The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES
TO FINANCIAL STATEMENTS (Unaudited)
NOTE 1: BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
BASIS OF PRESENTATION
The consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results of operations, financial position and cash flows of Eastman Kodak Company (“EKC” or the “Company”) and all companies directly or indirectly controlled, either through majority ownership or otherwise (collectively, “Kodak”). The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These consolidated interim statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the current period classification due to changes to Kodak’s organization structure effective January 1, 2017 and April 1, 2017 and a change in the presentation of discontinued operations and assets held for sale. In addition to the changes in segment reporting under the new organization structure, solvent recovery income for the Consumer and Film segment previously reported in Cost of Revenues is reported in Revenues and there is a change in the segment measure of profitability. Refer to Note 20, “Segment Information” and Note 21, “Discontinued Operations” for additional information.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2017-09, Compensation—Stock Compensation (Topic 718) — Scope of Modification Accounting, to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. The ASU is effective prospectively for annual and interim periods beginning after December 15, 2017 (January 1, 2018 for Kodak). Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. Kodak early adopted ASU 2017-09 effective April 1, 2017. The adoption of this guidance had no impact on Kodak’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No: 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The ASU simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. The ASU requires entities to calculate a goodwill impairment as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The same one-step impairment test applies to goodwill at all reporting units, even those with zero or negative carrying amounts. The ASU requires entities to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The ASU is effective prospectively for annual periods beginning after December 15, 2019, (January 1, 2020 for Kodak) with early adoption permitted for goodwill impairment tests performed after January 1, 2017. Kodak early adopted ASU 2017-04 effective January 1, 2017. The adoption of this guidance had no impact on Kodak’s Consolidated Financial Statements. As of September 30, 2017, the Unified Workflow Solutions reporting unit had a negative carrying value. Total goodwill assigned to the Unified Workflow Solutions reporting unit is $6 million.
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The ASU requires changes in the Company’s restricted cash to be classified as either operating activities, investing activities or financing activities in the Consolidated Statement of Cash Flows, depending on the nature of the activities that gave rise to the restriction. The new standard is effective for annual reporting periods beginning after December 15, 2017, (January 1, 2018 for Kodak) including interim reporting periods within those annual reporting periods. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. Kodak early adopted ASU 2016-18 effective January 1, 2017 which resulted in a decrease of $9 million in net cash flows provided by investing activities from what was previously reported for the nine-month period ended September 30, 2016.
[7]
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Class
ification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides clarification with respect to classification of several cash flow issues on the Statement of Cash Flows including debt prepayment or extinguishment costs, proceeds from the settlem
ent of insurance claims, and distributions received from equity method investees.
The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 (January 1, 2018 for Kodak). Kodak ear
ly adopted ASU 2016-15 retrospectively effective January 1, 2017. The adoption of this guidance had no
impact on Kodak’s Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. ASU 2016-16 requires the recognition of the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. The new standard is effective on a modified retrospective basis for annual reporting periods beginning after December 15, 2017, (January 1, 2018 for Kodak) including interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance (January 1, 2017 for Kodak). Kodak early adopted ASU 2016-16 on a modified retrospective basis during the first quarter of 2017. The adoption of this guidance had no impact on Kodak’s Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires entities to report the service cost component in the same line item(s) as other compensation costs arising from services rendered during the period and to report all other components of net benefit costs outside a subtotal of income from operations. In addition, the ASU allows only the service cost component to be eligible for capitalization when applicable. ASU 2017-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (January 1, 2018 for Kodak). Retrospective application is required for the presentation of the service cost and other cost components however the restrictions on the capitalization eligibility will be applied prospectively from the date of adoption. The components of net benefit cost are shown in Note 14, “Retirement Plans and Other Postretirement benefits”.
The guidance will impact presentation in the Consolidated Financial Statements and the capitalization of costs to inventory. The current presentation of the service cost component is consistent with the requirements of the new standard. Upon adoption, the other components (which are currently being presented within Cost of revenues, Selling and general administrative expenses and Research and development costs) are expected to be presented separately on the face of the Consolidated Statement of Operations. The segment profit measure currently includes only the service cost and amortization of prior service credits components of net periodic pension costs (refer to Note 20, “Segment Information”).
In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 defines in-substance nonfinancial assets, provides guidance with respect to accounting for partial sales of nonfinancial assets and conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard (Topic 606 as described below). ASU 2017-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (January 1, 2018 for Kodak) and allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application recognized at the date of initial application. Kodak expects to apply the modified retrospective adoption approach and expects that application of this standard will not have a significant impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. In addition, the ASU requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually.
The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 (January 1, 2020 for Kodak). Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018 (January 1, 2019 for Kodak). Kodak is currently evaluating the impact of this ASU.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets and eliminates certain real estate-specific provisions. The new leasing standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 (January 1, 2019 for Kodak). Early adoption is permitted. Kodak plans to adopt the new standard on the effective date and is currently evaluating the impact of this ASU on its financial statements. Kodak anticipates that the adoption of the amended lease guidance will materially affect its consolidated balance sheet and will require certain changes to its systems and processes.
[8]
In January 2016, the FASB issued ASU 2016-01, Financial Instruments
—
Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 primarily affects the accounting for equity investments, financial liab
ilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the ASU all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will gen
erally be measured at fair value through earnings. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The clas
sification and measurement guidance will be effective for Kodak beginning January 1, 2018, including interim periods within those fiscal years. Kodak does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Sta
tements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and most industry-specific guidance. The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date of ASU 2014-09. In 2016 the FASB issued ASU 2016-08, ASUs 2016-10 through 12 and ASU 2016-20 clarifying guidance regarding principle vs agent considerations, identification of performance obligations, analysis of licensing transactions, impairment considerations and disclosures. The new revenue standards are collectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (January 1, 2018 for Kodak) and allow either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application recognized at the date of initial application. Kodak currently anticipates applying the modified retrospective adoption approach. Brand license revenue recognized in the three months ended September 30, 2017 of $6 million would be recognized over time under the new revenue standards, which will result in a transition adjustment of $6 million. With the exception of brand license revenue, Kodak has not identified any changes in the timing of revenue recognition which will result in a material transition adjustment. Kodak’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date. Kodak is in the process of implementing appropriate changes to the business processes, systems and controls to support recognition and disclosure under the new standard. Training of employees on the impacts of the standard and changes to processes, systems and controls will continue throughout 2017.
