10-Q 1 form10q3q2012.htm EASTMAN KODAK COMPANY RE: 10-Q 3Q2012 form10q3q2012.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

[X]  Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012
or
[   ]  Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the transition period from ___ to ___

Commission File Number 1-87

EASTMAN KODAK COMPANY
 (Exact name of registrant as specified in its charter)

NEW JERSEY
16-0417150
(State of incorporation)
(IRS Employer Identification No.)
   
343 STATE STREET, ROCHESTER, NEW YORK
14650
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:     585-724-4000
_____________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes   [X]             No    [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Yes   [X]             No    [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    [X]      Accelerated filer    [  ]      Non-accelerated filer    [  ]       Smaller reporting company   [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes    [   ]            No    [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 
Title of each Class
Number of Shares Outstanding at
October 26, 2012
 
Common Stock, $2.50 par value
272,338,132

 
 

 


Eastman Kodak Company
Form 10-Q
September 30, 2012

Table of Contents


   
Page
 
Part I. - Financial Information
 
     
Item 1.
Financial Statements
2
 
Consolidated Statement of Operations (Unaudited)
2
 
Consolidated Statement of Comprehensive (Loss) Income (Unaudited)
3
 
Consolidated Statement of Retained Earnings (Unaudited)
4
 
Consolidated Statement of Financial Position (Unaudited)
5
 
Consolidated Statement of Cash Flows (Unaudited)
6
 
Notes to Financial Statements (Unaudited)
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
37
 
Liquidity and Capital Resources
53
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
57
Item 4.
Controls and Procedures
57
     
 
Part II. - Other Information
 
     
Item 1.
Legal Proceedings
58-61
Item 1A.
Risk Factors
62-68
Item 6.
Exhibits
68
     
 
Signature
69
 
Index to Exhibits
70-77
     

 
 

 

 
 
Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(in millions, except per share data)
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
                    
 
2012
   
2011
   
2012
   
2011
 
                         
Net sales
                       
   Products
  $ 835     $ 1,051     $ 2,507     $ 3,055  
   Services
    180       197       540       583  
   Licensing & royalties (Note 9)
    3       13       (53 )     39  
Total net sales
  $ 1,018     $ 1,261     $ 2,994     $ 3,677  
Cost of sales
                               
   Products
  $ 716     $ 930     $ 2,166     $ 2,741  
   Services
    142       151       424       453  
Total cost of sales
  $ 858     $ 1,081     $ 2,590     $ 3,194  
   Gross profit
  $ 160     $ 180     $ 404     $ 483  
Selling, general and administrative expenses
    196       259       608       800  
Research and development costs
    44       59       158       183  
Restructuring costs and other
    117       17       206       77  
Other operating (income) expenses, net
    (4 )     12       (4 )     (59 )
Loss from continuing operations before interest expense, other income (charges), net, reorganization items, net and income taxes
    (193 )     (167 )     (564 )     (518 )
Interest expense (contractual interest for the three and nine months ended September 30, 2012 of $52 and $151, respectively)
    41       41       117       116  
Loss on early extinguishment of debt, net
    -       -       7       -  
Other income (charges), net
    6       (7 )     5       1  
Reorganization items, net
    56       -       304       -  
Loss from continuing operations before income taxes
    (284 )     (215 )     (987 )     (633 )
Provision (benefit) for income taxes
    24       (1 )     (84 )     (43 )
Loss from continuing operations
    (308 )     (214 )     (903 )     (590 )
Loss from discontinued operations, net of income taxes
    (4 )     (8 )     (74 )     (57 )
NET LOSS ATTRIBUTABLE TO EASTMAN KODAK
  COMPANY
  $ (312 )   $ (222 )   $ (977 )   $ (647 )
Basic and diluted net loss per share attributable to Eastman Kodak Company common shareholders:
                               
  Continuing operations
  $ (1.13 )   $ (0.80 )   $ (3.32 )   $ (2.19 )
  Discontinued operations
    (0.02 )     (0.03 )     (0.28 )     (0.22 )
  Total
  $ (1.15 )   $ (0.83 )   $ (3.60 )   $ (2.41 )
                                 
Number of common shares used in basic and diluted net loss per share
    271.9       268.9       271.6       268.9  
                                 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
2

 

EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

 
(in millions)
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
NET LOSS ATTRIBUTABLE TO EASTMAN KODAK COMPANY
  $ (312 )   $ (222 )   $ (977 )   $ (647 )
Other comprehensive income (loss), net of tax:
                               
Realized and unrealized gains from hedging activity, net of tax of $0 and $1 for the three months ended September 30, 2012 and 2011,
and $2 and $0 for the nine months ended September 30, 2012 and 2011, respectively
    -       (8 )     4       (7 )
Unrealized gain from investment, net of tax of $0 for the three and nine months ended September 30, 2012
    1       -       1       -  
Currency translation adjustments
    (2 )     (7 )     (6 )     11  
Pension and other postretirement benefit plan obligation activity, net of tax of $7 and $4 for the three months ended September 30, 2012
and 2011, and $15 and $4 for the nine months ended September 30, 2012 and 2011, respectively
    34       1       95       52  
Total comprehensive loss, net of tax
  $ (279 )   $ (236 )   $ (883 )   $ (591 )
                                 

The accompanying notes are an integral part of these consolidated financial statements.

 
 
3

 

EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)

(in millions)
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Retained earnings at beginning of period
  $ 3,346     $ 4,536     $ 4,071     $ 4,969  
Net loss
    (312 )     (222 )     (977 )     (647 )
Loss from issuance of treasury stock
    (19 )     (41 )     (79 )     (49 )
Retained earnings at end of period
  $ 3,015     $ 4,273     $ 3,015     $ 4,273  
 
                               

The accompanying notes are an integral part of these consolidated financial statements.

 
4

 
 
EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

(in millions)
 
September 30,
   
December 31,
 
                                                                             
 
2012
   
2011
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 1,132     $ 861  
Receivables, net
    813       1,103  
Inventories, net
    638       607  
Deferred income taxes
    56       58  
Other current assets
    54       74  
 Total current assets
    2,693       2,703  
Property, plant and equipment, net of accumulated depreciation of
  $4,484 and $4,590, respectively
    746       895  
Goodwill
    279       277  
Other long-term assets
    685       803  
 TOTAL ASSETS
  $ 4,403     $ 4,678  
LIABILITIES AND EQUITY (DEFICIT)
               
Current Liabilities
               
Accounts payable, trade
  $ 440     $ 706  
Short-term borrowings and current portion of long-term debt
    40       152  
Accrued income and other taxes
    9       40  
Other current liabilities
    970       1,252  
 Total current liabilities
    1,459       2,150  
Long-term debt, net of current portion
    1,400       1,363  
Pension and other postretirement liabilities
    1,451       3,053  
Other long-term liabilities
    377       462  
Liabilities subject to compromise
    2,947       -  
Total Liabilities
    7,634       7,028  
                 
Commitments and Contingencies (Note 10)
               
                 
Equity (Deficit)
               
Common stock, $2.50 par value
    978       978  
Additional paid in capital
    1,106       1,108  
Retained earnings
    3,015       4,071  
Accumulated other comprehensive loss
    (2,572 )     (2,666 )
 
    2,527       3,491  
Less: Treasury stock, at cost
    (5,760 )     (5,843 )
Total Eastman Kodak Company shareholders’ deficit
    (3,233 )     (2,352 )
Noncontrolling interests
    2       2  
  Total deficit
    (3,231 )     (2,350 )
 TOTAL LIABILITIES AND DEFICIT
  $ 4,403     $ 4,678  
                 

The accompanying notes are an integral part of these consolidated financial statements.

 
5

 

EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 
   
Nine Months Ended
 
   
September 30,
 
(in millions)
 
2012
   
2011
 
             
Cash flows from operating activities:
       
Net loss
  $ (977 )   $ (647 )
Adjustments to reconcile to net cash used in operating activities:
 
Loss from discontinued operations, net of income taxes
    74       57  
Depreciation and amortization
    183       223  
Gain on sales of businesses/assets
    (10 )     (72 )
Loss on early extinguishment of debt
    7       -  
Non-cash restructuring costs, asset impairments and other charges
    32       15  
Non-cash and financing related reorganization items, net
    213       -  
Provision for deferred income taxes
    66       112  
Decrease in receivables
    192       113  
Increase in inventories
    (69 )     (80 )
Increase (decrease) in liabilities excluding borrowings
    41       (623 )
Other items, net
    (43 )     (15 )
Total adjustments
    686       (270 )
Net cash used in continuing operations
    (291 )     (917 )
Net cash provided by (used in) discontinued operations
    30       (121 )
Net cash used in operating activities
    (261 )     (1,038 )
Cash flows from investing activities:
               
Additions to properties
    (51 )     (88 )
Proceeds from sales of businesses/assets
    35       94  
Business acquisitions, net of cash acquired
    -       (27 )
Funding of restricted cash and investment accounts
    -       (22 )
Marketable securities - sales
    78       58  
Marketable securities - purchases
    (72 )     (55 )
     Net cash used in continuing operations
    (10 )     (40 )
     Net cash provided by discontinued operations
    27       -  
Net cash provided by (used in) investing activities
    17       (40 )
Cash flows from financing activities:
               
Proceeds from DIP credit agreement
    686       -  
Proceeds from other borrowings
    -       407  
Repayment of borrowings
    (175 )     (100 )
Reorganization items
    (40 )     -  
Debt issuance costs
    -       (6 )
Proceeds from sale and leaseback transaction
    41       -  
Net cash provided by financing activities
    512       301  
Effect of exchange rate changes on cash
    3       15  
Net increase (decrease) in cash and cash equivalents
    271       (762 )
Cash and cash equivalents, beginning of period
    861       1,624  
Cash and cash equivalents, end of period
  $ 1,132     $ 862  
                 

The accompanying notes are an integral part of these consolidated financial statements.

