The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
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
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The following is a description of the significant accounting policies of Kodak.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of EKC and all companies directly or indirectly controlled by EKC, either through majority ownership or otherwise. Kodak consolidates variable interest entities if Kodak has a controlling financial interest and is determined to be the primary beneficiary of the entity.
RECLASSIFICATIONS
Certain amounts for prior periods have been reclassified to conform to the current period classification in the disaggregated revenue information for the Digital Printing segment in Note 15, “Revenue”.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP accounting requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at year end and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from these estimates.
FOREIGN CURRENCY
For most subsidiaries and branches outside the U.S., the local currency is the functional currency. The financial statements of these subsidiaries and branches are translated into U.S. dollars as follows: assets and liabilities at year-end exchange rates; revenue, expenses and cash flows at average exchange rates; and shareholders’ equity at historical exchange rates. For those subsidiaries for which the local currency is the functional currency, the resulting translation adjustment is recorded as a component of Accumulated other comprehensive income in the accompanying Consolidated Statement of Financial Position.
For certain other subsidiaries and branches outside the U.S., operations are conducted primarily in U.S. dollars, which is therefore the functional currency. Monetary assets and liabilities of these foreign subsidiaries and branches, which are recorded in local currency, are remeasured at year-end exchange rates, while revenue, expense, and gain and loss accounts, which are recorded in local currency, are remeasured at average exchange rates. Non-monetary assets and liabilities are remeasured at historical exchange rates. Adjustments that result from the remeasurement of the assets and liabilities of these subsidiaries are included in Other charges (income), net in the accompanying Consolidated Statement of Operations.
The effects of foreign currency transactions, including related hedging activities, are included in Other charges (income), net, in the accompanying Consolidated Statement of Operations.
CASH EQUIVALENTS
All highly liquid investments with a remaining maturity of three months or less at date of purchase are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. The cost of inventories is determined by the average cost method, which approximates current cost. Kodak provides inventory reserves for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, net of accumulated depreciation. Kodak capitalizes additions and improvements while maintenance and repairs are charged to expense as incurred. Upon sale or other disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to Other operating income, net in the Consolidated Statement of Operations.
Kodak calculates depreciation expense using the straight-line method over the assets’ estimated useful lives, which are as follows:
| | | Estimated Useful | |
| | | Lives | |
| Buildings and building improvements | | 5-40 | |
| Land improvements | | 4-20 | |
| Leasehold improvements | | 3-20 | |
| Equipment | | 3-20 | |
| Tooling | | 1-3 | |
| Furniture and fixtures | | 5-10 | |
Kodak depreciates leasehold improvements over the shorter of the lease term or the assets’ estimated useful life.
INTERNAL USE SOFTWARE
Expenditures for software purchases and software developed for internal use are capitalized and depreciated on a straight-line basis over the estimated useful lives, generally 3 to 10 years. For software developed for internal use, certain costs are capitalized, including external direct costs of materials and services associated with developing or obtaining the software, and payroll and payroll-related costs for employees who are directly associated with internal-use software projects. Capitalization of these costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Costs associated with preliminary project stage activities, training, maintenance, and other post-implementation stage activities are expensed as incurred. The carrying value of owned software and development costs is recorded in Property, plant and equipment, net while the carrying value of cloud-based software and development costs is recorded in Other current assets and Other long-term assets. The carrying value of software and development costs is reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
GOODWILL
Goodwill is not amortized but is required to be assessed for impairment at least annually and whenever events or changes in circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
When testing goodwill for impairment, Kodak may assess qualitative factors for some or all of its reporting units to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If Kodak determines based on this qualitative test of impairment that it is more likely than not that a reporting unit’s fair value is less than its carrying amount or elects to bypass the qualitative assessment for some or all of its reporting units, then a quantitative goodwill impairment test is performed. The amount of goodwill impairment, if any, is calculated as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. Refer to Note 6, “Goodwill and Other Intangible Assets”.
WORKERS’ COMPENSATION
Kodak self-insures and participates in high-deductible insurance programs with retention and per occurrence deductible levels for claims related to workers’ compensation. The estimated liability for workers’ compensation is based on actuarially estimated, discounted cost of claims, including claims incurred but not reported. Historical loss development factors are utilized to project the future development of incurred losses, and the amounts are adjusted based on actual claim experience, settlements, claim development trends, changes in state regulations and judicial interpretations. Refer to Note 7, “Other Current Liabilities” and Note 8, “Other Long-Term Liabilities” for the estimated liabilities. Amounts recoverable from insurance companies or third parties are estimated using historical experience and estimates of future recoveries. Estimated recoveries are not offset against the related accrual. The amount recorded for the estimated recoveries at December 31, 2022 and 2021 was $15 million and $20 million, respectively, of which $12 million and $18 million are reported in Other long-term assets in the Consolidated Statement of Financial Position, respectively. The remaining $3 million and $2 million, respectively, is reported in Other current assets in the Consolidated Statement of Financial Position.
LEASES
Kodak as lessee
Kodak determines if an arrangement is a lease at inception. The primary criteria used to classify transactions as operating or finance leases are: (1) whether the ownership transfers at the end of the lease, (2) whether the lease term is equal to or greater than 75% of the economic life of the asset, and (3) whether the present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset at inception of the lease. Kodak does not have leases that include assets of a specialized nature, generally does not provide residual value guarantees or have any leases for which the exercise of end-of-lease purchase options is reasonably assured at lease inception.
Operating lease right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the operating lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The ROU assets are adjusted for prepayments and lease incentives. Variable lease payments are excluded from the measurement of ROU assets and lease liabilities and are recognized in expense in the period in which the obligation for those payments is incurred. Lease agreements may include options to extend or terminate the lease at Kodak’s discretion, which are included in the determination of the lease term when they are reasonably certain to be exercised.
Kodak’s lease agreements are primarily for real estate space and vehicles. Arrangements for goods and services are assessed to determine if the arrangement contains a lease at its inception. Operating leases are included within Operating lease right-of-use assets, Current portion of operating leases and Operating leases, net of current portion in the Consolidated Statement of Financial Position. Finance leases are included in Property, plant and equipment, net, Short-term borrowings and current portion of long-term debt and Long-term debt, net of current portion in the Consolidated Statement of Financial Position.
When available, the rate implicit in the lease is used to discount lease payments to present value; however, many leases do not provide a readily determinable implicit rate. Therefore, Kodak applies its incremental borrowing rate to discount the lease payments at lease commencement. The incremental borrowing rate is the rate of interest that EKC would have to pay to borrow, on a collateralized basis, over a similar term. Renewal options and/or termination options are factored into the determination of lease payments if considered probable.
Rental expense related to operating leases is recognized on a straight-line basis over the lease term. The lease agreements may include both lease and non-lease components. Kodak does not separate lease and non-lease components for real estate leases but does separate lease and non-lease components for equipment leases.
Kodak as Lessor
Kodak places its own equipment at customer sites under sales-type and operating lease arrangements. Arrangements classified as sales-type leases with revenue recognition at inception generally transfer title to the equipment by the end of the lease term or have a lease term that is for a major part of the remaining economic life of the equipment; and collectability is considered probable. Leases meeting the sales-type lease criteria with variable lease payments that do not depend upon a reference rate or index are classified as operating leases if they would otherwise result in a day-one loss. If the arrangement meets the criteria for a sales-type lease but collectability is not considered probable, Kodak will not derecognize the asset and will record all payments received as a liability until the earlier of collectability becoming probable or the termination of the lease. Arrangements that do not meet the sales-type lease criteria are classified as operating leases with revenue recognized over the term. Contracts with customers may include multiple performance obligations including equipment, optional software licenses and service agreements. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Equipment subject to operating leases is included in Property, plant and equipment, net in the Consolidated Statement of Financial Position and is depreciated to estimated residual value over its expected useful life. Equipment operating lease terms and depreciable lives generally vary from 3 to 7 years.
The Eastman Business Park segment’s core operations are commercial real estate management activities including real estate leasing and related facility management services. Kodak also leases underutilized portions of its other real estate properties to third parties under both operating lease and sublease agreements. Payments received under operating lease agreements as part of the Eastman Business Park segment are recognized on a straight-line basis over the term and are reported in Revenues in the Consolidated Statement of Operations. Payments received under lease and sublease agreements for other underutilized space are recognized on a straight-line basis and reported as cost reductions in Cost of revenues, Selling, general and administrative (“SG&A”) expenses, research and development (“R&D”) costs and Other charges (income), net.
Renewal options and/or termination options are factored into the determination of lease payments if considered probable. Kodak does not separate lease and non-lease components of contracts for real estate leases but does separate lease and non-lease components for equipment leases.
REVENUE
Kodak’s revenue transactions include sales of products (such as components and consumables for use in Kodak and other manufacturers’ equipment, film-based products and specialty materials and chemicals), equipment, software, services (such as equipment and software maintenance, engineering, coating and contract manufacturing services), integrated solutions, intellectual property and brand licensing, and commercial real estate management activities. Revenue from services includes extended warranty, customer support and maintenance agreements, consulting, training and education.
Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration Kodak expects to be entitled to in exchange for those goods or services.
For product sales (such as plates, film, inks, specialty materials and chemicals and other consumables) revenue is recognized when control has transferred from Kodak to the buyer, which may be upon shipment or upon delivery to the customer site, based on contract terms or legal requirements in certain jurisdictions. Equipment and software related service revenue is recognized using the time-based method ratably over the contractual period as it best depicts when the customer receives the benefit from the service. Service revenue for time and materials-based agreements is recognized as services are performed.
Equipment is generally dependent on, and interrelated with, the underlying operating system (firmware) and cannot function without the operating system. In these cases, the hardware and software licenses are accounted for as a single performance obligation. Contracts with customers may include multiple performance obligations including equipment and optional software licenses and service agreements. Service agreements generally have a one-year initial term subject to annual renewals and may be prepaid or paid over-time. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Kodak applies the residual allocation method for sales of certain complex, highly customized equipment due to significant variability in pricing. Standalone selling prices are based on the observable prices of the products or services when sold separately or by using expected cost-plus margin when directly observable prices are not available. The Company reassesses its standalone selling prices at least annually.
For non-complex equipment installations and software sales revenue is recognized when control of each distinct performance obligation has transferred from Kodak to the buyer, which is generally met when the equipment or software is delivered and installed at the customer site as delivery and installation generally occur within the same period. For complex equipment installations or integrated software solutions revenue is deferred until receipt of customer acceptance and control has transferred to the buyer.
Software licenses are sold both in bundled equipment arrangements as discussed above or on a stand-alone basis. Perpetual licenses are usually sold with post-contract support services (“PCS”) which are considered distinct performance obligations as the customer’s use of the existing software is not dependent upon future upgrades. Kodak recognizes software revenue at the time that the customer obtains control over the software which generally occurs upon installation while revenue allocated to the PCS is recognized over the service period. The Company also sells SaaS arrangements with revenue recognized over the contract term.
In service arrangements such as consulting where final acceptance by the customer is required, revenue is deferred until all acceptance criteria have been met and Kodak has a legal right to payment.
Kodak’s licensing revenue is comprised of software licenses as discussed above, licenses to use functional intellectual property (e.g. patents and technical know-how) and licenses to use symbolic intellectual property (e.g. brand names and trademarks). The timing and the amount of revenue recognized from the licensing of intellectual property depends upon a variety of factors, including the nature of the performance obligations (functional vs. symbolic licenses), specific terms of each agreement, and the payment terms. Aside from software licenses discussed above, Kodak’s functional licenses generally provide the right to use functional intellectual property; therefore, non-sales/usage-based revenue is recognized when the customer has the right to use the intellectual property while sales and usage-based royalties are recognized in the period the related sales and usage occurs. Revenue for symbolic licenses such as brand licenses are recognized over time.
Real estate management revenue consists primarily of income from tenant leases, including rent and utilities, as well as facility management services and hosting onsite events. Usage based revenue is recognized as earned while tenant lease income is recognized on a straight-line basis over the lease term (Refer to Leases; Kodak as Lessor above).
Deferred revenue is recorded when cash payments are received in advance of satisfying performance obligations such as deposits required in advance on equipment orders, prepaid service contracts, prepaid tenant lease income or prepaid royalties on intellectual property arrangements. Interest expense is imputed for payments received greater than one year in advance of performance.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. Kodak applies the practical expedient with respect to implied financial components and only imputes interest for payment terms greater than one year.
Sales and usage-based taxes are excluded from revenues.
Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. At the time revenue is recognized, Kodak records reductions to revenue for customer incentive programs, rebates and promotional allowances. For those incentives that require estimation, such as for volume rebates, Kodak uses historical experience and both internal and customer data to estimate the sales incentive at the time revenue is recognized.
Incremental direct costs of obtaining a contract consist of sales commissions. Kodak expenses sales commissions when incurred if the amortization period would be one year or less. Capitalized sales commissions are amortized on a straight-line basis over the life of the contract. These costs are recorded in SG&A expenses in the Consolidated Statement of Operations. Kodak accrues the estimated cost of post-sale obligations, including basic product warranties, at the time of revenue recognition.
Kodak does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less or for which revenue is recognized at the amount to which Kodak has the right to invoice for services performed.
Performance obligations with an original expected length of greater than one year generally consist of deferred service contracts, operating leases and licensing arrangements. As of December 31, 2022, there was approximately $55 million of unrecognized revenue from unsatisfied performance obligations. Approximately 35% of the revenue from unsatisfied performance obligations is expected to be recognized in 2023, 20% in 2024, 15% in 2025 and 30% thereafter.
RESEARCH AND DEVELOPMENT COSTS
R&D costs, which include costs incurred in connection with new product development, fundamental and exploratory research, process improvement, product use technology and product accreditation, are expensed in the period in which they are incurred.
ADVERTISING
Advertising costs are expensed as incurred and are included in SG&A expenses in the accompanying Consolidated Statement of Operations. Advertising expenses amounted to $3 million in the year ended 2022 and $2 million for each of the years ended 2021 and 2020.
SHIPPING AND HANDLING COSTS
Amounts charged to customers and costs incurred by Kodak related to shipping and handling are included in Net revenue and Cost of revenues, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying values of long-lived assets, other than goodwill and intangible assets with indefinite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable.
Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the asset group). If the sum of the expected undiscounted cash flows from the use of and eventual disposition of such asset group is less than the carrying value of the asset group a loss is recognized to the extent the carrying value of the asset group exceeds its fair value. Kodak determines fair value through quoted market prices in active markets or, if quoted market prices are unavailable, through the performance of internal analyses of discounted cash flows.
The remaining useful lives of long-lived assets are reviewed in connection with the assessment of recoverability of long-lived assets and the ongoing strategic review of the business and operations. If the review indicates that the remaining useful life of the long-lived asset has changed significantly, the depreciation on that asset is adjusted to facilitate full cost recovery over its revised estimated remaining useful life.
The carrying values of indefinite-lived intangible assets are evaluated for potential impairment annually or whenever events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Refer to Note 6, “Goodwill and Other Intangible Assets.”
INCOME TAXES
Kodak recognizes deferred tax liabilities and assets for the expected future tax consequences of operating losses, credit carry-forwards and temporary differences between the carrying amounts and tax basis of Kodak’s assets and liabilities. Kodak records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. For discussion of the amounts and components of the valuation allowances as of December 31, 2022 and 2021, refer to Note 18, “Income Taxes.”
The undistributed earnings of Kodak’s foreign subsidiaries are not considered permanently reinvested. Kodak has recognized a deferred tax liability (net of related foreign tax credits) on the foreign subsidiaries’ undistributed earnings.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
No accounting pronouncements were adopted in 2022.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 (as amended by ASUs 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, 2020-03 and 2022-02) 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 ASU is effective for Kodak for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 ( January 1, 2023 for Kodak). Kodak adopted the new standard on January 1, 2023 and it did not have a material impact on Kodak’s consolidated financial statements.
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:
| | | As of December 31, | |
| (in millions) | | 2022 | | | 2021 | |
| Cash and cash equivalents | | $ | 217 | | | $ | 362 | |
| Restricted cash reported in Other current assets | | | 7 | | | | 7 | |
| Restricted cash | | | 62 | | | | 54 | |
| Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows | | $ | 286 | | | $ | 423 | |
Restricted cash reported in Other current assets on the Consolidated Statement of Financial Position primarily represents amounts that support hedging activities.
Restricted cash includes $44 million and $45 million as of December 31, 2022 and 2021, respectively, representing the cash collateral required to be posted by the Company under the Letter of Credit Facility (“L/C Cash Collateral”) (Refer to Note 9, “Debt and Finance Leases” for information on the Restricted cash supporting the L/C Cash Collateral). In addition, Restricted cash as of December 31, 2022 and 2021 includes an escrow of $5 million and $4 million, respectively, in China to secure various ongoing obligations under the agreements for the strategic relationship with Lucky HuaGuang Graphics Co. Ltd. Long-term restricted cash also includes $6 million and $3 million of security posted related to Brazilian legal contingencies as of December 31, 2022 and 2021, respectively and $5 million of cash collateral posted for a letter of credit for aluminum purchases as of December 31, 2022 in the United Kingdom.
NOTE 3: INVENTORIES, NET
| |
|
As of December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
| Finished goods |
|
$ |
98 |
|
|
$ |
94 |
|
| Work in process |
|
|
64 |
|
|
|
65 |
|
| Raw materials |
|
|
75 |
|
|
|
60 |
|
| Total |
|
$ |
237 |
|
|
$ |
219 |
|
NOTE 4: PROPERTY, PLANT AND EQUIPMENT, NET
| | | As of December 31, | |
| (in millions) | | 2022 | | | 2021 | |
| Land | | $ | 51 | | | $ | 49 | |
| Buildings and building improvements | | | 134 | | | | 130 | |
| Machinery and equipment | | | 390 | | | | 387 | |
| Construction in progress | | | 29 | | | | 15 | |
| | | | 604 | | | | 581 | |
| Accumulated depreciation | | | (450 | ) | | | (441 | ) |
| Property, plant and equipment, net | | $ | 154 | | | $ | 140 | |
Depreciation expense was $24 million, $26 million and $32 million for the years ended December 31, 2022, 2021 and 2020, respectively.
NOTE 5: OTHER LONG-TERM ASSETS
| |
|
As of December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
| Preferred equity investment |
|
$ |
25 |
|
|
$ |
— |
|
| Estimated workers' compensation recoveries |
|
|
12 |
|
|
|
18 |
|
| Long-term receivables |
|
|
9 |
|
|
|
11 |
|
| Other |
|
|
30 |
|
|
|
26 |
|
| Total |
|
$ |
76 |
|
|
$ |
55 |
|
The Other component above consists of other miscellaneous long-term assets that, individually, were less than 5% of the total assets component in the accompanying Consolidated Statement of Financial Position, and therefore have been aggregated in accordance with Regulation S-X.
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying value of goodwill by reportable segment.
| | | | | | | | | | | Advanced | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | Consolidated | |
| (in millions) | | Printing | | | Printing | | | Chemicals | | | Brand | | | Total | |
| As of December 31, 2020 | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | $ | 56 | | | $ | 6 | | | $ | 14 | | | $ | — | | | $ | 76 | |
| Accumulated impairment losses | | | (56 | ) | | | — | | | | (8 | ) | | | — | | | | (64 | ) |
| Goodwill reallocation | | | — | | | | — | | | | (6 | ) | | | 6 | | | | — | |
| Balance as of December 31, 2020 | | | — | | | | 6 | | | | — | | | | 6 | | | | 12 | |
| Impairment | | | — | | | | — | | | | — | | | | — | | | | — | |
| As of December 31, 2021 | | | — | | | | 6 | | | | — | | | | 6 | | | | 12 | |
| Impairment | | | — | | | | — | | | | — | | | | — | | | | — | |
| As of December 31, 2022 | | $ | — | | | $ | 6 | | | $ | — | | | $ | 6 | | | $ | 12 | |
| | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | $ | 56 | | | $ | 6 | | | $ | 8 | | | $ | 6 | | | $ | 76 | |
| Accumulated impairment losses | | | (56 | ) | | | — | | | | (8 | ) | | | — | | | | (64 | ) |
| Balance as of December 31, 2022 | | $ | — | | | $ | 6 | | | $ | — | | | $ | 6 | | | $ | 12 | |
The Digital Printing segment has three goodwill reporting units: Electrophotographic Printing Solutions; Prosper and Versamark; and Software. The Advanced Materials and Chemicals segment has two goodwill reporting units: Motion Picture and Industrial Films and Chemicals; and Advanced Materials and Functional Printing. The Traditional Printing segment and Brand segment each have one goodwill reporting unit. As of December 31, 2022, goodwill is only recorded in the Brand and Software reporting units.
Kodak performed interim tests of impairment for goodwill as of June 30, 2020 due to the uncertainty regarding the negative impact of the COVID-19 pandemic on its operations, and as of March 31, 2020, due to the decline in market capitalization as of that date since the last goodwill impairment test ( December 31, 2019) and the uncertainty regarding the negative impact of the COVID-19 pandemic at that time.
Based on the results of the June 30, 2020 and March 31, 2020 analyses, no impairment of goodwill was indicated. No interim impairment tests for goodwill were required to be performed for any other interim periods in the years ended December 31, 2022, 2021 or 2020.
Based upon the results of Kodak’s December 31, 2022 and 2021 annual impairment tests, no impairment of goodwill is indicated. As of December 31, 2022 and 2021 the Brand reporting unit had negative carrying value.
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The gross carrying amount and accumulated amortization by major intangible asset category as of December 31, 2022 and 2021 were as follows:
| | | As of December 31, 2022 |
| | | | | | | | | | | | | | Weighted Average |
| | | Gross Carrying | | | Accumulated | | | | | | Remaining |
| (in millions) | | Amount | | | Amortization | | | Net | | Amortization Period (in years) |
| Technology-based | | $ | 99 | | | $ | 88 | | | $ | 11 | | 3 years |
| Kodak trade name | | | 17 | | | | — | | | | 17 | | Indefinite life |
| Customer-related | | | 9 | | | | 9 | | | | — | | 1 year |
| Total | | $ | 125 | | | $ | 97 | | | $ | 28 | | |
| | | As of December 31, 2021 |
| | | | | | | | | | | | | | Weighted Average |
| | | Gross Carrying | | | Accumulated | | | | | | Remaining |
| (in millions) | | Amount | | | Amortization | | | Net | | Amortization Period (in years) |
| Technology-based | | $ | 99 | | | $ | 84 | | | $ | 15 | | 4 years |
| Kodak trade name | | | 18 | | | | — | | | | 18 | | Indefinite life |
| Customer-related | | | 9 | | | | 8 | | | | 1 | | 2 years |
| Total | | $ | 126 | | | $ | 92 | | | $ | 34 | | |
In the first quarter of 2020, due to the uncertainty regarding the negative impact of the COVID-19 pandemic at that time, Kodak performed an interim test of impairment for the Kodak trade name. Based on the result of the interim impairment test, Kodak concluded the carrying value of the Kodak trade name exceeded its fair value. Pre-tax impairment charges of $3 million are included in Other operating income, net for the year ended December 31, 2020 in the Consolidated Statement of Operations. Kodak also performed an interim test of impairment for the Kodak trade name as of June 30, 2020 due to the uncertainty regarding the negative impact of the COVID-19 pandemic. Based on the result of the interim impairment test as of June 30, 2020, Kodak concluded the fair value of the Kodak trade name exceeded its carrying value resulting in no additional impairment. No interim impairment tests for the Kodak tradename were required to be performed for any other interim periods in the years ended December 31, 2022, 2021 or 2020.
The annual and interim impairment tests of the Kodak trade name use the income approach, specifically the relief from royalty method.