NOTE 2: CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Statement of Financial Position that sums to the total of such amounts shown in the Statement of Cash Flows:
|
|
September 30,
|
|
|
December 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
342
|
|
|
$
|
434
|
|
Restricted cash included in Other current assets
|
|
|
13
|
|
|
|
8
|
|
Long-term restricted cash
|
|
|
11
|
|
|
|
36
|
|
Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows
|
|
$
|
366
|
|
|
$
|
478
|
|
Restricted cash included in Other current assets on the Statement of Financial Position primarily represents amounts which support hedging activities.
Long-term restricted cash as of September 30, 2017 and December 31, 2016 includes $6 million and $7 million, respectively, of security posted related to Brazilian legal contingencies. Long-term restricted cash as of December 31, 2016 also included $25 million supporting compliance with the Excess Availability threshold under the Amended and Restated Credit Agreement (“Amended Credit Agreement”). During the second quarter of 2017, the amount of outstanding letters of credit issued under the Amended Credit Agreement was reduced by $20 million, which had a corresponding reduction in the amount of long-term restricted cash necessary to support compliance with the Excess Availability threshold. See Note 8, “Commitments and Contingencies” and “Sources of Liquidity” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
NOTE 3: RECEIVABLES, NET
|
|
September 30,
|
|
|
December 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Trade receivables
|
|
$
|
263
|
|
|
$
|
277
|
|
Miscellaneous receivables
|
|
|
36
|
|
|
|
34
|
|
Total (net of allowances of $9 as of September 30, 2017 and $8 as of December 31, 2016)
|
|
$
|
299
|
|
|
$
|
311
|
|
[9]
Approximately $26 million of the total trade receivable amounts as of both September 30, 2017 and December 31, 2016 will potentially be settled through customer deductions in lieu of cash payments. Such deductions represent rebates owed to customers and are included in Other current liabilities in the accompanying Consolidated Statement of Financial Position.
NOTE 4: INVENTORIES, NET
|
|
September 30,
|
|
|
December 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Finished goods
|
|
$
|
188
|
|
|
$
|
149
|
|
Work in process
|
|
|
64
|
|
|
|
57
|
|
Raw materials
|
|
|
64
|
|
|
|
65
|
|
Total
|
|
$
|
316
|
|
|
$
|
271
|
|
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill by reportable segment. The Enterprise Inkjet Systems, Advanced Materials and 3D Printing Technology and Eastman Business Park segments do not have goodwill and are therefore not presented:
(in millions)
|
|
Print
Systems
|
|
|
Flexographic Packaging
|
|
|
Software and
Solutions
|
|
|
Consumer
and Film
|
|
|
Consolidated Total
|
|
Balance as of December 31, 2016
|
|
$
|
56
|
|
|
$
|
20
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
88
|
|
Impairment
|
|
|
(56
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(56
|
)
|
Balance as of September 30, 2017
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
32
|
|
Gross goodwill and accumulated impairment losses were $96 million and $8 million, respectively, as of December 31, 2016 and $96 million and $64 million, respectively, as of September 30, 2017.
The Print Systems segment has two goodwill reporting units: Prepress Solutions and Electrophotographic Printing Solutions. The Software and Solutions segment has two goodwill reporting units: Kodak Technology Solutions and Unified Workflow Solutions. The Consumer and Film segment has two goodwill reporting units: Consumer Products and Motion Picture, Industrial Chemicals and Films. The Flexographic Packaging segment, Enterprise Inkjet Systems segment, Advanced Materials and 3D Printing Technology segment and Eastman Business Park segment all have one goodwill reporting unit. Goodwill is recorded in the Prepress Solutions, Flexographic Packaging, Unified Workflow Solutions and Consumer Products reporting units.
Given the decline in Kodak’s financial projections for the year and its market capitalization from the last goodwill impairment test (December 31, 2016), Kodak performed an interim goodwill impairment test as of September 30, 2017. Kodak utilized the discounted cash flow method and guideline public company method for the reporting units with goodwill. For these reporting units, Kodak selected equal weighting of the guideline public company method and the discounted cash flow method as the valuation approaches produced comparable ranges of fair value. Fair values for the other reporting units were estimated using the discounted cash flow method only.
Based upon the results of Kodak’s September 30, 2017 analysis, Kodak concluded that the Prepress Solutions reporting unit’s carrying value exceeded its fair value and recorded a pre-tax goodwill impairment loss of $56 million in the Consolidated Statement of Operations. No impairment of goodwill was indicated for the other reporting units.
The gross carrying amount and accumulated amortization by major intangible asset category as of September 30, 2017 and December 31, 2016 were as follows:
|
|
September 30, 2017
|
(in millions)
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Weighted-Average
Amortization Period
|
Technology-based
|
|
$
|
105
|
|
|
$
|
60
|
|
|
$
|
45
|
|
|
6 years
|
Kodak trade name
|
|
|
40
|
|
|
|
-
|
|
|
|
40
|
|
|
Indefinite life
|
Customer-related
|
|
|
11
|
|
|
|
6
|
|
|
|
5
|
|
|
6 years
|
Other
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
21 years
|
Total
|
|
$
|
158
|
|
|
$
|
66
|
|
|
$
|
92
|
|
|
|
[10]
|
|
December 31, 2016
|
(in millions)
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Weighted-Average
Amortization Period
|
Technology-based
|
|
$
|
122
|
|
|
$
|
57
|
|
|
$
|
65
|
|
|
6 years
|
Kodak trade name
|
|
|
40
|
|
|
|
-
|
|
|
|
40
|
|
|
Indefinite life
|
Customer-related
|
|
|
26
|
|
|
|
12
|
|
|
|
14
|
|
|
6 years
|
Other
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
21 years
|
Total
|
|
$
|
190
|
|
|
$
|
69
|
|
|
$
|
121
|
|
|
|
In the third quarter of 2017, due to canceling its copper mesh touch screen program, Kodak wrote off related intangible assets with a gross carrying amount of $33 million and accumulated amortization of $21 million and recorded an impairment charge of $12 million.