 
6

 

EASTMAN KODAK COMPANY
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (Unaudited)

NOTE 1:  BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

BASIS OF PRESENTATION

The consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted in accordance with Rule 10-01 of Regulation S-X.  In the opinion of management, the accompanying unaudited consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position and cash flows of Eastman Kodak Company, its wholly-owned subsidiaries, and its majority owned subsidiaries (collectively, the Company).  The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year.  These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

On January 19, 2012 (the “Petition Date”), Eastman Kodak Company and its U.S. subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Filing”) under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) case number 12-10202. The Company’s foreign subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Bankruptcy Filing. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Non-Filing Entities will continue to operate in the ordinary course of business.

The Company incurred a net loss for the years ended 2011, 2010 and, 2009, as well as the nine months ended September 30, 2012, and had a shareholders’ deficit as of September 30, 2012, December 31, 2011 and December 31, 2010.  To improve the Company’s performance and address competitive challenges, the Company is developing a strategic plan for the ongoing operation of the Company’s business.  Successful implementation of the Company’s plan, however, is subject to numerous risks and uncertainties.  In addition, the competitive industry conditions under which the Company operates have negatively impacted the Company’s financial position, results of operations and cash flows and may continue to do so in the future. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company’s ability to continue as a going concern is contingent upon the Company’s ability to comply with the financial and other covenants contained in its Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), the Bankruptcy Court’s approval of the Company’s reorganization plan and the Company’s ability to successfully implement the Company’s plan and obtain exit financing, among other factors.  As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under chapter 11, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Agreement), for amounts other than those reflected in the accompanying consolidated financial statements. Further, the reorganization plan could materially change the amounts and classifications of assets and liabilities reported in the consolidated financial statements.  The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Bankruptcy Filing.  Refer to Note 2, “Chapter 11 Filing” for additional information.

Certain amounts for prior periods have been reclassified to conform to the current period classification due to changes in the Company’s segment reporting structure and the presentation of discontinued operations.  Refer to Note 17, “Segment Information” and Note 19, “Discontinued Operations” for additional information.

 
7

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
 
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, “Intangibles-Goodwill and Other (Accounting Standards Codification (ASC) Topic 350) – Testing Goodwill for Impairment.”  ASU No. 2011-08 amends the impairment test for goodwill by allowing companies to first assess qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether it is necessary to perform the current two-step goodwill impairment test.  The changes to the ASC as a result of this update were effective prospectively for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for the Company).  The adoption of this guidance did not impact the Company’s Consolidated Financial Statements.
 
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220) - Presentation of Comprehensive Income.”  ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Subsequently, the FASB issued ASU No. 2011-12, “Comprehensive Income (ASC Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  ASU 2011-12 defers indefinitely the provision within ASU 2011-05 requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the income statement and the statement in which other comprehensive income is presented.  ASU 2011-12 does not change the other provisions instituted within ASU 2011-05.   The amendments of both ASUs were effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011 (January 1, 2012 for the Company).  The adoption of this guidance required changes in presentation only and did not have an impact on the Company's Consolidated Financial Statements.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (ASC Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU No. 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization.  The changes to the ASC as a result of this update were effective prospectively for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for the Company).  The adoption of this guidance did not have a significant impact on the Company’s Consolidated Financial Statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2012, the FASB issued ASU No. 2012-02, “Intangibles-Goodwill and Other (ASC Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment.”  ASU No. 2012-02 amends the impairment test for indefinite-lived intangible assets by allowing companies to first assess the qualitative factors to determine if it is more likely than not that an indefinite-lived intangible asset might be impaired as a basis for determining whether it is necessary to perform the quantitative impairment test.  The changes to the ASC as a result of this update are effective prospectively for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (January 1, 2013 for the Company).  The Company does not expect that the adoption of this guidance will have a material impact on its Consolidated Financial Statements.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (ASC Topic 210):  Disclosures about Offsetting Assets and Liabilities.”  ASU No. 2011-11 creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments.  The changes to the ASC as a result of this update are effective for periods beginning on or after January 1, 2013 (January 1, 2013 for the Company) and must be shown retrospectively for all comparative periods presented.  This guidance requires new disclosures only, and will have no impact on the Company’s Consolidated Financial Statements.

In December 2011, the FASB issued ASU No. 2011-10, “Derecognition of in Substance Real Estate – a Scope Clarification,” which amends ASC Topic 360, “Property, Plant and Equipment.”  ASU No. 2011-10 states that when an investor ceases to have a controlling financial interest in an entity that is in-substance real estate as a result of a default on the entity’s nonrecourse debt, the investor should apply the guidance under ASC Subtopic 360-20, Property, Plant and Equipment – Real Estate Sales to determine whether to derecognize the entity’s assets (including real estate) and liabilities (including the nonrecourse debt).  The changes to the ASC as a result of this update are effective prospectively for deconsolidation events occurring during fiscal years, and interim periods within those years, beginning on or after June 15, 2012 (January 1, 2013 for the Company).  Adoption of this guidance will not impact the Company’s Consolidated Financial Statements.

 
8

 

NOTE 2:  CHAPTER 11 FILING

The Bankruptcy Filing is intended to permit the Company to reorganize and increase liquidity in the U.S. and abroad, monetize non-strategic intellectual property and businesses, fairly resolve legacy liabilities, and focus on the most valuable business lines to enable sustainable profitability.  The Company’s goal is to develop and implement a reorganization plan that meets the standards for confirmation under the Bankruptcy Code.  Confirmation of a reorganization plan could materially alter the classifications and amounts reported in the Company’s consolidated financial statements, which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of a confirmation of a reorganization plan or other arrangement or the effect of any operational changes that may be implemented.

Operation and Implication of the Bankruptcy Filing

Under Section 362 of the Bankruptcy Code, the filing of voluntary bankruptcy petitions by the Debtors automatically stayed most actions against the Debtors, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company’s property.  Accordingly, although the Bankruptcy Filing triggered defaults for certain of the Debtors’ debt obligations, creditors are stayed from taking any actions as a result of such defaults.  Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under a reorganization plan.  As a result of the Bankruptcy Filing the realization of assets and the satisfaction of liabilities are subject to uncertainty.  The Debtors, operating as debtors-in-possession under the Bankruptcy Code, may, subject to approval of the Bankruptcy Court, sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements.  Further, a confirmed reorganization plan or other arrangement may materially change the amounts and classifications in the Company’s consolidated financial statements.

The Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions.  In general, rejection of an executory contract or unexpired lease is treated as a pre-petition breach of the executory contract or unexpired lease in question and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counter-party or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach.  Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure any existing defaults under such executory contract or unexpired lease.

Subsequent to the Petition Date, the Company received approval from the Bankruptcy Court to pay or otherwise honor certain pre-petition obligations generally designed to stabilize the Company’s operations.  These obligations related to certain employee wages, salaries and benefits, and the payment of vendors and other providers in the ordinary course for goods and services received after the Petition Date.  The Company has retained, pursuant to Bankruptcy Court approval, legal and financial professionals to advise the Company in connection with the Bankruptcy Filing and certain other professionals to provide services and advice in the ordinary course of business.  From time to time, the Company may seek Bankruptcy Court approval to retain additional professionals.

The U.S. Trustee for the Southern District of New York (the “U.S. Trustee”) has appointed an official committee of unsecured creditors (the “UCC”).  The UCC and its legal representatives have a right to be heard on all matters affecting the Debtors that come before the Bankruptcy Court.  There can be no assurance that the UCC will support the Company’s positions on matters to be presented to the Bankruptcy Court in the future or on any reorganization plan, once proposed.

On May 3, 2012, the U.S. Trustee appointed an official committee of retired employees of the Debtor entities.

Reorganization Plan

In order for the Company to emerge successfully from chapter 11, the Company must obtain the Bankruptcy Court’s approval of a reorganization plan, which will enable the Company to transition from chapter 11 into ordinary course operations outside of bankruptcy.  In connection with a reorganization plan, the Company also may require a new credit facility, or “exit financing.”  The Company’s ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters related to the Bankruptcy Filing.  A reorganization plan determines the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which the reorganization plan is confirmed.
 
Although the Company’s goal is to file a plan of reorganization, the Company may determine that it is in the best interests of the Debtors’ estates to seek Bankruptcy Court approval of a sale of all or a portion of the Company’s assets pursuant to Section 363 of the Bankruptcy Code or seek confirmation of a reorganization plan providing for such a sale or other arrangement.

