lower minimum operating cash balances, which further strengthens the Company’s financial position. Finally, our Form 10-Q discloses that we remain in compliance with covenants under our credit agreements.
To summarize, the COVID-19 pandemic had a significant impact on our operations in the quarter and the Company was able to reduce costs to partially offset these impacts. The Company’s balance sheet and financial position have been significantly strengthened due to the inter-company transaction in the second quarter and the conversion of secured convertible notes, which occurred subsequent to the quarter.
I will now turn the discussion back to Jim.
James V. Continenza — Executive Chairman
I am extremely proud of Kodak and our ability to navigate the past few months. Despite the challenges from the pandemic, we continued to innovate and move our business forward. The six recent products announced, the most products introduced by Kodak in several years, highlights our commitment to R&D and represents important steps towards restoring Kodak to its rightful place at the forefront of print. By doubling down on digital and inkjet, Kodak is well positioned to capture the opportunity with accelerated shift to digital print that the world is now experiencing.
Thank you for your time today. We look forward to speaking with you again next quarter.
Operator
[Operator Closing Remarks]