Amortization expense related to intangible assets was $5 million and $4 million for the three months ended September 30, 2017 and 2016 respectively, and $14 million and $15 million for the nine months ended September 30, 2017 and 2016, respectively.
During the first quarter of 2017, Kodak recorded $4 million to adjust the Prosper intangible asset carrying value to the amount that would have been recorded had the Prosper intangible assets been continuously classified as held and used. Refer to Note 10, “Other Operating Expense (Income), net” and Note 21, “Discontinued Operations”.
Estimated future amortization expense related to intangible assets that are currently being amortized as of September 30, 2017, is as follows:
(in millions)
|
|
|
|
|
Q4 2017
|
|
$
|
4
|
|
2018
|
|
|
12
|
|
2019
|
|
|
8
|
|
2020
|
|
|
6
|
|
2021
|
|
|
4
|
|
2022 and thereafter
|
|
|
18
|
|
Total
|
|
$
|
52
|
|
NOTE 6: OTHER CURRENT LIABILITIES
|
|
September 30,
|
|
|
December 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Employee related liabilities
|
|
$
|
54
|
|
|
$
|
49
|
|
Deferred revenue
|
|
|
30
|
|
|
|
32
|
|
Customer rebates
|
|
|
26
|
|
|
|
27
|
|
Restructuring liabilities
|
|
|
11
|
|
|
|
8
|
|
Deferred consideration on disposed businesses
|
|
|
10
|
|
|
|
7
|
|
Workers compensation
|
|
|
9
|
|
|
|
8
|
|
Other
|
|
|
72
|
|
|
|
80
|
|
Total
|
|
$
|
212
|
|
|
$
|
211
|
|
[11]
NOTE 7: OTHER LONG-TERM LIABILITIES
|
|
September 30,
|
|
|
December 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Workers compensation
|
|
$
|
102
|
|
|
$
|
105
|
|
Asset retirement obligations
|
|
|
38
|
|
|
|
38
|
|
Deferred taxes
|
|
|
17
|
|
|
|
16
|
|
Deferred consideration on disposed businesses
|
|
|
14
|
|
|
|
24
|
|
Environmental liabilities
|
|
|
12
|
|
|
|
12
|
|
Embedded conversion features derivative liability
(1)
|
|
|
1
|
|
|
|
43
|
|
Other
|
|
|
32
|
|
|
|
30
|
|
Total
|
|
$
|
216
|
|
|
$
|
268
|
|
|
(1)
|
Refer to Note 22, “Financial Instruments”
|
NOTE 8: COMMITMENTS AND CONTINGENCIES
As of September 30, 2017, the Company had outstanding letters of credit of $96 million issued under the Amended Credit Agreement, as well as bank guarantees and letters of credit of $4 million, surety bonds in the amount of $53 million, and restricted cash and deposits of $26 million, primarily to ensure the payment of possible casualty and workers’ compensation claims, environmental liabilities, legal contingencies and rental payments and to support various customs, tax and trade activities. The restricted cash and deposits are reflected in Restricted cash, Other current assets and Other long-term assets in the Consolidated Statement of Financial Position.
Kodak’s Brazilian operations are involved in various litigation matters and have received or been the subject of numerous governmental assessments related to indirect and other taxes in various stages of litigation, as well as civil litigation and disputes associated with former employees and contract labor. The tax matters, which comprise the majority of the litigation matters, are primarily related to federal and state value-added taxes. Kodak is disputing these matters and intends to vigorously defend its position. Kodak routinely assesses all these matters as to the probability of ultimately incurring a liability in its Brazilian operations and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable. As of September 30, 2017, the unreserved portion of these contingencies, inclusive of any related interest and penalties, for which there was at least a reasonable possibility that a loss may be incurred, amounted to approximately $54 million.
In connection with assessments in Brazil, local regulations may require Kodak to post security for a portion of the amounts in dispute. As of September 30, 2017, Kodak has posted security composed of $6 million of pledged cash reported within Restricted cash in the Consolidated Statement of Financial Position and liens on certain Brazilian assets with a net book value of approximately $73 million. Generally, any encumbrances on the Brazilian assets would be removed to the extent the matter is resolved in Kodak's favor.
Kodak is involved in various lawsuits, claims, investigations, remediations and proceedings, including, from time to time, commercial, customs, employment, environmental, and health and safety matters, which are being handled and defended in the ordinary course of business. Kodak is also subject, from time to time, to various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that are incorporated in a broad spectrum of Kodak’s products. These matters are in various stages of investigation and litigation and are being vigorously defended. Based on information currently available, Kodak does not believe that it is probable that the outcomes in any of these matters, individually or collectively, will have a material adverse effect on its financial position or results of operations. Litigation is inherently unpredictable, and judgments could be rendered or settlements entered that could adversely affect Kodak’s operating results or cash flows in a particular period. Kodak routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.
NOTE 9: GUARANTEES
EKC guarantees obligations to third parties for some of its consolidated subsidiaries. The maximum amount guaranteed is $10 million and the outstanding amount for those guarantees is $4 million.
In connection with the settlement of certain of the Company’s historical environmental liabilities at Eastman Business Park, in the event the historical liabilities exceed $99 million, the Company will become liable for 50% of the portion above $99 million with no limitation to the maximum potential future payments. There is no liability recorded for this guarantee.