 
9

 

On May 2, 2012, the Bankruptcy Court approved the Company’s motion to extend the period of time that the court gives the Company the exclusive right to file a plan of reorganization through and including October 15, 2012.  The extension concerns only the length of time in which the Company has the sole right to file a plan of reorganization, not the duration of the case.  On September 28, 2012, the Company filed a motion to further extend the period of exclusivity through and including February 28, 2013.  A hearing on this motion is scheduled for November 14, 2012.  The DIP Credit Agreement stipulates that a draft of an acceptable reorganization plan is to be provided to the DIP agent on or prior to January 15, 2013 and further requires the filing of an acceptable reorganization plan and disclosure statement with the court on or prior to February 15, 2013. The Company presently expects that any proposed reorganization plan will provide, among other things, settlement of the obligations under the DIP Credit agreement, mechanisms for settlement of claims against the Debtors’ estates, treatment of the Company’s existing equity and debt holders, and certain corporate governance and administrative matters pertaining to the reorganized Company.  Any proposed reorganization plan will be subject to revision prior to submission to the Bankruptcy Court based upon discussions with the Company’s creditors and other interested parties, and thereafter in response to creditor claims and objections and the requirements of the Bankruptcy Code or the Bankruptcy Court.  There can be no assurance that the Company will be able to secure approval for the Company’s proposed reorganization plan from the Bankruptcy Court or that the Company’s proposed plan will be accepted by the lenders under the DIP Credit Agreement.  In the event the Company does not secure approval of the reorganization plan, the outstanding DIP Credit Agreement principal and interest could become immediately due and payable.

Pre-Petition Claims

On April 18, 2012, as amended on May 16, 2012, the Debtors filed schedules of assets and liabilities and statements of financial affairs with the Bankruptcy Court.  On May 10, 2012, the Bankruptcy Court entered an order establishing July 17, 2012 as the bar date for potential creditors to file proofs of claims and established the required procedures with respect to filing such claims.  A bar date is the date by which pre-petition claims against the Debtors must be filed if the claimants wish to receive any distribution in the chapter 11 proceedings.

As of September 30, 2012 the Debtors have received approximately 6,000 proofs of claim, a portion of which assert, in part or in whole, unliquidated claims.  In the aggregate, total liquidated proofs of claim of approximately $20.5 billion have been filed against the Debtors.  New and amended claims may be filed in the future, including claims amended to assign values to claims originally filed with no designated value.  The Company is now in the process of reconciling such claims to the amounts listed by the Debtors in their schedule of assets and liabilities (as amended). Differences in liability amounts estimated by the Company and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate.  The Company may ask the Bankruptcy Court to disallow claims that the Company believes are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons.  In addition, as a result of this process, the Company may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise.  In light of the substantial number of claims filed, the claims resolution process may take considerable time to complete. The resolution of such claims could result in material adjustments to the Company’s financial statements. The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Court approves a plan of reorganization.  Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.

Financial Reporting in Reorganization

Expenses, gains and losses directly associated with reorganization proceedings are reported as Reorganization items, net in the accompanying Consolidated Statement of Operations.  In addition, liabilities subject to compromise in the chapter 11 proceedings are distinguished from liabilities of Non-Filing Entities, fully secured liabilities not expected to be compromised and from post-petition liabilities in the accompanying Consolidated Statement of Financial Position as of September 30, 2012.  Where there is uncertainty about whether a secured claim will be paid or impaired under the chapter 11 proceedings, the Company has classified the entire amount of the claim as a liability subject to compromise.  The amount of liabilities subject to compromise represents the Company’s estimate, where an estimate is determinable, of known or potential pre-petition claims to be addressed in connection with the bankruptcy proceedings.  Such liabilities are reported at the Company’s current estimate, where an estimate is determinable, of the allowed claim amount, even though they may settle for lesser amounts.  These claims remain subject to future adjustments, which may result from: negotiations; actions of the Bankruptcy Court; disputed claims; rejection of contracts and unexpired leases; the determination as to the value of any collateral securing claims; proofs of claims; or other events.

 
10

 

Effective as of January 19, 2012, the Company ceased recording interest expense on outstanding pre-petition debt classified as liabilities subject to compromise.  Contractual interest expense represents amounts due under the contractual terms of outstanding debt, including debt subject to compromise.  For the period from January 19, 2012 through September 30, 2012 contractual interest expense related to liabilities subject to compromise of approximately $34 million has not been recorded, as it is not expected to be an allowed claim under the chapter 11 case.

Section 363 Asset Sales

On March 1, 2012, the Company entered into an agreement with Shutterfly, Inc. related to the proposed sale of certain assets of Kodak Gallery on-line photo services business for $23.8 million (the “Stalking Horse Purchase Agreement”).  On May 1, 2012, the Bankruptcy Court approved the Stalking Horse Purchase Agreement. The Company received cash proceeds of approximately $19 million on the closing date, May 2, 2012.  The remaining proceeds were received on September 28, 2012 upon the successful transfer of the assets to Shutterfly, Inc.  Approximately 75% of the net proceeds from the sale were used to repay term debt under the DIP Credit Agreement.

On June 11, 2012, the Debtors filed a motion with the Bankruptcy Court seeking approval of bidding procedures to auction their Digital Capture and Kodak Imaging Systems and Services patent portfolios.  On July 2, 2012, the Bankruptcy Court approved the motion.  On September 14, 2012, the Debtors announced that they continue to have active negotiations with regard to the potential sale of their digital imaging patent portfolios.  Also on September 14, 2012, the Debtors filed with the Bankruptcy Court a notice to adjourn the sale hearing until further notice.  As of September 30, 2012, the Debtors have not reached a determination or agreement to sell the digital imaging patent portfolios and may, in consultation with their creditors, decide to retain and license these assets as a source of recovery for the Debtors’ creditors.

On August 23, 2012, the Company announced the decision to initiate sale processes for its Personalized Imaging and Document Imaging businesses. The Personalized Imaging business consists of Retail Systems Solutions, Paper & Output Systems, and Event Imaging Solutions.  The Document Imaging business consists of scanners, as well as capture software, and services for enterprise customers.  As of September 30, 2012, these businesses did not qualify for discontinued operations treatment as Bankruptcy Court approval is required for any potential sale.
 
Other Postemployment Benefits
 
On October 10, 2012, the Debtors filed a motion with the Bankruptcy Court seeking approval of a settlement agreement with the Official Committee of Retired Employees appointed by the U.S. Trustee under the chapter 11 proceedings (the "Retiree Committee").  The Retiree Committee was appointed to negotiate with the Debtors on behalf of retirees, long-term disability recipients, and their spouses, dependents or survivors, concerning the future of retiree medical, dental, life insurance and survivor income benefits.  The proposed settlement agreement provides, among other things, that the Debtors will no longer provide retiree medical, dental, life insurance and survivor income benefits to current and future retirees after December 31, 2012 (other than, at the retirees’ own cost, COBRA continuation coverage of medical and/or dental benefits available to active employees or conversion coverage as required by the plans or applicable law), and the Retiree Committee will set up a trust or account from which some limited benefits for some retirees may be provided after December 31, 2012.  The trust or account will be funded by the following contributions from the Debtors:  $7.5 million in cash, an administrative claim against the Debtors in the amount of $15 million, and a general unsecured claim against the Debtors in the amount of $635 million.  As part of the settlement, all other claims arising from or based on the termination or modification of retiree medical, dental, life insurance and survivor income benefits will be deemed settled and disallowed.  A Bankruptcy Court hearing on the Debtors' motion has been scheduled for November 1, 2012.
 
The unfunded position of the U.S. postretirement benefit plans of approximately $1.2 billion (calculated in accordance with U.S. GAAP) included in Liabilities subject to compromise presented in the Consolidated Statement of Financial Position as of September 30, 2012.
 
Retirees’ pension arrangements are not impacted by the proposed agreement with the Retiree Committee.

 
11

 

Eastman Kodak Company Guarantee

Eastman Kodak Company (“EKC”) has previously issued (pre-petition) a guarantee to Kodak Limited (“Subsidiary”) and the Trustee (“Trustee”) of the Kodak Pension Plan (“Plan”) in the United Kingdom.  Under that arrangement, EKC guaranteed to the Subsidiary and the Trustee the ability of the Subsidiary, only to the extent it becomes necessary to do so, to (1) make contributions to the Plan to ensure sufficient assets exist to make plan benefit payments, as they become due, if the Plan otherwise would not have sufficient assets and (2) make contributions to the Plan such that it will achieve fully funded status by the funding valuation for the period ending December 31, 2022.

The Subsidiary agreed to make certain contributions to the Plan as determined by a funding plan agreed to by the Trustee.  Under the terms of this agreement, the Subsidiary is obligated to pay a minimum amount of $50 million to the Plan in each of the years 2011 through 2014, and a minimum amount of $90 million to the Plan in each of the years 2015 through 2022.  Future funding beyond 2022 would be required if the Plan is still not fully funded as determined by the funding valuation for the period ending December 31, 2022.  Under the terms of this agreement, these payment amounts for the years 2015 through 2022 could be lower, and the payment amounts for all years noted could be higher by up to $5 million, based on the exchange rate between the U.S. dollar and British pound.  These minimum amounts do not include potential contributions related to tax benefits received by the Subsidiary.

The underfunded position of the Plan of approximately $1.1 billion (calculated in accordance with U.S. GAAP) is included in Pension and other postretirement liabilities presented in the Consolidated Statement of Financial Position as of September 30, 2012.  The underfunded obligation relates to a non-debtor entity.  The Trustee has asserted an unsecured claim of approximately $2.8 billion under the guarantee.  Kodak Limited has also asserted an unsecured claim under the guarantee for an unliquidated amount.  The ultimate treatment of the Trustee’s and Kodak Limited’s claims is not determinable at this time.

EKC has proposed that the Subsidiary’s 2012 contribution be considered part of the overall resolution of the claims of the Trustee and Kodak Limited.
 
NOTE 3: LIABILITIES SUBJECT TO COMPROMISE

The following table reflects pre-petition liabilities that are subject to compromise.