Based on the results of Kodak’s December 31, 2022 annual impairment test, the carrying value of the Kodak trade name exceeded its fair value and Kodak recorded a pre-tax impairment charge of $1 million driven by lower forecasted revenues primarily associated with the decision to cease manufacturing of the Electrophotographic Printing Solutions equipment products. The $1 million impairment charge is included in Other operating income, net for the year ended December 31, 2022 in the Consolidated Statement of Operations. No impairment of the Kodak trade name was indicated as of December 31, 2021.
Amortization expense related to intangible assets was $5 million for each of the years ended December 31, 2022, 2021 and 2020.
Estimated future amortization expense related to intangible assets that are currently being amortized as of December 31, 2022 was as follows:
| (in millions) | | | | |
| 2023 | | $ | 4 | |
| 2024 | | | 4 | |
| 2025 | | | 3 | |
| Total | | $ | 11 | |
NOTE 7: OTHER CURRENT LIABILITIES
| |
|
As of December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
| Deferred revenue and customer deposits |
|
$ |
40 |
|
|
$ |
43 |
|
| Employment-related liabilities |
|
|
35 |
|
|
|
34 |
|
| Customer rebates |
|
|
18 |
|
|
|
21 |
|
| Workers' compensation |
|
|
9 |
|
|
|
7 |
|
| Restructuring liabilities |
|
|
7 |
|
|
|
5 |
|
| Accrued interest |
|
|
6 |
|
|
|
5 |
|
| Preferred Stock dividends payable |
|
|
1 |
|
|
|
1 |
|
| Other |
|
|
27 |
|
|
|
26 |
|
| Total |
|
$ |
143 |
|
|
$ |
142 |
|
The customer rebate amounts will potentially be settled through customer deductions applied to outstanding trade receivables in lieu of cash payments.
The Other component above consists of other miscellaneous current liabilities that, individually, were less than 5% of the total current liabilities component within the Consolidated Statement of Financial Position and therefore have been aggregated in accordance with Regulation S-X.
NOTE 8: OTHER LONG-TERM LIABILITIES
| |
|
As of December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
| Workers' compensation |
|
$ |
59 |
|
|
$ |
83 |
|
| Asset retirement obligations |
|
|
43 |
|
|
|
42 |
|
| Deferred taxes |
|
|
27 |
|
|
|
29 |
|
| Deferred brand licensing revenue |
|
|
11 |
|
|
|
14 |
|
| Environmental liabilities |
|
|
8 |
|
|
|
9 |
|
| Embedded conversion option derivative liabilities |
|
|
4 |
|
|
|
7 |
|
| Other |
|
|
19 |
|
|
|
21 |
|
| Total |
|
$ |
171 |
|
|
$ |
205 |
|
The Other component above consists of other miscellaneous long-term liabilities that, individually, were less than 5% of the total liabilities component in the accompanying Consolidated Statement of Financial Position and therefore have been aggregated in accordance with Regulation S-X.
NOTE 9: DEBT AND FINANCE LEASES
Debt and finance leases and related maturities and interest rates were as follows at December 31, 2022 and 2021:
| | | | | | Weighted-Average | | As of December 31, | |
| | | | | | Effective | | 2022 | | | 2021 | |
| (in millions) | Type | | Maturity | | Interest Rate | | Carrying Value | | | Carrying Value | |
| | | | | | | | | | | | | | |
| Current portion: | | | | | | | | | | | | | |
| | RED-Rochester, LLC | | | | 11.45% | | $ | 1 | | | $ | 1 | |
| | | | | | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | |
| Non-current portion: | | | | | | | | | | | | | |
| | Term notes | | 2026 | | 13.74% | | | 286 | | | | 224 | |
| | Convertible debt | | 2026 | | 17.24% | | | 18 | | | | 15 | |
| | RED-Rochester, LLC | | 2033 | | 11.45% | | | 11 | | | | 12 | |
| | Finance leases | | Various | | Various | | | 1 | | | | 1 | |
| | Other debt | | Various | | Various | | | — | | | | 1 | |
| | | | | | | | | 316 | | | | 253 | |
| | | | | | | | $ | 317 | | | $ | 254 | |
Annual maturities of debt and finance leases outstanding at December 31, 2022 were as follows:
| | | Carrying | | | Maturity | |
| (in millions) | | Value | | | Value | |
| 2023 | | $ | 1 | | | $ | 1 | |
| 2024 | | | 2 | | | | 2 | |
| 2025 | | | 1 | | | | 1 | |
| 2026 | | | 304 | | | | 366 | |
| 2027 | | | 1 | | | | 1 | |
| 2028 and thereafter | | | 8 | | | | 8 | |
| Total | | $ | 317 | | | $ | 379 | |
Term Loan Credit Agreement
On February 26, 2021, the Company entered into a Credit Agreement (the “Term Loan Credit Agreement”) with certain funds affiliated with Kennedy Lewis Investment Management LLC (“KLIM”) as lenders (the “Term Loan Lenders”) and Alter Domus (US) LLC, as administrative agent. Pursuant to the Term Loan Credit Agreement, the Term Loan Lenders provided the Company with (i) an initial term loan in the amount of $225 million, which was drawn in full on the same date, and (ii) a commitment to provide delayed draw term loans in an aggregate principal amount of up to $50 million on or before February 26, 2023 (collectively, the “Term Loans”). Net proceeds from the Term Loan Credit Agreement were $215 million ($225 million aggregate principal less $10 million in debt transaction costs). The delayed draw term loans were drawn down in full on June 15, 2022. Net proceeds received on June 15, 2022 were $49 million ($50 million of aggregate principal less $1 million in debt transaction costs). The maturity date of the Term Loans is February 26, 2026 and the Term Loans are non-amortizing.
The Term Loans bear interest at a rate of 8.5% per annum payable quarterly in cash and 4.0% per annum Paid-In-Kind interest (“PIK”) or in cash, at the Company’s option, for an aggregate interest rate of 12.5% per annum. The Company elected the 4.0% per annum in PIK which is added to the carrying value of the debt through the term. Interest expense is recorded using the effective interest method.
The Term Loans are guaranteed by the Company and certain of its domestic subsidiaries (the “Subsidiary Guarantors”), and are secured by (i) a first priority lien on substantially all assets of the Company and the Subsidiary Guarantors (subject to certain exceptions) not constituting ABL Priority Collateral or L/C Cash Collateral (see below for definitions of ABL Priority Collateral and L/C Cash Collateral), including 100% of the stock of material U.S. subsidiaries and 65% of the stock of material foreign subsidiaries (the “Term Loan Priority Collateral”) and (ii) a third priority lien on the ABL Priority Collateral and L/C Cash Collateral. The aggregate carrying value of the Term Loan Priority Collateral, ABL Priority Collateral and L/C Cash Collateral as of December 31, 2022 was $2,457 million.
The Term Loan Credit Agreement limits, among other things, the ability of the Company and its Restricted Subsidiaries (as defined in the Term Loan Credit Agreement) to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) make restricted payments (including dividend payments, et al.) and (v) make investments. The Term Loan Credit Agreement does not include a financial maintenance covenant or any subjective acceleration clauses. The Term Loan Credit Agreement does contain customary affirmative covenants including delivery of certain of the Company’s financial statements and customary event of default provisions, including a cross-default provision that would give rise to an event of default if there is a default under or acceleration of “Material Indebtedness”. Material Indebtedness includes obligations having a principal amount of at least $25 million and obligations under the ABL Facility or Letter of Credit Facility.
On an annual basis, the Company will prepay, within 10 business days following the filing of annual Form 10-K, outstanding Loans in an amount equal to Excess Cash Flow (“ECF”) as defined in the Term Loan Credit Agreement provided no such prepayment is required if such prepayment would cause U.S. liquidity to be less than $85 million. For the year ended December 31, 2022 ECF was a negative amount, therefore no prepayment is required in 2023.
Board Rights Agreement
On February 26, 2021, in connection with the execution of the Term Loan Credit Agreement, the Company entered into a letter agreement with KLIM (the “Board Rights Agreement”). Pursuant to the Board Rights Agreement, the Company’s Board of Directors (“Board”) appointed an individual designated by KLIM as a member of the Board effective April 1, 2021. The individual appointed was elected to serve one-year terms at the annual meetings on May 19, 2021 and May 18, 2022. KLIM has the right to nominate one director at each annual or special meeting of the Company’s shareholders until the third anniversary of the execution of the Board Rights Agreement or until KLIM ceases to hold at least 50% of the original principal amount of the Term Loans and commitments under the Term Loan Credit Agreement, whichever is earlier.
Until KLIM ceases to hold at least 50% of the original principal amount of the Term Loans and commitments under the Term Loan Credit Agreement, at any time that KLIM’s designated director is not serving on the Board, KLIM will have the right to designate a non-voting observer to the Board. Such observer will have the right to attend meetings of the Board and, under certain circumstances, committees and subcommittees of the Board and to receive information and materials made available to the Board, in each case, subject to certain restrictions and exceptions.
Securities Purchase Agreement
On February 26, 2021, the Company and the Term Loan Lenders (the “Buyers”), entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) pursuant to which the Company sold to the Buyers (i) an aggregate of 1,000,000 shares (the “Purchased Shares”) of the Company’s common stock, par value $0.01 per share (“Common Stock”) for a purchase price of $10.00 in cash per share for an aggregate purchase price of $10 million and (ii) $25 million aggregate principal amount of the Company’s newly issued 5.0% unsecured convertible promissory notes due May 28, 2026 (the “2021 Convertible Notes”) in a private placement transaction. The issuance and sale of the Purchased Shares and 2021 Convertible Notes were consummated on February 26, 2021.
2021 Convertible Notes
The 2021 Convertible Notes bear interest at a rate of 5.0% per annum, which will be payable in cash on the maturity date and in additional shares of Common Stock on any conversion date. The payment of interest only at the maturity date has the same effect as delivering additional debt instruments to the Holders of the 2021 Convertible Notes and therefore is considered PIK. Therefore, PIK will be added to the carrying value of the debt through the term and interest expense will be recorded using the effective interest method. The maturity date of the 2021 Convertible Notes is May 28, 2026.
Conversion Features
The Buyers have the right to elect at any time to convert the 2021 Convertible Notes into shares of Common Stock at an initial conversion rate equal to 100 shares of Common Stock per each $1,000 principal amount of the 2021 Convertible Notes (based on an initial conversion price equal to $10.00 per share of Common Stock). The conversion rate and conversion price is subject to certain customary anti-dilution adjustments. If the closing price of the Common Stock equals or exceeds $14.50 (subject to adjustment in the same manner as the conversion price) for 45 trading days within any period of 60 consecutive trading days, the Company has the right to cause the mandatory conversion of the 2021 Convertible Notes into shares of Common Stock.
In the event of certain fundamental transactions, the Buyers have the right, within a period of 30 days following the occurrence of such transaction (“Holder Fundamental Transaction Election Period”), to elect to either require prepayment of the 2021 Convertible Notes at par plus accrued and unpaid interest or convert all or a portion of the 2021 Convertible Notes into shares of Common Stock at the conversion rate then in effect plus any additional shares based on the price per share of Common Stock in connection with the fundamental transaction, or to receive the shares of a successor entity, if any.
Embedded Derivatives
The 2021 Convertible Notes were considered more akin to a debt-type instrument and the economic characteristics and risks of the embedded conversion features are not considered clearly and closely related to the 2021 Convertible Notes. Accordingly, these embedded features were bifurcated from the 2021 Convertible Notes and separately accounted for on a combined basis at fair value as a single derivative liability. Kodak allocated $12 million of the net proceeds received to a derivative liability based on the aggregate fair value of the embedded features on the date of issuance which reduced the net carrying value of the 2021 Convertible Notes. The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other charges (income), net in the Consolidated Statement of Operations. The fair value of the Convertible Notes embedded derivative as of December 31, 2022 and 2021 was a liability of $2 million and $4 million, respectively, and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 14, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the 2021 Convertible Notes at December 31, 2022 and 2021 was $18 million and $15 million, respectively. The estimated fair value of the 2021 Convertible Notes as of December 31, 2022 and 2021 was $16 million and $18 million, respectively (Level 3). The carrying value is being accreted to the aggregate principal amount using the effective interest method from the date of issuance through the maturity date.
Securities Registration Rights Agreement
On February 26, 2021, the Company and the Buyers entered into a Registration Rights Agreement (the “Securities Registration Rights Agreement”) providing the Buyers with registration rights in respect of the Purchased Shares and the Common Stock issuable upon conversion of the 2021 Convertible Notes. The Securities Registration Rights Agreement contains other customary terms and conditions, including certain customary indemnification obligations; however, the Securities Registration Rights Agreement does not obligate the Company to facilitate an underwritten offering of the registered Common Stock by the Buyers.
Amended and Restated ABL Credit Agreement
On September 3, 2013, the Company entered into an Asset Based Revolving Credit Agreement (the “Original ABL Credit Agreement”). On May 26, 2016, the Company and the subsidiaries of the Company that are guarantors (the “Subsidiary Guarantors”) entered into an Amended and Restated Credit Agreement (the “ABL Credit Agreement”) with the lenders party thereto, Bank of America, N.A., as administrative and collateral agent, and Bank of America, N.A. and JPMorgan Chase Bank, N.A., as joint lead arrangers and joint bookrunners, which amended and restated the Original ABL Credit Agreement.
The ABL Credit Agreement provided that the Lenders make available asset-based revolving loans (the “ABL Loans”) and letters of credit in an aggregate amount of up to $150 million, subject to the Borrowing Base.
On January 27, 2020 Kodak exercised its right under the ABL Credit Agreement to permanently reduce lender commitments from $150 million to $120 million. As a result, the minimum Excess Availability decreased to $15 million from the previous minimum of $18.75 million.
On March 27, 2020, the Company and the Subsidiary Guarantors entered into Amendment No. 3 to the ABL Credit Agreement (the “Amendment”) with the lenders party thereto (the “Lenders”), Bank of America, N.A., as administrative and collateral agent, and Bank of America, N.A. and each of the parties to the ABL Credit Agreement as lenders.
Each of the capitalized but undefined terms used in the context of describing the ABL Credit Agreement and the Amendment has the meaning ascribed to such term in the ABL Credit Agreement and the Amendment.
The Amendment decreased the available ABL Loans and letters of credit from an aggregate amount of up to $120 million to $110 million, subject to the Borrowing Base. As a result of the additional reduction in lender commitments, the minimum Excess Availability decreased to $13.75 million from the previous amount of $15 million.
The Amendment also changed Equipment Availability from (i) the lesser of 75% of Net Orderly Liquidation Value of Eligible Equipment or $6 million to (ii) the lesser of 70% of Net Orderly Liquidation Value of Eligible Equipment or $14.75 million as of March 31, 2020. The $14.75 million amount decreases by $1 million per quarter starting on July 1, 2020 until maturity or the amount is decreased to $0, whichever comes first.
On February 26, 2021, the Company and the Subsidiary Guarantors entered into a fourth amendment to the ABL Credit Agreement (as amended in 2021, the “Amended ABL Credit Agreement”), among the Company, the Subsidiary Guarantors, the lenders party thereto, Bank of America, N.A., as agent (the “Agent”), and Bank of America, N.A. and JPMorgan Chase Bank, N.A., as arrangers, with the Agent and the Required Lenders. Each of the capitalized but undefined terms used in the context of describing the Amended ABL Credit Agreement has the meaning ascribed to such term in the Amended ABL Credit Agreement.
The Amended ABL Credit Agreement amends the ABL Credit Agreement to, among other things, (i) extend the maturity date to February 26, 2024 or the date that is 90 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company’s Term Loans, 2021 Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing and (ii) decrease the aggregate amount of commitments from $110 million to $90 million, which decreased the minimum Excess Availability to $11.25 million from the previous amount of $13.75 million. Commitments under the Amended ABL Credit Agreement continue to be able to be used in the form of revolving loans or letters of credit. The Company issued approximately $58 million and $46 million letters of credit under the Amended ABL Credit Agreement as of December 31, 2022 and 2021, respectively.
The revolving loans bear interest at the rate of LIBOR plus 3.50%-4.00% per annum (subject to provisions providing for a replacement benchmark rate upon the discontinuation of LIBOR) or a floating Base Rate (as defined in the Amended ABL Credit Agreement) plus 2.50%-3.00% per annum, based on Excess Availability (as defined in the Amended ABL Credit Agreement). The Company will pay an unused line fee of 37.5-50 basis points per annum, depending on whether the unused portion of the maximum amount available is less than or equal to 50% or greater than 50%, respectively. The Company will pay a letter of credit fee of 3.50%-4.00% per annum, based on Excess Availability, on issued and outstanding letters of credit, in addition to a fronting fee of 25 basis points on such letters of credit.
Obligations under the Amended ABL Credit Agreement continue to be secured by: (i) a first priority lien on assets of the Company and the Subsidiary Guarantors constituting cash (other than L/C Cash Collateral, as defined below), accounts receivable, inventory, machinery and equipment and certain other assets (the “ABL Priority Collateral”) and (ii) a second priority lien on substantially all assets of the Company and the Subsidiary Guarantors (subject to certain exceptions) other than the ABL Priority Collateral, including the L/C cash collateral and 100% of the stock of material U.S. subsidiaries and 65% of the stock of material foreign subsidiaries.
The Amended ABL Credit Agreement continues to limit, among other things, the ability of the Company and its Restricted Subsidiaries (as defined in the Amended ABL Credit Agreement) to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) make restricted payments and (v) make investments. The Amended ABL Credit Agreement leaves in place customary affirmative covenants, including delivery of certain of the Company’s financial statements set forth therein.
Under the Amended ABL Credit Agreement the Company is required to maintain Minimum Liquidity of at least $80 million, which is tested at the end of each quarter. Minimum Liquidity was $150 million and $250 million at December 31, 2022 and 2021, respectively. If Minimum Liquidity falls below $80 million an Event of Default would occur, in which case the Agent would have the right to declare the obligation of each Lender to make Revolving Loans and of the Issuing Banks to issue Letters of Credit to be terminated, and declare the Revolving Loans, all interest thereon and all other amounts payable under the Amended ABL Credit Agreement to be due and payable.
Under both the Amended ABL Credit Agreement and the ABL Credit Agreement the Company is required to maintain Excess Availability above 12.5% of lender commitments ($11.25 million at both December 31, 2022 and 2021), which is tested at the end of each month. Excess Availability was $21 million and $27 million as of December 31, 2022 and 2021, respectively.
If Excess Availability falls below 12.5% of lender commitments a Fixed Charge Coverage Ratio Trigger Event would occur. During any Fixed Charge Coverage Ratio Trigger Event, the Company would be required to maintain a Fixed Charge Coverage Ratio of greater than or equal to 1.0 to 1.0. If Excess Availability falls below 12.5% of lender commitments, Kodak may, in addition to the requirement to be in compliance with the minimum Fixed Charge Coverage Ratio, become subject to cash dominion control. Since Excess Availability was greater than 12.5% of lender commitments at December 31, 2022 and 2021, Kodak was not required to have a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0.
If Excess Availability falls below 12.5% of lender commitments and the Fixed Charge Coverage Ratio is less than 1.0 to 1.0, an Event of Default would occur and the Agent would have the right to declare the obligation of each Lender to make Revolving Loans and of the Issuing Banks to issue Letters of Credit to be terminated, and declare the Revolving Loans, all interest thereon and all other amounts payable under the Amended ABL Credit Agreement to be due and payable.
Each existing direct or indirect U.S. subsidiary of the Company (other than Immaterial Subsidiaries, Unrestricted Subsidiaries and certain other subsidiaries) has provided an unconditional guarantee (and any such future subsidiaries must provide an unconditional guarantee) of the obligations of the Company under the Credit Agreements.
Under the terms of the ABL Credit Agreement, the Company may designate Restricted Subsidiaries as Unrestricted Subsidiaries provided the aggregate sales of all Unrestricted Subsidiaries are less than 7.5% of the consolidated sales of Kodak and the aggregate assets of all Unrestricted Subsidiaries are less than 7.5% of Kodak’s consolidated assets. Further, on a pro forma basis at the time of designation and immediately after giving effect thereto, Excess Availability must be at least $30 million and the pro forma Fixed Charge Coverage Ratio must be no less than 1.0 to 1.0. Upon designation of Unrestricted Subsidiaries, the Company is required to provide to the Lenders reconciling statements to eliminate all financial information pertaining to Unrestricted Subsidiaries which is included in its annual and quarterly consolidated financial statements.
In March 2018, the Company designated five subsidiaries as Unrestricted Subsidiaries: Kodak PE Tech, LLC, Kodak LB Tech, LLC, Kodak Realty, Inc, Kodakit Singapore Pte. Limited and KP Services (Jersey) Ltd. This action allowed the Company to better position assets which may be monetized in the future and address costs related to underutilized properties. In 2020 Kodak discontinued the operation of Kodakit Singapore Pte. Limited and sold the assets and liabilities of Kodak LB Tech, LLC in an intercompany transaction.
Under the Amended ABL Credit Agreement the Company designated three subsidiaries as Unrestricted Subsidiaries: Kodak PE Tech, LLC, Kodak Realty, Inc, and KP Services (Jersey) Ltd. Collectively, the Unrestricted Subsidiaries had sales of approximately $6 million, $7 million and $6 million for the years ended December 31, 2022, 2021 and 2020, respectively, which represented 1% of Kodak’s consolidated sales for each period. These subsidiaries had assets of $12 million and $13 million as of December 31, 2022 and 2021, respectively, which represented 1% of Kodak’s consolidated assets as of such dates.
The Amended ABL Credit Agreement limits, among other things, the Company’s and the Subsidiary Guarantors’ ability to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) make restricted payments (including dividend payments, et al.) and (v) make investments. In addition to other customary affirmative covenants, the Amended ABL Credit Agreement provides for a periodic delivery by the Company of its various financial statements as set forth in the Amended ABL Credit Agreement. Events of default under the ABL Credit Agreement include, among others, failure to pay any principal, interest or other amount due under the applicable agreement, breach of specific covenants and a change of control of the Company. Upon an event of default, the lenders may declare the outstanding obligations under the Amended ABL Credit Agreement to be immediately due and payable and exercise other rights and remedies provided for in the agreement.
On March 14, 2023, the Company entered into an amendment to the Amended ABL Credit Agreement (the “2023 Amended ABL Credit Agreement”) and Letter of Credit Facility Agreement (the “2023 Amended L/C Facility Agreement) to, among other things: (i) extend the maturity date from February 26, 2024 to the earliest of June 12, 2024, the termination of the 2023 Amended L/C Facility Agreement or the 2023 Amended ABL Credit Agreement, as applicable, or the date that is 91 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company’s Term Loans, 2021 Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing; (ii) maintain daily Minimum Liquidity of $50 million, subject to certain cure rights, in addition to maintaining the existing quarterly Minimum Liquidity of $80 million, and (iii) on February 26, 2024, decrease the aggregate amount of commitments from $90 million to $81 million.
Letter of Credit Facility Agreement
On February 26, 2021, the Company and the Subsidiary Guarantors entered into a Letter of Credit Facility Agreement (the “L/C Facility Agreement”, and together with the Term Loan Credit Agreement and the Amended ABL Credit Agreement the “Credit Agreements”) among the Company, the Subsidiary Guarantors, the lenders party thereto (the “L/C Lenders”), Bank of America, N.A., as agent, and Bank of America, N.A., as issuing bank. Pursuant to the L/C Facility Agreement, the L/C Lenders committed to issue letters of credit on the Company’s behalf in an aggregate amount of up to $50 million, provided that the Company posts cash collateral in an amount greater than or equal to 103% of the aggregate amount of letters of credit issued and outstanding at any given time (the “L/C Cash Collateral”).