[12]
Extended Warranty Arrangements
Kodak offers its customers extended warranty arrangements that are generally one year, but may range from three months to six years after the original warranty period. Kodak provides repair services and routine maintenance under these arrangements. Kodak has not separated the extended warranty revenues and costs from the routine maintenance service revenues and costs, as it is not practicable to do so. Therefore, these revenues and costs have been aggregated in the discussion that follows. The change in Kodak’s deferred revenue balance in relation to these extended warranty and maintenance arrangements from December 31, 2016 to September 30, 2017, which is reflected in Other current liabilities in the accompanying Consolidated Statement of Financial Position, was as follows:
(in millions)
|
|
|
|
|
Deferred revenue on extended warranties as of December 31, 2016
|
|
$
|
24
|
|
New extended warranty and maintenance arrangements in 2017
|
|
|
97
|
|
Recognition of extended warranty and maintenance arrangement revenue in 2017
|
|
|
(98
|
)
|
Deferred revenue on extended warranties as of September 30, 2017
|
|
$
|
23
|
|
NOTE 10: OTHER OPERATING EXPENSE (INCOME), NET
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments
(1) (2) (3)
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
25
|
|
Prosper asset remeasurement
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
Legal settlements
(5) (6)
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
(16
|
)
|
Gain on sale of assets
(7)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(7
|
)
|
Total
|
|
$
|
20
|
|
|
$
|
(6
|
)
|
|
$
|
32
|
|
|
$
|
2
|
|
(1)
|
In the third quarter of 2017, due to canceling its copper mesh touch screen program, Kodak concluded that the carrying value of property, plant and equipment (PP&E) and intangible assets associated with those operations exceeded their fair value. Kodak recorded pre-tax impairment charges in the three months ended September 30, 2017 of $8 million related to the PP&E and $12 million for the intangible assets
|
(2
)
|
In the first quarter of 2016, due to the exit of its position in silver metal mesh touch screen development, Kodak concluded that the carrying value of PP&E associated with those operations exceeded their fair value and recorded pre-tax impairment charges of $12 million. Kodak also wrote off related intangible assets with a gross carrying amount of $14 million and accumulated amortization of $6 million and recorded an impairment charge of $8 million.
|
(3)
|
In the first quarter of 2016, Kodak concluded the carrying value of the Kodak trade name exceeded its fair value and recorded an impairment charge of $5 million related to the Kodak trade name.
|
(4)
|
In the first quarter of 2017, Kodak reduced the carrying value of Prosper fixed assets ($8 million) and intangible assets ($4 million) to the amount that would have been recorded had the Prosper assets been continuously classified as held and used. Refer to Note 21, “Discontinued Operations’.
|
(5)
|
In the third quarter of 2016, Kodak settled a legal contingency and reduced the associated reserve by $6 million.
|
(6)
|
In the first quarter of 2016, Kodak received $10 million representing net litigation proceeds from DuPont.
|
(
7)
|
On June 30, 2016, Kodak sold certain assets of its brand protection business to eApeiron Solutions Inc. in exchange for cash consideration of approximately $6 million and an equity investment of 19.9%. Kodak is accounting for this investment under the equity method of accounting. Kodak recognized a gain of approximately $7 million on this transaction.
|
[13]
NOTE 11: OTHER (INCOME) CHARGES, NET
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Change in fair value of embedded conversion features derivative liability
(1)
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
(42
|
)
|
|
$
|
—
|
|
Loss on foreign exchange transactions
|
|
|
2
|
|
|
|
1
|
|
|
|
7
|
|
|
|
3
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
Total
|
|
$
|
(4
|
)
|
|
$
|
1
|
|
|
$
|
(33
|
)
|
|
$
|
3
|
|
(1)
|
Refer to Note 22, “Financial Instruments”.
|
NOTE 12: INCOME TAXES
Kodak’s income tax (benefit) provision and effective tax rate were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Loss) earnings from continuing operations before
income taxes
|
|
$
|
(58
|
)
|
|
$
|
15
|
|
|
$
|
(37
|
)
|
|
$
|
23
|
|
Effective tax rate
|
|
|
22.4
|
%
|
|
|
20.0
|
%
|
|
|
16.2
|
%
|
|
|
69.6
|
%
|
(Benefit) provision for income taxes
|
|
|
(13
|
)
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
16
|
|
(Benefit) provision for income taxes @ 35%
|
|
|
(20
|
)
|
|
|
5
|
|
|
|
(13
|
)
|
|
|
8
|
|
Difference between tax at effective vs. statutory rate
|
|
$
|
7
|
|
|
$
|
(2
|
)
|
|
$
|
7
|
|
|
$
|
8
|
|
For the three and nine months ended September 30, 2017, the difference between Kodak’s recorded (benefit) provision and the (benefit) provision, respectively, that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) the impact related to existing valuation allowances associated with changes in net deferred tax assets from current earnings and losses, (2) the results from operations in jurisdictions outside the U.S., (3) a benefit associated with the tax impact of a goodwill impairment, and (4) changes in audit reserves, including
settlements with taxing authorities in locations outside the U.S
.
For the three and nine months ended September 30, 2016, the difference between Kodak’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1)
the impact related to existing valuation allowances associated with changes in net deferred tax assets from current earnings and losses,
(2) the results from operations in jurisdictions outside the U.S., (3) a provision associated with foreign withholding taxes on undistributed earnings and (4) changes in audit reserves.
NOTE 13: RESTRUCTURING LIABILITIES
Charges for restructuring activities are recorded in the period in which Kodak commits to a formalized restructuring plan, or executes the specific actions contemplated by the plan, and all criteria for liability recognition under the applicable accounting guidance have been met. Restructuring actions taken in the first nine months of 2017 were initiated to reduce Kodak’s cost structure as part of its commitment to drive sustainable profitability and included actions associated with the Prosper business cost reduction, voluntary workforce transition plans in the U.S., an office closure in Switzerland, the cancellation of the copper touch screen program, as well as various targeted reductions in manufacturing, service, sales, research and development and other administrative functions.
[14]
Restructuring Reserve Activity
The activity in the accrued balances and the non-cash charges and credits incurred in relation to restructuring activities for the nine months ended September 30, 2017 were as follows:
(in millions)
|
|
Severance
Reserve
(1)
|
|
|
Exit
Costs
Reserve
(1)
|
|
|
Long-lived Asset
Impairments and
Inventory
Write-downs
(1)
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Q1 charges
|
|
|
5
|
|
|
|
—
|
|
|
|
8
|
|
|
|
13
|
|
Q1 utilization/cash payments
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(11
|
)
|
Q1 other adjustments and reclasses
(2)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Balance as of March 31, 2017
|
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Q2 charges
|
|
$
|
8
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Q2 utilization/cash payments
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
Q2 other adjustments and reclasses
(3)
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
Balance as of June 30, 2017
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
12
|
|
Q3 charges
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
5
|
|
Q3 utilization/cash payments
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Q3 other adjustments and reclasses
(4)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
Balance as of September 30, 2017
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
11
|
|
(1)
|
The severance and exit costs reserves require the outlay of cash, while long-lived asset impairments and inventory write-downs represent non-cash items.
|
(2)
|
The $(1) million represents severance related charges for pension plan special termination benefits, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position.
|
(3)
|
The $(4) million includes $(5) million of severance related charges for pension plan special termination benefits, which were reclassified to Pension and other postretirement liabilities, and $1 million of foreign currency translation adjustments.
|
(4)
|
The $(3) million represents severance related charges for pension plan special termination benefits, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position.
|
For the three months ended September 30, 2017 the $5 million of charges including $1 million of charges for inventory write-downs which were reported in Cost of revenues in the Consolidated Statement of Operations. The remaining $4 million was reported as Restructuring costs and other.