   
As of
 
(in millions)
 
September 30,
 
   
2012
 
Accounts payable
  $ 286  
Debt
    683  
Pension and postretirement obligations
    1,722  
Other liabilities subject to compromise
    256  
Liabilities subject to compromise
  $ 2,947  

The Bankruptcy Filing constituted an event of default with respect to certain of the Company’s debt instruments. Refer to Note 8, “Short-Term Borrowings and Long-Term Debt” for additional information.  Other liabilities subject to compromise include accrued liabilities for customer programs, deferred compensation, environmental, taxes, and contract and lease rejections. The amount of liabilities subject to compromise represents the Company’s estimate, where an estimate is determinable, of known or potential pre-petition claims to be addressed in connection with the bankruptcy proceedings.  Such liabilities are reported at the Company’s current estimate, where an estimate is determinable, of the allowed claim amount, even though they may settle for lesser amounts.  These claims remain subject to future adjustments, which may result from: negotiations; actions of the Bankruptcy Court; disputed claims; rejection of contracts and unexpired leases; the determination as to the value of any collateral securing claims; proofs of claims; or other events.  Refer to Note 2, "Chapter 11 Filing" for additional information.

 
12

 

NOTE 4:  REORGANIZATION ITEMS, NET

A summary of reorganization items, net for the three and nine months ended September 30, 2012 is presented in the following table:
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions)
 
2012
   
2012
 
             
Professional fees
  $ 37     $ 125  
DIP credit agreement financing costs
    -       45  
Provision for expected allowed claims
    19       138  
Other items, net
    -       (4 )
Reorganization items, net
  $ 56     $ 304  
                 

For the three and nine months ended September 30, 2012, the Company paid approximately $48 million and $131 million, respectively, for reorganization items.

NOTE 5:  RECEIVABLES, NET

   
As of
 
   
September 30,
   
December 31,
 
 (in millions)                                                        
 
2012
   
2011
 
             
Trade receivables
  $ 699     $ 996  
Miscellaneous receivables
    114       107  
Total (net of allowances of $53 and $51 as of
    September 30, 2012 and December 31, 2011,
    respectively)
  $ 813     $ 1,103  
 
               

Approximately $112 million and $191 million of the total trade receivable amounts as of September 30, 2012 and December 31, 2011, respectively, will potentially be settled through customer deductions in lieu of cash payments.  Such deductions represent rebates owed to customers and are included in Other current liabilities as of December 31, 2011 and Other current liabilities and Liabilities subject to compromise as of September 30, 2012 in the accompanying Consolidated Statement of Financial Position.

 
13

 

NOTE 6:  INVENTORIES, NET
 
   
As of
 
(in millions)
 
September 30,
   
December 31,
 
   
2012
   
2011
 
 
           
Finished goods
  $ 381     $ 379  
Work in process
    146       123  
Raw materials
    111       105  
                 
           Total
  $ 638     $ 607  
                 
 
NOTE 7:  GOODWILL

The carrying value of goodwill by reportable segments is as follows:

(in millions)
 
Graphics,
                   
   
Entertainment and
   
Digital Printing
   
Personalized and
       
   
Commercial Films
   
and Enterprise
   
Document Imaging
   
Consolidated
 
   
Segment
   
Segment
   
Segment
   
Total
 
                         
                         
Balance as of December 31, 2011:
  $ 1     $ 17     $ 259     $ 277  
Currency translation adjustments
    -       -       2       2  
Balance as of September 30, 2012:
  $ 1     $ 17     $ 261     $ 279  
                                 

Gross goodwill and accumulated impairment losses are $1.688 billion and $1.411 billion, respectively, as of December 31, 2011 and $1.690 billion and $1.411 billion, respectively, as of September 30, 2012.

As of December 31, 2011, the net goodwill balance of $277 million, under the prior year segment reporting structure, was comprised of $197 million for the Consumer Digital Imaging Group and $80 million for the Graphic Communications Group.

The Company tests goodwill for impairment annually on September 30, or whenever events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  The Company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component).  A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component.  When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit.  An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.
 
As a result of the change in segments that became effective as of September 30, 2012, the Company’s reporting units changed.  The Personalized and Document Imaging segment has three reporting units: Personalized Imaging, Document Imaging and Intellectual Property. The Graphics, Entertainment and Commercial Films segment has two reporting units: Graphics and Entertainment Imaging and Commercial Films.  The Digital Printing and Enterprise Segment has four reporting units: Digital Printing, Packaging and Functional Printing, Enterprise Services and Solutions, and Consumer Inkjet Systems.

Prior to the September 30, 2012 change in reporting units, the only reporting units with goodwill remaining were the Consumer Digital Imaging Group (“CDG”) and the Business Services and Solutions Group (“BSSG”). Consumer Inkjet Systems which was part of the CDG reporting unit was transferred to the Digital Printing and Enterprise segment.  Personalized Imaging and Intellectual Property, which were part of the CDG reporting unit, are now included in the Personalized and Document Imaging Segment.  Document Imaging, which was part of the BSSG reporting unit, was transferred to the Personalized and Document Imaging segment.  Workflow software which was part of BSSG was transferred to the Graphics, Entertainment and Commercial Films segment.  Enterprise Services and Solutions which was part of BSSG is included in the Digital Printing and Enterprise Segment.  Goodwill was reassigned to affected reporting units using a relative fair value allocation.

Based upon the results of the Company’s September 30, 2012 analysis, no impairment of goodwill was indicated.

 
14

 

NOTE 8:  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Debt and related maturities and interest rates were as follows at September 30, 2012 and December 31, 2011:

                 
As of
 
(in millions)
               
September 30, 2012
   
December 31, 2011
 
                           
           
Weighted-Average
             
           
Effective
             
           
Interest
   
Carrying
   
Carrying
 
Country
Type
 
Maturity
   
Rate
   
Value
   
Value
 
                           
Current portion:
                         
U.S.
Revolver
 
2013
      4.75 %   $ -     $ 100  
Germany
Term note
    2012-2013       6.16 %     38       40  
Brazil
Term note
    2012-2013       19.80 %     2       2  
                        40       142  
Non-current portion:
                                 
U.S.
DIP Credit Agreement
    2013       8.66 %     661       -  
Germany
Term note
    2013       6.16 %     -       35  
Brazil
Term note
    2013       19.80 %     -       3  
U.S.
Secured term note
    2018       10.11 %     492       491  
U.S
Secured term note
    2019       10.87 %     247       247  
                        1,400       776  
Liabilities subject to compromise:
                               
U.S.
Term note
    2013       6.16 %     20       19  
U.S.
Term note
    2013       7.25 %     250       250  
U.S.
Convertible
    2017       12.75 %     400       315  
U.S.
Term note
    2018       9.95 %     3       3  
U.S.
Term note
    2021       9.20 %     10       10  
                        683       597  
                      $ 2,123     $ 1,515  
 

 
15

 

The carrying value of the 2017 Convertible Senior Notes was increased during the quarter ended June 30, 2012 to reflect the stated principal amount of the notes.  When the notes were initially issued, $107 million of the principal amount of the debt was allocated to reflect the equity component of the notes.  The remaining carrying value of the debt was originally being accreted to the $400 million stated principal amount using the effective interest method.  The increase, in the second quarter of 2012, in the carrying value of the debt resulted in a $90 million provision for expected allowed claims reflected in Reorganization items, net in the accompanying Consolidated Statement of Operations.

No portion of the carrying value of the Company’s debt was considered Liabilities subject to compromise in the Statement of Financial Position as of December 31, 2011, as the Company filed for chapter 11 bankruptcy protection on January 19, 2012.  The amounts shown as Liabilities subject to compromise as of December 31, 2011 in the table above were classified as long-term debt as of December 31, 2011 and are reflected as liabilities subject to compromise above only for presentation purposes.

Annual maturities of debt outstanding at September 30, 2012, excluding debt classified as liabilities subject to compromise, were as follows:
 
   
Carrying
   
Maturity
 
(in millions)
 
Value
   
Value
 
             
2013
  $ 701     $ 709  
2014
    -       -  
2015
    -       -  
2016
    -       -  
 2017 and thereafter
    739       750  
Total
  $ 1,440     $ 1,459  
                 

Debtor-in-Possession Credit Agreement
 
In connection with the Bankruptcy Filing, on January 20, 2012, the Company and Kodak Canada Inc. (the “Canadian Borrower” and, together with the Company, the “Borrowers”) entered into a Debtor-in-Possession Credit Agreement, as amended on January 25, 2012 (the “DIP Credit Agreement”), with certain subsidiaries of the Company and the Canadian Borrower signatory thereto (“Subsidiary Guarantors”), the lenders signatory thereto (the “Lenders”), Citigroup Global Markets Inc., as sole lead arranger and bookrunner, and Citicorp North America, Inc., as syndication agent, administration agent and co-collateral agent (the “Agent”).  Pursuant to the terms of the DIP Credit Agreement, the Lenders agreed to lend in an aggregate principal amount of up to $950 million, consisting of an up to $250 million super-priority senior secured asset-based revolving credit facility and an up to $700 million super-priority senior secured term loan facility (collectively, the “Loans”).  A portion of the revolving credit facility will be available to the Canadian Borrower and may be borrowed in Canadian Dollars.  The DIP Credit Agreement was approved on February 15, 2012 by the Bankruptcy Court.  The DIP Credit Agreement terminates and all outstanding obligations must be repaid on the earliest to occur of (i) July 20, 2013, (ii) the date of the substantial consummation of certain reorganization plans, or (iii) certain other events, including Events of Default and repayment in full of the obligations pursuant to a mandatory prepayment.
 