The term of the L/C Facility Agreement is three years, subject to the same automatic springing maturity as the Amended ABL Credit Agreement. The Company issued approximately $43 million and $44 million letters of credit under the L/C Facility Agreement as of December 31, 2022 and 2021, respectively. The balance on deposit in the L/C Cash Collateral account as of December 31, 2022 and 2021 is approximately $44 million and $45 million, respectively, of which $14 million was deposited into the L/C Cash Collateral account from proceeds of the financing transactions described herein and the remainder of which was cash collateral previously used to secure letters of credit under the ABL Credit Agreement. The L/C Facility Agreement has the same requirement to maintain Minimum Liquidity of $80 million as is contained in the Amended ABL Credit Agreement.
The Company will pay an unused line fee of 37.5-50 basis points per annum, depending on whether the unused portion of the maximum commitments is less than or equal to 50% or greater than 50% of such commitments, respectively. The Company will pay a letter of credit fee of 3.75% per annum on issued and outstanding letters of credit, in addition to a fronting fee of 25 basis points on such letters of credit. Amounts drawn under any letter of credit will be reimbursed from the L/C Cash Collateral. If not so reimbursed, and not otherwise repaid by the Company to the applicable L/C Lenders, such amounts will accrue interest, to be paid monthly, at a floating Base Rate (as defined in the L/C Facility Agreement) plus 2.75% per annum until repaid.
As with the Amended ABL Credit Agreement and the ABL Credit Agreement, the L/C Facility Agreement also requires the Company to maintain Excess Availability above 12.5% of lender commitments. If Excess Availability falls below 12.5% of lender commitments a Fixed Charge Coverage Ratio Trigger Event would occur under the L/C Facility Agreement as well as the Amended ABL Credit Agreement and the ABL Credit Agreement. During any Fixed Charge Coverage Ratio Trigger Event, the Company would be required to maintain a Fixed Charge Coverage Ratio of greater than or equal to 1.0 to 1.0.
The Company’s obligations under the L/C Facility Agreement are guaranteed by the Subsidiary Guarantors and are secured by (i) a first priority lien on the L/C Cash Collateral, (ii) a second priority lien on the ABL Priority Collateral and (iii) a third priority lien on the Term Loan Priority Collateral.
RED-Rochester, LLC
In January 2019 Kodak entered into a series of agreements with RED-Rochester, LLC (“RED”), which provides utilities to Eastman Business Park. Kodak received a payment of $14 million from RED. Kodak is required to pay a minimum annual payment to RED of approximately $2 million regardless of utility usage. Kodak is accounting for the $14 million payment from RED as debt. The minimum payments required under the agreement from Kodak to RED are reported as a reduction of the debt and interest expense using the effective interest method. The debt payments to RED continue until August 2033.
2019 Convertible Notes
On May 20, 2019, the Company and Longleaf Partners Small Cap Fund, C2W Partners Master Fund Limited and Deseret Mutual Pension Trust, which are investment funds managed by Southeastern Asset Management, Inc. (the “2019 Notes Purchasers”), entered into a Notes Purchase Agreement pursuant to which the Company agreed to issue and sell to the Notes Purchasers, and the Notes Purchasers agreed to purchase from the Company, $100 million aggregate principal amount of the Company’s 2019 Convertible Notes due 2021.
The transaction closed on May 24, 2019. The proceeds were used to repay the remaining first lien term loans outstanding ($83 million) under the Company’s term credit agreement, which was terminated with the repayment. The remaining proceeds were used for general corporate purposes. The maturity date of the 2019 Convertible Notes was November 1, 2021.
The 2019 Convertible Notes interest rate was 5.00% per annum, payable in cash on their maturity date (PIK interest) and, at the option of the Company, in either cash or additional shares of Common Stock on any conversion date. Therefore, PIK was added to the carrying value of the debt through the term and interest expense was recorded using the effective interest method.
On July 29, 2020, the Company received conversion notices from holders of the 2019 Convertible Notes exercising their rights to convert an aggregate of $95 million of principal amount of the 2019 Convertible Notes (the “Initial Converted Notes”) into shares of Common Stock. Under the terms of the 2019 Convertible Notes, the conversion date of the Initial Converted Notes was July 29, 2020 (the “Initial Conversion Date”) and the Company was obligated to deliver an aggregate of 29,922,956 shares of Common Stock (the “Initial Conversion Shares”) to the holders of the Initial Converted Notes within five trading days after the Initial Conversion Date. The Company issued the Initial Conversion Shares on August 3, 2020 and paid the $5.6 million of accumulated interest on the Initial Converted Notes in cash. As a result, the Company’s obligations under the Initial Converted Notes were fully discharged and the remaining outstanding principal amount of the 2019 Convertible Notes was $5 million.
On September 30, 2020, the Company announced its election to mandatorily convert the remaining $5 million outstanding principal amount of the 2019 Convertible Notes (the “Mandatory Converted Notes”) into shares of Common Stock. The conversion of the Mandatory Converted Notes was effective on September 30, 2020 (the “Mandatory Conversion Date”). The Company issued 1,574,892 shares of Common Stock to the holder of the Mandatory Converted Notes on September 30, 2020 (the “Mandatory Conversion Shares”). The Company paid the accrued interest on the Mandatory Converted Notes in the form of cash and interest ceased to accrue on the Mandatory Converted Notes on the Mandatory Conversion Date. As a result of the conversion of all the 2019 Convertible Notes, the lien granted by the Company on certain of its assets to secure the 2019 Convertible Notes was released.
Embedded Derivatives
The 2019 Convertible Notes were considered more akin to a debt-type instrument and the economic characteristics and risks of the embedded conversion features and term extension at the Company’s option were not considered clearly and closely related to the 2019 Convertible Notes. Accordingly, these embedded features were bifurcated from the 2019 Convertible Notes and separately accounted for on a combined basis at fair value as a single derivative liability. Kodak allocated $14 million of the net proceeds received to a derivative liability based on the aggregate fair value of the embedded features and term extension on the date of issuance which reduced the net carrying value of the 2019 Convertible Notes. The derivative was being accounted for at fair value with subsequent changes in the fair value being reported as part of Other charges (income), net in the Consolidated Statement of Operations.
The carrying value of the 2019 Convertible Notes at the time of issuance, $84 million ($100 million aggregate gross proceeds less $14 million allocated to the derivative liability and $2 million in transaction costs), was being accreted to the face amount using the effective interest method from the date of issuance through the maturity date.
Loss on Early Extinguishment
The calculation of the loss on early extinguishment of debt for the 2019 Convertible Notes when converted in 2020 is shown below:
| (in millions) | | | | |
| Fair value of Initial Conversion Shares | | $ | 506 | |
| Fair value of Mandatory Conversion Shares | | | 13 | |
| Carrying value of 2019 Convertible Notes | | | (92 | ) |
| Fair value of pro-rata share of embedded derivatives at Initial Conversion Date | | | (416 | ) |
| Fair value of pro-rata share of embedded derivatives at Mandatory Conversion Date | | | (9 | ) |
| Total | | $ | 2 | |
NOTE 10: REDEEMABLE, CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock was as follows:
| |
|
December 31, |
|
|
December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
| Series B preferred stock |
|
$ |
95 |
|
|
$ |
94 |
|
| Series C preferred stock |
|
|
108 |
|
|
|
102 |
|
| Total |
|
$ |
203 |
|
|
$ |
196 |
|
Series A Preferred Stock
On November 15, 2016, the Company issued 2,000,000 shares of 5.50% Series A Preferred Stock, no par value per share, for an aggregate purchase price of $200 million, or $100 per share pursuant to a Series A Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”) with Southeastern Asset Management, Inc. (“Southeastern”) and Longleaf Partners Small-Cap Fund, C2W Partners Master Fund Limited and Deseret Mutual Pension Trust, which are investment funds managed by Southeastern (such investment funds, collectively, the “Series A Purchasers”), dated November 7, 2016. The Company received net proceeds of $198 million after issuance costs.
The Company classified the Series A Preferred Stock as temporary equity in the Consolidated Statement of Financial Position.
Redemption Features
If any shares of Series A Preferred Stock had not been converted prior to the fifth anniversary of the initial issuance of the Series A Preferred Stock, the Company would have been required to redeem such shares at $100 per share plus the amount of accrued and unpaid dividends. As the Company concluded that the Series A Preferred Stock was considered more akin to a debt-type instrument, the redemption feature was considered to be clearly and closely related to the host contract and therefore was not required to be separated from the Series A Preferred Stock.
Repurchase and Exchange Agreement
On February 26, 2021 the Company entered into a Series A Preferred Stock Repurchase and Exchange Agreement (the “Repurchase and Exchange Agreement”) with Southeastern and the Purchasers. The Company repurchased one million shares of the Series A Preferred Stock under the terms of the Repurchase and Exchange Agreement for $100,641,667, representing the liquidation value of the Series A Preferred Stock plus accrued and unpaid dividends. In addition, the Company and the Purchasers agreed to exchange the remaining one million shares of Series A Preferred Stock held by the Purchasers for shares of the Company’s newly created 4.0% Series B Convertible Preferred Stock, no par value (the “Series B Preferred Stock”) on a one-for-one basis plus accrued and unpaid dividends of $641,667. The exchange of shares of Series A Preferred Stock for shares of Series B Preferred Stock was a noncash financing activity.
Embedded Conversion Features
Each share of Series A Preferred Stock was convertible, at the option of each holder at any time, into shares of Common Stock at the initial conversion rate of 5.7471 (equivalent to an initial conversion price of $17.40 per share of Common Stock). If a holder elected to convert any shares of Series A Preferred Stock during a specified period in connection with a fundamental change (as defined in the Certificate of Designations), the conversion rate would have been adjusted under certain circumstances and such holder would also have been entitled to a payment in respect of accumulated dividends. If a holder elected to convert any shares of Series A Preferred Stock during a specified period following a reorganization event (as defined in the Certificate of Designations), such holder could have elected to have the conversion rate adjusted. In addition, the Company had the right to require holders to convert any shares of Series A Preferred Stock in connection with certain reorganization events, in which case the conversion rate would have been adjusted under certain circumstances. If shares of Series A Preferred Stock were not converted in connection with a reorganization event, such shares would have become convertible into the exchanged property from the reorganization event.
The Company had the right to convert Series A Preferred Stock into Common Stock at any time after the second anniversary of the initial issuance if the closing price of the Common Stock equaled or exceeded 125 percent of the then-effective conversion price for 45 trading days within a period of 60 consecutive trading days, with the last trading day of such 60 day period ending on the trading day immediately preceding the business day on which the Company issues a press release announcing the mandatory conversion.
Kodak allocated $43 million of the net proceeds from the issuance of the Series A Stock 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. 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), was 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.
Extinguishment of Series A Preferred Stock
The carrying value, including the fair value of the embedded derivative liability, of the Series A Preferred Stock prior to extinguishment approximated $203 million. Upon repurchase and exchange of the Series A Preferred Stock, Kodak recorded $8 million as a deemed dividend to Additional paid in capital in the Consolidated Statement of Financial Position, representing the difference between the fair value of consideration transferred and the carrying value of the Series A Preferred Stock.
Dividend and Other Rights
The holders of Series A Preferred Stock were entitled to cumulative dividends payable quarterly in cash at a rate of 5.50% per annum. Until the third quarter of 2018 all dividends owed on the Series A Preferred Stock were declared and paid when due. No quarterly dividend was declared in the third or fourth quarters of 2018 or the first and second quarters of 2019. After the second quarter of 2019, quarterly cash dividends were declared each quarter and were paid when due. In July 2020, the Company declared and paid the four quarterly dividends that were in arrears. The total amount of dividends in arrears was $11 million.
Series B Preferred Stock
The fair value of the Series B Preferred Stock at the time of issuance approximated $95 million. The Company has classified the Series B Preferred Stock as temporary equity in the Consolidated Statement of Financial Position.
Dividend and Other Rights
On February 25, 2021, the Company filed with the Department of Treasury of the State of New Jersey a Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of the Company (the “Series B Certificate of Designations”) which established the designation, number of shares, rights, preferences and limitations of the Series B Preferred Stock which became effective upon filing. The Series B Preferred Stock ranks senior to the Common Stock and pari passu with the Series C Preferred Stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Series B Preferred Stock has a liquidation preference of $100 per share, and the holders of Series B Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 4.0% per annum. If dividends on any Series B Preferred Stock are in arrears for six or more consecutive or non-consecutive dividend periods, the holders of the Series B Preferred Stock will be entitled to nominate one director at the next annual shareholder meeting and all subsequent shareholder meetings until all accumulated dividends on such Series B Preferred Stock have been paid or set aside. Dividends owed on the Series B Preferred Stock have been declared and paid when due. Holders of Series B Preferred Stock will have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company.
Conversion Features
Each share of Series B Preferred Stock is convertible, at the option of each holder at any time, into shares of Common Stock at the initial conversion rate of 9.5238 shares of Common Stock for each share of Series B Preferred Stock (equivalent to an initial conversion price of $10.50 per share of Common Stock). The initial conversion rate and the corresponding conversion price are subject to certain customary anti-dilution adjustments. If a holder elects to convert any shares of Series B Preferred Stock during a specified period in connection with a fundamental change (as defined in the Series B Certificate of Designations), such holder can elect to have the conversion rate adjusted and can elect to receive a cash payment in lieu of shares for a portion of the shares. Such holder will also be entitled to a payment in respect of accumulated dividends. In addition, the Company will have the right to require holders to convert any shares of Series B Preferred Stock in connection with certain reorganization events in which case the conversion rate will be adjusted, subject to certain limitations.
The Company has the right to cause the mandatory conversion of the Series B Preferred Stock into shares of Common Stock if the closing price of the Common Stock has equaled or exceeded $14.50 (subject to adjustment in the same manner as the conversion price) for 45 trading days within a period of 60 consecutive trading days.
Embedded Conversion Features
The Company concluded that the Series B Preferred Stock was more akin to a debt-type instrument and that the economic characteristics and risks of the conversion option upon a fundamental change by the holder was not considered clearly and closely related to the Series B Preferred Stock. Accordingly, this embedded conversion feature was bifurcated from the Series B Preferred Stock and is being separately accounted for as a derivative. The Company allocated $1 million to the derivative liability based on the aggregate fair value of the embedded conversion feature on the date of issuance which reduced the original carrying value of the Series B Preferred Stock.
The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other charges (income), net in the Consolidated Statement of Operations. The fair value of the Series B Preferred Stock embedded derivative as of both December 31, 2022 and 2021 was a liability of $1 million and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 14, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the Series B Preferred Stock at the time of issuance, $93 million ($95 million fair value of Series B Preferred Stock on February 26, 2021 less $1 million allocated to the derivative liability and $1 million of 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, May 28, 2026.
Redemption Features
If any shares of Series B Preferred Stock have not been converted prior to May 28, 2026 (the “Redemption Date”), the Company is required to redeem such shares at $100 per share plus the amount of accrued and unpaid dividends. As the Company concluded that the Series B Preferred Stock is considered more akin to a debt-type instrument, the redemption feature is considered to be clearly and closely related to the host contract and therefore was not required to be separated from the Series B Preferred Stock.
Series B Registration Rights Agreement
On November 15, 2016, the Company and the Series A Purchasers entered into a Registration Rights Agreement (the “Series A Registration Rights Agreement”) which provided the Series A Purchasers with customary registration rights in respect of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock. The Series A Registration Rights Agreement contains other customary terms and conditions, including certain customary indemnification obligations. The Repurchase and Exchange Agreement extended the registration rights provided under the Series A Registration Rights Agreement to shares of Common Stock issuable upon conversion of the Series B Preferred Stock.
Series C Preferred Stock
Purchase Agreement
On February 26, 2021, the Company and GO EK Ventures IV, LLC (the “Investor”) entered into a Series C Preferred Stock Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company agreed to sell to the Investor, and the Investor agreed to purchase from the Company, an aggregate of 1,000,000 shares of the Company’s newly created 5.0% Series C Convertible Preferred Stock, no par value per share (the “Series C Preferred Stock”), for a purchase price of $100 per share, representing $100 million of gross proceeds to the Company. The initial issuance and sale of 750,000 shares ($75 million gross proceeds) closed on February 26, 2021. The final issuance and sale of the remaining 250,000 shares ($25 million gross proceeds) closed on March 30, 2021 after expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. The Investor is a fund managed by Grand Oaks Capital. The Company used the proceeds from the sale of the Series C Preferred Stock for general corporate purposes including the funding of growth initiatives. The Company has classified the Series C Preferred Stock as temporary equity in the Consolidated Statement of Financial Position.
Dividend and Other Rights
On February 25, 2021, the Company filed with the Department of Treasury of the State of New Jersey a Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of the Company (the “Series C Certificate of Designations”) which established the designation, number of shares, rights, preferences and limitations of the Series C Preferred Stock and became effective upon filing. The Series C Preferred Stock ranks senior to the Common Stock and pari passu with the Series B Preferred Stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Series C Preferred Stock has an initial liquidation preference of $100 per share, and holders of Series C Preferred Stock are entitled to cumulative dividends payable quarterly “in-kind” in the form of additional shares of Series C Preferred Stock at a rate of 5.0% per annum. If dividends on the Series C Preferred Stock are not declared and paid for any given fiscal quarter, the liquidation preference is automatically increased by the amount of such unpaid dividends. Holders of the Series C Preferred Stock are also entitled to participate in any dividends paid on the Common Stock (other than stock dividends) on an as-converted basis, with such dividends on any shares of the Series C Preferred Stock being payable upon conversion of such shares of Series C Preferred Stock to Common Stock. Dividends owed on the Series C Preferred Stock have been declared and additional Series C shares issued when due.
Holders of Series C Preferred Stock are entitled to vote together with the holders of the Common Stock as a single class, in each case, on an as-converted basis, except where a separate class vote is required by law. Holders of Series C Preferred Stock have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company.
Pursuant to the Purchase Agreement, the Investor has the right to nominate one director at each annual or special meeting of the Company’s shareholders until the earlier of the third anniversary of the execution of the Purchase Agreement and such time as the Investor and its Affiliates (as defined in the Purchase Agreement) do not hold at least a majority of the Series C Preferred Stock purchased under the Purchase Agreement. The Investor’s nominee pursuant to this right was elected to serve one-year terms at the annual meetings on May 19, 2021 and May 18, 2022.
Conversion Features
Each share of Series C Preferred Stock is convertible, at the option of each holder at any time, into shares of Common Stock at the initial conversion price of $10 per share of Common Stock. The initial conversion price and the corresponding conversion rate are subject to certain customary anti-dilution adjustments and to proportional increase in the event the liquidation preference of the Series C Preferred Stock is automatically increased as described above. If a holder elects to convert any shares of Series C Preferred Stock during a specified period in connection with a fundamental change (as defined in the Series C Certificate of Designations), such holder can elect to have the conversion rate adjusted and can elect to receive a cash payment in lieu of shares for a portion of the shares of Common Stock. Such holder will also be entitled to a payment in respect of accumulated dividends and a payment based on the present value of all required remaining dividend payments through May 28, 2026, the mandatory redemption date. Such additional payments will be payable at the Company’s option in cash or in additional shares of Common Stock. In addition, the Company will have the right to require holders to convert any shares of Series C Preferred Stock in connection with certain reorganization events in which case the conversion rate will be adjusted, subject to certain limitations.
The Company has the right to cause the mandatory conversion of the Series C Preferred Stock into shares of Common Stock (i) at any time after February 26, 2023 if the closing price of the Common Stock has equaled or exceeded 200% of the then-effective conversion price for 45 trading days within a period of 60 consecutive trading days, or (ii) at any time after February 26, 2024 if the closing price of the Common Stock has equaled or exceeded 150% of the then-effective conversion price for 45 trading days within a period of 60 consecutive trading days.
Embedded Conversion Features
The Company concluded that the Series C Preferred Stock is more akin to a debt-type instrument and that the economic characteristics and risks of the conversion option upon a fundamental change by the holder is not considered clearly and closely related to the Series C Preferred Stock. Accordingly, this embedded conversion feature was bifurcated from the Series C Preferred Stock and separately accounted for as a derivative. The Company allocated $2 million of the net proceeds received to the derivative liability based on the aggregate fair value of the embedded conversion features on the dates of issuance which reduced the original carrying value of the Series C Preferred Stock. The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other charges (income), net in the Consolidated Statement of Operations. The fair value of the Series C Preferred Stock derivative as of December 31, 2022 and 2021 was a liability of $1 million and $2 million, respectively, and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 14, “Financial Instruments” for information on the valuation of the derivative.
The carrying value of the Series C Preferred Stock at the time of issuance, $97 million ($100 million aggregate gross proceeds less $2 million allocated to the derivative liability and $1 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.
Redemption Features
If any shares of Series C Preferred Stock have not been converted prior to the Redemption Date, the Company is required to redeem such shares at $100 per share plus the amount of accrued and unpaid dividends thereon; provided that the holders of the Series C Preferred Stock have the right to extend such redemption date by up to two years. As the Company concluded that the Series C Preferred Stock is more akin to a debt-type instrument, the redemption feature is considered to be clearly and closely related to the host contract and therefore was not required to be separated from the Series C Preferred Stock.
Series C Registration Rights Agreement
On February 26, 2021, the Company and the Investor entered into a Registration Rights Agreement (the “Series C Registration Rights Agreement”) which provides the Investor with customary registration rights in respect of the shares of Common Stock issuable upon conversion of the Series C Preferred Stock. The Series C Registration Rights Agreement contains other customary terms and conditions, including certain customary indemnification obligations.
NOTE 11: LEASES
Kodak as lessee
The table below presents the lease-related assets and liabilities on the balance sheet:
| |
Classification in the |
|
December 31, |
|
| (in millions) |
Consolidated Statement of Financial Position |
|
2022 |
|
|
2021 |
|
| Assets |
|
|
|
|
|
|
|
|
|
| Operating lease assets |
Operating lease right-of-use assets |
|
$ |
39 |
|
|
$ |
47 |
|
| Finance lease assets |
Property, plant and equipment, net |
|
|
1 |
|
|
|
1 |
|
| Total lease assets |
|
$ |
40 |
|
|
$ |
48 |
|
| |
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
| Current |
|
|
|
|
|
|
|
|
|
| Operating |
Current portion of operating leases |
|
$ |
15 |
|
|
$ |
13 |
|
| Noncurrent |
|
|
|
|
|
|
|
|
|
| Operating |
Operating leases, net of current portion |
|
|
31 |
|
|
|
45 |
|
| Finance |
Long-term debt, net of current portion |
|
|
1 |
|
|
|
1 |
|
| Total lease liabilities |
|
$ |
47 |
|
|
$ |
59 |
|
| |
|
|
|
|
|
|
|
|
|
| Weighted-average remaining lease term (in years) |
|
|
|
|
|
|
|
|
|
| Operating |
|
|
|
|
|
|
5 |
|
| Finance |
|
|
|
|
|
|
3 |
|
| Weighted-average discount rate |
|
|
|
|
|
|
|
|
|
| Operating |
|
|
|
|
|
|
12.17 |
% |
| Finance |
|
|
|
|
|
|
5.18 |
% |
Lease Costs
The table below presents certain information related to the lease expense for finance and operating leases. Lease expense is presented gross of sublease income. See “Kodak as Lessor” section below for income from subleases.
| |
|
Year Ended December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Finance lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization of leased assets |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1 |
|
| Interest on lease liabilities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Operating lease expense |
|
|
17 |
|
|
|
19 |
|
|
|
21 |
|
| Variable lease expense (1) |
|
|
7 |
|
|
|
9 |
|
|
|
9 |
|
| Total lease expense |
|
$ |
25 |
|
|
$ |
29 |
|
|
$ |
31 |
|
| |
(1) |
Variable lease expense is related to real estate leases and primarily includes taxes, insurance and operating costs. |
Other Information
The table below presents supplemental cash flow information related to leases.
| |
|
Year Ended December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating cash flows for operating leases |
|
$ |
19 |
|
|
$ |
21 |
|
|
$ |
22 |
|
| Operating cash flow for finance leases |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Financing cash flow for finance leases |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
| |
|
$ |
20 |
|
|
$ |
22 |
|
|
$ |
23 |
|
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for the next five years and thereafter to the finance lease liabilities and operating lease liabilities recorded on the balance sheet.
| Undiscounted future cash flows: | | | | | | | | |
| (in millions) | | Operating Leases | | | Finance Leases | |
| 2023 | | $ | 20 | | | $ | — | |
| 2024 | | | 12 | | | | 1 | |
| 2025 | | | 7 | | | | — | |
| 2026 | | | 6 | | | | — | |
| 2027 | | | 5 | | | | — | |
| Thereafter | | | 18 | | | | — | |
| Total minimum lease payments | | | 68 | | | | 1 | |
| Less: amount of lease payments representing interest | | | (22 | ) | | | — | |
| Present value of future minimum lease payments | | | 46 | | | | 1 | |
| Less: current obligations under leases | | | 15 | | | | — | |
| Long-term lease obligations | | $ | 31 | | | $ | 1 | |
At December 31, 2022 leases that had not yet commenced were not significant.