The severance costs for the three months ended September 30, 2017 related to the elimination of approximately 100 positions including approximately 25 manufacturing/service positions, 25 research and development positions and 50 administrative positions. The geographic composition of these positions includes approximately 75 in the United States and Canada and 25 throughout the rest of the world.
For the nine months ended September 30, 2017 the $29 million of charges includes $7 million of charges for inventory write-downs which were reported in Cost of revenues in the Consolidated Statement of Operations. The remaining $22 million was reported as Restructuring costs and other.
The severance costs for the nine months ended September 30, 2017 related to the elimination of approximately 300 positions including approximately 100 manufacturing/service positions, 50 research and development positions and 150 administrative positions. The geographic composition of these positions includes approximately 200 in the United States and Canada and 100 throughout the rest of the world.
As a result of these initiatives, the majority of the severance will be paid during periods through the first quarter of 2018. However, in some instances, the employees whose positions were eliminated can elect or are required to receive their payments over an extended period of time. In addition, certain exit costs, such as long-term lease payments, will be paid over periods throughout the remainder of 2017 and beyond.
[15]
NOTE 14: RETIREM
ENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of the net periodic benefit cost for all major U.S. and Non-U.S. defined benefit plans are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(in millions)
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
Major defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
9
|
|
|
$
|
2
|
|
Interest cost
|
|
|
29
|
|
|
|
3
|
|
|
|
27
|
|
|
|
4
|
|
|
|
86
|
|
|
|
9
|
|
|
|
85
|
|
|
|
11
|
|
Expected return on plan assets
|
|
|
(61
|
)
|
|
|
(7
|
)
|
|
|
(65
|
)
|
|
|
(8
|
)
|
|
|
(183
|
)
|
|
|
(20
|
)
|
|
|
(196
|
)
|
|
|
(22
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
Actuarial loss
|
|
|
—
|
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
4
|
|
|
|
—
|
|
Net pension income before special
termination benefits
|
|
|
(31
|
)
|
|
|
(3
|
)
|
|
|
(35
|
)
|
|
|
(3
|
)
|
|
|
(93
|
)
|
|
|
(7
|
)
|
|
|
(103
|
)
|
|
|
(9
|
)
|
Special termination benefits
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
Net pension income
|
|
|
(28
|
)
|
|
|
(3
|
)
|
|
|
(35
|
)
|
|
|
(3
|
)
|
|
|
(84
|
)
|
|
|
(7
|
)
|
|
|
(100
|
)
|
|
|
(9
|
)
|
Other plans
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Total net pension income
|
|
$
|
(28
|
)
|
|
$
|
(4
|
)
|
|
$
|
(35
|
)
|
|
$
|
(3
|
)
|
|
$
|
(84
|
)
|
|
$
|
(7
|
)
|
|
$
|
(100
|
)
|
|
$
|
(10
|
)
|
For both the three and nine months ended September 30, 2017 and 2016 the special termination benefits charges were incurred as a result of Kodak’s restructuring actions.
NOTE 15: REDEEMABLE, CONVERTIBLE SERIES A PREFERRED STOCK
On November 15, 2016, the Company issued 2,000,000 shares of 5.50% Series A Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”), for an aggregate purchase price of $200 million, or $100 per share. The Company has classified the Series A Preferred Stock as temporary equity in the Consolidated Statement of Financial Position. Kodak allocated $43 million of the net proceeds received to a derivative liability based on the aggregate fair value of the embedded conversion features on the date of issuance which reduced the net carrying value of the Series A Preferred Stock (see Note 22, “Financial Instruments”). The carrying value of the Series A Preferred Stock at the time of issuance, $155 million ($200 million aggregate gross proceeds less $43 million allocated to the derivative liability and $2 million in transaction costs), is being accreted to the mandatory redemption amount using the effective interest method to Additional paid in capital in the Consolidated Statement of Financial Position as a deemed dividend from the date of issuance through the mandatory redemption date, November 15, 2021. The holders of Series A Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 5.50% per annum. The Company declared a cash dividend of approximately $3 million in September 2017, which was paid on October 19, 2017. The accrual for the cash dividend declared is included in Other current liabilities in the accompanying Consolidated Statement of Financial Position as of September 30, 2017. As of September 30, 2017, the Series A Preferred Stock has not been converted and none of the antidilution provisions have been triggered. Any shares of Series A Preferred Stock not converted prior to the fifth anniversary of the initial issuance of the Series A Preferred Stock are required to be redeemed at $100 per share plus the amount of accrued and unpaid dividends.
NOTE 16: EARNINGS PER SHARE
Basic earnings per share computations are based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share include any dilutive effect of potential common shares. In periods with a net loss from continuing operations available to common shareholders, diluted earnings per share are calculated using weighted-average basic shares for that period, as utilizing diluted shares would be anti-dilutive to loss per share.