The Company and each existing and future direct or indirect U.S. subsidiary of the Company (other than indirect U.S. subsidiaries held through foreign subsidiaries and certain immaterial subsidiaries (if any)) (the “U.S. Guarantors”) have agreed to provide unconditional guarantees of the obligations of the Borrowers under the DIP Credit Agreement.  In addition, the U.S. Guarantors, the Canadian Borrower and each existing and future direct and indirect Canadian subsidiary of the Canadian Borrower (other than certain immaterial subsidiaries (if any)) (the “Canadian Guarantors” and, together with the U.S. Guarantors, the “Guarantors”) have agreed to provide unconditional guarantees of the obligations of the Canadian Borrower under the DIP Credit Agreement.  

 
16

 
 
Under the terms of the DIP Credit Agreement, the Company will have the option to have interest on the loans provided thereunder accrue at a base rate or the then applicable LIBOR Rate (subject to certain adjustments and, in the case of the term loan facility, a floor of 1.00%), plus a margin, (x) in the case of the revolving loan facility, of 2.25% for a base rate revolving loan or 3.25% for a LIBOR rate revolving loan, and (y) in the case of the term loan facility, of 6.50% for a base rate loan and 7.50% for a LIBOR Rate loan.  The obligations of the Borrowers and the Guarantors under the DIP Credit Agreement are secured by a first-priority security interest in and lien upon all of the existing and after-acquired personal property of the Company and the U.S. Guarantors, including pledges of all stock or other equity interest in direct subsidiaries owned by the Company or the U.S. Guarantors (but only up to 65% of the voting stock of each direct foreign subsidiary owned by the Company or any U.S. Guarantor in the case of pledges securing the Company’s and the U.S. Guarantors’ obligations under the DIP Credit Agreement).  Assets of the type described in the preceding sentence of the Canadian Borrower or any Canadian subsidiary of the Canadian Borrower are similarly pledged to secure the obligations of the Canadian Borrower and Canadian Guarantor under the DIP Credit Agreement.  The security and pledges are subject to certain exceptions.
 
The DIP Credit Agreement limits, among other things, the Borrowers’ and the Subsidiary Guarantors’ ability to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) prepay subordinated indebtedness and make other restricted payments, (v) enter into sale and leaseback transactions and (vi) modify the terms of any organizational documents and certain material contracts of the Borrowers and the Subsidiary Guarantors.  In addition to standard obligations, the DIP Credit Agreement provides for specific milestones that the Company must achieve by specific target dates.  In addition, the Company and its subsidiaries are required to maintain consolidated Adjusted EBITDA (as defined in the DIP Credit Agreement) of not less than a specified level for certain periods, with the specified levels ranging from $(130) million to $175 million depending on the applicable period.  The Company and its subsidiaries must also maintain minimum U.S. Liquidity (as defined in the DIP Credit Agreement) ranging from $100 million to $250 million depending on the applicable period.  The Company was required to maintain U.S. Liquidity of $125 million, $250 million, and $150 million for the periods from January 20, 2012 to February 15, 2012; February 16, 2012 to March 31, 2012; and April 1, 2012 to September 30, 2012, respectively.  From October 1, 2012 through the termination of the DIP Credit Agreement, the Company must maintain U.S. Liquidity of $100 million, subject to increase under certain circumstances as described in the DIP Credit Agreement.  The Company was in compliance with all covenants under the DIP credit agreement as of September 30, 2012.
 
The Company must prepay the DIP Credit Agreement with all net cash proceeds from sales of or casualty events relating to certain types of collateral consisting of accounts, inventory, equipment or machinery (as defined in the DIP Credit Agreement).  In addition, all net cash proceeds from any sale in respect of the Company’s digital imaging patent portfolio must be used to prepay the DIP Credit Agreement.  With respect to all other asset sales or casualty events, or intellectual property licensing or settlement agreements, 75% of the net cash proceeds must be used to prepay the DIP Credit Agreement and 25% may be retained by the Company (retained proceeds were $25 million as of September 30, 2012).  However, once the Company’s share of these retained proceeds totals $150 million, all remaining and future net proceeds must be used to prepay the DIP Credit Agreement.
 
The Borrowers drew $700 million in term loans under the DIP Credit Agreement during the first quarter of 2012 and have issued approximately $114 million of letters of credit under the revolving credit facilities as of September 30, 2012.  Under the DIP Credit Agreement borrowing base calculation the Borrowers had approximately $70 million available under the revolving credit facility as of September 30, 2012.   Availability under the DIP Credit Agreement is subject to borrowing base availability, reserves and other limitations.

Second Amended and Restated Credit Agreement

On April 26, 2011, the Company and its subsidiary, Kodak Canada, Inc., together with the Company’s U.S. subsidiaries as guarantors entered into a Second Amended and Restated Credit Agreement (“Second Amended Credit Agreement”), with the named lenders and Bank of America, N.A. as administrative agent, in order to amend and extend its Amended and Restated Credit Agreement dated as of March 31, 2009, as amended (“Amended Credit Agreement”).
 
On January 20, 2012, the Company repaid all obligations and terminated all commitments under the Second Amended and Restated Credit Agreement in connection with entering into and drawing funds from the DIP Credit Agreement.  The repayment resulted in a loss on early extinguishment of debt of $7 million.

 
17

 
 
Second Lien Note Holders Agreement

On February 14, 2012, the Company reached an adequate protection agreement with a group representing at least 50.1% of the Second Lien Note Holders (2019 Senior Secured Note Holders and 2018 Senior Secured Note Holders), which was reflected in the final DIP Credit Agreement order (the “Final DIP Order”).  The Company agreed, among other things, to provide all Second Lien Note Holders with a portion of the proceeds received from certain sales and settlements in respect of the Company’s digital imaging patent portfolio subject to the following waterfall and the Company’s right to retain a percentage of certain proceeds under the DIP Credit Agreement: first, to repay any outstanding obligations under the DIP Credit Agreement, including cash collateralizing letters of credit (unless certain parties otherwise agree); second, to pay 50% of accrued second lien interest at the non-default rate; third, the Company retains $250 million; fourth, to repay the remaining accrued and unpaid second lien interest at the non-default rate; fifth, any remaining proceeds after conditions one through four up to $2,250 million to be split 60% to the Company and 40% to repay outstanding second lien debt at par; and sixth, the Company agreed that any proceeds above $2,250 million will be split 50% to the Company and 50% to Second Lien Note Holders until second lien debt is fully paid.  The Company also agreed to pay current interest to Second Lien Note Holders upon the receipt of $250 million noted above.  Subject to the satisfaction of certain conditions, the Company also agreed to pay reasonable fees of certain advisors to the Second Lien Note Holders.

The Bankruptcy Filing constituted an event of default with respect to the Company’s Senior Secured Notes due 2019 and Senior Secured Notes due 2018.  The creditors are, however, stayed from taking any action as a result of the default under Section 362 of the Bankruptcy Code.  As a result of the adequate protection agreement reached with the Second Lien Note Holders and consideration of existing collateral, these debt obligations are considered fully secured and have not been reported as liabilities subject to compromise.

Debt Subject to Compromise

The Bankruptcy Filing constituted an event of default with respect to certain of the Company’s unsecured debt obligations.  As a result of the Bankruptcy Filing, the principal and interest due under these debt instruments shall be immediately due and payable.  However, the creditors are stayed from taking any action as a result of the default under Section 362 of the Bankruptcy Code.

NOTE 9:  INCOME TAXES

The Company’s income tax  provision (benefit) and effective tax rate were as follows:

(in millions)
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Loss from continuing operations before income taxes
  $ (284 )   $ (215 )   $ (987 )   $ (633 )
Effective tax rate
    (8.5 )%     0.5 %     8.5 %     6.8 %
Provision (benefit) for income taxes
  $ 24     $ (1 )   $ (84 )   $ (43 )
Benefit for income taxes @ 35%
  $ (99 )   $ (75 )   $ (345 )   $ (222 )
Difference between tax at effective vs. statutory rate
  $ 123     $ 74     $ 261     $ 179  

For the three months ended September 30, 2012, the difference between the Company’s recorded benefit and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a provision associated with legislative tax rate changes in a jurisdiction outside the U.S., and (3) tax accounting impacts related to items reported in Accumulated other comprehensive loss in the Consolidated Statement of Financial Position.

 
18

 
 
In March 2011, the Company filed a Request for Competent Authority Assistance with the United States Internal Revenue Service (IRS).  The request related to a potential double taxation issue with respect to certain patent licensing royalty payments received by the Company in 2009 and 2010.  In the nine months ended September 30, 2012, the Company received notification that the IRS had reached agreement with the Korean National Tax Service (NTS) with regards to the Company’s March 2011 request.  As a result of the agreement reached by the IRS and NTS, the Company was due a partial refund of Korean withholding taxes in the amount of $123 million.  The Company had previously agreed with the licensees that made the royalty payments that any refunds of the related Korean withholding taxes would be shared equally between the Company and the licensees.  The licensees’ share ($61 million) of the Korean withholding tax refund has therefore been reported as a licensing revenue reduction in Licensing & royalties in the Consolidated Statement of Operations.

For the nine months ended September 30, 2012, the difference between the Company’s recorded benefit and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a benefit as a result of the Company reaching a settlement of the competent authority claim noted above, (3) tax accounting impacts related to items reported in Accumulated other comprehensive loss in the Consolidated Statement of Financial Position, (4) provisions associated with the establishment of  deferred tax asset valuation allowances outside the U.S., (5) a provision associated with legislative tax rate changes in a jurisdiction outside the U.S., and (6) a provision associated with foreign withholding taxes on undistributed earnings.