Kodak as Lessor
Kodak’s net investment in sales-type leases as of December 31, 2022 and 2021 was $4 million and $6 million, respectively. The current portion of the net investment in sales-type leases is included in Other current assets in the Consolidated Statement of Financial Position. The portion of the net investment in sales-type leases due after one year is included in Other long-term assets.
The table below reconciles the undiscounted cash flows to be received for the next five years and thereafter to the net investment in sales-type leases recorded in the Consolidated Statement of Financial Position:
| (in millions) |
|
|
|
|
| 2023 |
|
$ |
2 |
|
| 2024 |
|
|
1 |
|
| 2025 |
|
|
1 |
|
| 2026 and thereafter |
|
|
1 |
|
| Total minimum lease payments |
|
|
5 |
|
| Less: unearned interest |
|
|
(1 |
) |
| Net investment in sales-type leases |
|
$ |
4 |
|
Undiscounted cash flows to be received for the next five years and thereafter for operating leases and subleases are:
| (in millions) |
|
|
|
|
| 2022 |
|
$ |
8 |
|
| 2023 |
|
|
6 |
|
| 2024 |
|
|
2 |
|
| 2025 |
|
|
2 |
|
| 2026 |
|
|
1 |
|
| Thereafter |
|
|
5 |
|
| Total minimum lease payments |
|
$ |
24 |
|
Income recognized on lease arrangements for the years ended December 31, 2022, 2021 and 2020 is presented below:
| |
|
Year Ended December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Lease income - sales-type leases |
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
1 |
|
| Lease income - operating leases |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
| Sublease income |
|
|
— |
|
|
|
— |
|
|
|
2 |
|
| Variable lease income (1) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
| Total lease income |
|
$ |
14 |
|
|
$ |
16 |
|
|
$ |
16 |
|
| |
(1) |
Variable lease income primarily represents operating costs under real estate leases and incremental variable income based on usage under equipment leases. |
Equipment subject to operating leases and the related accumulated depreciation were as follows:
| |
|
As of December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
| Equipment subject to operating leases |
|
$ |
19 |
|
|
$ |
21 |
|
| Accumulated depreciation |
|
|
(16 |
) |
|
|
(18 |
) |
| Equipment subject to operating leases, net |
|
$ |
3 |
|
|
$ |
3 |
|
Equipment subject to operating leases, net is included in Property, plant and equipment, net in the Consolidated Statement of Financial Position.
NOTE 12: COMMITMENTS AND CONTINGENCIES
Asset Retirement Obligations
Kodak’s asset retirement obligations primarily relate to asbestos contained in buildings that Kodak owns. In many of the countries in which Kodak operates, environmental regulations exist that require Kodak to handle and dispose of asbestos in a special manner if a building undergoes major renovations or is demolished. Otherwise, Kodak is not required to remove the asbestos from its buildings. Kodak records a liability equal to the estimated fair value of its obligation to perform asset retirement activities related to the asbestos, computed using an expected present value technique, when sufficient information exists to calculate the fair value. Kodak does not have a liability recorded related to every building that contains asbestos because Kodak cannot estimate the fair value of its obligation for certain buildings due to a lack of sufficient information about the range of time over which the obligation may be settled through demolition, renovation or sale of the building.
The following table provides asset retirement obligation activity (in millions):
| | | For the Year Ended December 31, | |
| | | 2022 | | | 2021 | |
| Asset Retirement Obligations at start of period | | $ | 42 | | | $ | 41 | |
| Liabilities incurred in the current period | | | 1 | | | | — | |
| Liabilities settled in the current period | | | (2 | ) | | | — | |
| Revision in estimated cash flows | | | 2 | | | | 1 | |
| Asset Retirement Obligations at end of period | | $ | 43 | | | $ | 42 | |
Other Commitments and Contingencies
As of December 31, 2022 the Company had outstanding letters of credit of $58 million and $43 million issued under the Amended ABL Credit Agreement and the L/C Facility Agreement, respectively, as well as bank guarantees and letters of credit of $1 million, surety bonds in the amount of $29 million, and restricted cash of $69 million, primarily related to cash collateral for the outstanding letters of credit under the L/C Facility Agreement, to ensure the payment of possible casualty and workers compensation claims, environmental liabilities, legal contingencies, rental payments, and to support various customs, hedging, tax and trade activities. The restricted cash is recorded in Current assets and Restricted cash 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 and income taxes. Kodak’s Brazilian operations are disputing these matters and intend to vigorously defend their position. Kodak routinely assesses 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 December 31, 2022, Kodak’s Brazilian Operations maintained accruals of approximately $2 million for claims aggregating approximately $114 million inclusive of interest and penalties where appropriate. The unreserved portion of the indirect taxes, civil litigation and disputes involving former employees and contract labor claims, 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 $6 million.
In connection with assessments in Brazil, local regulations require Kodak to post security for a portion of the amounts in dispute. As of December 31, 2022, 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 $41 million. Generally, any encumbrances on the Brazilian assets would be removed to the extent the matter is resolved in Kodak's favor.
On August 13, 2020 Tiandong Tang commenced a class action lawsuit against the Company, its Executive Chairman and Chief Executive Officer and its Chief Financial Officer in Federal District Court in the District of New Jersey, and on August 26, 2020 Jimmie A. McAdams and Judy P. McAdams commenced a class action lawsuit against the Company and its Executive Chairman and Chief Executive Officer in Federal District Court in the Southern District of New York (collectively, the “Securities Class Actions”). The Securities Class Actions seek damages and other relief based on alleged violations of federal securities laws in the context of the U.S. International Development Finance Corporation (the “DFC”) announcement (the “DFC Announcement”) of the signing of a non-binding letter of interest to provide a subsidiary of the Company with a potential $765 million loan (the “DFC Loan”) to support the launch of Kodak Pharmaceuticals, an initiative that would manufacture pharmaceutical ingredients for essential generic drugs (the “DFC Pharmaceutical Project”) on July 28, 2020. The Securities Class Actions were transferred to the Federal District Court for the Western District of New York and were consolidated into a single proceeding (the “Consolidated Securities Class Action”) on June 22, 2021. Les Investissements Kiz Inc. and UAT Trading Service, Inc. were appointed by the court to serve as lead plaintiff for the Consolidated Securities Class Action on August 2, 2021, and the lead plaintiff filed an amended consolidated complaint on October 1, 2021 which added Kodak’s General Counsel and current and former members of its Board of Directors as additional defendants. The Company and individual defendants filed a joint motion to dismiss the Consolidated Securities Class Action on December 14, 2021. The lead plaintiff filed an opposition to the motion to dismiss on February 28, 2022, and the Company and the individual defendants filed responses to the plaintiff’s opposition on April 6, 2022. A hearing with respect to the motion to dismiss was held on August 3, 2022, and the lawsuit was dismissed with prejudice on September 28, 2022. The plaintiffs filed a notice of appeal of the dismissal on October 27, 2022 but withdrew the appeal on January 25, 2023 as a result of which the lawsuit is concluded.
The Company has also received five requests under New Jersey law demanding, among other things, that the Company take certain actions in response to alleged breaches of fiduciary duty relating to option grants and securities transactions in the context of the DFC Announcement and alleged proxy statement disclosure deficiencies (each a “Derivative Demand”, and collectively the “Derivative Demands”). On May 19, 2021 Louis Peters, one of the persons making a Derivative Demand (“Peters”), commenced a derivative lawsuit on behalf of the Company against certain officers and current and former directors of the Company and the Company as a nominal defendant in the Supreme Court of the State of New York in Monroe County seeking damages and equitable relief based on alleged breaches of fiduciary duty and unjust enrichment resulting from stock trades, option grants and a charitable contribution in the context of the DFC Announcement of the potential DFC Loan and DFC Pharmaceutical Project (the “State Derivative Lawsuit”). The plaintiff filed an amended complaint in the State Derivative Lawsuit on August 23, 2021, and the Company and individual defendants filed motions to dismiss (or alternatively, in the case of the Company, a motion for summary judgment) in the State Derivative Lawsuit on October 22, 2021. On March 17, 2022, the Court issued an order staying the State Derivative Lawsuit pending the resolution of the Federal Derivative Lawsuit described below.
On September 2, 2021 Herbert Silverberg, another person making a Derivative Demand (“Silverberg”), commenced a derivative lawsuit on behalf of the Company against one current and one former director of the Company and the Company as a nominal defendant in the Federal District Court for the Western District of New York seeking damages and equitable relief on a basis overlapping with the State Derivative Lawsuit and alleged proxy statement misrepresentations and omissions. On October 4, 2021 Peters commenced a derivative lawsuit on behalf of the Company against the same parties named in the State Derivative Lawsuit in the Federal District Court for the Western District of New York seeking damages and equitable relief on a basis overlapping with the State Derivative Lawsuit and alleged violations of Section 10(b) of the Exchange Act. The Federal derivative lawsuits filed by Silverberg and Peters were consolidated into a single proceeding (the “Federal Derivative Lawsuit”) on January 18, 2022, and Peters was appointed as lead plaintiff in the Federal Derivative Lawsuit. An amended consolidated complaint combining the allegations contained in the Federal derivative lawsuits filed by Silverberg and Peters was filed in the Federal Derivative Lawsuit on February 16, 2022, and the Company and individual defendants served motions to dismiss or, in the alternative in the case of the Company, for summary judgment on April 15, 2022. Threshold discovery in the case has been completed, and the Company and individual defendants formally filed their motions to dismiss on September 30, 2022. The plaintiffs filed an opposition to the motions to dismiss/for summary judgment on November 14, 2022, and the Company and the individual defendants filed responses to the plaintiffs’ opposition on December 27, 2022 and December 23, 2022, respectively.
Additional shareholder derivative lawsuits may be brought based on the other Derivative Demands (any such lawsuits, collectively with the State Derivative Lawsuit, the Federal Derivative Lawsuit and the Fiduciary Class Action, the “Fiduciary Matters”). The Company, acting through a Special Committee of Independent Directors, previously determined that there was no merit to the claims alleged by the Derivative Demands made through the time of its determination (except with respect to the charitable contribution, which was not fully considered by the Special Committee). See the Company’s Current Report on Form 8‐K filed with the SEC on September 16, 2020. The Company, acting through a separate Special Litigation Committee of Independent Directors, concurred with the first Special Committee’s findings and further concluded it is not in the Company’s interest to bring or allow any other shareholder to assert any of the claims alleged by the State Derivative Lawsuit or Federal Derivative Lawsuit (with the exception of the Peters claim purportedly arising under Section 10(b) of the Exchange Act, which was not addressed as no demand was made with respect to such claim). The second Special Litigation Committee will carefully review any other additional complaints constituting Fiduciary Matters which may be filed.
The DFC Announcement has also prompted investigations by several congressional committees, the SEC and the New York Attorney General’s office. The Company has cooperated in those investigations.
As previously reported, the Attorney General of the State of New York (the “NYAG”) has threatened to file a lawsuit against the Company and its Chief Executive Officer alleging violations of New York State’s Martin Act (the “Threatened Claim”). In connection with the Threatened Claim, on June 15, 2021 the Supreme Court of the State of New York in New York County issued an order providing for additional document production by the Company to the NYAG and the taking by the NYAG of investigative testimony of the Company’s Chief Executive Officer and General Counsel. The Company has completed its document production and its officers provided the testimony as contemplated by such order on October 8, 2021 and October 1, 2021, respectively. The Company had discussions with the NYAG regarding a potential resolution of the Threatened Claim in the spring of 2022, but those discussions did not result in a resolution. If the Threatened Claim is ultimately brought by the NYAG, the Company intends to vigorously defend itself against the Threatened Claim.
In addition, Kodak is involved in various lawsuits, claims, investigations, remediations and proceedings, including, from time to time, commercial, customs, employment, environmental, tort 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 these various matters, individually or collectively, will have a material adverse effect on its financial condition 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 13: GUARANTEES
In accordance with the terms of a settlement agreement concerning certain of the Company’s historical environmental liabilities at EBP, 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 related to this guarantee.
Indemnifications
Kodak may, in certain instances, indemnify third parties when it sells businesses and real estate, and in the ordinary course of business with its customers, suppliers, service providers and business partners. Additionally, Kodak indemnifies officers and directors who are, or were, serving at Kodak’s request in such capacities. Historically, costs incurred to settle claims related to these indemnifications have not been material to Kodak’s financial position, results of operations or cash flows. Further, the fair value of any right to indemnification granted during the year ended December 31, 2022 was not material to Kodak’s financial position, results of operations or cash flows.
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 costs from the routine maintenance service costs, as it is not practicable to do so. Therefore, these 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, 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, 2020 |
|
$ |
19 |
|
| New extended warranty and maintenance arrangements |
|
|
90 |
|
| Recognition of extended warranty and maintenance arrangement revenue |
|
|
(90 |
) |
| Deferred revenue on extended warranties as of December 31, 2021 |
|
|
19 |
|
| New extended warranty and maintenance arrangements |
|
|
89 |
|
| Recognition of extended warranty and maintenance arrangement revenue |
|
|
(89 |
) |
| Deferred revenue on extended warranties as of December 31, 2022 |
|
$ |
19 |
|
Costs incurred under these extended warranty and maintenance arrangements for the years ended December 31, 2022, 2021 and 2020 amounted to $78 million, $82 million and $88 million, respectively.
NOTE 14: 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, as well as forecasted foreign currency denominated intercompany assets.
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 earnings (loss) at the same time that the exposed assets and liabilities are re-measured through net earnings (loss) (both in Other charges (income), net in the Consolidated Statement of Operations). The notional amount of such contracts open at December 31, 2022 and 2021 was approximately $308 million and $322 million, respectively. The majority of the contracts of this type held by Kodak at December 31, 2022 and 2021 were denominated in euros, Chinese renminbi and Japanese yen. The net effect of foreign currency forward contracts in the results of operations is shown in the following table:
| | | Year Ended December 31, | |
| (in millions) | | 2022 | | | 2021 | | | 2020 | |
| Net loss (gain) from derivatives not designated as hedging instruments | | $ | 16 | | | $ | (1 | ) | | $ | (11 | ) |
Kodak had no derivatives designated as hedging instruments for the years ended December 31, 2022 and 2021. Kodak’s derivative counterparties are high-quality investment or commercial banks with significant experience with such instruments. Kodak manages exposure to counterparty credit risk by requiring specific minimum credit standards and diversification of counterparties. Kodak has procedures to monitor the credit exposure amounts. The maximum credit exposure at December 31, 2022 was not significant to Kodak.
In the event of a default under the Company’s Credit Agreements, 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 9, “Debt and Finance Leases”, the Company concluded that the 2021 Convertible Notes are more akin to a debt-type instrument and that the economic characteristics and risks of the embedded conversion features are not considered clearly and closely related to the 2021 Convertible Notes. The embedded conversion features not considered clearly and closely related are the conversion at the option of the holder (“Optional Conversion”), the mandatory conversion by Kodak (“Mandatory Conversion”) and the conversion in the event of a fundamental transaction by the holder at the then applicable conversion rate (“Fundamental Change Conversion”). Accordingly, these embedded conversion features were bifurcated from the 2021 Convertible Notes and separately accounted for on a combined basis as a single derivative asset or liability. The derivative was in a liability position at December 31, 2022 and 2021 and was reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivative is being accounted for at fair value with changes in fair value included in Other charges (income), net in the Consolidated Statement of Operations.
As discussed in Note 10, “Redeemable, Convertible, Preferred Stock”, the Company concluded that the Series B Preferred Stock and the Series C Preferred Stock are more akin to a debt-type instrument and that the economic characteristics and risks of the conversion in the event of a fundamental change (“Fundamental Change Conversion”) is not considered clearly and closely related to the Series B and Series C Preferred Stock. Accordingly, this embedded conversion feature was bifurcated from both the Series B and Series C Preferred Stock and are separately accounted for as a derivative asset or liability. Both derivatives were in a liability position at December 31, 2022 and 2021 and were reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivatives are being accounted for at fair value with changes in fair value included in Other charges (income), net in the Consolidated Statement of Operations.
The Company concluded that the Series A Preferred Stock was 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 were the conversion at the option of the holder, the ability of Kodak to automatically convert the stock after the second anniversary of issuance 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 asset or liability. The embedded conversion features were revalued as of February 26, 2021 when the Company repurchased one million shares of Series A Preferred Stock and exchanged the remaining one million shares of Series A Preferred Stock for Series B Preferred Stock. The revaluation as of February 26, 2021 resulted in the recognition of $2 million of net expense which was included in Other charges (income), net in the Consolidated Statement of Operations. With the repurchase and exchange of the shares of the Series A Preferred Stock the embedded conversion features derivative liability expired.
As discussed in Note 9, “Debt and Finance Leases”, the Company concluded that the 2019 Convertible Notes were more akin to a debt-type instrument and that the economic characteristics and risks of the embedded conversion features and term extension option were not considered clearly and closely related to the 2019 Convertible Notes. The embedded conversion features not considered clearly and closely related are the conversion at the option of the holder (“Optional Conversion”) and the conversion in the event of a fundamental change or reorganization (“Fundamental Change or Reorganization Conversion”). Accordingly, these embedded conversion features and the term extension option were bifurcated from the 2019 Convertible Notes and separately accounted for on a combined basis as a single derivative asset or liability. The embedded conversion features and term extension option were revalued as of August 3, 2020, when the Initial Conversion Shares were issued, resulting in the recognition of $407 million of expense for a pro-rata portion of the embedded conversion features and term extension option. The remaining embedded conversion features and term extension option were revalued again as of the Mandatory Conversion date, resulting in the recognition of $9 million of net expense. With the conversion of the 2019 Convertible Notes in the third quarter of 2020, the embedded conversion features and term extension option expired. The derivative was being accounted for at fair value with changes in fair value reported in Other charges (income), net in the Consolidated Statement of Operations.
The net effect of the Preferred Stock and Convertible Notes embedded derivatives in the results of operations is shown in the following table:
| | | Year Ended December 31, | |
| (in millions) | | 2022 | | | 2021 | | | 2020 | |
| Net (gain) loss from Preferred Stock and Convertible Notes embedded derivatives | | $ | (3 | ) | | $ | (7 | ) | | $ | 382 | |
Fair Value
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 Other current assets in the Consolidated Statement of Financial Position and the gross fair value of foreign currency contracts in a liability position are reported in Other current liabilities. The gross fair value of foreign currency forward contracts in an asset position as of December 31, 2022 and 2021 was $1 million and $0 million, respectively. The gross fair value of the foreign currency forward contracts in a liability position as of December 31, 2022 and 2021 was $1 million and $0 million, respectively.
The fair value of the embedded conversion features derivatives was calculated using unobservable inputs (Level 3 fair measurements). The value of the embedded derivatives associated with the 2021 Convertible Notes and Series A, Series B and Series C Preferred Stock was calculated using a binomial lattice model.
Except for the fair value determined at the time of conversion, the fair value of the embedded conversion features and term extension option for the 2019 Convertible Notes derivatives was calculated using unobservable inputs (Level 3 fair measurements). The value of the conversion features associated with the 2019 Convertible Notes was calculated using a binomial lattice model. The value of the term extension option reflected the probability weighted average value of the 2019 Convertible Notes using the original maturity date and a hypothetical extended maturity date, with all other contractual terms unchanged. The fair value of the embedded conversion features and term extension option for the 2019 Convertible Notes were revalued as of the conversion dates, August 3, 2020 and September 30, 2020. The fair value of the embedded derivative at each conversion date was calculated based on the fair value of the shares issued less the fair value of debt. The fair value of shares issued is based on the weighted average stock price at the time of day the shares were transferred for August 3, 2020, and the closing stock price as of September 30, 2020. The fair value of debt is based on pricing models based on the value of related cash flows discounted at current market interest rates.
The following tables present the key inputs in the determination of fair value for the embedded conversion features:
2021 Convertible Notes:
| | | Valuation Date | |
| | | December 31, | | | December 31, | |
| | | 2022 | | | 2021 | |
| Total value of embedded derivative liability (in millions) | | $ | 2 | | | $ | 4 | |
| Kodak's closing stock price | | $ | 3.05 | | | $ | 4.68 | |
| Expected stock price volatility | | | 50.00 | % | | | 36.00 | % |
| Risk free rate | | | 4.17 | % | | | 1.17 | % |
| Implied credit spread on the 2021 Convertible Notes | | | 26.19 | % | | | 18.89 | % |
Series B Preferred Stock:
| | | Valuation Date | |
| | | December 31, | | | December 31, | |
| | | 2022 | | | 2021 | |
| Total value of embedded derivative liability (in millions) | | $ | 1 | | | $ | 1 | |
| Kodak's closing stock price | | $ | 3.05 | | | $ | 4.68 | |
| Expected stock price volatility | | | 50.00 | % | | | 36.00 | % |
| Risk free rate | | | 4.17 | % | | | 1.17 | % |
| Implied credit spread on the Series B Preferred Stock | | | 27.19 | % | | | 19.39 | % |
Series C Preferred Stock:
| | | Valuation Date | |
| | | December 31, | | | December 31, | |
| | | 2022 | | | 2021 | |
| Total value of embedded derivative liability (in millions) | | $ | 1 | | | $ | 2 | |
| Kodak's closing stock price | | $ | 3.05 | | | $ | 4.68 | |
| Expected stock price volatility | | | 50.00 | % | | | 36.00 | % |
| Risk free rate | | | 4.17 | % | | | 1.17 | % |
| Implied credit spread on the Series C Preferred Stock | | | 29.19 | % | | | 21.39 | % |
2019 Convertible Notes:
| | | Valuation Date | |
| | | | | | | | | |
| | | September 30, 2020 | | | August 3, 2020 | |
| Total value of embedded derivative liability immediately prior to extinguishment (in millions) | | $ | 9 | | | $ | 429 | |
| Total value of embedded derivative liability that expired (in millions) | | $ | 9 | | | $ | 416 | |
| Value of remaining embedded derivative liability (in millions) | | $ | — | | | $ | 13 | |
| Kodak's closing stock price (1) | | | 8.82 | | | | 16.91 | |
| Risk free rate | | | 0.12 | % | | | 0.12 | % |
| Yield on the Series A Preferred Stock | | | 8.93 | % | | | 9.47 | % |
| | (1) | The closing stock price was used for the September 30, 2020 valuation. The weighted average stock price based on the time of day the shares were transferred was used for the August 3, 2020 valuation. |
The Fundamental Change Conversion values at issuance were calculated as the difference between the total value of the 2021 Convertible Notes, Series B or Series C Preferred Stock, as applicable, and the sum of the net present value of the cash flows if the 2021 Convertible Notes are repaid at their maturity or the Series B and Series C Preferred Stock is redeemed on its redemption date and the values of the other embedded derivatives. The Fundamental Change Conversion value reduces the value of the embedded conversion features derivative liability. Other than events which alter the likelihood of a fundamental change, the value of the Fundamental Change Conversion reflects the value as of the issuance date, amortized for the passage of time.