[16]
A reconciliation of the amounts used to calculate basic and diluted earnings per share for the three and nine m
onths ended September 30, 2017 follows: (in millions):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2017
|
|
Loss from continuing operations attributable
to Eastman Kodak Company
|
|
$
|
(46
|
)
|
|
$
|
(32
|
)
|
Less: Series A convertible preferred stock cash dividend
|
|
|
(3
|
)
|
|
|
(8
|
)
|
Less: Series A convertible preferred stock deemed dividend
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Loss from continuing operations available to
common shareholders - basic and diluted
|
|
$
|
(51
|
)
|
|
$
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
Loss from net earnings attributable
to Eastman Kodak Company
|
|
$
|
(46
|
)
|
|
$
|
(35
|
)
|
Less: Series A convertible preferred stock cash dividend
|
|
|
(3
|
)
|
|
|
(8
|
)
|
Less: Series A convertible preferred stock deemed dividend
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Loss from net earnings available to
common shareholders - basic and diluted
|
|
$
|
(51
|
)
|
|
$
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic and diluted
|
|
|
42.5
|
|
|
|
42.5
|
|
As a result of the net loss from continuing operations available to common shareholders for the three and nine months ending September 30, 2017, Kodak calculated diluted earnings per share using weighted-average basic shares outstanding for those periods. If Kodak reported earnings from continuing operations available to common shareholders for the three and nine months ending September 30, 2017, the calculation of diluted earnings per share would have included the assumed conversion of 0.2 million of unvested restricted stock units.
The computation of diluted earnings per share for the three and nine months ended September 30, 2017 also excluded the impact of (1) the assumed conversion of 2.0 million shares of Series A convertible preferred shares, (2) the assumed conversion of net share settled warrants to purchase 1.8 million shares of common stock at an exercise price of $14.93, (3) the assumed conversion of net share settled warrants to purchase 1.8 million shares of common stock at an exercise price of $16.12 and (4) the assumed conversion of 4.6 million outstanding employee stock options because the effects would have been anti-dilutive.
Weighted average diluted shares were 42.8 million for the three-month period and 42.5 for the nine-month period ended September 30, 2016, respectively, and included the dilutive effect of 0.4 million and 0.3 million unvested restricted stock units for the three and nine month periods ended September 30, 2016, respectively. In addition, the weighted average diluted shares for the three-month period ended September 30, 2016 included the dilutive effect of net share settled warrants to purchase 0.1 million shares of common stock at an exercise price of $14.93.
The computation of diluted earnings per share for the three and nine month periods ended September 30, 2016 excluded the impact of the assumed conversion of net share settled warrants to purchase 1.8 million shares of common stock at an exercise price of $16.12 and the assumed conversion of 2.0 million outstanding employee stock options because they would have been anti-dilutive. In addition, the computation of diluted earnings per share for the nine-month period ended September 30, 2016 excluded the impact of conversion of net share settled warrants to purchase 1.8 million shares of common shares at an exercise price of $14.93 because the effects would have been anti-dilutive.
NOTE 17: SHAREHOLDERS’ EQUITY
Kodak has 560 million shares of authorized stock, consisting of: (i) 500 million shares of common stock, par value $0.01 per share and (ii) 60 million shares of preferred stock, no par value, issuable in one or more series. As of September 30, 2017 and December 31, 2016, there were 42.6 million and 42.4 million shares of common stock outstanding and 2.0 million shares of Series A preferred stock issued and outstanding, respectively. Treasury stock consisted of approximately 0.5 million shares at both September 30, 2017 and December 31, 2016.
[17]
NOTE 18: OTHER COMPREHENSIVE (LOSS) INCOM
E
The changes in Other comprehensive (loss) income, by component, were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Currency translation adjustments
|
|
$
|
(5
|
)
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
10
|
|
Pension and other postretirement benefit plan changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newly established net actuarial loss
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(145
|
)
|
Tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Newly established net actuarial loss, net of tax
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(144
|
)
|
Reclassification adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
(a)
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
(5
|
)
|
Amortization of actuarial (gains) losses
|
(a)
|
|
(1
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
—
|
|
Recognition of gains due to settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Total reclassification adjustments
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(6
|
)
|
Tax provision
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Reclassification adjustments, net of tax
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
(5
|
)
|
Pension and other postretirement benefit plan changes,
net of tax
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(9
|
)
|
|
|
(149
|
)
|
Other comprehensive loss
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(139
|
)
|
(a)
|
Reclassified to Total Net Periodic Benefit Cost - refer to Note 14, "Retirement Plans and Other Postretirement Benefits".
|
NOTE 19: ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is composed of the following:
|
|
September 30,
|
|
|
December 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Currency translation adjustments
|
|
$
|
(87
|
)
|
|
$
|
(96
|
)
|
Pension and other postretirement benefit plan changes
|
|
|
(351
|
)
|
|
|
(342
|
)
|
Ending balance
|
|
$
|
(438
|
)
|
|
$
|
(438
|
)
|
[18]
NOTE 20: SEGMENT INFORMATION
Effective January 1, 2017, Kodak changed its organizational structure. Micro 3D Printing, within the Micro 3D Printing and Packaging segment, was moved into the Intellectual Property Solutions segment, which has been renamed the Advanced Materials and 3D Printing Technology segment. The Flexographic Packaging business, formerly part of the Micro 3D Printing and Packaging segment, is now being reported as a dedicated segment.
Effective April 1, 2017, Kodak made another change to its organizational structure. Digital front-end controllers within the Prosper business in the Enterprise Inkjet Systems segment was moved to the Unified Workflow Solutions business within the Software and Solutions segment.
Prior period segment results have been revised to conform to the current period segment reporting structure.
Financial information is reported for seven reportable segments: Print Systems, Enterprise Inkjet Systems, Flexographic Packaging, Software and Solutions, Consumer and Film, Advanced Materials and 3D Printing Technology and Eastman Business Park. A description of the reportable segments follows.
Print Systems
: The Print Systems segment is comprised of two lines of business: Prepress Solutions and Electrophotographic Printing Solutions.
Enterprise Inkjet Systems
: The Enterprise Inkjet Systems segment is comprised of two lines of business: the Prosper business and the Versamark business.
Flexographic Packaging
: The Flexographic Packaging segment is comprised of the Packaging line of business.
Software and Solutions
: The Software and Solutions segment is comprised of two lines of business: Unified Workflow Solutions and Kodak Technology Solutions.
Consumer and Film
: The Consumer and Film segment is comprised of three lines of business: Industrial Film and Chemicals, Motion Picture and Consumer Products (which includes Consumer Inkjet Solutions).