During the nine months ended September 30, 2012, the Company determined that it is more likely than not that a portion of the deferred tax assets outside the U.S. would not be realized and accordingly, recorded a tax provision of $20 million associated with the establishment of a valuation allowances on those deferred tax assets.

For the three months ended September 30, 2011, the difference between the Company’s recorded benefit and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a provision associated with legislative tax rate changes in a jurisdiction outside the U.S., (3) a provision related to withholding taxes on undistributed earnings, and (4) a benefit as a result of the Company reaching a settlement with a taxing authority in a location outside the U.S.

During the third quarter of 2011, the Company concluded that the undistributed earnings of its foreign subsidiaries would no longer be considered permanently reinvested.  After assessing the assets of the subsidiaries relative to the specific opportunities for reinvestment, as well as the forecasted uses of cash for both its domestic and foreign operations, the Company concluded that it was prudent to change its indefinite reinvestment assertion to allow for greater flexibility in its cash management.

As a result of the change in its assertion the Company recorded an estimated deferred tax liability (net of related foreign tax credits) of $373 million on the foreign subsidiaries’ undistributed earnings.  This deferred tax liability was fully offset by a corresponding decrease in the Company’s U.S. valuation allowance, which resulted in no net impact on the tax provision.  The Company also recorded a provision of $35 million for the potential foreign withholding taxes on the undistributed earnings.

During the three months ended September 30, 2011, the Company agreed to terms with a tax authority outside the U.S. and settled audits for calendar years 2001 through 2002.  For these years, the Company originally recorded liabilities for uncertain tax positions (UTP) totaling $56 million (plus interest of approximately $43 million).  The settlement resulted in a net reduction in Accrued income and other taxes and the recognition of a $94 million tax benefit.

For the nine months ended September 30, 2011, the difference between the Company’s recorded benefit and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a provision associated with the establishment of a deferred tax asset valuation allowance outside the U.S., (3)  a provision associated with legislative tax rate changes in a jurisdiction outside the U.S., (4)  a provision related to withholding taxes on undistributed earnings, (5) a benefit associated with the release of a deferred tax asset valuation allowance in a certain jurisdiction outside the U.S., (6) a benefit as a result of the Company reaching a settlement with a taxing authority in a location outside the U.S., (7) tax accounting impacts related to items reported in Accumulated other comprehensive loss, and (8) changes in audit reserves and settlements.

 
19

 
 
During the nine months ended September 30, 2011, the Company agreed to terms with the U.S. Internal Revenue Service and settled federal audits for calendar years 2001 through 2005.  For these years, the Company originally recorded federal and related state liabilities for UTP totaling $115 million (plus interest of approximately $25 million).  The settlement resulted in a reduction in Accrued income and other taxes (including the UTP previously noted) of $296 million, the recognition of a $50 million tax benefit, and a reduction in net deferred tax assets of $246 million.  The Company will receive a net federal refund of approximately $2 million and estimates that it will pay $23 million  to satisfy state obligations as amended state returns are filed.

During the nine months ended September 30, 2011, the Company determined that it was more likely than not that a portion of the deferred tax assets outside the U.S. would not be realized and accordingly, recorded a tax provision of $22 million associated with the establishment of a valuation allowance on those deferred tax assets.

NOTE 10:  COMMITMENTS AND CONTINGENCIES

Environmental

The Company’s undiscounted accrued liabilities for future environmental investigation, remediation, and monitoring costs are composed of the following items:

   
As of
 
(in millions)
 
September 30,
   
December 31,
 
   
2012
   
2011
 
             
Eastman Business Park site, Rochester, NY
  $ 49     $ 49  
Other current operating sites
    8       9  
Sites associated with former operations
    17       19  
Sites associated with the non-imaging health businesses sold in 1994
    17       18  
           Total
  $ 91     $ 95  
                 

These amounts are reported in Other long-term liabilities as of December 31, 2011 and Other long-term liabilities and Liabilities subject to compromise as of September 30, 2012 in the accompanying Consolidated Statement of Financial Position.

Cash expenditures for the aforementioned investigation, remediation and monitoring activities are expected to be incurred over the next thirty years for most of the sites.  For these known environmental liabilities, the accrual reflects the Company’s best estimate of the amount it will incur under the agreed-upon or proposed work plans.  The Company’s cost estimates were determined using the ASTM Standard E 2137-06, "Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters," and have not been reduced by possible recoveries from third parties.  The overall method includes the use of a probabilistic model which forecasts a range of cost estimates and a single most probable cost estimate for the remediation required at individual sites.  For the purposes of establishing Company-level environmental reserves, the single most probable cost estimate for each site is used.  All projects are closely monitored and the models are reviewed as significant events occur or at least once per year.  The Company’s estimate includes investigations, equipment and operating costs for remediation and long-term monitoring of the sites.  Accrued liabilities of Debtor entities related to sites no longer owned by the Company have been classified as liabilities subject to compromise.

 
20

 

Liabilities subject to compromise are reported at the Company’s current estimate, where an estimate is determinable, of the allowed claim amount.

The Company is presently designated as a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (the Superfund Law), or under similar state laws, for environmental assessment and cleanup costs as the result of the Company’s alleged arrangements for disposal of hazardous substances at eight Superfund sites.  In connection with the chapter 11 filing, the Company has provided withdrawal notifications or entered into settlement negotiations with involved regulatory agencies.

Among these matters is a case in which the Company and Sterling Drug were named by the U.S. Environmental Protection Agency (EPA) as a PRP with potential liability for the study and remediation of the Lower Passaic River Study Area (LPRSA) portion of the Diamond Alkali Superfund Site, based on the Company’s ownership of Sterling Drug from 1988 to 1994 and retention of certain Sterling Drug liabilities and a defense and indemnification agreement between the Company and Bayer, which purchased all stock in Sterling Drug (now STWB).   The Company and Sterling Drug were also named as third-party defendants (along with approximately 300 other entities) in an action initially brought by the New Jersey Department of Environmental Protection (NJDEP) in the Supreme Court of New Jersey, Essex County seeking recovery of all costs associated with the investigation, removal, cleanup and damage to natural resources resulting from the disposal of various forms of chemicals in the Passaic River. The damages are alleged to potentially range "from hundreds of millions to several billions of dollars”.  The litigation against Kodak was stayed by the bankruptcy proceeding.  Bayer and STWB have filed proofs of claim against the Debtors in this matter.  Based on currently available information, the Company has been unable to reasonably estimate a range of loss pertaining to this matter at this time.

Estimates of the amount and timing of future costs of environmental remediation requirements are by their nature imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the PRPs.  Based on information presently available, the Company does not believe it is reasonably possible that losses for known exposures or allowed claims could exceed current accruals by material amounts, although costs could be material to a particular quarter or year, with the possible exception of matters related to the Passaic River which is described above.

Other Commitments and Contingencies

As of September 30, 2012, the Company had outstanding letters of credit of $114 million issued under the DIP Credit Agreement, as well as bank guarantees and letters of credit of $12 million, surety bonds in the amount of $27 million, and cash and investments in trust of $33 million, primarily to ensure the payment of possible casualty and workers’ compensation claims, environmental liabilities, legal contingencies, rental payments, and to support various customs, tax and trade activities.  The restricted cash and investment in trust amounts are recorded within Other long-term assets in the Consolidated Statement of Financial Position.

In March 2012, the Company sold a property in Mexico for approximately $41 million and leased back the property for a one-year term.  The pre-tax gain on the property sale of approximately $35 million was deferred and no gain was recognizable upon the closing of the sale as the Company has continuing involvement in the property for the remainder of the lease term.  The deferred pre-tax gain is reported in Other current liabilities in the Consolidated Statement of Financial Position as of September 30, 2012.

The Company’s Brazilian operations are involved in governmental assessments of indirect and other taxes in various stages of litigation, primarily related to federal and state value-added taxes.  The Company is disputing these matters and intends to vigorously defend its position.  Based on the opinion of legal counsel and current reserves already recorded for those matters deemed probable of loss, management does not believe that the ultimate resolution of these matters will materially impact the Company’s results of operations or financial position.  The Company routinely assesses all these matters as to the probability of ultimately incurring a liability in its Brazilian operations and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.  As of September 30, 2012, the unreserved portion of these contingencies, inclusive of any related interest and penalties, for which there was at least a reasonable possibility that a loss may be incurred, amounted to approximately $65 million.

 
21

 


The Company and its subsidiaries are involved in various lawsuits, claims, investigations and proceedings, including commercial, customs, employment, environmental, and health and safety matters, which are being handled and defended in the ordinary course of business.  The Company is also subject 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 the Company’s products.  These matters are in various stages of investigation and litigation, and are being vigorously defended. Much of the pending litigation against the Debtors has been stayed as a result of the chapter 11 filing and will be subject to resolution in accordance with the Bankruptcy Code and the orders of the Bankruptcy Court. Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition or results of operations, litigation is inherently unpredictable.  Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company 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 11:  GUARANTEES

The Company guarantees debt and other obligations of certain customers.  The debt and other obligations are primarily due to banks and leasing companies in connection with financing of customers’ purchases of equipment and product from the Company.  At September 30, 2012, the maximum potential amount of future payments (undiscounted) that the Company could be required to make under these customer-related guarantees was $22 million.  At September 30, 2012, the carrying amount of any liability related to these customer guarantees was not material.

The customer financing agreements and related guarantees, which mature on varying dates through 2016, typically have a term of 90 days for product and short-term equipment financing arrangements, and up to five years for long-term equipment financing arrangements.  These guarantees would require payment from the Company only in the event of default on payment by the respective debtor.  In some cases, particularly for guarantees related to equipment financing, the Company has collateral or recourse provisions to recover and sell the equipment to reduce any losses that might be incurred in connection with the guarantees.  However, any proceeds received from the liquidation of these assets would not cover the maximum potential loss under these guarantees.