The calculation of the Fundamental Change or Reorganization Conversion values for the 2019 Convertible Notes and Series A Preferred Stock was the same as the calculation described above for the Fundamental Change Conversion values for the 2021 Convertible Notes and Series B and C Preferred Stock.
The fair values of long-term borrowings were $271 million and $269 million at December 31, 2022 and 2021, respectively. Fair values of long-term borrowings (Level 2 fair value measurements) are determined by reference to quoted market prices, if available, or by pricing models based on the value of related cash flows discounted at current market interest rates.
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 year ended December 31, 2022.
The carrying values of cash and cash equivalents, restricted cash and the current portion of long-term borrowings approximate their fair values.
NOTE 15: REVENUE
Disaggregation of Revenue
The following tables present revenue disaggregated by major product, portfolio summary and geography.
Major product:
| | | Year Ended | |
| | | December 31, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| Plates, inks and other consumables | | $ | 589 | | | $ | 63 | | | $ | 26 | | | $ | — | | | $ | — | | | $ | 678 | |
| Ongoing service arrangements (1) | | | 75 | | | | 130 | | | | 14 | | | | — | | | | — | | | | 219 | |
| Total Annuities | | | 664 | | | | 193 | | | | 40 | | | | — | | | | — | | | | 897 | |
| Equipment & Software | | | 47 | | | | 34 | | | | — | | | | — | | | | — | | | | 81 | |
| Film and chemicals | | | — | | | | — | | | | 192 | | | | — | | | | — | | | | 192 | |
| Other (2) | | | — | | | | — | | | | 2 | | | | 17 | | | | 16 | | | | 35 | |
| Total | | $ | 711 | | | $ | 227 | | | $ | 234 | | | $ | 17 | | | $ | 16 | | | $ | 1,205 | |
| | | Year Ended | |
| | | December 31, 2021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| Plates, inks and other consumables | | $ | 530 | | | $ | 69 | | | $ | 24 | | | $ | — | | | $ | — | | | $ | 623 | |
| Ongoing service arrangements (1) | | | 79 | | | | 134 | | | | 6 | | | | — | | | | — | | | | 219 | |
| Total Annuities | | | 609 | | | | 203 | | | | 30 | | | | — | | | | — | | | | 842 | |
| Equipment & Software | | | 50 | | | | 46 | | | | — | | | | — | | | | — | | | | 96 | |
| Film and chemicals | | | — | | | | — | | | | 180 | | | | — | | | | — | | | | 180 | |
| Other (2) | | | — | | | | — | | | | 2 | | | | 15 | | | | 15 | | | | 32 | |
| Total | | $ | 659 | | | $ | 249 | | | $ | 212 | | | $ | 15 | | | $ | 15 | | | $ | 1,150 | |
| | | Year Ended | |
| | | December 31, 2020 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| Plates, inks and other consumables | | $ | 463 | | | $ | 64 | | | $ | 21 | | | $ | — | | | $ | — | | | $ | 548 | |
| Ongoing service arrangements (1) | | | 80 | | | | 131 | | | | 3 | | | | — | | | | — | | | | 214 | |
| Total Annuities | | | 543 | | | | 195 | | | | 24 | | | | — | | | | — | | | | 762 | |
| Equipment & Software | | | 49 | | | | 46 | | | | — | | | | — | | | | — | | | | 95 | |
| Film and chemicals | | | — | | | | — | | | | 137 | | | | — | | | | — | | | | 137 | |
| Other (2) | | | — | | | | — | | | | 11 | | | | 13 | | | | 11 | | | | 35 | |
| Total | | $ | 592 | | | $ | 241 | | | $ | 172 | | | $ | 13 | | | $ | 11 | | | $ | 1,029 | |
| | (1) | Service revenue in the Consolidated Statement of Operations includes the ongoing service revenue shown above as well as revenue from project-based document management and managed print services businesses, which is included in Other above. |
| | (2) | Other includes revenue from professional services, non-recurring engineering services, print and managed media services, tenant rent and related property management services and licensing. |
Product Portfolio Summary:
| | | Year Ended | |
| | | December 31, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| Growth engines (1) | | $ | 266 | | | $ | 129 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 397 | |
| Strategic other businesses (2) | | | 445 | | | | 55 | | | | 232 | | | | 17 | | | | 16 | | | | 765 | |
| Planned declining businesses (3) | | | — | | | | 43 | | | | — | | | | — | | | | — | | | | 43 | |
| | | $ | 711 | | | $ | 227 | | | $ | 234 | | | $ | 17 | | | $ | 16 | | | $ | 1,205 | |
| | | Year Ended | |
| | | December 31, 2021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| Growth engines (1) | | $ | 217 | | | $ | 142 | | | $ | — | | | $ | — | | | $ | — | | | $ | 359 | |
| Strategic other businesses (2) | | | 442 | | | | 58 | | | | 211 | | | | 15 | | | | 15 | | | | 741 | |
| Planned declining businesses (3) | | | — | | | | 49 | | | | 1 | | | | — | | | | — | | | | 50 | |
| | | $ | 659 | | | $ | 249 | | | $ | 212 | | | $ | 15 | | | $ | 15 | | | $ | 1,150 | |
| | | Year Ended | |
| | | December 31, 2020 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| Growth engines (1) | | $ | 162 | | | $ | 135 | | | $ | 3 | | | $ | — | | | $ | — | | | $ | 300 | |
| Strategic other businesses (2) | | | 430 | | | | 52 | | | | 159 | | | | 13 | | | | 11 | | | | 665 | |
| Planned declining businesses (3) | | | — | | | | 54 | | | | 10 | | | | — | | | | — | | | | 64 | |
| | | $ | 592 | | | $ | 241 | | | $ | 172 | | | $ | 13 | | | $ | 11 | | | $ | 1,029 | |
| | (1) | Growth engines consist of Sonora in the Traditional Printing segment, PROSPER and Software in the Digital Printing segment and Advanced Materials and Functional Printing in the Advanced Materials and Chemicals segment, excluding intellectual property (IP) licensing. |
| | (2) | Strategic other businesses include plates and CTP equipment and related service in the Traditional Printing segment; brand licensing; Nexpress and related toner business in the Digital Printing segment; and Motion Picture and Industrial Film and Chemicals (including external inks) and IP licensing in the Advanced Materials and Chemicals segment. |
| | (3) | Planned declining businesses are product lines where the decision has been made to stop new product development and manage an orderly expected decline in the installed product and annuity base or are otherwise not strategic to Kodak. These product families consist of Consumer Inkjet, Kodak Services for Business (“KSB”) and Kodakit in the Advanced Materials and Chemicals segment and Versamark and Digimaster in the Digital Printing segment. |
Geography (1):
| | | Year Ended | |
| | | December 31, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| United States | | $ | 167 | | | $ | 109 | | | $ | 177 | | | $ | 17 | | | $ | 16 | | | $ | 486 | |
| Canada | | | 12 | | | | 8 | | | | 2 | | | | — | | | | — | | | | 22 | |
| North America | | | 179 | | | | 117 | | | | 179 | | | | 17 | | | | 16 | | | | 508 | |
| Europe, Middle East and Africa | | | 336 | | | | 74 | | | | 19 | | | | — | | | | — | | | | 429 | |
| Asia Pacific | | | 166 | | | | 33 | | | | 35 | | | | — | | | | — | | | | 234 | |
| Latin America | | | 30 | | | | 3 | | | | 1 | | | | — | | | | — | | | | 34 | |
| Total Sales | | $ | 711 | | | $ | 227 | | | $ | 234 | | | $ | 17 | | | $ | 16 | | | $ | 1,205 | |
| | | Year Ended | |
| | | December 31, 2021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| United States | | $ | 135 | | | $ | 109 | | | $ | 152 | | | $ | 15 | | | $ | 15 | | | $ | 426 | |
| Canada | | | 12 | | | | 8 | | | | 2 | | | | — | | | | — | | | | 22 | |
| North America | | | 147 | | | | 117 | | | | 154 | | | | 15 | | | | 15 | | | | 448 | |
| Europe, Middle East and Africa | | | 302 | | | | 85 | | | | 17 | | | | — | | | | — | | | | 404 | |
| Asia Pacific | | | 181 | | | | 43 | | | | 41 | | | | — | | | | — | | | | 265 | |
| Latin America | | | 29 | | | | 4 | | | | — | | | | — | | | | — | | | | 33 | |
| Total Sales | | $ | 659 | | | $ | 249 | | | $ | 212 | | | $ | 15 | | | $ | 15 | | | $ | 1,150 | |
| | | Year Ended | |
| | | December 31, 2020 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advanced | | | | | | | | | | | | | |
| | | Traditional | | | Digital | | | Materials and | | | | | | | | | | | | | |
| | | Printing | | | Printing | | | Chemicals | | | Brand | | | Other | | | Total | |
| United States | | $ | 121 | | | $ | 106 | | | $ | 115 | | | $ | 13 | | | $ | 11 | | | $ | 366 | |
| Canada | | | 14 | | | | 8 | | | | 1 | | | | — | | | | — | | | | 23 | |
| North America | | | 135 | | | | 114 | | | | 116 | | | | 13 | | | | 11 | | | | 389 | |
| Europe, Middle East and Africa | | | 257 | | | | 86 | | | | 12 | | | | — | | | | — | | | | 355 | |
| Asia Pacific | | | 171 | | | | 37 | | | | 43 | | | | — | | | | — | | | | 251 | |
| Latin America | | | 29 | | | | 4 | | | | 1 | | | | — | | | | — | | | | 34 | |
| Total Sales | | $ | 592 | | | $ | 241 | | | $ | 172 | | | $ | 13 | | | $ | 11 | | | $ | 1,029 | |
| | (1) | Sales are reported in the geographic area in which they originate. No non-U.S. country generated more than 10% of net sales in the years ended December 31, 2022, 2021 and 2020. |
101
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed trade receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) in the Consolidated Statement of Financial Position. The contract assets are transferred to trade receivables when the rights to consideration become unconditional. The amounts recorded for contract assets are reported in Other current assets in the Consolidated Statement of Financial Position. The contract liabilities primarily relate to prepaid service contracts, upfront payments for certain equipment purchases or prepaid royalties on intellectual property arrangements. The amounts recorded for contract liabilities are reported in Other current liabilities and Other long-term liabilities in the Consolidated Statement of Financial Position. Contract assets and liabilities consisted of the following:
| | | As of December 31, | |
| (in millions) | | 2022 | | | 2021 | |
| Contract assets | | $ | 1 | | | $ | 3 | |
| | | | | | | | | |
| Contract liabilities - current | | | 40 | | | | 43 | |
| Contract liabilities - long-term | | | 11 | | | | 14 | |
| Total | | $ | 51 | | | $ | 57 | |
Activity in deferred revenue accounts consisted of:
| | | Year Ended December 31, | |
| (in millions) | | 2022 | | | 2021 | | | 2020 | |
| Beginning liabilities recognized in revenue | | $ | 38 | | | $ | 37 | | | $ | 43 | |
| Cash payments received, net of revenue recognized | | | 30 | | | | 28 | | | | 41 | |
NOTE 16: OTHER OPERATING INCOME, NET
| |
|
Year Ended December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
| Legal settlements |
|
$ |
(1 |
) |
|
$ |
(7 |
) |
|
$ |
— |
|
| Loss (gain) related to the sales of assets (1) |
|
|
— |
|
|
|
1 |
|
|
|
(10 |
) |
| Transition services agreement income |
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
| Asset impairments (2) |
|
|
1 |
|
|
|
— |
|
|
|
3 |
|
| Other |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
| Total |
|
$ |
(1 |
) |
|
$ |
(6 |
) |
|
$ |
(14 |
) |
| |
(1) |
In the first quarter of 2020, Kodak sold a property in the U.S. and recognized a gain of $9 million. |
| |
(2) |
In the fourth quarter of 2022 and first quarter of 2020, Kodak recorded impairment charges of $1 million and $3 million related to the Kodak trade name. Refer to Note 6, “Goodwill and Other Intangible Assets”. |
NOTE 17: OTHER CHARGES (INCOME), NET
| |
|
Year Ended December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Change in fair value of embedded conversion features derivative (1) |
|
$ |
(3 |
) |
|
$ |
(7 |
) |
|
$ |
382 |
|
| Loss on foreign exchange transactions |
|
|
4 |
|
|
|
2 |
|
|
|
5 |
|
| Other |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
| Total |
|
$ |
1 |
|
|
$ |
(5 |
) |
|
$ |
386 |
|
| |
(1) |
Refer to Note 14, “Financial Instruments”. |
NOTE 18: INCOME TAXES
The components of earnings (loss) from continuing operations before income taxes and the related provision for U.S. and other income taxes were as follows (in millions):
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| (Loss) earnings from continuing operations before income taxes: | | | | | | | | | | | | |
| U.S. | | $ | (2 | ) | | $ | (12 | ) | | $ | (388 | ) |
| Outside the U.S. | | | 33 | | | | 40 | | | | 12 | |
| Total | | $ | 31 | | | $ | 28 | | | $ | (376 | ) |
| U.S. income taxes: | | | | | | | | | | | | |
| Current benefit | | $ | — | | | $ | — | | | $ | — | |
| Deferred (benefit) provision | | | (3 | ) | | | (1 | ) | | | 2 | |
| Income taxes outside the U.S.: | | | | | | | | | | | | |
| Current provision (benefit) | | | 7 | | | | 4 | | | | (3 | ) |
| Deferred provision | | | 1 | | | | 1 | | | | 169 | |
| Total provision | | $ | 5 | | | $ | 4 | | | $ | 168 | |
The differences between income taxes computed using the U.S. federal income tax rate and the provision for income taxes for continuing operations were as follows (in millions):
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Amount computed using the statutory rate | | $ | 7 | | | $ | 6 | | | $ | (79 | ) |
| Increase (reduction) in taxes resulting from: | | | | | | | | | | | | |
| Unremitted foreign earnings | | | (2 | ) | | | (1 | ) | | | 2 | |
| Operations outside the U.S. | | | 4 | | | | 8 | | | | 3 | |
| Legislative tax law and rate changes | | | — | | | | (28 | ) | | | (11 | ) |
| Valuation allowance | | | (9 | ) | | | 20 | | | | 220 | |
| Tax settlements and adjustments, including interest | | | 4 | | | | (1 | ) | | | (43 | ) |
| Embedded derivative liability | | | — | | | | (1 | ) | | | 81 | |
| Other, net | | | 1 | | | | 1 | | | | (5 | ) |
| Provision from income taxes | | $ | 5 | | | $ | 4 | | | $ | 168 | |
The significant components of deferred tax assets and liabilities were as follows (in millions):
| | | As of December 31, | |
| | | 2022 | | | 2021 | |
| Deferred tax assets | | | | | | | | |
| Restructuring programs | | $ | 2 | | | $ | 1 | |
| Leasing | | | 3 | | | | 3 | |
| Foreign tax credit | | | 358 | | | | 358 | |
| Inventories | | | 14 | | | | 10 | |
| Investment tax credit | | | 26 | | | | 33 | |
| Employee deferred compensation | | | 22 | | | | 26 | |
| Depreciation | | | 33 | | | | 37 | |
| Research and development costs | | | 42 | | | | 42 | |
| Tax loss carryforwards | | | 506 | | | | 499 | |
| Other deferred revenue | | | 2 | | | | 2 | |
| Other | | | 74 | | | | 85 | |
| Total deferred tax assets before valuation allowances | | $ | 1,082 | | | $ | 1,096 | |
| Valuation allowances | | | (826 | ) | | | (934 | ) |
| Total net deferred tax assets | | $ | 256 | | | $ | 162 | |
| | | | | | | | | |
| Deferred tax liabilities | | | | | | | | |
| Pension and postretirement obligations | | $ | (258 | ) | | $ | (162 | ) |
| Goodwill/intangibles | | | (8 | ) | | | (9 | ) |
| Unremitted foreign earnings | | | (17 | ) | | | (20 | ) |
| Total deferred tax liabilities | | | (283 | ) | | | (191 | ) |
| Net deferred tax liabilities | | $ | (27 | ) | | $ | (29 | ) |
Deferred tax liabilities are reported in the following component within the Consolidated Statement of Financial Position (in millions):
| | | As of December 31, | |
| | | 2022 | | | 2021 | |
| Other long-term liabilities | | $ | (27 | ) | | $ | (29 | ) |
| Net deferred tax liabilities | | $ | (27 | ) | | $ | (29 | ) |
As of December 31, 2022, Kodak had available domestic and foreign NOL carry-forwards for income tax purposes of approximately $2,083 million, of which approximately $910 million have an indefinite carry-forward period. The remaining $1,173 million expire between the years 2023 and 2042. As of December 31, 2022, Kodak had unused foreign tax credits and investment tax credits of $358 million and $26 million, respectively, with various expiration dates through 2036.
Utilization of NOL carry-forwards and tax credits may be subject to limitations in the event of significant changes in stock ownership of the Company in the future. Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the utilization of NOL carryforwards, other tax carryforwards, and certain built-in losses as defined under that Section, upon an ownership change. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in Kodak’s stock by more than 50 percentage points over a three-year testing period.
Kodak had deferred tax liabilities of $17 million and $20 million for potential taxes on the undistributed earnings, primarily attributed to foreign withholding taxes, as of December 31, 2022 and 2021, respectively.
Kodak’s valuation allowance as of December 31, 2022 was $826 million. Of this amount, $285 million was attributable to Kodak’s net deferred tax assets outside the U.S. of $275 million and $541 million related to Kodak’s net deferred tax assets in the U.S. of $524 million, for which Kodak believes it is not more likely than not that the assets will be realized.
Kodak’s valuation allowance as of December 31, 2021 was $934 million. Of this amount, $360 million was attributable to Kodak’s net deferred tax assets outside the U.S. of $351 million, and $574 million related to Kodak’s net deferred tax assets in the U.S. of $554 million, for which Kodak believes it is not more likely than not that the assets will be realized.
As of March 31, 2020, Kodak determined that it was more likely than not that deferred tax assets outside the U.S. which were not offset with valuation allowances as of March 31, 2020 would not be realized due to reductions in estimates of future profitability as a result of the COVID-19 pandemic in locations outside the U.S. Accordingly, Kodak recorded a provision of $167 million associated with the establishment of a valuation allowance on those deferred tax assets.
Accounting for Uncertainty in Income Taxes
A reconciliation of the beginning and ending amount of Kodak’s liability for income taxes associated with unrecognized tax benefits is as follows
(in millions):
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Balance as of January 1 | | $ | 4 | | | $ | 8 | | | $ | 54 | |
| Tax positions related to the current year: | | | | | | | | | | | | |
| Additions | | | — | | | | — | | | | — | |
| Tax positions related to prior years: | | | | | | | | | | | | |
| Additions | | | 1 | | | | — | | | | 2 | |
| Reductions | | | (2 | ) | | | (1 | ) | | | (42 | ) |
| Settlements with taxing jurisdictions | | | — | | | | (3 | ) | | | (6 | ) |
| Balance as of December 31 | | $ | 3 | | | $ | 4 | | | $ | 8 | |
Kodak’s policy regarding interest and/or penalties related to income tax matters is to recognize such items as a component of provision for income taxes. Kodak had approximately $10 million and $11 million of interest and penalties associated with uncertain tax benefits accrued as of December 31, 2022 and 2021, respectively.
Kodak had uncertain tax benefits of approximately $13 million and $15 million as of December 31, 2022 and 2021, respectively, that, if recognized, would affect the effective income tax rate. Kodak has classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled. The current liabilities are recorded in Other current liabilities in the Consolidated Statement of Financial Position. Noncurrent income tax liabilities are recorded in Other long-term liabilities in the Consolidated Statement of Financial Position.
It is reasonably possible that the liability associated with Kodak’s unrecognized tax benefits will increase or decrease within the next twelve months. These changes may be the result of settling ongoing audits or the expiration of statutes of limitations. Such changes to the unrecognized tax benefits could range from $0 million to $2 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.
Although management believes that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the earnings of Kodak. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.
During 2022, Kodak agreed to terms with a taxing authority outside the U.S. and settled open tax audits for years 2015 through 2018. This settlement included a cash payment of $2 million which is reflected in the provision for taxes and a decrease in net deferred tax assets of $3 million which is fully offset by a reduction in the valuation allowance.
During 2021, Kodak agreed to terms with a taxing authority outside the U.S. and settled open tax audits for years through 2014. For these years Kodak originally recorded liabilities for unrecognized tax positions (“UTPs”) totaling $3 million (plus interest of approximately $4 million) which were substantially offset by prepaid assets.
During 2020, Kodak agreed to terms with the IRS and settled the federal audit for calendar years 2013 and 2014. For these years, Kodak originally recorded a federal UTP totaling $41 million, which was fully offset by tax attributes. This settlement resulted in an increase in net deferred tax assets and was fully offset by a corresponding increase in Kodak’s U.S. valuation allowance, resulting in no net tax benefit.
Kodak is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. Kodak has substantially concluded all U.S. federal income tax matters for years through 2018 and state income tax matters for years through 2015 with the respective tax authorities. With respect to countries outside the U.S., Kodak has substantially concluded all material foreign income tax matters through 2013 with respective foreign tax jurisdiction authorities.
NOTE 19: RESTRUCTURING COSTS AND OTHER
Kodak recognizes the need to continually rationalize its workforce and streamline its operations in the face of ongoing business and economic changes. Charges for restructuring initiatives 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.
The activity incurred in relation to restructuring programs during the three years ended December 31, 2022 were as follows (in millions):
| |
|
Severance |
|
|
Exit Costs |
|
|
Inventory |
|
|
|
|
|
| |
|
Reserve (1) |
|
|
Reserve (1) |
|
|
Write-downs (1) |
|
|
Total |
|
| Balance as of December 31, 2019 |
|
$ |
11 |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
12 |
|
| Charges |
|
|
16 |
|
|
|
1 |
|
|
|
— |
|
|
|
17 |
|
| Utilization/cash payments |
|
|
(14 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
(15 |
) |
| Other adjustments & reclasses (2) |
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
| Balance as of December 31, 2020 |
|
|
10 |
|
|
|
1 |
|
|
|
— |
|
|
|
11 |
|
| Charges |
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
| Utilization/cash payments |
|
|
(10 |
) |
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
| Other adjustments & reclasses (2) |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
| Balance as of December 31, 2021 |
|
|
4 |
|
|
|
1 |
|
|
|
— |
|
|
|
5 |
|
| Charges |
|
|
6 |
|
|
|
4 |
|
|
|
3 |
|
|
|
13 |
|
| Utilization/cash payments |
|
|
(6 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
(9 |
) |
| Other adjustments & reclasses (2) |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
| Balance as of December 31, 2022 |
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
7 |
|
| |
(1) |
The severance and exit costs reserves require the outlay of cash. Inventory write-downs are non-cash items. |
| |
(2) |
The $2 million in 2022 and 2021 and the $3 million in 2020 represented severance charges funded from pension plan assets, which were reclassified to Pension and other postretirement liabilities. |
2020 Activity
Restructuring actions taken in 2020 were initiated to reduce Kodak’s cost structure as part of its commitment to drive sustainable profitability and included various targeted reductions in manufacturing, service, sales, research and development, and other administrative functions.