Advanced Materials and 3D Printing Technology
: The Advanced Materials and 3D Printing Technology segment includes the Kodak Research Laboratories and associated new business opportunities and intellectual property licensing not directly related to other business segments.
Eastman Business Park
: The Eastman Business Park segment includes the operations of the Eastman Business Park, a more than 1,200-acre technology center and industrial complex.
Segment financial information is shown below:
Segment Revenues
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Print Systems
|
|
$
|
232
|
|
|
$
|
250
|
|
|
$
|
681
|
|
|
$
|
739
|
|
Enterprise Inkjet Systems
|
|
|
33
|
|
|
|
47
|
|
|
|
105
|
|
|
|
123
|
|
Flexographic Packaging
|
|
|
34
|
|
|
|
34
|
|
|
|
104
|
|
|
|
98
|
|
Software and Solutions
|
|
|
21
|
|
|
|
21
|
|
|
|
64
|
|
|
|
66
|
|
Consumer and Film
|
|
|
55
|
|
|
|
55
|
|
|
|
151
|
|
|
|
174
|
|
Advanced Materials and 3D Printing Technology
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Eastman Business Park
|
|
|
4
|
|
|
|
4
|
|
|
|
12
|
|
|
|
11
|
|
Consolidated total
|
|
$
|
379
|
|
|
$
|
411
|
|
|
$
|
1,117
|
|
|
$
|
1,211
|
|
[19]
Segment Operational EBITDA and Consolidated (Loss) Earnings from Continuing Operations Before Income Taxes
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Print Systems
|
|
$
|
13
|
|
|
$
|
27
|
|
|
$
|
42
|
|
|
$
|
67
|
|
Enterprise Inkjet Systems
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
2
|
|
|
|
(18
|
)
|
Flexographic Packaging
|
|
|
7
|
|
|
|
7
|
|
|
|
21
|
|
|
|
17
|
|
Software and Solutions
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Consumer and Film
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(10
|
)
|
|
|
18
|
|
Advanced Materials and 3D Printing Technology
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Eastman Business Park
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
Total of reportable segments
|
|
|
15
|
|
|
|
22
|
|
|
|
37
|
|
|
|
64
|
|
All Other
(1)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
2
|
|
Corporate components of pension and OPEB income
(2)
|
|
|
37
|
|
|
|
40
|
|
|
|
108
|
|
|
|
121
|
|
Depreciation and amortization
|
|
|
(21
|
)
|
|
|
(25
|
)
|
|
|
(62
|
)
|
|
|
(82
|
)
|
Restructuring costs and other
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(29
|
)
|
|
|
(13
|
)
|
Stock based compensation
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(7
|
)
|
|
|
(6
|
)
|
Consulting and other costs
(3)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
Idle costs
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Manufacturing costs originally planned to be absorbed by silver
metal mesh touch screen production
(5)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
Other operating (expense) income, net
(6)
|
|
|
(20
|
)
|
|
|
6
|
|
|
|
(32
|
)
|
|
|
(2
|
)
|
Goodwill impairment loss
(6)
|
|
|
(56
|
)
|
|
|
—
|
|
|
|
(56
|
)
|
|
|
—
|
|
Interest expense
(6)
|
|
|
(8
|
)
|
|
|
(16
|
)
|
|
|
(24
|
)
|
|
|
(48
|
)
|
Other income (charges), net
(6)
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
33
|
|
|
|
(3
|
)
|
Consolidated (loss) earnings from continuing operations before
income taxes
|
|
$
|
(58
|
)
|
|
$
|
15
|
|
|
$
|
(37
|
)
|
|
$
|
23
|
|
(1)
|
RED utilities variable interest entity, which was deconsolidated as of December 31, 2016 (interest and depreciation of RED are included in the respective lines below).
|
(2)
|
Composed of interest cost, expected return on plan assets, amortization of actuarial gains and losses and curtailment and settlement components of pension and other postretirement benefit expenses.
|
(3)
|
Consulting and other costs are professional services and internal costs associated with certain corporate strategic initiatives.
|
(4)
|
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.
|
(5)
|
Consists of manufacturing costs originally planned to be absorbed by silver metal mesh touch screen production that are excluded from the segment measure of profit and loss.
|
(6)
|
As reported in the Consolidated Statement of Operations.
|
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”). As demonstrated in the above table, Operational EBITDA represents the (loss) earnings from continuing operations excluding the provision for income taxes; corporate components of pension and OPEB income; depreciation and amortization expense; restructuring costs; stock-based compensation expense; consulting and other costs; idle costs; manufacturing costs originally planned to be absorbed by silver metal mesh touch screen production; other operating expense, net (unless otherwise indicated); goodwill impairment losses; interest expense; and other (income) charges, net. Overhead costs no longer absorbed by the Prosper discontinued operations of $4 million and $12 million in the three and nine months ended September 30, 2016, respectively, were also excluded from segment earnings while the business was reported in discontinued operations. As the Prosper business is no longer reported in discontinued operations, overhead allocations are included in the Enterprise Inkjet Solutions segment measure for all periods presented.
Kodak’s segments are measured using Operational EBITDA both before and after allocation of corporate selling, general and administrative expenses (“SG&A”). The segment earnings measure reported is after allocation of corporate SG&A as this most closely aligns with U.S. GAAP.
[20]
Research and Development activities not directly related to the other segments are reported within the Advanced Materials and 3D Printing Technology segment.
Change in Segment Measure of Profitability
During the first quarter of 2017 the segment measure was changed to exclude internal costs associated with corporate strategic initiatives. The segment measure already excluded external costs associated with those initiatives. Additionally, third party costs associated with incremental idle building space has been added to idle costs.
NOTE 21: DISCONTINUED OPERATIONS
KODAK PROSPER Enterprise Inkjet Business
The results of the Prosper business were previously presented as discontinued operations. However, the held for sale criteria were no longer met as of March 31, 2017. In April 2017, Kodak decided to retain the Prosper business. The assets and liabilities of the Prosper business, previously presented as held for sale, have been reclassified to held and used in the Consolidated Statement of Financial Position as of December 31, 2016, and the results of the Prosper business have been reclassified from discontinued operations to continuing operations for all periods presented. The Prosper business’ assets and liabilities as of March 31, 2017 were measured at the carrying amount before the assets were classified as held for sale, reduced by $12 million representing the depreciation and amortization expense that would have been recognized had the assets been continuously classified as held for use. The $12 million reduction to the carrying value of the Prosper assets was reported in Other operating expense, net in the first quarter of 2017.