The Company also guarantees potential indebtedness to banks and other third parties for some of its consolidated subsidiaries.  The maximum amount guaranteed is $101 million on a global basis, and the outstanding amount for those guarantees is $85 million with $38 million recorded within the Short-term borrowings and current portion of long-term debt, and Long-term debt, net of current portion in the accompanying Consolidated Statement of Financial Position.  These guarantees expire in 2012 through 2019.

Pursuant to the terms of the Company's DIP Credit Agreement, obligations of the Borrowers to the Lenders under the DIP Credit Agreement, as well as secured agreements in an amount not to exceed $75 million, are guaranteed by the Company and the Company’s U.S. subsidiaries and included in the above amounts.  Secured agreements under the DIP Credit Agreement for the Debtors totaled $20 million as of September 30, 2012.

Warranty Costs

The Company has warranty obligations in connection with the sale of its products and equipment.  The original warranty period is generally one year or less.  The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale.  The Company estimates its warranty cost at the point of sale for a given product based on historical failure rates and related costs to repair.

The change in the Company's accrued warranty obligations balance, which is reflected in Other current liabilities in the accompanying Consolidated Statement of Financial Position, was as follows:

(in millions)

Accrued warranty obligations as of December 31, 2011
  $ 46  
Actual warranty experience during 2012
    (58 )
2012 warranty provisions
    44  
Accrued warranty obligations as of September 30, 2012
  $ 32  

 
22

 
 
The Company also offers its customers extended warranty arrangements that are generally one year, but may range from three months to three years after the original warranty period.  The Company provides repair services and routine maintenance under these arrangements.  The Company has not separated the extended warranty revenues and costs from the routine maintenance service revenues and costs, as it is not practicable to do so.  Therefore, these revenues and costs have been aggregated in the discussion that follows.  Costs incurred under these arrangements for the nine months ended September 30, 2012 amounted to $208 million.  The change in the Company's deferred revenue balance in relation to these extended warranty and maintenance arrangements from December 31, 2011 to September 30, 2012, 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, 2011
  $ 120  
New extended warranty and maintenance arrangements in 2012
    296  
Recognition of extended warranty and maintenance arrangement revenue in 2012
    (297 )
Deferred revenue on extended warranties as of September 30, 2012
  $ 119  

NOTE 12:  RESTRUCTURING LIABILITIES

Charges for restructuring activities are recorded in the period in which the Company commits to a formalized restructuring plan, or executes the specific actions contemplated by the plan, and all criteria for liability recognition under the applicable accounting guidance have been met.  Restructuring actions taken in the first nine months of 2012 were initiated to reduce the Company’s cost structure as part of its commitment to drive sustainable profitability.  Year to date actions included the winding down of sales of consumer inkjet printers, the digital capture and devices business exit, traditional product manufacturing capacity reductions in the U.S. and Mexico, workforce reductions triggered by the Kodak Gallery wind-down, consolidation of thermal media manufacturing in the U.S. and various targeted reductions in research and development, sales, service, and other administrative functions.

 
23

 

Restructuring Reserve Activity

The activity in the accrued balances and the non-cash charges and credits incurred in relation to restructuring activities for the three and nine months ended September 30, 2012 were as follows:

               
Long-lived Asset
             
         
Exit
   
Impairments and
             
   
Severance
   
Costs
   
Inventory
   
Accelerated
       
(in millions)
 
Reserve
   
Reserve
   
Write-downs
   
Depreciation
   
Total
 
                               
Balance as of December 31, 2011
  $ 38     $ 22     $ -     $ -       60  
                                         
Q1 2012 charges - continuing operations
    78       2       -       1       81  
Q1 2012 charges - discontinued operations
    14       -       -       -       14  
Q1 utilization/cash payments
    (20 )     (3 )             (1 )     (24 )
Q1 2012 other adjustments & reclasses  (1)
    (55 )     (8 )     -       -       (63 )
Balance as of March 31, 2012
  $ 55     $ 13     $ -     $ -     $ 68  
                                         
Q2 2012 charges - continuing operations
  $ 8     $ 1     $ 1     $ 1     $ 11  
Q2 2012 charges - discontinued operations
    5       1       4       -       10  
Q2 2012 utilization/cash payments
    (24 )     (3 )     (5 )     (1 )     (33 )
Q2 2012 other adjustments & reclasses  (2)
    (4 )     7       -       -       3  
Balance as of June 30, 2012
  $ 40     $ 19     $ -     $ -     $ 59  
                                         
Q3 2012 charges - continuing operations
  $ 60     $ 37     $ 27     $ 2     $ 126  
Q3 2012 charges - discontinued operations
    1       1       -       -       2  
Q3 2012 utilization/cash payments
    (13 )     (2 )     (27 )     (2 )     (44 )
Q3 2012 other adjustments & reclasses  (3)
    (41 )     -       -       -       (41 )
Balance as of September 30, 2012
  $ 47     $ 55     $ -     $ -     $ 102  
                                         

(1)  
The $(63) million includes $(54) million for severance-related charges for special termination benefits, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position.  The remaining $(9) million reflects amounts reclassified as Liabilities subject to compromise.
 
(2)  
The $3 million includes $(2) million for severance-related charges for special termination benefits, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position, and $7 million of reserves reclassified from Liabilities subject to compromise.  The remaining $(2) million reflects foreign currency translation adjustments.

(3)  
The $(41) million includes $(42) million for severance-related charges for special termination benefits, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position.  The remaining $1 million reflects foreign currency translation adjustments.
 
 
 
24

 

For the three months ended September 30, 2012, the $128 million of charges include $2 million for accelerated depreciation and $7 million for inventory write-downs, which were reported in Cost of sales in the accompanying Consolidated Statement of Operations, and $2 million which was reported as discontinued operations.  The remaining costs incurred of $117 million were reported as Restructuring costs and other in the accompanying Consolidated Statement of Operations for the three months ended September 30, 2012.  The severance and exit costs reserves require the outlay of cash, while long-lived asset impairments, accelerated depreciation and inventory write-downs represent non-cash items.

The third quarter 2012 severance costs related to the elimination of approximately 775 positions, including approximately 225 manufacturing/service positions, 450 administrative positions, and 100 research and development positions.  The geographic composition of these positions includes approximately 650 in the United States and Canada, and 125 throughout the rest of the world.

The charges of $128 million recorded in the third quarter of 2012 included $74 million applicable to the Digital Printing and Enterprise Segment, $7 million applicable to the Graphics, Entertainment and Commercial Films Segment, $6 million applicable to the Personalized and Document Imaging Segment, and $39 million that was applicable to manufacturing, research and development, and administrative functions, which are shared across all segments.  The remaining $2 million was applicable to discontinued operations.

For the nine months ended September 30, 2012, the $244 million of charges include $4 million of charges for accelerated depreciation and $8 million of charges for inventory write-downs, which were reported in Cost of sales in the accompanying Consolidated Statement of Operations, and $26 million which was reported as discontinued operations.  The remaining costs incurred of $206 million were reported as Restructuring costs and other in the accompanying Consolidated Statement of Operations for the nine months ended September 30, 2012.  The severance and exit costs reserves require the outlay of cash, while long-lived asset impairments, accelerated depreciation and inventory write-downs represent non-cash items.

The severance costs for the nine months ended September 30, 2012 related to the elimination of approximately 2,825 positions, including approximately 1,600 manufacturing/service positions, 875 administrative positions, and 350 research and development positions.  The geographic composition of these positions includes approximately 1,850 in the United States and Canada, and 975 throughout the rest of the world.

The charges of $244 million recorded in the first three quarters of 2012 included $89 million applicable to the Digital Printing and Enterprise Segment, $16 million applicable to the Graphics, Entertainment and Commercial Films Segment, $22 million applicable to the Personalized and Document Imaging Segment, and $91 million that was applicable to manufacturing, research and development, and administrative functions, which are shared across both segments.  The remaining $26 million was applicable to discontinued operations.

As a result of these initiatives, the majority of the severance will be paid during periods through the first half of 2013 since, in some instances; the employees whose positions were eliminated can elect or are required to receive their payments over an extended period of time.  In addition, certain exit costs, such as long-term lease payments, will be paid over periods throughout 2012 and beyond.

 
25

 

NOTE 13:  RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS

Components of the net periodic benefit cost for all major funded and unfunded U.S. and Non-U.S. defined benefit plans for the three and nine months ended September 30, 2012 and 2011 are as follows:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(in millions)
 
2012
   
2011
   
2012
   
2011
 
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
 
Major defined benefit plans:
                                               
  Service cost
  $ 12     $ 2     $ 13     $ 4     $ 36     $ 8     $ 38     $ 12  
  Interest cost
    51       38       63       46       155       116       190       137  
  Expected return on plan assets
    (97 )     (39 )     (109 )     (54 )     (292 )     (123 )     (327 )     (159 )
  Amortization of:
                                            -                  
     Recognized prior service cost
    1       1       -       1       1       2       1       3  
     Recognized net actuarial loss
    43       17       18       13       130       50       52       39  
  Pension expense (income) before
    special termination benefits,
    curtailments, and settlements
    10       19       (15 )     10       30       53       (46 )     32  
  Special termination benefits
    42       -       2       -       98       -       19       1  
  Curtailment loss (gain)
    -       (1 )     -       -       -       (1 )     -       -  
  Settlement loss
    -       1       -       10       -       2       -       10  
Net pension expense (income)
    52       19       (13 )     20       128       54       (27 )     43  
Other plans including unfunded
  plans
    -       3       -       3       -       9       -       9  
Total net pension expense (income)
  from continuing operations
  $ 52     $ 22     $ (13 )   $ 23     $ 128     $ 63     $ (27 )   $ 52  
                                                                 

For the three months ended September 30, 2012 and 2011, $42 million and $2 million, respectively, of special termination benefits charges were incurred as a result of the Company's restructuring actions.  For the nine months ended September 30, 2012 and 2011, $98 million and $20 million, respectively, of special termination benefits charges were incurred as a result of the Company's restructuring actions.  These charges have been included in Restructuring costs and other in the Consolidated Statement of Operations.