As a result of these actions, for the year ended December 31, 2020 Kodak recorded $17 million of charges which were reported as Restructuring costs and other in the accompanying Consolidated Statement of Operations.
The 2020 severance costs related to the elimination of approximately 250 positions, including approximately 160 administrative and 90 manufacturing/service. The geographic composition of these positions included approximately 140 in the U.S. and Canada and 110 throughout the rest of the world.
2021 Activity
Restructuring actions taken in 2021 were initiated to reduce Kodak’s cost structure as part of its commitment to drive sustainable profitability and included various targeted reductions in manufacturing, service, sales, research and development, and other administrative functions.
As a result of these actions, for the year ended December 31, 2021 Kodak recorded $6 million of charges which were reported as Restructuring costs and other in the accompanying Consolidated Statement of Operations.
The 2021 severance costs related to the elimination of approximately 130 positions, including approximately 70 administrative and 60 manufacturing/service positions. The geographic composition of these positions included approximately 70 in the U.S. and Canada and 60 throughout the rest of the world.
2022 Activity
Restructuring actions taken in 2022 were initiated to reduce Kodak’s cost structure as part of its commitment to drive sustainable profitability and included ceasing manufacturing of the Electrophotographic Printing Solutions equipment products as well as various targeted reductions in manufacturing, service, sales, research and development and administrative functions.
As a result of these actions, for the year ended December 31, 2022 Kodak recorded $13 million of charges of which $10 million were reported as Restructuring costs and other and $3 million were reported as Cost of revenues in the accompanying Consolidated Statement of Operations.
The 2022 severance costs related to the elimination of approximately 115 positions, including approximately 50 administrative, 40 manufacturing/service and 25 research and development positions. The geographic composition of these positions included approximately 65 in the U.S. and Canada and 50 throughout the rest of the world. The 2022 exit costs relate to the cessation of manufacturing of the Electrophotographic Printing Solutions equipment products and represent contractual obligations associated with open purchase orders as of December 31, 2022.
As a result of these initiatives, the majority of the severance and exit cost liabilities as of December 31, 2022 will be paid during periods through the end of the second quarter of 2023. Approximately $1 million of the exit cost reserve relates to a liability for which timing of the payment is uncertain.
NOTE 20: RETIREMENT PLANS
Substantially all U.S. employees are covered by a noncontributory defined benefit plan, the Kodak Retirement Income Plan (“KRIP” or the "U.S. Plan"), which is funded by Company contributions to an irrevocable trust fund. The funding policy for KRIP is to contribute amounts sufficient to meet minimum funding requirements as determined by employee benefit and tax laws plus any additional amounts the Company determines to be appropriate. Assets in the trust fund are held for the sole benefit of participating employees and retirees.
For U.S. employees hired prior to March 1999, KRIP’s benefits were generally based on a formula recognizing length of service and final average earnings. KRIP included a separate cash balance formula for all U.S. employees hired after February 1999, as well as employees hired prior to that date who opted into the cash balance formula during a special election period. Effective January 1, 2015 the KRIP was amended to provide that all participants accrue benefits under a single, revised cash balance formula (the “Cash Balance Plan”). The Cash Balance Plan credits employees’ hypothetical accounts with an amount equal to a specified percentage of their pay, plus interest based on the 30-year Treasury bond rate. In May 2022, the KRIP plan was amended to increase the employees’ crediting rates from 9% or 10% of pay based on employee classification to 12% or 13% of pay, retroactive to January 1, 2022. The plan amendment also provided a one-time service credit to eligible employees’ cash balance accounts.
Many subsidiaries and branches operating outside the U.S. have defined benefit retirement plans covering substantially all employees. Contributions by Kodak for these plans are typically deposited under government or other fiduciary-type arrangements. Retirement benefits are generally based on contractual agreements that provide for benefit formulas using years of service and/or compensation prior to retirement. The actuarial assumptions used for these plans reflect the diverse economic environments within the various countries in which Kodak operates.
Information on the major funded and unfunded U.S. and Non-U.S. defined benefit pension plans is presented below. The information for the U.S. for all years presented relates to KRIP. The composition of the major Non-U.S. plans may vary from year to year. If the major Non-U.S. plan composition changes, prior year data is conformed to ensure comparability.
Obligations and Funded Status:
The measurement date used to determine the pension obligation for all funded and unfunded U.S. and Non-U.S. defined benefit plans is December 31.
| | | Year Ended | | | Year Ended | |
| | | December 31, 2022 | | | December 31, 2021 | |
| (in millions) | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Change in Benefit Obligation | | | | | | | | | | | | | | | | |
| Projected benefit obligation at beginning of period | | $ | 3,132 | | | $ | 816 | | | $ | 3,476 | | | $ | 912 | |
| Service cost | | | 13 | | | | 3 | | | | 11 | | | | 3 | |
| Interest cost | | | 80 | | | | 9 | | | | 47 | | | | 5 | |
| Benefit payments | | | (294 | ) | | | (44 | ) | | | (318 | ) | | | (48 | ) |
| Plan Amendments | | | 28 | | | | — | | | | — | | | | — | |
| Actuarial (gain) loss | | | (479 | ) | | | (165 | ) | | | (86 | ) | | | 21 | |
| Special termination benefits | | | 2 | | | | — | | | | 2 | | | | — | |
| Currency adjustments | | | — | | | | (42 | ) | | | — | | | | (77 | ) |
| Projected benefit obligation at end of period | | $ | 2,482 | | | $ | 577 | | | $ | 3,132 | | | $ | 816 | |
| | | | | | | | | | | | | | | | | |
| Change in Plan Assets | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of period | | $ | 4,105 | | | $ | 626 | | | $ | 3,707 | | | $ | 696 | |
| Actual Return on plan assets | | | (152 | ) | | | (31 | ) | | | 716 | | | | 32 | |
| Employer contributions | | | — | | | | 5 | | | | — | | | | 7 | |
| Benefit payments | | | (294 | ) | | | (44 | ) | | | (318 | ) | | | (48 | ) |
| Currency adjustments | | | — | | | | (30 | ) | | | — | | | | (61 | ) |
| Fair value of plan assets at end of period | | $ | 3,659 | | | $ | 526 | | | $ | 4,105 | | | $ | 626 | |
| | | | | | | | | | | | | | | | | |
| Over (under) funded status at end of period | | $ | 1,177 | | | $ | (51 | ) | | $ | 973 | | | $ | (190 | ) |
| | | | | | | | | | | | | | | | | |
| Accumulated benefit obligation at end of period | | $ | 2,482 | | | $ | 568 | | | $ | 3,130 | | | $ | 800 | |
An actuarial gain of $479 million related to the U.S. Plan's projected benefit obligation ("PBO") was recognized in 2022, primarily driven by an increase in the discount rate ($582 million), partially offset by a loss associated with updated mortality assumptions ($105 million). Additionally, a prior service cost was recognized as a result of a plan amendment ($28 million). In 2021, a PBO actuarial gain of $86 million was recognized for the U.S. Plan driven primarily by an increase in the discount rate ($105 million). The Non-U.S. PBO actuarial gain of $165 million recognized in 2022 was driven primarily by an increase in the discount rates, whereas the loss in 2021 was driven primarily by changes in inflation and other demographic assumptions partially offset by an increase in discount rates.
The actual return on plan assets for the U.S. Plan was a loss of $152 million for the year ended December 31, 2022 and a gain of $716 million for the year ended December 31, 2021. The loss for 2022 reflects lower than expected bond performance due to rising interest rates, and the gain for 2021 reflects higher expected returns for the U.S. private equity and hedge fund portfolios. The total net realized losses from derivative investments for 2022 and 2021 were approximately ($128) million and ($23) million, respectively. Refer to discussion below on derivative instruments for further information.
The weighted-average assumptions used to determine the benefit obligation amounts for all major funded and unfunded U.S. and Non-U.S. defined benefit plans were as follows:
| | | As of December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Discount rate | | | 5.13 | % | | | 3.93 | % | | | 2.54 | % | | | 1.48 | % | | | 2.09 | % | | | 1.01 | % |
| Salary increase rate | | | 1.00 | % | | | 2.71 | % | | | 1.00 | % | | | 2.39 | % | | | 3.50 | % | | | 1.56 | % |
| Interest crediting rate for cash balance plan | | | 4.00 | % | | NA | | | | 2.00 | % | | NA | | | | 1.75 | % | | NA | |
Amounts recognized in the Consolidated Statement of Financial Position for all major funded and unfunded U.S. and Non-U.S. defined benefit plans are as follows (in millions):
| | | As of December 31, | |
| | | 2022 | | | 2021 | |
| | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Pension and other postretirement assets | | $ | 1,177 | | | $ | 42 | | | $ | 973 | | | $ | 36 | |
| Pension and other postretirement liabilities | | | — | | | | (93 | ) | | | — | | | | (226 | ) |
| Net amount recognized | | $ | 1,177 | | | $ | (51 | ) | | $ | 973 | | | $ | (190 | ) |
Information with respect to the major funded and unfunded U.S. and Non-U.S. defined benefit plans with a projected benefit obligation in excess of the fair value of plan assets is as follows (in millions):
| ` | | As of December 31, | |
| | | 2022 | | | 2021 | |
| | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Projected benefit obligation | | $ | — | | | $ | 209 | | | $ | — | | | $ | 575 | |
| Fair value of plan assets | | | — | | | | 116 | | | | — | | | | 349 | |
Information with respect to the major funded and unfunded U.S. and Non-U.S. defined benefit plans with an accumulated benefit obligation in excess of the fair value of plan assets is as follows (in millions):
| | | As of December 31, | |
| | | 2022 | | | 2021 | |
| | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Accumulated benefit obligation | | $ | — | | | $ | 201 | | | $ | — | | | $ | 560 | |
| Fair value of plan assets | | | — | | | | 116 | | | | — | | | | 349 | |
Amounts recognized in accumulated other comprehensive income (loss) in shareholders’ equity for all major funded and unfunded U.S. and Non-U.S. defined benefit plans consist of (in millions):
| | | As of December 31, | |
| | | 2022 | | | 2021 | |
| | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Prior service credit | | $ | (25 | ) | | $ | 2 | | | $ | 6 | | | $ | 2 | |
| Net actuarial gain (loss) | | | 594 | | | | (43 | ) | | | 445 | | | | (177 | ) |
| Total | | $ | 569 | | | $ | (41 | ) | | $ | 451 | | | $ | (175 | ) |
Other changes in major plan assets and benefit obligations recognized in Other comprehensive income (loss) are as follows (in millions):
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Newly established gain (loss) | | $ | 149 | | | $ | 120 | | | $ | 635 | | | $ | (4 | ) | | $ | — | | | $ | (38 | ) |
| Newly established prior service cost | | | (28 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service credit | | | (3 | ) | | | — | | | | (7 | ) | | | — | | | | (7 | ) | | | — | |
| Net actuarial loss | | | — | | | | 10 | | | | 30 | | | | 9 | | | | 15 | | | | 7 | |
| Net loss recognized in expense due to settlement | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | — | |
| Total income (loss) recognized in Other comprehensive income | | $ | 118 | | | $ | 130 | | | $ | 658 | | | $ | 5 | | | $ | 17 | | | $ | (31 | ) |
For the year ended December 31, 2022, the U.S. gain consisted of the PBO actuarial gain of $479 million partially offset by asset actuarial losses of $330 million and the non-U.S. gain primarily consisted of the PBO actuarial gain of $165 million partially offset by asset actuarial losses of $45 million. For the year ended December 31, 2021, the U.S. gain consisted of asset actuarial gains of $549 million and the PBO actuarial gain of $86 million.
Pension Income:
Pension income for all defined benefit plans included (in millions):
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Major defined benefit plans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 13 | | | $ | 3 | | | $ | 11 | | | $ | 3 | | | $ | 11 | | | $ | 3 | |
| Interest cost | | | 80 | | | | 9 | | | | 47 | | | | 5 | | | | 86 | | | | 9 | |
| Expected return on plan assets | | | (178 | ) | | | (14 | ) | | | (167 | ) | | | (15 | ) | | | (196 | ) | | | (19 | ) |
| Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service credit | | | (3 | ) | | | — | | | | (7 | ) | | | — | | | | (7 | ) | | | — | |
| Actuarial loss | | | — | | | | 10 | | | | 30 | | | | 9 | | | | 15 | | | | 7 | |
| Pension income before special termination benefits | | | (88 | ) | | | 8 | | | | (86 | ) | | | 2 | | | | (91 | ) | | | — | |
| Special termination benefits | | | 2 | | | | — | | | | 2 | | | | — | | | | 3 | | | | — | |
| Settlement losses | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | — | |
| Net pension income for major defined benefit plans | | | (86 | ) | | | 8 | | | | (84 | ) | | | 2 | | | | (79 | ) | | | — | |
| Other plans including unfunded plans | | | — | | | | — | | | | — | | | | (2 | ) | | | — | | | | 1 | |
| Net pension (income), expense | | $ | (86 | ) | | $ | 8 | | | $ | (84 | ) | | $ | — | | | $ | (79 | ) | | $ | 1 | |
The $9 million settlement loss for the year ended December 31, 2020 was incurred as a result of lump sum payments from KRIP.
The special termination benefits for each of the years ended December 31, 2022, 2021 and 2020 were incurred as a result of Kodak’s restructuring actions and, therefore, have been included in Restructuring costs and other in the Consolidated Statement of Operations for those periods.
The weighted-average assumptions used to determine net pension (income) expense for all the major funded and unfunded U.S. and Non-U.S. defined benefit plans were as follows:
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | | | U.S. | | | Non-U.S. | |
| Effective rate for service cost | | | 3.45 | % | | | 1.60 | % | | | 2.11 | % | | | 1.17 | % | | | 2.97 | % | | | 1.48 | % |
| Effective rate for interest cost | | | 2.97 | % | | | 1.20 | % | | | 1.42 | % | | | 0.70 | % | | | 2.58 | % | | | 1.19 | % |
| Salary increase rate | | | 1.00 | % | | | 2.39 | % | | | 3.50 | % | | | 1.56 | % | | | 3.50 | % | | | 1.72 | % |
| Expected long-term rate of return on plan assets | | | 5.30 | % | | | 2.67 | % | | | 5.20 | % | | | 2.56 | % | | | 6.00 | % | | | 3.27 | % |
| Interest crediting rate for cash balance plan | | | 2.58 | % | | NA | | | | 1.75 | % | | NA | | | | 2.50 | % | | NA | |
The expected return on plan assets (“EROA”) is a long-term rate of return which is based on a combination of formal asset and liability studies that include forward-looking return expectations given the current asset allocation.
Kodak uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant projected cash outflows.
Plan Asset Investment Strategy
The investment strategy underlying the asset allocation for the pension assets is to achieve an optimal return on assets with an acceptable level of risk while providing for the long-term liabilities and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plans. This is primarily achieved by investing in a broad portfolio constructed of various asset classes including equity, debt, real estate, private equity, hedge funds and other assets and instruments. In addition, the U.S. Plan uses derivative investments primarily to hedge liability interest rate risk to U.S. government bonds. Other investment objectives include maintaining broad diversification between and within asset classes and investment managers and managing asset volatility relative to plan liabilities.
Every three years, or when market conditions have changed materially, each of Kodak’s major pension plans will undertake an asset allocation or asset and liability modeling study. The asset allocation and expected return on the plans’ assets are individually set to provide for benefits and other cash obligations within each country’s legal investment constraints.
Actual allocations may vary from the target asset allocations due to market value fluctuations, the length of time it takes to implement changes in strategy, and the timing of cash contributions and cash requirements of the plans. The asset allocations are monitored and are rebalanced in accordance with the policy set forth for each plan.
Plan Asset Risk Management
Kodak evaluates its defined benefit plans’ asset portfolios for the existence of significant concentrations of risk. Types of concentrations that are evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country, individual fund and single investment manager. As of December 31, 2022 two investment management firms (Loomis Sayles and Income Research + Management) each managed 10% of plan assets. In 2021 there were no significant concentrations (defined as greater than 10% of plan assets) of risk in Kodak’s defined benefit plan assets.
The Company’s weighted-average asset allocations for its major U.S. defined benefit pension plan by asset category, are as follows:
| | | As of December 31, | | | | |
| | | 2022 | | | 2021 | | | 2022 Target | |
| Asset Category | | | | | | | | | | | |
| Equity securities | | | 0 | % | | | 5 | % | | 0% | |
| Debt securities | | | 20 | % | | | 11 | % | | 18-24% | |
| Real estate | | | 1 | % | | | 1 | % | | 0% | |
| Cash and cash equivalents | | | 7 | % | | | 5 | % | | 0-10% | |
| Global balanced asset allocation funds | | | 0 | % | | | 8 | % | | 0% | |
| Private equity | | | 30 | % | | | 26 | % | | 23-28% | |
| Hedge funds (1) | | | 42 | % | | | 44 | % | | 46-58% | |
| Total | | | 100 | % | | | 100 | % | | | |
| | (1) | The 2022 target for hedge funds includes a policy allocation to U.S. government bonds that is obtained via treasury futures contracts. |
Kodak’s weighted-average asset allocations for its major Non-U.S. defined benefit pension plans by asset category, are as follows:
| | | As of December 31, | | | | |
| | | 2022 | | | 2021 | | | 2022 Target | |
| Asset Category | | | | | | | | | | | |
| Equity securities | | | 6 | % | | | 6 | % | | 0-10% | |
| Debt securities | | | 16 | % | | | 17 | % | | 10-20% | |
| Real estate | | | 2 | % | | | 2 | % | | 0-5% | |
| Cash and cash equivalents | | | 4 | % | | | 2 | % | | 0-5% | |
| Global balanced asset allocation funds | | | 0 | % | | | 0 | % | | 0% | |
| Hedge Funds | | | 4 | % | | | 5 | % | | 0-10% | |
| Private equity | | | 8 | % | | | 7 | % | | 0-10% | |
| Insurance contracts | | | 60 | % | | | 61 | % | | 25-75% | |
| Total | | | 100 | % | | | 100 | % | | | |
Derivative Investments
The U.S. Plan derivative instruments consist of direct investments in exchange traded futures contracts. Government bond exposure is obtained via U.S. government bond futures. Foreign currency futures contracts are used to partially hedge foreign currency risk.
As of December 31, 2022 and 2021, the notional amount for exchange traded futures contracts approximated $389 million and $1.0 billion, respectively. Realized gains and losses from these derivative investments are included in the gain on plan assets balance. The total fair value of these derivative instruments at December 31, 2022 and 2021 was $0 million and $10 million, respectively, which represents the unrealized gains and losses on these contracts and is included in the derivative line items in the table of plan assets below. The U.S. defined benefit pension plan is required to maintain cash on deposit to collateralize its obligations under its futures contracts. As of December 31, 2022 and 2021, approximately $9 million and $17 million, respectively, were on deposit in cash and Treasury bills to fulfill these requirements and are included in the cash and cash equivalents asset class in the table below.
The U.S. Plan invests in a diversified portfolio of hedge funds that may utilize derivative instruments to execute their investment strategy. Any gains or losses, as well as changes in the fair value of derivative investments held by the hedge fund, are included in the hedge fund’s net asset value.
Fair Value Measurements
Kodak’s plan assets are accounted for at fair value and are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement, with the exception of investments for which fair value is measured using the net asset value (“NAV”) per share expedient. Kodak’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value of assets and their placement within the fair value hierarchy levels.
The fair value of Kodak’s U.S. defined benefit pension plan assets at December 31, 2022 and 2021 by asset class are presented in the tables below:
U.S. Plan
December 31, 2022
| | | U.S. | |
| | | Quoted Prices | | | | | | | | | | | | | | | | | |
| | | in Active | | | | | | | | | | | | | | | | | |
| | | Markets for | | | Significant | | | Significant | | | | | | | | | |
| | | Identical | | | Observable | | | Unobservable | | | | | | | | | |
| | | Assets | | | Inputs | | | Inputs | | | Measured at | | | | | |
| (in millions) | | (Level 1) | | | (Level 2) | | | (Level 3) | | | NAV | | | Total | |
| Cash and cash equivalents | | $ | 251 | | | $ | — | | | $ | — | | | $ | — | | | $ | 251 | |
| | | | | | | | | | | | | | | | | | | | | |
| Debt Securities: | | | | | | | | | | | | | | | | | | | | |
| Government bonds | | | — | | | | 39 | | | | — | | | | — | | | | 39 | |
| Investment grade bonds | | | — | | | | 717 | | | | — | | | | — | | | | 717 | |
| | | | | | | | | | | | | | | | | | | | | |
| Real estate | | | — | | | | — | | | | — | | | | 29 | | | | 29 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other: | | | | | | | | | | | | | | | | | | | | |
| Hedge funds | | | — | | | | — | | | | — | | | | 1,528 | | | | 1,528 | |
| Private Equity | | | — | | | | — | | | | 3 | | | | 1,092 | | | | 1,095 | |
| | | $ | 251 | | | $ | 756 | | | $ | 3 | | | $ | 2,649 | | | $ | 3,659 | |
U.S. Plan
December 31, 2021
| | | U.S. | |
| | | Quoted Prices | | | | | | | | | | | | | | | | | |
| | | in Active | | | | | | | | | | | | | | | | | |
| | | Markets for | | | Significant | | | Significant | | | | | | | | | |
| | | Identical | | | Observable | | | Unobservable | | | | | | | | | |
| | | Assets | | | Inputs | | | Inputs | | | Measured at | | | | | |
| (in millions) | | (Level 1) | | | (Level 2) | | | (Level 3) | | | NAV | | | Total | |
| Cash and cash equivalents | | $ | 202 | | | $ | — | | | $ | — | | | $ | — | | | $ | 202 | |
| | | | | | | | | | | | | | | | | | | | | |
| Global equity securities funds | | | — | | | | — | | | | — | | | | 201 | | | | 201 | |
| | | | | | | | | | | | | | | | | | | | | |
| Debt Securities: | | | | | | | | | | | | | | | | | | | | |
| Investment grade bonds | | | — | | | | 440 | | | | — | | | | — | | | | 440 | |
| | | | | | | | | | | | | | | | | | | | | |
| Real estate | | | — | | | | — | | | | — | | | | 36 | | | | 36 | |
| | | | | | | | | | | | | | | | | | | | | |
| Global balanced asset allocation funds | | | — | | | | — | | | | — | | | | 327 | | | | 327 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other: | | | | | | | | | | | | | | | | | | | | |
| Hedge funds | | | — | | | | 6 | | | | — | | | | 1,801 | | | | 1,807 | |
| Private Equity | | | — | | | | — | | | | | | | | 1,082 | | | | 1,082 | |
| Derivatives with unrealized gains | | | 10 | | | | — | | | | — | | | | — | | | | 10 | |
| | | $ | 212 | | | $ | 446 | | | $ | — | | | $ | 3,447 | | | $ | 4,105 | |
Assets not utilizing the NAV per share expedient are valued as follows:
| | (1) | Cash and cash equivalents are primarily held in short term investment funds and are used for benefit and fee payments, as well as for margin and liquidity requirements associated with the U.S. Plan’s derivative instrument contracts. |
| | (2) | Debt securities are traded on an active market and are valued using a market approach based on the closing price on the last business day of the year. |
Investments Valued at NAV
Kodak performs an investment-by-investment analysis to determine if the investment meets the requirements to be measured at NAV. For investments with lagged pricing, Kodak uses the latest available net asset values and considers expected return and other relevant material events for the year-end valuation of these investments.