The reclassification of the results of the Prosper Business to continuing operations had the following impacts on the Consolidated Statement of Operations:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
68
|
|
Cost of revenues
|
|
|
—
|
|
|
|
27
|
|
|
|
—
|
|
|
|
58
|
|
Selling, general and administrative expenses
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
20
|
|
Research and development costs
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
16
|
|
Other operating (income) expense, net
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
Income (loss) from continuing operations before taxes
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
(12
|
)
|
|
|
(26
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Income (loss) from continuing operations
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
(12
|
)
|
|
$
|
(27
|
)
|
NOTE 22: FINANCIAL INSTRUMENTS
Kodak, as a result of its global operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates, which may adversely affect its results of operations and financial position. Kodak manages such exposures, in part, with derivative financial instruments. Foreign currency forward contracts are used to mitigate currency risk related to foreign currency denominated assets and liabilities. Kodak’s exposure to changes in interest rates results from its investing and borrowing activities used to meet its liquidity needs. Kodak does not utilize financial instruments for trading or other speculative purposes.
Kodak’s foreign currency forward contracts are not designated as hedges and are marked to market through net (loss) earnings at the same time that the exposed assets and liabilities are remeasured through net (loss) earnings (both in Other (income) charges, net in the Consolidated Statement of Operations). The notional amount of such contracts open at September 30, 2017 and December 31, 2016 was approximately $543 million and $340 million, respectively. The majority of the contracts of this type held by Kodak as of September 30, 2017 are denominated in Swiss francs and euros. The majority of the contracts of this type held by Kodak as of December 31, 2016 were denominated in euros, British pounds, and Chinese renminbi.
The net effect of foreign currency forward contracts in the results of operations is shown in the following table:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss from derivatives not designated as hedging
instruments
|
|
$
|
(8
|
)
|
|
$
|
(2
|
)
|
|
$
|
(8
|
)
|
|
$
|
(3
|
)
|
[21]
Kodak had no derivatives designated as hedging instruments for the three and nine months ended September 30, 2017 and 2016.
In the event of a default under the Company’s Senior Secured First Lien Term Credit Agreement, the Amended Credit Agreement, or a default under any derivative contract or similar obligation of Kodak, subject to certain minimum thresholds, the derivative counterparties would have the right, although not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value, but with liability positions netted against asset positions with the same counterparty.
As discussed in Note 15, “Redeemable, Convertible, Series A Preferred Stock”, the Company concluded that the Series A Preferred Stock is considered more akin to a debt-type instrument and that the economic characteristics and risks of the embedded conversion features, except where the conversion price was increased to the liquidation preference, were not considered clearly and closely related to the Series A Preferred Stock. The embedded conversion features not considered clearly and closely related are the conversion at the option of the holder (“Optional Conversion”); the ability of Kodak to automatically convert the stock after the second anniversary of issuance (“Mandatory Conversion”) and the conversion in the event of a fundamental change or reorganization (“Fundamental Change or Reorganization Conversion”). Accordingly, these embedded conversion features were bifurcated from the Series A Preferred Stock and separately accounted for on a combined basis as a single derivative liability which is reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivative liability is being accounted for at fair value with changes in fair value being reported in Other (income) charges, net in the Consolidated Statement of Operations.
Fair Value
Fair values of marketable securities are determined using quoted prices in active markets for identical assets (Level 1 fair value measurements). Fair values of Kodak’s foreign currency forward contracts are determined using observable inputs (Level 2 fair value measurements) and are based on the present value of expected future cash flows (an income approach valuation technique) considering the risks involved and using discount rates appropriate for the duration of the contracts. The gross fair value of foreign currency forward contracts in an asset position are reported in Receivables, net and the gross fair value of foreign currency forward contracts in a liability position are reported in Other current liabilities in the Consolidated Statement of Financial Position. Neither the fair value of marketable securities nor the gross fair values of the foreign currency forward contracts was material as of September 30, 2017 and December 31, 2016.
Transfers between levels of the fair value hierarchy are recognized based on the actual date of the event or change in circumstances that caused the transfer. There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 30, 2017.
The fair value of the embedded conversion features derivative liability is calculated using unobservable inputs (Level 3 fair measurements). The value of the Optional Conversion and Mandatory Conversion is calculated using a binomial lattice model. The following table presents the key inputs in the determination of the fair value of the Optional Conversion and Mandatory Conversion at September 30, 2017 and December 31, 2016:
|
|
Valuation Date
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Total value of embedded derivative liability ($ millions)
|
|
$
|
1
|
|
|
$
|
43
|
|
Kodak's closing stock price
|
|
|
7.35
|
|
|
|
15.50
|
|
Expected stock price volatility
|
|
|
43.27
|
%
|
|
|
42.85
|
%
|
Risk free rate
|
|
|
1.79
|
%
|
|
|
1.93
|
%
|
Yield on the preferred stock
|
|
|
12.46
|
%
|
|
|
11.38
|
%
|
The Fundamental Change and Reorganization Conversion value at issuance was calculated as the difference between the total value of the Series A Preferred Stock and the sum of the net present value of the cash flows if the Series A Preferred Stock is redeemed on its fifth anniversary and the values of the other embedded derivatives. The Fundamental Change and Reorganization Conversion value reduces the value of the embedded conversion features derivative liability. Unless events occur which would alter the likelihood of a fundamental change or reorganization event, the value of the Fundamental Change and Reorganization Conversion reflects the value as of the issuance date, amortized for the passage of time.
The fair values of long-term borrowings (Level 2 fair value measurements) are determined by reference to quoted market prices of similar instruments, if available, or by pricing models based on the value of related cash flows discounted at current market interest rates. The fair values of long-term borrowings were $411 million and $406 million at September 30, 2017 and December 31, 2016, respectively.
The carrying values of cash and cash equivalents and restricted cash approximate their fair values.
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