The Company made contributions (funded plans) or paid benefits (unfunded plans) totaling approximately $24 million relating to its major U.S. and non-U.S. defined benefit pension plans for the nine months ended September 30, 2012.  If Kodak Limited’s 2012 contribution to the Kodak Pension Plan is not considered as a part of the overall resolution of the claims of the Trustee of the Kodak Pension Plan and Kodak Limited, and is instead paid during 2012, the Company forecasts its contribution (funded plans) and benefit payment (unfunded plans) requirements for its major U.S. and non-U.S. defined benefit pension plans for the balance of 2012 to be approximately $82 million.  See Eastman Kodak Company Guarantee in Note 2, “Chapter 11 Filing,” for further discussion of the 2012 contribution to the Kodak Pension Plan.
 
Postretirement benefit costs for the Company's U.S. and Canada postretirement benefit plans, which represent the Company's major postretirement plans, include:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions)
 
2012
   
2011
   
2012
   
2011
 
                         
Service cost
  $ 1     $ -     $ 1     $ 1  
Interest cost
    13       16       39       49  
Amortization of:
                               
   Prior service credit
    (20 )     (20 )     (58 )     (59 )
   Recognized net actuarial loss
    8       8       23       24  
Total net postretirement
  benefit expense
  $ 2     $ 4     $ 5     $ 15  

The Company paid benefits totaling approximately $88 million relating to its U.S. and Canada postretirement benefit plans for the nine months ended September 30, 2012.  The Company expects to pay benefits of approximately $27 million for these postretirement plans for the remainder of 2012.
 
 
26

 
 
NOTE 14:  OTHER OPERATING (INCOME) EXPENSES, NET

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions)
 
2012
   
2011
   
2012
   
2011
 
                         
(Income) expenses:
                       
Gain on sale of certain image sensor patents
    -       -       -       (62 )
Goodwill impairment
    -       8       -       8  
Other
    (4 )     4       (4 )     (5 )
   Total
  $ (4 )   $ 12     $ (4 )   $ (59 )
                                 

NOTE 15:  EARNINGS PER SHARE

Basic earnings per share computations are based on the weighted-average number of shares of common stock outstanding during the year.  As a result of the net loss from continuing operations presented for the three and nine months ended September 30, 2012, respectively, the Company calculated diluted earnings per share using weighted-average basic shares outstanding for those periods, as utilizing diluted shares would be anti-dilutive to loss per share.  Weighted-average basic shares outstanding for the three and nine months ended September 30, 2012 were 271.9 million and 271.6 million, respectively.

If the Company had reported earnings from continuing operations for the quarter ended September 30, 2012, no additional shares of the Company’s common stock from unvested share-based awards would have been included in the computation of diluted earnings per share since they were all anti-dilutive.  Potential shares of the Company’s common stock related to the assumed conversion of (1) approximately 11.0 million outstanding employee stock options, (2) approximately 40.0 million outstanding detachable warrants to purchase common shares, and (3) approximately $400 million of convertible senior notes due 2017 would still have been excluded from the computation of diluted earnings per share, as these securities were anti-dilutive.

Basic earnings per share computations are based on the weighted-average number of shares of common stock outstanding during the year.  As a result of the net loss from continuing operations presented for the three and nine months ended September 30, 2011, respectively, the Company calculated diluted earnings per share using weighted-average basic shares outstanding for those periods, as utilizing diluted shares would be anti-dilutive to loss per share.  Weighted-average basic shares outstanding for the three and nine months ended September 30, 2011 were 268.9 million.

If the Company had reported earnings from continuing operations for the quarter ended September 30, 2011, approximately 3.6 million potential shares of the Company’s common stock from unvested share-based awards would have been included in the computation of diluted earnings per share.  However, potential shares of the Company’s common stock related to the assumed conversion of (1) approximately 17.3 million outstanding employee stock options, (2) approximately 40.0 million outstanding detachable warrants to purchase common shares, and (3) approximately $313 million of convertible senior notes due 2017 would still have been excluded from the computation of diluted earnings per share, as these securities were anti-dilutive.
 
NOTE 16:  SHAREHOLDERS' EQUITY

The Company has 950 million shares of authorized common stock with a par value of $2.50 per share, of which 391 million shares had been issued as of September 30, 2012 and December 31, 2011.  Treasury stock at cost consisted of approximately 119 million and 120 million shares as of September 30, 2012 and December 31, 2011, respectively.

 
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NOTE 17:  SEGMENT INFORMATION

Current Segment Reporting Structure

Effective September 30, 2012, the Company has three reportable segments:  the Graphics, Entertainment and Commercial Films Segment, the Digital Printing and Enterprise Segment, and the Personalized and Document Imaging Segment.  Prior period segment results have been revised to conform to the current period segment reporting structure.  A description of the new reportable segments follows.

Graphics, Entertainment and Commercial Films Segment:  The Graphics, Entertainment and Commercial Films Segment encompasses Entertainment Imaging & Commercial Films, and Graphics.

Digital Printing and Enterprise Segment:  The Digital Printing and Enterprise Segment encompasses Digital Printing, Packaging and Functional Printing, Enterprise Services & Solutions, and Consumer Inkjet Systems.  On September 28, 2012, the Company announced a plan, starting in 2013, to focus its Consumer Inkjet business solely on the sale of ink to its installed printer base.

Personalized and Document Imaging Segment:  The Personalized and Document Imaging Segment encompasses the Company’s Intellectual Property licensing activities related to digital imaging products, as well as Personalized Imaging and Document Imaging.
 
Segment financial information is shown below:

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
(in millions)
 
2012
   
2011
   
2012
   
2011
 
                         
Net sales from continuing operations:
                       
                         
Graphics, Entertainment & Commercial Films
  $ 406     $ 548     $ 1,294     $ 1,660  
Digital Printing and Enterprise
    230       267       671       764  
Personalized and Document Imaging
    382       446       1,029       1,253  
  Consolidated total
  $ 1,018     $ 1,261     $ 2,994     $ 3,677  
                                 

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
(in millions)
 
2012
   
2011
   
2012
   
2011
 
                         
(Loss) earnings from continuing operations before interest expense, other income (charges),
net, reorganization items, net, and income taxes:
                       
                         
Graphics, Entertainment and Commercial Films
  $ (4 )   $ (2 )   $ (22 )   $ (23 )
Digital Printing and Enterprise
    (43 )     (137 )     (171 )     (419 )
Personalized and Document Imaging
    10       15       (57 )     (24 )
  Total of reportable segments
    (37 )     (124 )     (250 )     (466 )
Restructuring costs and other
    (126 )     (18 )     (218 )     (86 )
Corporate components of pension and
  OPEB expense
    (34 )     (13 )     (100 )     (25 )
Other operating income (expenses), net
    4       (12 )     5       59  
Legal contingencies, settlements and other
    -       -       (1 )     -  
Loss on early extinguishment of debt, net
    -       -       (7 )     -  
Interest expense
    (41 )     (41 )     (117 )     (116 )
Other income (charges), net
    6       (7 )     5       1  
Reorganization items, net
    (56 )     -       (304 )     -  
Consolidated loss from continuing
  operations before income taxes
  $ (284 )   $ (215 )   $ (987 )   $ (633 )
                                 
 
(in millions)
 
As of
September 30,
2012
   
As of
December 31,
2011
 
             
Segment total assets:
           
             
Graphics, Entertainment and Commercial Films
  $ 1,236     $ 1,451  
Digital Printing and Enterprise
    547       552  
Personalized and Document Imaging
    1,024       1,298  
   Total of reportable segments
    2,807       3,301  
Cash and marketable securities
    1,135       867  
Deferred income tax assets
    461       510  
Consolidated total assets
  $ 4,403     $ 4,678  
                 

 
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NOTE 18:  FINANCIAL INSTRUMENTS

The following table presents the carrying amounts, estimated fair values, and location in the Consolidated Statement of Financial Position for the Company’s financial instruments:

       
Value Of Items Recorded At Fair Value
 
(in millions)
     
As of September 30, 2012
 
       
Total
   
Level 1
   
Level 2
   
Level 3
 
ASSETS
                           
Marketable securities
                           
Short-term available-for-sale
Other current assets
    $ 2     $ 2     $ -     $ -  
Long-term available-for-sale
Other long-term assets
      8       8       -       -  
                                     
Derivatives
                                   
Short-term foreign exchange contracts
Receivables, net
      1       -       1       -  
                                     
                                     
                                     
       
Value Of Items Not Recorded At Fair Value
 
       
As of September 30, 2012
 
       
Total
   
Level 1
   
Level 2
   
Level 3
 
ASSETS
                                   
Marketable securities
                                   
                                     
Long-term held-to-maturity
Other long-term assets
Carrying value
  $ 23