The total fair value, unfunded commitments and redemption provisions for the U.S defined benefit pension plan’s investments valued at NAV are as follows:
| Investments Valued at NAV at December 31, 2022 | |
| | | | | | | Unfunded | | | Redemption | | | Redemption | |
| (in millions): | | Fair Value | | | Commitments | | | Frequency | | | Notice Period | |
| Real estate | | $ | 29 | | | $ | — | | | N/A | | | N/A | |
| Private equity | | | 1,092 | | | | 229 | | | N/A | | | N/A | |
| Hedge Funds | | | 1,528 | | | | 26 | | | Bi-Monthly, Monthly, Quarterly, Semi-Annual, and Annual | | | 5-365 days | |
| Total | | $ | 2,649 | | | $ | 255 | | | | | | | |
| Investments Valued at NAV at December 31, 2021 | |
| | | | | | | Unfunded | | | Redemption | | | Redemption | |
| (in millions): | | Fair Value | | | Commitments | | | Frequency | | | Notice Period | |
| Global equity securities fund | | $ | 201 | | | $ | — | | | Monthly, Quarterly | | | 6-90 days | |
| Real estate | | | 36 | | | | — | | | N/A | | | N/A | |
| Global balanced asset allocation funds | | | 327 | | | | — | | | Monthly | | | 6-15 days | |
| Private equity | | | 1,082 | | | | 262 | | | N/A | | | N/A | |
| Hedge Funds | | | 1,801 | | | | 26 | | | Bi-Monthly, Monthly, Quarterly, Semi-Annual, and Annual | | | 5-365 days | |
| Total | | $ | 3,447 | | | $ | 288 | | | | | | | |
Global Equity Securities Funds hold a broad diversified portfolio of U.S. equity, developed international equity, and emerging markets equity securities. These investments are primarily valued by the fund administrator based on a market or income valuation methodology depending on the specific type of security or instrument held. The U.S. Plan redeemed its investment in the Global Equity Securities Funds in 2022.
Real estate investments primarily include investments in limited partnerships that invest in office, industrial, retail and apartment properties. Investments are primarily valued by the fund manager based on independent appraisals, discounted cash flow models, cost and comparable market transactions. The term of each fund is typically 10 or more years and the fund’s investors do not have an option to redeem their interest in the fund but receive distributions through the liquidation of the underlying investments.
The Global Balanced Asset Allocation Fund investments are commingled funds that hold a diversified portfolio of passive market exposures, including equities, debt, currencies and commodities that uses an equal risk parity allocation strategy. These investments are primarily valued by the fund manager based on a market or income valuation methodology depending on the specific type of security or instrument held. The U.S. Plan redeemed its investment in the Global Balanced Asset Allocation Funds in 2022.
Private equity investments are primarily comprised of direct limited partnerships and fund-of-fund investments that invest in distressed investments, venture capital, leveraged buyouts and special situations. Private equity investments are valued by the fund manager primarily based on independent appraisals, discounted cash flow models, cost, and comparable market transactions. The term of each fund is typically 10 or more years and the fund’s investors do not have an option to redeem their interest in the fund. The investors in the fund receive distributions through the liquidation of the underlying investments in the fund.
The U.S. Plan invests in a portfolio of hedge funds to supplement the return generated by its exchange traded futures contracts as well as in a separate portfolio of hedge funds where the objective is to seek a higher absolute return. Hedge fund investments are made through direct investments in individual hedge funds. The hedge fund investments substantially consist of a diversified portfolio of hedge funds that use equity, debt, commodity, currency strategies and derivative instruments. The U.S. defined benefit pension plan evaluates several factors for investing in hedge funds including investment strategy, return, risk, liquidity, correlation to other funds and the number of funds to achieve a diversified portfolio of hedge funds.
Hedge funds are typically valued by each fund’s third-party fund administrator based upon the valuation of the underlying securities and instruments, primarily by applying a market or income valuation methodology as appropriate depending on the specific type of security or instrument held. The U.S. defined benefit pension plan maintains cash and Treasury bills as liquidity reserves that serve as variation margin for the U.S. Treasury futures contracts directly held by the U. S. Plan to hedge its liability duration. Approximately $90 million and $87 million of cash liquidity reserves associated with hedge funds as of December 31, 2022 and 2021, respectively, are included in the cash and cash equivalents asset class in the table above.
The tables below summarize Kodak’s U.S. Plan investments in hedge funds by type for those investments valued at NAV:
U.S. Plan:
December 31, 2022
| | | | | | Redemption | | Redemption |
| (in millions) | | Net Asset Value | | Frequency | | Notice Period |
| Multi-strategy hedge funds | | $ | 495 | | Quarterly | | 45-90 days |
| Relative value hedge funds | | | 331 | | Bi-monthly, Quarterly | | 6-120 days |
| Directional hedge funds | | | 167 | | Monthly | | 5 days |
| Equity long/short hedge funds | | | 227 | | Quarterly | | 45-90 days |
| Sector specialist hedge funds | | | 135 | | Quarterly, Semi-Annually | | 60-90 days |
| Long-biased hedge funds | | | 159 | | Quarterly, Annually | | 60-90 days |
| Event driven hedge funds | | | 14 | | Quarterly | | 90 days |
| | | $ | 1,528 | | | | |
December 31, 2021
| | | | | | Redemption | | Redemption |
| (in millions) | | Net Asset Value | | Frequency | | Notice Period |
| Multi-strategy hedge funds | | $ | 653 | | Monthly, Quarterly | | 15-90 days |
| Relative value hedge funds | | | 354 | | Bi-monthly, Quarterly | | 6-365 days |
| Directional hedge funds | | | 260 | | Bi-monthly, Quarterly | | 5-30 days |
| Equity long/short hedge funds | | | 225 | | Quarterly | | 45-90 days |
| Sector specialist hedge funds | | | 107 | | Quarterly | | 90 days |
| Long-biased hedge funds | | | 138 | | Quarterly, Annually | | 60-75 days |
| Event driven hedge funds | | | 64 | | Quarterly | | 90 days |
| | | $ | 1,801 | | | | |
Hedge funds typically have the right to restrict redemption requests beyond Kodak’s control. In these cases, redemptions may extend beyond the general redemption terms outlined in the table above. Certain hedge fund investments have no redemption rights and will become liquid only upon sale by the hedge fund managers. As of December 31, 2022 and 2021, these investments represented approximately 1% and 5% of the hedge funds investments valued at NAV, respectively.
Liquidity
Approximately 29% of total U.S. Plan assets as of December 31, 2022 are invested in real estate funds, private equity funds and other investments where the U.S. Plan receives distributions through the liquidation of the underlying investments. Liquidity of U.S. Plan assets is managed to minimize the likelihood that these investments would need to be sold to cover benefit payments, derivative losses, or any other short-term need.
The total unfunded commitments, if and when they are called over the term of each investment, are expected to be funded by the available liquidity in the U.S. Plan consistent with historical experience.
The fair value of Kodak’s major non-U.S. defined benefit pension plans assets at December 31, 2022 and 2021 by asset class are presented in the tables below:
Major Non-U.S. Plans
December 31, 2022
| | | Non - U.S. | |
| | | Quoted Prices | | | | | | | | | | | | | | | | | |
| | | in Active | | | | | | | | | | | | | | | | | |
| | | Markets for | | | Significant | | | Significant | | | | | | | | | |
| | | Identical | | | Observable | | | Unobservable | | | | | | | | | |
| | | Assets | | | Inputs | | | Inputs | | | Measured at | | | | | |
| (in millions) | | (Level 1) | | | (Level 2) | | | (Level 3) | | | NAV | | | Total | |
| Cash and cash equivalents | | $ | 21 | | | $ | — | | | $ | — | | | $ | — | | | $ | 21 | |
| | | | | | | | | | | | | | | | | | | | | |
| Equity securities | | | 31 | | | | — | | | | — | | | | — | | | | 31 | |
| | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | |
| Investment grade bonds | | | 35 | | | | 45 | | | | — | | | | — | | | | 80 | |
| Global high yield & emerging market debt | | | 2 | | | | — | | | | — | | | | — | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | |
| Real estate | | | — | | | | — | | | | — | | | | 11 | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other: | | | | | | | | | | | | | | | | | | | | |
| Hedge Funds | | | — | | | | — | | | | — | | | | 20 | | | | 20 | |
| Private equity | | | — | | | | — | | | | — | | | | 43 | | | | 43 | |
| Insurance contracts | | | — | | | | 29 | | | | 289 | | | | — | | | | 318 | |
| | | $ | 89 | | | $ | 74 | | | $ | 289 | | | $ | 74 | | | $ | 526 | |
Major Non-U.S. Plans
December 31, 2021
| | | Non - U.S. | |
| | | Quoted Prices | | | | | | | | | | | | | | | | | |
| | | in Active | | | | | | | | | | | | | | | | | |
| | | Markets for | | | Significant | | | Significant | | | | | | | | | |
| | | Identical | | | Observable | | | Unobservable | | | | | | | | | |
| | | Assets | | | Inputs | | | Inputs | | | Measured at | | | | | |
| (in millions) | | (Level 1) | | | (Level 2) | | | (Level 3) | | | NAV | | | Total | |
| Cash and cash equivalents | | $ | 13 | | | $ | — | | | $ | — | | | $ | — | | | $ | 13 | |
| | | | | | | | | | | | | | | | | | | | | |
| Equity securities | | | 38 | | | | — | | | | — | | | | — | | | | 38 | |
| | | | | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | | | | |
| Investment grade bonds | | | 49 | | | | 56 | | | | — | | | | — | | | | 105 | |
| Global high yield & emerging market debt | | | 2 | | | | — | | | | — | | | | — | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | |
| Real estate | | | — | | | | — | | | | — | | | | 12 | | | | 12 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other: | | | | | | | | | | | | | | | | | | | | |
| Hedge funds | | | — | | | | — | | | | — | | | | 32 | | | | 32 | |
| Private equity | | | — | | | | — | | | | — | | | | 42 | | | | 42 | |
| Insurance contracts | | | — | | | | 40 | | | | 342 | | | | — | | | | 382 | |
| | | $ | 102 | | | $ | 96 | | | $ | 342 | | | $ | 86 | | | $ | 626 | |
For Kodak’s major non-U.S. defined benefit pension plans, equity investments are invested broadly in local equity, developed international and emerging markets. Fixed income investments are comprised primarily of government and investment grade corporate bonds. Real estate investments primarily include investments in limited partnerships that invest in office, industrial, and retail properties. Global Balanced Asset Allocation investments are commingled funds that hold a diversified portfolio of passive market exposures, including equities, debt, currencies and commodities. Hedge fund investments are comprised of a diversified portfolio of hedge funds using equity, debt, commodity and currency instruments. Private equity investments are comprised of limited partnerships and fund-of-fund investments that invest in distressed investments, venture capital and leveraged buyouts. Insurance contracts are typically annuities from life insurance companies covering specific pension obligations.
For investments in real estate and private equity funds, the investors do not have an option to redeem their interest in the fund. The investors in the fund receive distributions through the liquidation of the underlying investments in the fund. There are no material unfunded commitments as of December 31, 2022 and 2021.
Of the December 31, 2022 and 2021 investments shown in the major Non-U.S. plans table above, there are no material derivative exposures.
The following is a reconciliation of the beginning and ending balances of level 3 assets of Kodak’s major U.S. and non-U.S. defined benefit pension plans:
| | | U.S. | |
| | | | | | | Net Realized and Unrealized Gains | | | | | | | | | |
| | | | | | | | | | | Relating to | | | | | | | | |
| | | Balance at | | | Relating to | | | Assets | | | Net Purchases, | | | Balance at | |
| | | January 1, | | | Assets | | | Sold During the | | | Sales and | | | December 31, | |
| (in millions) | | 2022 | | | Still Held | | | Period | | | Settlements | | | 2022 | |
| Private Equity | | | — | | | | — | | | | — | | | | 3 | | | | 3 | |
| Total | | $ | - | | | $ | — | | | $ | — | | | $ | 3 | | | $ | 3 | |
| | | U.S. | |
| | | | | | | Net Realized and Unrealized Gains | | | | | | | | | |
| | | | | | | | | | | Relating to | | | | | | | | |
| | | Balance at | | | Relating to | | | Assets | | | Net Purchases, | | | Balance at | |
| | | January 1, | | | Assets | | | Sold During the | | | Sales and | | | December 31, | |
| (in millions) | | 2021 | | | Still Held | | | Period | | | Settlements | | | 2021 | |
| Private Equity | | | 5 | | | | (5 | ) | | | — | | | | — | | | | — | |
| Total | | $ | 5 | | | $ | (5 | ) | | $ | — | | | $ | — | | | $ | — | |
| | | U.S. | |
| | | | | | | Net Realized and Unrealized Gains | | | | | | | | | |
| | | | | | | | | | | Relating to | | | | | | | | |
| | | Balance at | | | Relating to | | | Assets | | | Net Purchases, | | | Balance at | |
| | | January 1, | | | Assets | | | Sold During the | | | Sales and | | | December 31, | |
| (in millions) | | 2020 | | | Still Held | | | Period | | | Settlements | | | 2020 | |
| Private Equity | | | 7 | | | | (2 | ) | | | — | | | | — | | | | 5 | |
| Total | | $ | 7 | | | $ | (2 | ) | | $ | — | | | $ | — | | | $ | 5 | |
| | | Non - U.S. | |
| | | | | | | Net Realized and Unrealized Gains | | | | | | | | | |
| | | | | | | | | | | Relating to | | | | | | | | |
| | | Balance at | | | Relating to | | | Assets | | | Net Purchases, | | | Balance at | |
| | | January 1, | | | Assets | | | Sold During the | | | Sales and | | | December 31, | |
| | | 2022 | | | Still Held | | | Period | | | Settlements | | | 2022 | |
| Insurance Contracts | | | 342 | | | | (53 | ) | | | — | | | | — | | | | 289 | |
| Total | | $ | 342 | | | $ | (53 | ) | | $ | — | | | $ | — | | | $ | 289 | |
| | | Non - U.S. | |
| | | | | | | Net Realized and Unrealized Gains | | | | | | | | | |
| | | | | | | | | | | Relating to | | | | | | | | |
| | | Balance at | | | Relating to | | | Assets | | | Net Purchases, | | | Balance at | |
| | | January 1, | | | Assets | | | Sold During the | | | Sales and | | | December 31, | |
| | | 2021 | | | Still Held | | | Period | | | Settlements | | | 2021 | |
| Insurance Contracts | | | 291 | | | | (37 | ) | | | — | | | | 88 | | | | 342 | |
| Total | | $ | 291 | | | $ | (37 | ) | | $ | — | | | $ | 88 | | | $ | 342 | |
| | | Non - U.S. | |
| | | | | | | Net Realized and Unrealized Gains | | | | | | | | | |
| | | | | | | | | | | Relating to | | | | | | | | |
| | | Balance at | | | Relating to | | | Assets | | | Net Purchases, | | | Balance at | |
| | | January 1, | | | Assets | | | Sold During the | | | Sales and | | | December 31, | |
| | | 2020 | | | Still Held | | | Period | | | Settlements | | | 2020 | |
| Insurance Contracts | | | 273 | | | | 18 | | | | — | | | | — | | | | 291 | |
| Total | | $ | 273 | | | $ | 18 | | | $ | — | | | $ | — | | | $ | 291 | |
The following pension benefit payments, which reflect expected future service, are expected to be paid (in millions):
| | | | U.S. | | | Non-U.S. | |
| 2023 | | | $ | 290 | | | $ | 43 | |
| 2024 | | | | 258 | | | | 42 | |
| 2025 | | | | 248 | | | | 41 | |
| 2026 | | | | 237 | | | | 40 | |
| 2027 | | | | 226 | | | | 39 | |
| 2028 - 2032 | | | | 976 | | | | 182 | |
NOTE 21: OTHER POSTRETIREMENT BENEFITS
In Canada, Kodak provides medical, dental, life insurance, and survivor income benefits to eligible retirees. The plan is closed to new participants. Information on the Canada other postretirement benefit plan is presented below.
The measurement date used to determine the net benefit obligation for the Canada other postretirement benefit plan is December 31.
Changes in Kodak’s benefit obligation and funded status were as follows (in millions):
| |
|
Year Ended December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Net benefit obligation at beginning of period |
|
$ |
52 |
|
|
$ |
58 |
|
| Interest cost |
|
|
1 |
|
|
|
1 |
|
| Actuarial (gain) loss |
|
|
(7 |
) |
|
|
(5 |
) |
| Benefit payments |
|
|
(3 |
) |
|
|
(2 |
) |
| Net benefit obligation at end of period |
|
|
43 |
|
|
|
52 |
|
| |
|
|
|
|
|
|
|
|
| Underfunded status at end of period |
|
|
(43 |
) |
|
|
(52 |
) |
Amounts recognized in the Consolidated Statement of Financial Position consist of (in millions):
| |
|
As of December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Other current liabilities |
|
$ |
(3 |
) |
|
$ |
(3 |
) |
| Pension and other postretirement liabilities |
|
|
(40 |
) |
|
|
(49 |
) |
| |
|
$ |
(43 |
) |
|
$ |
(52 |
) |
Amounts recognized in Accumulated other comprehensive loss consist of (in millions):
| |
|
As of December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Net actuarial gain |
|
$ |
11 |
|
|
$ |
4 |
|
Changes in benefit obligations recognized in Other comprehensive loss (income) consist of (in millions):
| |
|
Year Ended December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Newly established gain |
|
$ |
7 |
|
|
$ |
5 |
|
| Total gain recognized in Other comprehensive income |
|
$ |
7 |
|
|
$ |
5 |
|
Other postretirement benefit cost included:
| |
|
Year Ended December 31, |
|
| |
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Components of net postretirement benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
| Service cost |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| Interest cost |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
| Other postretirement benefit cost from continuing operations |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1 |
|
The weighted-average assumptions used to determine the net benefit obligations were as follows:
| |
|
As of December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Discount rate |
|
|
5.15 |
% |
|
|
2.97 |
% |
| Salary increase rate |
|
|
2.10 |
% |
|
|
1.85 |
% |
The weighted-average assumptions used to determine the net postretirement benefit cost were as follows:
| |
|
Year Ended December 31, |
|
| |
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Effective rate for interest cost |
|
|
2.53 |
% |
|
|
1.81 |
% |
|
|
2.78 |
% |
| Salary increase rate |
|
|
1.85 |
% |
|
|
1.70 |
% |
|
|
1.80 |
% |
The weighted-average assumed healthcare cost trend rates used to compute the other postretirement amounts were as follows:
| |
|
2022 |
|
|
2021 |
|
| Healthcare cost trend |
|
|
5.64 |
% |
|
|
5.34 |
% |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |
|
|
3.57 |
% |
|
|
3.32 |
% |
| Year that the rate reaches the ultimate trend rate |
|
2043 |
|
|
2041 |
|
The following other postretirement benefits, which reflect expected future service, are expected to be paid (in millions):
| 2023 |
|
$ |
3 |
|
| 2024 |
|
|
3 |
|
| 2025 |
|
|
3 |
|
| 2026 |
|
|
3 |
|
| 2027 |
|
|
3 |
|
| 2028 - 2032 |
|
|
12 |
|
NOTE 22: EARNINGS PER SHARE
Basic earnings per share are calculated using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share calculations include any dilutive effect of potential common shares. In periods with a net loss from continuing operations, 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.
A reconciliation of the amounts used to calculate basic and diluted earnings per share for the years ended December 31, 2022, 2021 and 2020 follows:
| | | Year Ended December 31, | |
| (in millions) | | 2022 | | | 2021 | | | 2020 | |
| Income (loss) from continuing operations attributable to Eastman Kodak Company | | $ | 26 | | | $ | 24 | | | $ | (544 | ) |
| Less: Preferred Stock cash and accrued dividends | | | (4 | ) | | | (4 | ) | | | (11 | ) |
| Less: Preferred Stock in-kind dividends | | | (5 | ) | | | (4 | ) | | | — | |
| Less: Preferred Stock deemed dividends | | | (2 | ) | | | (3 | ) | | | (9 | ) |
| Plus: Expiration of Series A embedded derivative | | | — | | | | 11 | | | | — | |
| Less: Earnings attributable to Series C Preferred shareholders | | | (2 | ) | | | (2 | ) | | | — | |
| Income (loss) from continuing operations available to common shareholders - basic and diluted | | $ | 13 | | | $ | 22 | | | $ | (564 | ) |
| | | Year Ended December 31, | |
| (in millions) | | 2022 | | | 2021 | | | 2020 | |
| Net income (loss) attributable to Eastman Kodak Company | | $ | 26 | | | $ | 24 | | | $ | (541 | ) |
| Less: Preferred Stock cash and accrued dividends | | | (4 | ) | | | (4 | ) | | | (11 | ) |
| Less: Preferred Stock in-kind dividends | | | (5 | ) | | | (4 | ) | | | — | |
| Less: Preferred Stock deemed dividends | | | (2 | ) | | | (3 | ) | | | (9 | ) |
| Plus: Expiration of Series A embedded derivative | | | — | | | | 11 | | | | — | |
| Less: Earnings attributable to Series C Preferred shareholders | | | (2 | ) | | | (2 | ) | | | — | |
| Net income (loss) available to common shareholders - basic and diluted | | $ | 13 | | | $ | 22 | | | $ | (561 | ) |
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Weighted-average common shares outstanding - basic | | | 78.9 | | | | 78.4 | | | | 57.4 | |
| Effect of dilutive securities: | | | | | | | | | | | | |
| Unvested restricted stock units and awards | | | 0.6 | | | | 0.1 | | | | — | |
| Stock options | | | 1.1 | | | | 2.0 | | | | — | |
| Weighted-average common shares outstanding - diluted | | | 80.6 | | | | 80.5 | | | | 57.4 | |
The computation of diluted earnings per share for the year ended December 31, 2022 excluded the impact of (1) the assumed conversion of $25 million of 2021 Convertible Notes, (2) the assumed conversion of 1.0 million shares of Series B Preferred Stock, (3) the assumed conversion of 1.1 million shares of Series C Preferred Stock and (4) the assumed exercise of 3.3 million outstanding employee stock options in each case because they would have been anti-dilutive.
The computation of diluted earnings per share for the year ended December 31, 2021 excluded the impact of (1) the assumed conversion of $25 million of 2021 Convertible Notes, (2) the assumed conversion of 1.0 million shares of Series B Preferred Stock, (3) the assumed conversion of 1.0 million shares of Series C Preferred Stock and (4) the assumed exercise of 2.9 million outstanding employee stock options in each case because they would have been anti-dilutive.
As a result of the loss from continuing operations available to common shareholders for the year ended December 31, 2020, Kodak calculated diluted earnings per share using weighted-average basic shares outstanding. If Kodak reported earnings from continuing operations available to common shareholders for the year ended December 31, 2020 the calculation of diluted earnings per share would have included the assumed vesting of 0.6 million unvested restricted stock units and the exercise of 0.7 million stock options.
The computation of diluted earnings per share for the year ended December 31, 2020 excluded the impact of (1) the assumed conversion of 2.0 million shares of Series A Preferred Stock, and (2) the assumed exercise of 4.0 million outstanding employee stock options in each case because they would have been anti-dilutive.
NOTE 23: STOCK-BASED COMPENSATION
Kodak’s stock incentive plan is the 2013 Omnibus Incentive Plan (as restated and further amended, the “2013 Plan”). The 2013 Plan is administered by the Compensation, Nominating and Governance Committee of the Board of Directors.
Officers, directors and employees of the Company and its consolidated subsidiaries are eligible to receive awards. Stock options are generally non-qualified, are at exercise prices equal to or greater than the closing price of Kodak’s stock on the date of grant and expire seven years or ten years after the grant date. Stock-based compensation awards granted under Kodak’s stock incentive plan are generally subject to a three-year vesting period from the date of grant, or a later date as determined by the Compensation, Nominating and Governance Committee. Awards are subject to settlement in newly-issued shares of common stock. Unless sooner terminated by the Compensation, Nominating and Governance Committee, no awards may be granted under the 2013 Plan after May 19, 2031.
The maximum number of shares of common stock available for grant under the 2013 Plan is 13.0 million. For stock option grants awarded on or prior to May 19, 2021, for the number of shares available for grant under the 2013 Plan, a stock option counted as a fraction of a share, based on the fair market value of the stock option relative to the closing stock price on the date of grant. For stock option awards granted after May 19, 2021, a stock option counts as one share. Each restricted stock unit and restricted stock award counts as one share. The total number of shares of common stock registered for issuance under the 2013 Plan is approximately 13.5 million. In addition, under the 2013 Plan, the maximum number of shares available for the grant of incentive stock options is 2.0 million shares. The maximum number of shares as to which stock options or stock appreciation rights may be granted to any one person under the 2013 Plan in any calendar year is 2.5 million shares.
The maximum number of awards that may be granted to any non-employee director under the 2013 Plan in any calendar year may not exceed a number of awards with a grant date fair value of $450,000, computed as of the grant date.
Compensation expense is recognized on a straight-line basis over the service or performance period for each separately vesting tranche of the award and is adjusted for actual forfeitures before vesting. Kodak assesses the likelihood that performance-based shares will be earned based on the probability of meeting the performance criteria. For those performance-based awards that are deemed probable of achievement, expense is recorded, and for those awards that are deemed not probable of achievement, no expense is recorded. Kodak assesses the probability of achievement each quarter.
Restricted Stock Units and Restricted Stock awards
Restricted stock units and restricted stock awards are payable in shares of the Company common stock upon vesting. The fair value is based on the closing market price of the Company’s stock on the grant date. Compensation cost related to restricted stock units and restricted stock awards was $4 million, $5 million and $1 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The weighted average grant date fair value of restricted stock units and awards granted for the years ended December 31, 2022, 2021 and 2020 was $4.60, $8.50 and $2.91, respectively. The total fair value of restricted stock units and awards that vested was $5 million, $6 million and $2 million for the years ended December 31, 2022, 2021 and 2020. As of December 31, 2022, there was $3 million of unrecognized compensation cost related to restricted stock units. The cost is expected to be recognized over a weighted average period of 1.3 years.
The following table summarizes information about unvested restricted stock unit and award activity for the year ended December 31, 2022:
| | | Restricted | | | Weighted-Average | |
| | | Stock | | | Grant Date | |
| | | Units/Awards | | | Fair Values | |
| Outstanding on December 31, 2021 | | | 872,877 | | | $ | 8.10 | |
| Granted | | | 651,375 | | | $ | 4.60 | |
| Vested | | | 361,708 | | | $ | 5.04 | |
| Forfeited | | | 21,667 | | | $ | 5.52 | |
| Outstanding on December 31, 2022 | | | 1,140,877 | | | $ | 6.30 | |
In addition to the outstanding unvested restricted stock units and awards per the above table, there are also 302,099 vested restricted stock units outstanding as of December 31, 2022 with a weighted average grant date fair value of $6.45.
Stock Options
The following table summarizes information about stock option activity for the year ended December 31, 2022:
| | | | | | | | | | | Average | | | | | |
| | | | | | | Weighted | | | Remaining | | | Aggregate | |
| | | Shares | | | Exercise | | | Contractual | | | Intrinsic | |
| | | Under | | | Price | | | Life | | | Value | |
| | | Option | | | Per Share | | | (Years) | | | ($ millions) | |
| Outstanding on December 31, 2021 | | | 7,234,449 | | | $ | 7.29 | | | | | | | | | |
| Expired | | | 330,138 | | | $ | 14.24 | | | | | | | | | |
| Exercised | | | 20,000 | | | $ | 3.03 | | | | | | | | | |
| Outstanding on December 31, 2022 | | | 6,884,311 | | | $ | 6.97 | | | | 2.73 | | | $ | — | |
| Exercisable on December 31, 2022 | | | 6,745,963 | | | $ | 6.99 | | | | 2.72 | | | $ | — | |
| Expected to vest December 31, 2022 | | | 138,348 | | | $ | 5.57 | | | | 3.14 | | | $ | — | |
The aggregate intrinsic value represents the total pretax intrinsic value that option holders would have received had all option holders exercised their options on the last trading day of the year. The aggregate intrinsic value is the difference between the Kodak closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options. The intrinsic values of options outstanding, exercisable or expected to vest as of December 31, 2022 were each less than $1 million.
The weighted average grant date fair value of options granted for the year ended December 31, 2020 was $5.86. There were no options granted in the years ended December 31, 2022 and 2021. The total fair value of options that vested during both the years ended December 31, 2022 and 2021 was $2 million. The total value of the options that vested during the year ended December 31, 2020 was $13 million. Compensation cost related to stock options for the years ended December 31, 2022, 2021 and 2020 was $1 million, $2 million and $14 million, respectively.
As of December 31, 2022, there was less than $1 million of unrecognized compensation cost related to stock options, which will be recognized during 2023.
On February 26, 2021 James V. Continenza, Executive Chairman and Chief Executive Officer of Kodak, and the Company entered into an Executive Chairman and CEO Agreement, as amended on November 30, 2022 (the “Employment Agreement”). The Employment Agreement is effective for a three-year period beginning on February 26, 2021. Pursuant to the Employment Agreement, Mr. Continenza will not have the right to exercise any stock options granted to him in February 2019 or July 2020 to the extent that, after giving effect to the issuance of the Company’s common stock resulting from such exercise, Mr. Continenza (together with his affiliates and any person acting as a group), would beneficially own more than 4.99% of the then issued and outstanding shares of Common Stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation shall cease and be of no further force and effect upon a Change of Control (as such term is defined in the Company’s Amended and Restated 2013 Omnibus Incentive Plan). The restrictions on the exercisability of previous stock option awards were a modification of the original awards. As the February 2019 and July 2020 stock options were fully vested prior to the modification date and there was no incremental value provided in the modification, no additional compensation expense was recognized. Also pursuant to the Employment Agreement, Mr. Continenza was granted 200,000 fully vested restricted stock units. The Company recognized $2 million of stock-based compensation expense associated with the grant of restricted stock units.
The Company issued stock-based compensation grants for 2.4 million stock options on July 27, 2020. The terms of 1.8 million of the options awarded on July 27, 2020 provided for immediate vesting or vesting upon conversion of the 2019 Convertible Notes. As 100% of the 2019 Convertible Notes were converted during the three months ended September 30, 2020, the 1.8 million options with accelerated vesting terms vested in that same period. The remaining 0.6 million options provide for vesting terms of between two and three years.
The valuation of the stock options granted on July 27, 2020 resulted in approximately $12.6 million of compensation expense being reported in Selling, general and administrative expenses in the Consolidated Statement of Operations in the year ended December 31, 2020.
There were less than 1 million options exercised in the years ended December 31, 2022 and 2021 and approximately 2.0 million options exercised in the year ended December 31, 2020. The options exercised in 2020 included 0.3 million options exercised by ex-employees of Kodak that had previously been forfeited. The Company issued shares to the ex-employees in exchange for proceeds based on the exercise prices of the forfeited options. The Company is accounting for the exercise of the forfeited options as a modification of the original awards.
The Company recovered $3.6 million during the three months ended December 31, 2020 from certain of the ex-employees and received a $2.0 million refund of withholding taxes on behalf of those ex-employees in the year ended December 31, 2021.
The Company recognized compensation expense of approximately $5.1 million in the three months ended September 30, 2020 related to the 0.3 million previously forfeited options, representing the fair value of the shares issued to the ex-employees less the exercise proceeds received from the ex-employees. Stock compensation expense, reported in Selling, general and administrative expenses in the Consolidated Statement of Operations, was reduced by $4.6 million in the three months ended December 31, 2020, representing the cash received for certain of the erroneous grants and the refund of withholding taxes due on behalf of the ex-employees. Income recognized in excess of the original stock compensation expense recorded for each individual grant (approximately $1.0 million) was recognized in Other operating income, net in the Consolidated Statement of Operations.
Other than for the awards granted on July 27, 2020, Kodak utilizes the Black-Scholes option valuation model to estimate the fair value of stock options.
The expected term of options granted is the period of time the options are expected to be outstanding and is calculated using a simplified method based on the option’s vesting period and original contractual term. The Company uses the historical volatility of the Company’s stock to estimate expected volatility. The risk-free rate was based on the yield on U.S. Treasury notes with a term equal to the option’s expected term.
The following inputs were used for the valuation of option grants issued in the year ended December 31, 2020 (there were no stock option grants issued in the years ended December 31, 2022 and 2021):
| | | Year Ended | |
| | | December 31, | |
| | | 2020 | |
| Weighted-average fair value of options granted | | $ | 1.50 | |
| Weighted-average risk-free interest rate | | | 2.43 | % |
| Expected option lives (in years) | | | 3.7 | |
| Weighted-average volatility | | | 98 | % |
| Expected dividend yield | | | 0.00 | % |
Given the volatility of the Company’s stock price in the third quarter of 2020, the Company utilized a lattice-based valuation model to value the time-based vesting awards granted July 27, 2020 and a Monte Carlo simulation valuation model to value the options granted on July 27, 2020 which vested upon conversion of the 2019 Convertible Notes.
The following inputs were used in the lattice-based valuation of the July 27, 2020 option grants:
| | | July 27, 2020 | |
| | | Option Awards | |
| Weighted-average fair value of options granted | | $ | 6.57 | |
| Range of risk-free interest rates | | | 0.11% - 0.30% | |
| Weighted-average term (in years) | | | 5.57 | |
| Weighted-average volatility | | | 98 | % |
| Weighted-average expected dividend yield | | | 0.00 | % |
NOTE 24: SHAREHOLDERS’ EQUITY
The Company 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 December 31, 2022 and 2021 there were 79.1 million and 78.7 million shares of common stock outstanding, respectively, 1.0 million shares of Series B preferred stock issued and outstanding, and 1.1 million and 1.0 million shares of Series C preferred stock issued and outstanding, respectively.
Treasury Stock
Treasury stock consisted of approximately 0.9 million shares and 0.8 million shares at December 31, 2022 and 2021, respectively.
Registration Statements
On August 10, 2021, the Company filed a Registration Statement on Form S-3 (Registration No. 254352) to register for possible resale from time to time of up to 44,490,032 shares of common stock, subject to adjustments for stock splits, stock dividends and reclassifications and similar transactions (the “Resale Shares”). The Company registered the Resale Shares to satisfy its obligations under the following agreements:
| | (1) | A registration rights agreement (the “Backstop Registration Rights Agreement”), dated as of September 3, 2013, between the Company and GSO Capital Partners LP, on behalf of various managed funds, BlueMountain Capital Management, LLC, on behalf of various managed funds, George Karfunkel, United Equities Commodities Company, Momar Corporation and Contrarian Capital Management, LLC, on behalf of Contrarian Funds, LLC, which, prior to the expiration of the Backstop Registration Rights Agreement on October 16, 2021, required the registration of certain shares of common stock. |
| | (2) | A Series A Preferred Stock repurchase and exchange agreement, dated as of February 26, 2021, with Southeastern Asset Management, Inc. (“Southeastern”) and Longleaf Partners Small-Cap Fund, C2W Partners Master Fund Limited and Deseret Mutual Pension Trust, which are investment funds managed by Southeastern (such investment funds, collectively, the “Purchasers”), extending the registration rights provided under a registration rights agreement, dated as of November 15, 2016, with Southeastern and the Purchasers, to shares of the Company's common stock issuable upon conversion of 1,000,000 shares of Series B Preferred Stock (as defined herein) issued thereunder. |
| | (3) | A registration rights agreement, dated as of February 26, 2021, with GO EK Ventures IV, LLC (the “Investor”), a fund managed by Grand Oaks Capital, providing the Investor with registration rights in respect of shares of the Company's common stock issuable upon conversion of 1,000,000 shares of Series C Preferred Stock (as defined herein) issued pursuant to a Series C Preferred Stock purchase agreement, dated as of February 26, 2021, with the Investor; and |
| | (4) | A securities registration rights agreement, dated as of February 26, 2021, with certain funds affiliated with Kennedy Lewis Investment Management LLC (the “Buyers”), providing the Buyers with registration rights in respect of (i) 1,000,000 shares of the Company's common stock and (ii) shares of the Company's common stock issuable upon conversion of $25,000,000 aggregate principal amount of the Company's 5.0% unsecured convertible promissory notes due May 28, 2026, in each case, issued in a private placement transaction pursuant to a securities purchase agreement, dated as of February 26, 2021, with the Buyers. |
On August 10, 2021, the Company filed a shelf Registration Statement on Form S-3 (Registration No. 254353) for the offer and sale of securities from time to time in one or more offerings of up to $500,000,000 of common stock, preferred stock, debt securities, warrants, depositary shares, purchase contracts, guarantees and units. The Company would file a prospectus supplement to include the specific terms of any offering or sale under this shelf registration statement. At December 31, 2022 the Company had not made any offerings or sales of securities pursuant to this registration statement.
NOTE 25: OTHER COMPREHENSIVE INCOME (LOSS)
The changes in Other comprehensive income (loss) by component, were as follows:
| |
|
|
Year Ended December 31, |
|
| (in millions) |
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Currency translation adjustments |
|
|
$ |
(12 |
) |
|
$ |
6 |
|
|
$ |
(16 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension and other postretirement benefit plan changes |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Newly established net actuarial gain (loss) |
|
|
|
277 |
|
|
|
632 |
|
|
|
(34 |
) |
| Newly established prior service cost |
|
|
|
(28 |
) |
|
|
— |
|
|
|
— |
|
| Tax benefit |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Newly established net actuarial loss, net of tax |
|
|
|
249 |
|
|
|
632 |
|
|
|
(34 |
) |
| Reclassification adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization of prior service credit |
(a) |
|
|
(4 |
) |
|
|
(7 |
) |
|
|
(7 |
) |
| Amortization of actuarial losses |
(a) |
|
|
8 |
|
|
|
37 |
|
|
|
19 |
|
| Recognition of gains (losses) due to settlements and curtailments |
(a) |
|
|
— |
|
|
|
(1 |
) |
|
|
9 |
|
| Total reclassification adjustments |
|
|
|
4 |
|
|
|
29 |
|
|
|
21 |
|
| Tax provision |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Reclassification adjustments, net of tax |
|
|
|
4 |
|
|
|
29 |
|
|
|
21 |
|
| Pension and other postretirement benefit plan changes, net of tax |
|
|
|
253 |
|
|
|
661 |
|
|
|
(13 |
) |
| Other comprehensive loss |
|
|
$ |
241 |
|
|
$ |
667 |
|
|
$ |
(29 |
) |
| (a) |
Reclassified to Pension income - refer to Note 20, "Retirement Plans" and Note 21, "Other Postretirement Benefits" for additional information. |
NOTE 26: ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) is composed of the following:
| |
|
As of December 31, |
|
| (in millions) |
|
2022 |
|
|
2021 |
|
| Currency translation adjustments |
|
$ |
(112 |
) |
|
$ |
(100 |
) |
| Pension and other postretirement benefit plan changes |
|
|
574 |
|
|
|
321 |
|
| Ending balance |
|
$ |
462 |
|
|
$ |
221 |
|
NOTE 27: SEGMENT INFORMATION
Kodak has four reportable segments: Traditional Printing, Digital Printing, Advanced Materials and Chemicals and Brand. A description of Kodak’s reportable segments follows.
Traditional Printing: The Traditional Printing segment is comprised of Prepress Solutions.
Digital Printing: The Digital Printing segment is comprised of four lines of business: the Electrophotographic Printing Solutions business, the Prosper business, the Versamark business and the Software business.
Advanced Materials and Chemicals: The Advanced Materials and Chemicals segment is comprised of four lines of business: Industrial Film and Chemicals, Motion Picture, Advanced Materials and Functional Printing and KSB. KSB was sold to Swiss Post Solutions in December 2020.
Brand: The Brand segment contains the brand licensing business.
All Other: All Other is comprised of the operations of the Eastman Business Park, a more than 1,200 acre technology center and industrial complex.
Segment financial information is shown below. Asset information by segment is not disclosed as this information is not separately identified and reported to the Chief Operating Decision Maker.
Net Revenues from Continuing Operations by Reportable Segment
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| (in millions) | | | | | | | | | | | | |
| Traditional Printing | | $ | 711 | | | $ | 659 | | | $ | 592 | |
| Digital Printing | | | 227 | | | | 249 | | | | 241 | |
| Advanced Materials and Chemicals | | | 234 | | | | 212 | | | | 172 | |
| Brand | | | 17 | | | | 15 | | | | 13 | |
| Total of reportable segments | | | 1,189 | | | | 1,135 | | | | 1,018 | |
| Other | | | 16 | | | | 15 | | | | 11 | |
| Consolidated total | | $ | 1,205 | | | $ | 1,150 | | | $ | 1,029 | |
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 table below, Operational EBITDA represents the earnings (loss) from continuing operations before income taxes excluding non-service cost components of pension and other postemployment benefits income; depreciation and amortization expense; restructuring costs and other; stock-based compensation expense; consulting and other costs; idle costs; other operating income, net (unless otherwise indicated); interest expense; loss on early extinguishment of debt and other (charges) income, net.
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. Research and development activities not directly related to the other segments are reported within the Advanced Materials and Chemicals segment.
2023 Segments
Change in Segments
Effective February 2023 Kodak changed its organizational structure. The Traditional Printing segment and the Digital Printing segment were combined into one segment, named the Print segment. No changes were made to Kodak's other segments.
Segment Operational EBITDA and Consolidated Income (Loss) from Continuing Operations Before Income Taxes
| | | Year Ended December 31, | |
| (in millions) | | 2022 | | | 2021 | | | 2020 | |
| Traditional Printing | | $ | 27 | | | $ | 9 | | | $ | 21 | |
| Digital Printing | | | (22 | ) | | | (5 | ) | | | (10 | ) |
| Advanced Materials and Chemicals | | | (1 | ) | | | (6 | ) | | | (23 | ) |
| Brand | | | 14 | | | | 13 | | | | 11 | |
| Total of reportable segments | | | 18 | | | | 11 | | | | (1 | ) |
| Other | | | 3 | | | | 2 | | | | 1 | |
| Depreciation and amortization | | | (29 | ) | | | (31 | ) | | | (37 | ) |
| Restructuring costs and other | | | (13 | ) | | | (6 | ) | | | (17 | ) |
| Stock-based compensation | | | (5 | ) | | | (7 | ) | | | (15 | ) |
| Consulting and other costs (1) | | | 2 | | | | (19 | ) | | | (9 | ) |
| Idle costs (2) | | | (3 | ) | | | (2 | ) | | | (3 | ) |
| Other operating income, net, excluding income from transition services agreement (3) | | | 1 | | | | 6 | | | | 7 | |
| Interest expense (4) | | | (40 | ) | | | (33 | ) | | | (12 | ) |
| Pension income excluding service cost component (4) | | | 98 | | | | 102 | | | | 98 | |
| Loss on early extinguishment of debt (4) | | | — | | | | — | | | | (2 | ) |
| Other (charges) income, net (4) | | | (1 | ) | | | 5 | | | | (386 | ) |
| Consolidated earnings (loss) from continuing operations before income taxes | | $ | 31 | | | $ | 28 | | | $ | (376 | ) |
| (1) | Consulting and other costs are professional services and internal costs associated with corporate strategic initiatives, investigations and litigation. Consulting and other costs include $10 million of income in the year ended December 31, 2022 representing insurance reimbursement of legal costs previously paid by the Company associated with investigations and litigation matters. Kodak received $5 million of insurance reimbursement in the fourth quarter of 2022 and the remaining $5 million in January 2023. |
| (2) | Consists of third-party costs such as security, maintenance, and utilities required to maintain land and buildings in certain locations not used in any Kodak operations and the costs, net of any rental income received, of underutilized portions of certain properties. |
| (3) | $6 million of income from the transition services agreement with the purchaser of the Company's flexographic packaging business in 2019 was recognized in the year ended December 31, 2020. No income was recognized in the years ended December 31, 2022 and 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. |
In 2022, Kodak decreased employee benefit reserves by $15 million composed of a reduction in workers’ compensation reserves of approximately $13 million driven by changes in discount rates and a decrease in other employee benefit reserves of approximately $2 million, driven by both changes in discount rates and favorable experience. The decrease in reserves in 2022 impacted gross profit by approximately $9 million, R&D by approximately $1 and SG&A by approximately $5 million.
Kodak decreased workers’ compensation reserves by approximately $4 million in 2021 driven by changes in discount rates. The decrease in reserves in 2021 impacted gross profit by approximately $3 million and SG&A by approximately $1 million.
Kodak increased employee benefit reserves by approximately $4 million in 2020 reflecting an increase in workers’ compensation reserves ($7 million) partially offset by a decrease in postemployment benefit reserves ($3 million). The increase in reserves in 2020 impacted gross profit and SG&A each by approximately $2 million.
Amortization and depreciation expense by segment are not included in the segment measure of profit and loss but are regularly provided to the Chief Operating Decision Maker.
| (in millions) | | Year Ended December 31, | |
| Intangible asset amortization expense from continuing operations: | | 2022 | | | 2021 | | | 2020 | |
| Traditional Printing | | $ | — | | | $ | — | | | $ | 1 | |
| Digital Printing | | | 4 | | | | 4 | | | | 3 | |
| Brand | | | 1 | | | | 1 | | | | 1 | |
| Consolidated total | | $ | 5 | | | $ | 5 | | | $ | 5 | |
| (in millions) | | Year Ended December 31, | |
| Depreciation expense from continuing operations: | | 2022 | | | 2021 | | | 2020 | |
| Traditional Printing | | $ | 11 | | | $ | 14 | | | $ | 19 | |
| Digital Printing | | | 6 | | | | 6 | | | | 7 | |
| Advanced Materials and 3D Printing | | | 6 | | | | 5 | | | | 5 | |
| Other | | | 1 | | | | 1 | | | | 1 | |
| Consolidated total | | $ | 24 | | | $ | 26 | | | $ | 32 | |
| (in millions) | | Year Ended December 31, | |
| Long-lived assets located in: (1) | | 2022 | | | 2021 | |
| The United States | | $ | 95 | | | $ | 81 | |
| Europe, Middle East and Africa | | | 9 | | | | 14 | |
| Asia Pacific | | | 6 | | | | 4 | |
| Canada and Latin America | | | 44 | | | | 41 | |
| Non-U.S. countries total (2) | | | 59 | | | | 59 | |
| Consolidated total | | $ | 154 | | | $ | 140 | |
| (1) | Long-lived assets are comprised of property, plant and equipment, net. |
| (2) | Of the total non-U.S. property, plant and equipment in 2022, $41 million was located in Brazil. Of the total non-U.S. property, plant and equipment in 2021, $39 million was located in Brazil. |
Major Customers
No single customer represented 10% or more of Kodak’s total net revenue in any year presented.